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

FORM 10-K

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

1221 State Street, Suite 200 Santa Barbara, CA 93101
(Address of principal executive offices, including zip code)

(805) 884-8308
(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
(together with associated rights to purchase additional Common Shares).
(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  ý                             NO  o

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.

YES  o                             NO  ý

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).

YES  o                             NO  ý

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 June 30, 2003 of $3.02, as reported on the Nasdaq National Market, was approximately $12.2 million. Common shares held as of June 30, 2003 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 8, 2004, the Registrant had outstanding 5,983,349 common shares, no par value.

Documents Incorporated by Reference

Portions of the definitive Management Information Circular and Proxy Statement for the Annual and Special Meeting of Shareholders, which will be filed with the Securities and Exchange Commission on or before 120 days after December 31, 2003, are incorporated by reference into Part III.

INDEX

724 SOLUTIONS INC.
ANNUAL REPORT ON FORM 10-K

PART I

ITEM 1.    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 deliver reliable, scalable technology and solutions that allow mobile network operators to rapidly deploy next-generation IP-based network and data services. We were incorporated in 1997 and in 1999 we introduced our initial financial services products and solutions. In 2001, we began offering our Alerts and our Mobile Internet Gateway products to mobile network operators. In October 2002, our products and solutions for mobile network operators were re-branded as the X-treme family of products. 724 Solutions' X-treme Mobility Suite (XMS) of products provides mobile network operators solutions for their data networks that assist them in growing next-generation data services.

        We have established customer relationships with some of the leading companies within the mobile network operator industry, including Sprint PCS, Alltel, ASPire Technologies (China Mobile), DiGi Telecommunications (Malaysia), MTC Vodafone (Kuwait), Radiolinja Finland and Radiolinja Estonia. Additionally, we are assisted in our sales efforts by leading global and regional partners, such as Anabatic Technologies, Hewlett-Packard, Nokia, Ericsson, ZTE, Intervoice, ITS (International Turnkey Systems), bmd wireless, Xoriant, Sprint, Sun Microsystems and Computer Sciences Corporation.

ACQUISITIONS

        We have completed four acquisitions:

        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, a provider of intelligent alerting infrastructure software.

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

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INDUSTRY OVERVIEW

EMERGENCE OF THE MOBILE DATA SECTOR

        Over the course of the past 10 years, mobile network operators have evolved a mobile data business that is built around a series of discrete data offerings that now collectively generate a meaningful percentage of their overall revenues. According to a Yankee Group Report (Feb 2003, Western Europe Mobile Data Forecast), mobile data revenue has grown steadily over the last three years in real terms and in its contribution to total revenue. For example, according to Yankee Group, in Western Europe, data services revenue for mobile network operators grew from an average of 3 percent of total service revenues in 1999, to 10 percent of total mobile service revenue in 2001, and 13 percent in 2002. This portion of revenue is expected to continue to grow over the next several years, being fueled further by the introduction of IP-based data services over 2.5G and 3G networks and the proliferation of more sophisticated multi-modal devices. Yankee Group predicts the total mobile data services market to be worth over $150 billion by 2007. It is expected that data revenues for mobile operators in 2007 will come from a combination of data services: messaging, entertainment, information, m-commerce and enterprise solutions.

        Data services will not be restricted to any single protocol. Instead, data services will span protocols such as WAP 1.X, WAP 2.0, SMS, MMS, other more traditional protocols, such as IMAP and HTTP (which are already used by some mobile devices), as well as evolving protocols and services such as SIP and Voice Over IP. Yankee Group predicts that the total number of worldwide wireless subscribers will approach 1.8 billion by 2007, with over 60% using data services.

        Mobile network operators, equipment manufacturers and infrastructure and application software providers are responding to the growing demand for wireless access to Internet-related and other wireless data services. For example, mobile network operators continue to rollout next generation networks, which are required for the delivery of advanced mobile data services and improved user experience with existing services. Handset and other mobile equipment manufactures are also increasingly making mobile data functionality a key feature of their product offerings.

BUSINESS STRATEGY

THE MARKET OPPORTUNITY

        As mobile network operators deploy their next-generation data networks, they face many challenges. We believe that it is essential that next-generation data networks be designed to allow mobile network operators to make use of best-of-breed components that enable a wide variety of new revenue generating opportunities. It is also important that mobile network operators deploy a reliable data network that can seamlessly support the dramatic growth of next-generation services, without creating economic barriers or compromising their return on investment. 724 Solutions has designed its X-treme Mobility Suite of products to provide mobile network operators with compelling solutions to these challenges.

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OUR STRATEGY

        In order to address these market opportunities, our strategy is to:

        PROVIDE AN OPEN, FLEXIBLE TECHNOLOGY ARCHITECTURE: Our product architecture is open and generally designed to enable customers to expand the functionality of their next-generation networks, and to be compatible with existing systems. In this regard, our architecture allows customers to add new applications, modes of interaction and devices as their needs evolve. We expect to continue broadening the range of capabilities available to our customers.

        OFFER SOLUTIONS THAT ASSIST OUR CUSTOMERS IN GROWING THEIR MOBILE DATA REVENUES: We are focused on developing and delivering differentiated solutions for our mobile network operator customers. These solutions are designed to assist our customers in increasing the average revenue per user that they derive from mobile data services. Our approach is to take advantage of our 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 deliver innovative mobile data services.

        LEVERAGE STRATEGIC PARTNERSHIPS: We have established and continue to develop strategic relationships with distribution partners and providers of complementary products and services to extend our market reach in order to enhance our solutions and improve our cost structure.

        IMPROVE OPERATING EFFICIENCY: We maintain a conservative approach to the management of costs and have implemented a series of initiatives over the past two years to substantially improve our cost structure. We will continue to look for ways to reduce our operating costs and deliver our products efficiently 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 mobile data services and derive new revenue streams. Our products can be rapidly implemented, integrate easily with existing systems, are scalable and provide a robust platform for future growth. Key benefits of our products include:

        ACHIEVE LEVELS OF RELIABILITY ON PAR WITH THE VOICE NETWORKS: Our core technology is capable of being deployed in a robust and geographically distributed basis, allowing our customers to achieve levels of availability equivalent to those derived from voice networks.

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        RAPIDLY INTRODUCE NEW INNOVATIVE PREMIUM CONTENT: Our products are designed to allow mobile network operators to rapidly provision premium content providers into mobile data services, and to manage the complex business rules associated with such services.

        EASE OF INTEGRATION AND OPEN STANDARDS: Our products link to our customers' existing systems, enabling them to reduce their initial investment, and to extend the productivity and functionality of their existing infrastructure to offer new services.

        IMPROVE SCALABILITY AND FLEXIBILITY: Our products are designed to scale linearly to accommodate the growth our customers' mobile data services thus allowing our customers to synchronize the growth of their infrastructure investments with the growth in their mobile data revenues.

OUR PRODUCTS

        724 Solutions offers reliable, scalable technology and solutions for mobile network operators.

        Features:

        Our X-treme Mobility Suite of products is designed to facilitate the addition of new applications, devices, premium content and services. These products provide tools and application services that simplify development and assist mobile network operators in quickly bringing mobile applications to market.

        Open Architecture—Standards-based applications that support widely used communications standards, protocols and programming languages such as WAP 2.0, MMS, SMS and Java technologies that allow for easy installation and personalization.

        Flexible Framework—Adaptive architecture easily allows modular enhancements such as new protocols, well-defined customization points and interfaces.

        Scalable—Scales easily across both processors and machines.

        High Performance—Fast transaction processing helps ensure efficient hardware utilization.

MOBILE NETWORK OPERATOR SOLUTIONS

        724 Solutions designed the X-treme Mobility Suite of products to address the challenges that mobile network operators face in the deployment of next-generation IP-based data networks and the implementation of winning business models. The infrastructure products within XMS enable mobile network operators to implement solutions based upon open standards technologies such as WAP 2.0, MMS, SMS, J2ME and others. The applications and services enablers within XMS are specifically designed to assist mobile network operators in implementing innovative business models and bringing highly targeted content to their subscribers, thus monetizing the investment that they have made in their mobile data networks. All of the products within the XMS suite are designed to operate independently of the others, allowing mobile network operators the ability to mix and match our solutions with multiple vendors, if they so choose.

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X-treme Mobility Gateways

        The X-treme Mobility Gateways (XMG) are open, secure, scalable, and highly fault tolerant implementations designed to extend revenue-producing premium content services to mobile subscribers. The core technology was originally developed in the Tandem Computers High Performance Research Labs with the goal to embody the fundamentals of scalability, availability, geographic distribution and fault tolerance in a software platform that would support the data communications of the next generation. XMG contains replication and fail-over technologies that deliver continuous availability and increase the deployment configuration options. These same capabilities also enable the gateways to be deployed on a geographically distributed basis with full support for geographic fail-over between sites.

X-treme MMS Accelerator

        The X-treme MMS Accelerator (XMA) is an open and standards-based software product that enables mobile network operators to improve the delivery of bulk multi-media messages for application-to-peer multi-media messaging services. XMA supports all major Internet enabled mobile devices and has been tested for all major carrier network technologies and all major browser types. By supporting all major content mark up languages, including image and mark-up language translation, and all bearers for notification, XMA permits a broad range of mobile devices to receive time-sensitive and legacy content from mobile network operators and third party providers of application-to-peer bulk multimedia messaging services. XMA can be used to bypass mobile network operators' existing MMSC infrastructure that may be incapable of handling bulk messaging.

X-treme Service Activity Manager

        We believe that mobile network operators will need to attract a large number of content and application providers to their mobile data services if they are to be successful in appealing to the broadest possible cross-section of their subscriber base. The X-treme Service Activity Manager (XSAM) is a workflow engine that allows operators to more easily manage the relationships with content providers. This standards-based product manages the business rules associated with each unique relationship (between subscriber/mobile network operator/content provider) on a request-by-request basis across many channels of delivery, including SMS, MMS and WAP, allows premium content providers to self-provision themselves into the mobile data service, and allows the mobile network operator to produce settlement reports that detail the revenue share with the various premium content providers. XSAM substantially enhances the mobile network operator's ability to introduce innovative premium content on a rapid basis.

X-treme Alerts Platform

        Our X-treme Alerts Platform enables mobile network operators to rapidly introduce personalized and customizable actionable alerts, leveraging both SMS and MMS channels of communication with the subscriber. Our mature and proven technology is positioned to assist mobile network operators in accelerating the adoption of SMS and MMS services by subscribers through the delivery of time-sensitive and high value digital content.

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X-treme Mobile Data Applications

        Through mobile network operators, we deliver a series of actionable alerting solutions for their own use and for them to offer to their enterprise customers to assist them in lowering operating costs and improving customer relationship management. These actionable alerting solutions include collections management, fraud management and account management notifications. These solutions involve a broad range of notification channels including SMS, MMS, WAP Push, Instant Messaging, email, and voice.

SUPPORT SERVICES

        Together with our resellers and distributors, 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—Our professional services team and our system integrators are experienced in helping our customers realize the benefits of our products, providing a range of services to allow our customers to rapidly integrate and deploy our technology and bring their various wireless services and applications to market. Our professional services focus on those areas where our products interface with our customers' internal systems.

        Training Services—We provide customers with sophisticated product information and hands-on experience in order to help improve productivity and minimize their required learning time so they can take full advantage of their technology investment.

        Customer Support—Support is available on a 24x7 basis.

CUSTOMERS

        We sell our software products to customers throughout the world, primarily to mobile network operators. In addition, we provide our customers with professional and training services.

        Our agreements with our mobile network operator customers grant them nonexclusive licenses to use our software in connection with providing mobile data services to their subscribers. The relevant contractual terms, including pricing and payment terms for licenses, are negotiated with each customer. Products are licensed under either a perpetual license model or under a time-based license model. In addition, we typically provide fee-based maintenance and support services to our customers, under which they receive error corrections and remote support.

        In 2003, we derived approximately 83%, 11% and 6% of our revenues from customers in North America, Europe and Asia Pacific respectively. In 2002, we derived approximately 84%, 10% and 6% of our revenues from customers in North America, Europe and Asia Pacific, respectively. See note 12 to our consolidated financial statements. In the year ended December 31, 2003, we had one customer, Hewlett-Packard Company, that accounted for 52% of our total revenues.

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RESEARCH AND DEVELOPMENT

        As of March 1, 2003, our research and development department consisted of 65 employees. These units are responsible for assessing new technologies, new release schedules, product architecture, security, performance engineering, product requirements, quality assurance and product support.

SALES AND MARKETING

        As of March 1, 2003, our sales and marketing group consisted of 18 employees. Our sales employees generally receive incentive compensation based on individual sales volume.

        To expand our distribution, we supplement our direct sales and marketing efforts by establishing relationships with resellers such as hardware and other software/solutions providers as well as 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 global mobile operators and content and technology providers to facilitate the adoption of 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. Through strategic relationships, we seek to gain worldwide access and positioning, technological leadership, and an early awareness of emerging mobile technologies.

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 next-generation IP-based network and data services, we assess potential competitors based primarily on their product functionality and range of services, the security and scalability of their product architecture, their customer base and geographic focus and their capitalization and other resources.

        Our principal current and potential competitors are:

        MOBILE ACCESS GATEWAY VENDORS AND MESSAGING SOLUTION PROVIDERS: Companies in this category include Openwave Systems, LogicaCMG, Comverse, Materna, Nokia and Ericsson. Some of these companies can be both partners and competitors in the mobile operator segment.

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        ALERTS FOCUSED BUSINESSES: Companies that focus in the development and delivery of alerts and message-based technology include: Xiam, First Hop, Materna, and Infospace.

        NETWORK EQUIPMENT AND DEVICE MANUFACTURERS: Ericsson, Nokia, Motorola and other large wireless technology vendors are both potential competitors and potential partners.

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 some or all of our trademarks in Europe, Canada, the United States, the United Kingdom, Japan, Australia and Mexico. We have received registered trademarks in Australia, the U.K., Mexico and the European Community.

        We have also applied for patents for applications relating to our mobile commerce technology, the X-treme Mobility Suite of products and our multi-channel framework technology. 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, we have received thirteen patents with respect to the technologies relating to our X-treme Mobility Suite of products.

        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 and issued 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 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.

        To date, no claims have been made that any of our products infringe 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 March 1, 2004, we had 101 employees worldwide.

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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. Any shortfall in our revenues relative to our expectations could cause a significant increase 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 UNCERTAIN 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 market of mobile network operators. If general economic conditions are adverse, if the economies in which our target customers are located suffer from a recession, if demand for our solutions does not expand, or if war or terrorism impacts the U.S., Canada, Europe, Asia or our other target markets, our ability to increase our customer base may be limited, and our revenue may decrease further.

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

        We believe that a variety of factors in the current market contribute to the risk that prices and therefore our gross margins will decrease in future fiscal quarters. For example, as our customers continue to assess their business strategies and their budgets for wireless spending, we may feel additional pressure to lower our prices. In addition, consolidation among mobile network operators could create increased pricing pressure and competition in the marketplace.

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

        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 as a result of our dependence on a small number of products with only limited market acceptance. Our business strategy may not be successful, and we may not successfully address these risks.

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IF WE DO NOT SUCCESSFULLY DELIVER 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 2002, we transferred the management of our application hosting service to Computer Sciences Corporation ("CSC"). We are currently dependent on CSC to provide secure hosting services for our software products. 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 mobile network operators worldwide, which require 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 FACE RISKS SELLING IN THE MOBILE NETWORK OPERATOR MARKET.

        We have made selling to mobile network operators a primary focus of our activities. 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, increase our expenses and damage our reputation.

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. Some potential customers may be reluctant to work with us due to our stock price, or due to our financial condition. If customers do not accept our products as the preferred solution, we may not attract new customers and our business will not grow.

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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.

        Revenue under most of our license agreements depends on the number of monthly subscribers to the services that are based on our products. 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 adoption among their consumers. As a result, we cannot ensure that a large number of consumers will use these services in the future.

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. Consolidation of companies in the telecommunications industry may reduce the number of potential new customers that would be available to us. 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.

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 solutions to a limited number of customers. In the year ended December 31, 2003, we had one customer, Hewlett-Packard Company, that accounted for 52% 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.

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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. 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 OR REQUIRE CAPITAL INVESTMENTS IN ALTERNATIVE SECURITY TECHNOLOGY.

        Despite our efforts to maximize the security of 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 necessarily ensure that this technology, future advances in this technology or other developments will be able to prevent security breaches. As a result, we may need to develop or license other technology in the future to address these security concerns.

        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 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.

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

        Our operations outside the U.S. 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 and the Euro, could cause currency exchange losses, as our offices outside of the United States generate non-US 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 have substantially reduced the number of our employees. This means that we 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. 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 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.

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

        The U.S., Canadian and other foreign governments generally limit the export of encryption technology, which our products incorporate. A variety of cryptographic products generally require export approvals from certain government agencies in the case of exports from certain countries, 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., Canadian or other relevant 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. Most of our current 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. 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.

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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, mobile network operator and financial markets. Current barriers to market acceptance of these services include cost, reliability, platform and distribution channel constraints, consumer privacy concerns, functionality and ease of use. Mobile individuals currently use many competing products, such as portable computers, to remotely access the Internet. These products generally are designed for the visual presentation of data, while, until recently, wireless devices historically have been limited in this regard. 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 and data 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.

OUR BUSINESS DEPENDS ON CONTINUED INVESTMENT AND IMPROVEMENT IN COMMUNICATION NETWORKS.

        Some of our customers and other mobile network operators have made substantial investments in 2.5 generation and 3rd generation networks. These networks are designed to support more complex applications, and to provide consumers with a more robust user experience. If network operators delay their deployment of these networks, or do not roll them out successfully, there could be reduced demand for our products and services. In addition, if communication service providers fail to continue to make investments in their networks or at a slower pace in the future, there may be less demand for our products and services.

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 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 mobile network operators;



•

software vendors focused on mobile network operators;



•

enterprise software vendors and systems integrators;



•

network equipment and device manufacturers; and



•

mobile access gateway vendors and messaging solution providers.

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        We may also face competition in the future from established companies that have not previously entered the market for wireless data infrastructure software and 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.

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. 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.

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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 proprietary technology, including software, documentation and other written materials under patent, 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 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.

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 claims asserted by third parties that our products infringe their intellectual property rights, in the future, third parties may assert claims of this kind. 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

THE RIGHTS THAT HAVE BEEN AND MAY IN THE FUTURE BE GRANTED TO OUR SHAREHOLDERS MAY ALLOW OUR BOARD AND MANAGEMENT TO DETER A POTENTIAL ACQUISITION OF OUR COMPANY.

        Our board of directors has adopted a shareholder rights plan, or "poison pill," which our shareholders will be asked to renew and continue at our shareholder meeting scheduled to take place on April 29, 2004. Under the plan, rights to purchase common shares have been issued to holders of common shares. These rights become exercisable under certain circumstances in which someone acquires 20% or more of our outstanding shares. As a result of the plan, anyone wishing to take over the company may be forced under certain circumstances to negotiate a transaction with our board and management or comply with certain bid criteria in order not to trigger the exercise of rights. The need to negotiate with the board or management or to comply with certain bid criteria could add complexity to a proposed takeover. For example, a proposed hostile bidder might have to bring court or regulatory proceedings to have the shareholder rights plan cease-traded. This could prolong the take-over process and, arguably, deter a potential bidder.

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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, U.S. Holders (as defined below in this report) 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 U.S. Holders 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.

        There is a substantial risk that we were a passive foreign investment company for the year 2003. To determine whether we are a passive foreign investment company, our revenue and expenses and the value of our assets would need to be examined each year. The manner in which the tests apply to our business is not certain. 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. In addition, we are required to determine each year whether the value of our assets that produce passive income or are held to produce passive income will constitute at least 50% of our total assets. As a result of the size of our cash position, based on the published position of the Internal Revenue Service ("IRS") that for this purpose, cash is considered to be an asset which produces passive income, even if the cash is held as working capital, we would be considered a passive foreign investment company for the year ended December 31, 2003. The published position of the IRS that cash held as working capital is a passive asset has not been promulgated in regulations, and no other official guidance has been issued on the question. Therefore, it is unclear that we were a passive foreign investment company for 2003 and shareholders should consult their own advisors regarding our status as a passive foreign investment company. Even if it were determined that we were not a passive foreign investment company for 2003, no assurances can be given that we will not be a passive foreign investment company in future years. See Item 5 "Market for Registrant's Common Equity and Related Stockholder Matters—Passive Foreign Investment Company Considerations."

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        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.

        The volume of trading in our common shares on the Toronto Stock Exchange and the NASDAQ National Market has not been substantial. As a result, even small dispositions of our common shares in the public market could cause the market price of the common shares to fall. The perception among investors that these sales will occur could also produce this effect.

        We have granted options to purchase our common shares in accordance with our 2000 Stock Option Plan and previous stock option plans. The exercise of options and the subsequent sale of shares could adversely affect the market price of our common shares.

INFORMATION REGARDING FORWARD-LOOKING STATEMENTS

        Statements contained in this report which are not historical facts are forward-looking statements within the meaning of Section 21E of the U.S. Securities Exchange Act of 1934, as amended. A forward-looking statement may contain words such as "anticipate that," "believes," "continue to," "estimates," "expects to," "hopes," "intends," "plans," "to be," "will be," "will continue to be," or similar words. These forward-looking statements include the statements herein regarding: future developments in our markets and the markets in which we expect to compete, including the wireless communications industry; our estimated cost reductions; our future ability to fund our operations and become profitable; our development of new products and relationships;; the rate at which consumers will adopt wireless applications; our ability to increase our customer base; the services that we or our customers will 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; 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.

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ITEM 2.    PROPERTIES.

        Our registered office is located in Toronto, Ontario, Canada and our corporate office is located in Santa Barbara, California. We also have development and sales offices in Hong Kong, Germany, Switzerland, the United Kingdom and the United States.

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. These lawsuits have since been consolidated into a single action and an amended complaint was filed on or about April 19, 2002. Similar actions have or since been filed against over 300 other issuers that have had initial public offerings since 1998 and all are included in a single coordinated proceeding in the Southern District of NewYork.

        The amended complaint in the IPO Allocation Litigation names as defendants, in addition to the Company, some 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. In October 2002, the Individual Defendants were dismissed from the IPO Allocation Litigation without prejudice.

        In July 2003, a committee of the Company's Board of Directors conditionally approved a proposed partial settlement with the plaintiffs in this matter. The settlement would provide, among other things, a release of the Company and of the Individual Defendants for the conduct alleged in the action to be wrongful in the amended complaint. The Company would agree to undertake other responsibilities under the partial settlement, including agreeing to assign away, not assert, or release certain potential claims the Company may have against its underwriters. Any direct financial impact of the proposed settlement is expected to be borne by the Company's insurers. The committee agreed to approve the settlement subject to a number of conditions, including the participation of a substantial number of other issuer defendants in the proposed settlement, the consent of the Company's insurers to the settlement, and the completion of acceptable final settlement documentation. Furthermore, the settlement is subject to a hearing on fairness and approval by the Court overseeing the IPO Allocation Litigation.

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        If the proposed settlement is not consummated, the Company intends to continue 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 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.

        Our common shares are listed on the Nasdaq National Market under the symbol "SVNX" and on The Toronto Stock Exchange (the "TSX") under the symbol "SVN." Between September 18, 2002 and June 12, 2003, our common shares were traded on the Nasdaq SmallCap Market. The following table sets forth the high and low closing sales prices per share of our common shares as reported on Nasdaq National Market and The Toronto Stock Exchange for each of the quarters during the fiscal years ending December 31, 2003 and December 31, 2002.

Year Ended December 31, 2003

Year Ended December 31, 2002

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RECORD HOLDERS

        As of March 8, 2004, approximately 130 of the holders of record of our Common Shares had addresses in the U.S. These holders owned 3,901,910 Common Shares, or approximately 65% of our total issued and outstanding Common Shares.

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.

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SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS.

        The following table sets forth certain information relating to our option plans as of December 31, 2003:

(1)

724 will not make further grants under this Plan.

(2)

Includes 71,600 Common Shares subject to options that were granted under the TANTAU Plan prior to, and assumed by us upon, the acquisition of TANTAU Software, Inc. While these options are governed by the terms of the TANTAU Plan, applicable rules of the TSX provided that these options are notionally counted against available grant room under the 2000 Plan.

(3)

Outstanding options under this plan were assumed upon the Corporation's acquisition of TANTAU.

(4)

This figure includes 1,566 Common Shares subject to options that were granted outside of the TANTAU Plan to a former TANTAU employee.

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;

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•

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.

        "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 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.

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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.

        Under recently-enacted U.S. federal income tax legislation, a non-corporate U.S. holder's "qualified dividend income" currently is subject to tax at reduced rates not exceeding 15%. For this purpose, "qualified dividend income" generally includes dividends paid by a foreign corporation if either (a) the stock of that corporation with respect to which the dividends are paid is readily tradable on an established securities market in the U.S., or (b) that corporation is eligible for benefits of a comprehensive income tax treaty with the U.S. which includes an information exchange program and is determined to be satisfactory by the U.S. Secretary of the Treasury. The Internal Revenue Service has determined that the Canada-U.S. Tax Convention is satisfactory for this purpose. Dividends paid by a foreign corporation will not qualify for the reduced rates, however, if such corporation is treated, for the tax year in which the dividend is paid or the preceding tax year, as a "passive foreign investment company" for U.S. federal income tax purposes. See the discussion under "—Passive Foreign Investment Company Considerations" below.

        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

        The rules governing "passive foreign investment companies" can have significant tax effects on U.S. Holders. If we are a passive foreign investment company, or "PFIC", for any taxable year in which a U. S. Holder owns any of our common shares, the U.S. federal income tax consequences of owning and disposing of common shares may differ from those described above. Our treatment as a PFIC could result in a reduction in the after-tax return to the U.S. Holders of our common shares.

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        For U.S. federal income tax purposes, we will be classified as a PFIC for any taxable year in which either (i) 75% or more of our gross income is "passive income," or (ii) at least 50% of the average value (or in some cases, adjusted tax basis) of all of our assets for the taxable year produce or are held for the production of "passive income." For this purpose, passive income generally includes interest, dividends, some types of rents and royalties, annuities and the excess of gains over losses from the disposition of assets that produce these types of income.

        There is a substantial risk that we were a PFIC for the year 2003. To determine whether we are a PFIC, our revenue and expenses and the value of our assets would need to be examined each year. The manner in which the tests apply to our business is not certain. 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. In addition, we are required to determine each year whether the value of our assets that produce passive income or are held to produce passive income will constitute at least 50% of our total assets. As a result of the size of our cash position, based on the published position of the IRS that for this purpose, cash is considered to be an asset that produces passive income, even if the cash is held as working capital, we would be considered a PFIC for the year ended December 31, 2003. The published position of the IRS that cash held as working capital is a passive asset has not been promulgated in regulations, and no other official guidance has been issued on the question. Therefore, it is unclear that we were a PFIC for 2003 and U.S. Holders should consult their own advisors regarding our PFIC status. Even if it were determined that we were not a PFIC for 2003, no assurances can be given that we will not be a PFIC in future years.

        If we are a PFIC for U.S. federal income tax purposes, for any taxable year in which a U.S. Holder owns common shares, such U.S. Holder would be subject to certain U.S. tax consequences, including special rules applicable to certain "excess distributions," as defined in Section 1291 of the Code, and gain on the sale of common shares. In general, the U.S. Holder must allocate the excess distribution or gain ratably to each day in such holder's holding period for the common shares. The portion of the excess distribution or gain allocated to the current taxable year and any taxable year in the holding period before we were a PFIC would be taxed as ordinary income for the current year. The portion of the excess distribution or gain allocated to each of the other taxable years would be subject to tax at the maximum ordinary income rate in effect for such taxable year and an interest charge would be imposed on the resulting tax liability determined as if that liability had been due with respect to that prior year.

        The tax consequences referred to above will not apply if the U.S. Holder makes a timely election to treat us as a qualified electing fund, or QEF, for the first taxable year in which the U.S. Holder owns common shares and in which we are a PFIC, and certain other requirements are satisfied. A shareholder making the QEF election is required for each taxable year to include in income a pro rata share of the ordinary income and net capital gain of the QEF, subject to a separate election to defer payment of taxes, which deferral is subject to an interest charge. The inclusion in income is required regardless of whether or not we actually distribute any dividends, and a U.S. Holder could therefore have a tax liability for our earnings or gain without a corresponding receipt of cash. To make a QEF election, U.S. Holders will need to have an annual information statement from us setting forth, among other things, our earnings and capital gains for the year. Because of the substantial risk that we are a PFIC, we will supply the PFIC annual information statement to any U.S. Holder who requests it, provided we are able to do so. Further information can be obtained from Investor Relations, (805) 884-8308 x4, ir@724.com.

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        The QEF election is made on a shareholder-by-shareholder basis and can be revoked only with the consent of the IRS. In general, a U.S. Holder must make a QEF election on or before the due date for filing its income tax return for the first year to which the QEF election will apply. In certain circumstances, however, U.S. Holders may make a retroactive election to be treated as a QEF. This retroactive election in some cases requires the filing of a protective statement with the holder's income tax return for the first year to which the QEF election would apply. In addition, QEF elections may in certain circumstances be made for years after the first year in which we are a PFIC, but adverse consequences may result from elections filed for such years. U.S. Holders should consult with their own tax advisors concerning the advisability, requirements, procedures and timing for making a QEF election or a retroactive QEF election.

        As an alternative to making the QEF election the U.S. Holder of PFIC stock which is publicly traded may in certain circumstances avoid the tax consequences generally applicable to holders of a PFIC by electing to mark the stock to market annually, recognizing as ordinary income or loss each year an amount equal to the difference as of the close of the taxable year between the fair market value of the PFIC stock and the U.S. Holder's adjusted tax basis in the PFIC stock. Losses would be allowed only to the extent of net mark-to-market gain previously included by the U.S. Holder under the election for prior taxable years. This election is available for so long as our common shares constitute "marketable stock." The term "marketable stock" includes stock of a PFIC that is "regularly traded" on a "qualified exchange or other market." Generally, a "qualified exchange or other market" means (i) a national securities exchange which is registered with the U.S. Securities and Exchange Commission or the national market system established pursuant to Section 11A of the Securities Exchange Act of 1934 or (ii) a foreign securities exchange that meets certain requirements. A class of stock that is traded on one or more qualified exchanges or other markets is "regularly traded" on such exchanges or markets for any calendar year during which such class of stock is traded, other than in de minimis quantities, on at least 15 days during each calendar quarter. We believe that the Nasdaq National Market will constitute a qualified exchange or other market for this purpose. However, no assurances can be provided that our common shares will continue to trade on the Nasdaq National Market, that the Toronto Stock Exchange will be deemed to be a qualified exchange or other market for this purpose, or that the shares will be regularly traded for this purpose.

        Any U.S. Holder who owns, directly or indirectly, any stock in a PFIC must file an annual return with the IRS. All U.S. Holders are advised to consult their own tax advisers about the PFIC rules generally and about the advisability, requirements, procedures and timing of their making any of the available tax elections, including the QEF or mark-to-market elections.

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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 30% 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. The backup withholding tax rate is currently 28%, and is scheduled to increase to 31% after 2010.

        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' 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.

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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 TSX 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 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

        None.

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ITEM 6.    SELECTED FINANCIAL DATA.

        The selected consolidated statement of operations data for the years ended December 31, 2003, 2002 and 2001 and the balance sheet data as of December 31, 2003 and 2002 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 January 1, 1999 to December 31, 2000 and the balance sheet data as of December 31, 2001, 2000 and 1999 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. The information for 2001 and 2002 give effect to our January 2001 acquisition of TANTAU. 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."

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 annual consolidated financial statements for the year ended December 31, 2003 and accompanying notes set forth 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

        724 Solutions Inc. is a leading provider of next-generation IP-based network and data services. We were incorporated in 1997, and in 1999 we introduced our initial products and solutions for the financial services industry (FI). In 2001, following the acquisition of TANTAU Software, we began offering our products to mobile network operators (MNO's).

        During 2002, we concluded that the adoption of wireless technologies by the financial services industry had slowed considerably and that such organizations would remain conservative about this type of investment for the next two to three years. At the same time, our analysis indicated that the opportunity in the MNO sector was potentially larger and also likely to develop sooner. We therefore made the decision to principally focus on the MNO market, with a corresponding diminished focus on the delivery of financial services applications.

        Accordingly, we made the decision to adjust the size of the investment that we were making in each of these two market segments; substantially reducing the level for the FI market, while bolstering that for the MNO market. We continue to monitor our cost structure to ensure that the investments we make on a product-by-product basis are appropriate to the revenue opportunities we believe exist.

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        We believe that MNO's planning next-generation data networks face two distinct challenges. Firstly, it is important that data networks are designed to support a wide variety of new revenue opportunities, partnerships and technologies so that the mobile operators can adjust their strategies quickly. Secondly, it is equally important that mobile operators deploy data networks that can grow smoothly and reliably, without creating economic barriers or compromising return on investment.

        724 Solutions designed the X-treme Mobility Suite (XMS) of products to address the challenges that mobile operators face in deploying next-generation data networks. Our XMS gateway products enable mobile operators to implement solutions based on emerging open standards technologies including WAP 2.0, MMS, SMS and J2ME. XMS application enablers support a wide variety of commerce initiatives and third party content initiatives. The X-treme Mobility Suite provides the flexibility, scalability and total cost of ownership metrics that help ensure both the short-term and long-term success of next-generation mobile data networks.

        Our customers currently include leading mobile network operators. With our corporate office in Santa Barbara, California, we have development and sales offices around the world, including Hong Kong, Switzerland, Germany, Canada, the United Kingdom and the United States.

DEVELOPMENTS IN 2003

RESTRUCTURING AND OTHER CHARGES

        During 2003, we continued the cost reduction initiatives that we began in 2001. These efforts were implemented in order to reduce our overall operating costs and to realign our operating expenses and investments with a view to achieving operational profitability. We reduced our worldwide work force by approximately 40 people and closed redundant facilities. As a result of these transactions, we recorded $950,000 in restructuring charges related to severance and lease exit costs. These charges were mostly offset by a reduction to our hosting reserve of $900,000, as actual hosting related costs were lower than our original estimate (see Note 15(a) to our consolidated financial statements).

WRITE-DOWN OF GOODWILL

        SFAS No. 142 and CICA Handbook section 3062 require goodwill to be assessed for impairment only, rather than being amortized, on a prospective basis starting January 1, 2002 (see "Significant Accounting Policies," note 2 to our consolidated financial statements). We assessed the value of goodwill at December 31, 2003 and recorded a write-down of $9.1 million.

        As described in Note 15(b) of our consolidated financial statements, at the end of 2003, the carrying value of goodwill was nil.

REVERSE STOCK SPLIT

        On April 24, 2003, our shareholders approved a ten for one reverse stock split of our common shares. As a result, the historic number of shares, historic loss per share and the weighted average number of shares used in compiling basic and diluted loss per share have been restated for all periods presented to reflect the reverse stock split.

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STOCK-BASED COMPENSATION

        Prior to January 1, 2003, we applied the intrinsic method of accounting to employee stock options. Under this method, deferred stock-based compensation is recorded only if the current market value of the underlying common share exceeds the exercise price per share on the date of grant.

        The CICA Accounting Standards Board has amended Handbook Section 3870, Stock-based Compensation and Other Stock-based Payments (HB3870) to require entities to account for employee stock options using the fair value based method beginning January 1, 2004, and encouraged companies to adopt early in 2003. We have chosen to early adopt the fair value based method on a prospective basis in 2003 under both HB3870 in Canada and FAS148 for US GAAP reporting.

        Since the total stock option expense for 2003 using the fair value based method is only $62,000, we have determined that it is not necessary to restate our 2003 quarterly results.

CRITICAL ACCOUNTING POLICIES

        We periodically review our financial reporting and disclosure practices and accounting policies to ensure that they provide accurate and transparent information relative to the current economic and business environment. As part of this process, we have reviewed our selection, application and communication of critical accounting policies 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 policies are described in Note 2 to our audited annual consolidated financial statements for the year ended December 31, 2003.

REVENUE RECOGNITION

SOURCES OF REVENUE

        We derive revenue from licensing our products and providing related services, including installation, integration, training, maintenance and support, and application hosting services. We recognize revenue from our license agreements when all the following conditions are met:

•

We have an executed license agreement with the customer;



•

We have delivered the software product to the customer;



•

The amount of the fees to be paid by the customer is fixed and determinable; and



•

Collection of these fees is deemed probable.

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

        For license and services agreements that provide significant commitments to refunds and/or penalties on the services and/or license components should the system not perform according to documented specifications, we defer recognition of revenue for the amount subject to refund or penalty on unproven products until we achieve contractually defined milestones or until customer acceptance has occurred, as the case may be for such agreements.

PRODUCT REVENUE

        Product revenue consists of the following:

•

Fixed License Fee Arrangement—a one-time license fee for a fixed number of copies or unlimited use of the software with a perpetual term. We typically recognize the upfront fees in the period the contract is executed or shortly thereafter.



•

Variable License Fee Arrangement—a variable license fee based on the numbers of users in a period. Revenue is recognized on an ongoing basis and will vary with the number of our customers' end users.



•

Reseller Arrangement—the reseller typically pays 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 non-refundable license fees when we have met our revenue recognition criteria for license agreements as outlined above.

SERVICE REVENUE

IMPLEMENTATION AND CUSTOMER SERVICE FEES

        Revenue from implementation and customer services includes fees for implementation of our product offerings, consulting and training 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 associated with the variable fee license model, any maintenance payments will be recognized on a monthly basis as earned.

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HOSTING FEES

        We no longer provide hosting services directly. Instead, we have arranged an alliance with Computer Sciences Corporation (CSC), whereby CSC is our preferred hosting partner for current and future customer deployments where hosting is or will be required. Under our existing hosting contracts, we typically charge customers a monthly flat fee or a monthly fee based on the number of users. The fees are recognized on a monthly basis.

        For a more detailed description of our revenue recognition policies, please refer to Note 2(c) of our annual audited consolidated financial statements for the year ended December 31, 2003.

RESULTS OF OPERATIONS

YEAR ENDED DECEMBER 31, 2003 COMPARED TO YEAR ENDED DECEMBER 31, 2002

        Our consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles. As applied to our financial statements, these principles conform in all material respects with U.S. generally accepted accounting principles.

REVENUE

PRODUCT REVENUE

        In the year ended December 31, 2003, product revenue decreased to $7.0 million from $8.8 million in 2002. As indicated in the Overview section, starting in 2002 and continuing through 2003, our focus on MNO's increased while our focus on the financial services industry decreased. Revenue from our XMS suite of products increased to $5.8 million in 2003 from $1.3 million in 2002. During 2003 and 2002, product revenue from the financial services industry was $1.2 million and $7.5 million, respectively.

SERVICE REVENUE

        Service revenue decreased to $5.9 million for the year ended December 31, 2003 from $11.9 million in 2002. The decrease was a result of changing our customer focus to MNO's and our product focus to the X-treme Mobility Suite of products. In 2003, service revenue from our XMS suite of products decreased to $2.7 million from $4.7 million in 2002. While the number of installations in the MNO sector increased significantly in 2003, the scope of the services performed was much narrower because we enhanced our core products, thus making it unnecessary for new MNO customers to incur significant customization charges. Service revenue from the financial services industry was $3.2 million in 2003, down from $7.2 million in 2002.

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OPERATING EXPENSES

COST OF REVENUE

        Cost of revenue (COR) consists primarily of personnel costs associated with customer support, training and implementations, 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 was $6.0 million for the year ended December 31, 2003, compared to $7.3 million in 2002. COR decreased in 2003 because we completed fewer projects and they tended to be narrower in scope than those completed in 2002 and because we eliminated costs not essential to our focus on mobile network operators. Cost of revenue, as a percentage of revenue, was 47% for the year ended December 31, 2003 compared to 35% in 2002.

RESEARCH AND DEVELOPMENT

        Research and development expenses include 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 the cost of retaining independent contractors and consultants, software licensing expenses, and allocated operating expenses.

        Research and development (R&D) expenses decreased to $9.4 million for the year ended December 31, 2003, compared to $16.6 million in 2002. The decrease is a result of our restructuring initiatives through which we reduced our R&D headcount and developed a more streamlined, integrated and focused product road map that reduced duplication in the R&D process. We 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 73% for the year ended December 31, 2003, compared to 80% in 2002.

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 $7.0 million for the year ended December 31, 2003, compared to $17.2 million in 2002. The decrease is a result of the reduction in the number of sales and marketing personnel and reduced spending on discretionary marketing programs. We continue to monitor our sales and marketing expenditures to ensure that they remain aligned with our targeted opportunities as well as prevailing market conditions. S&M expense, as a percentage of revenue, was 54% for the year ended December 31, 2003, compared to 83% in 2002.

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 executive officers and business development, financial planning and control, legal, human resources and corporate administration staff.

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        G&A expenses decreased to $4.1 million for the year ended December 31, 2003, compared to $7.0 million in 2002. The decrease in G&A expenses reflects our restructuring initiatives that have reduced complexity in our business in order to align our infrastructure with the current market environment. G&A expense, as a percentage of revenue, was 32% for the year ended December 31, 2003, compared to 34% in 2002.

DEPRECIATION AND AMORTIZATION

        Depreciation expense was $908,000 in the year ended December 31, 2003, compared to $5.1 million in 2002. Depreciation decreased significantly because we have decommissioned redundant fixed assets and reduced our capital expenditure budgets as part of our restructuring initiatives.

        Amortization expense decreased to $3.5 million for the year ended December 31, 2003, compared to $4.4 million in 2002. The amortization expense recorded in 2003 and 2002 represents the amortization of acquired technology, which was amortized over a period of two to five years.

        As described in Note 15 of our consolidated financial statements, at the end of 2003, the carrying value of acquired technology was nil.

STOCK-BASED COMPENSATION

        Prior to January 1, 2003, we applied the fair value based method of accounting prescribed by CICA Handbook Section 3870, Stock-based Compensation and Other Stock-based Payments (HB3870), only to employee stock appreciation rights, and applied the intrinsic method of accounting to employee stock options. Under the intrinsic method, 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.

        The CICA Accounting Standards Board has amended HB3870 to require entities to account for employee stock options using the fair value based method beginning January 1, 2004, and encouraged companies to adopt early in 2003. We have chosen to early adopt the fair value based method on a prospective basis in 2003 under both HB3870 in Canada and FAS148 for US GAAP reporting.

        Under the fair value based method, compensation cost is measured at fair value at the date of grant and is expensed over the award's vesting period. In accordance with the prospective transitional option permitted under amended HB3870 and FAS148, we have retroactively applied the fair value based method to all employee stock options granted on or after January 1, 2003. Since the total stock option expense for 2003 using the fair value based method is only $62,000, we have determined that it is not necessary to restate our 2003 quarterly results.

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        Historically, our Stock-based compensation has primarily represented the amortization of deferred stock-based compensation recorded as a result of assuming, through acquisitions, stock option plans that included unvested options and common shares. This stock based compensation was amortized on a straight-line basis over the vesting period of these options, and was fully amortized by June 30, 2003. Also included in stock-based compensation is the immediate recognition of stock compensation expense for those terminated employees who had options that immediately vested upon their termination, and the 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.

        Stock-based compensation decreased to $1.7 million for the year ended December 31, 2003, including $62,000 related to the fair value of options granted in 2003, compared to $17.8 million in the comparative period in 2002. The 2002 expense included significant charges related to the immediate recognition of deferred stock-based compensation associated with employees who were terminated as part of our restructuring plan as well as the 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. In addition, the deferred stock compensation associated with the Tantau acquisition was higher in 2002 as it was fully amortized by the end of January 2003.

RESTRUCTURING COSTS

        In the second quarter of 2001, we began to identify areas to reduce costs by eliminating duplicate resources and positions, narrowing our product offerings and streamlining our operating processes. We continue to evaluate costs on an ongoing basis.

        In the year ended December 31, 2003, we recorded net restructuring costs of $50,000, compared to $20.6 million in 2002. The 2003 expense included $775,000 related to severance costs and $175,000 related to lease exit costs. These charges were mostly offset by a reduction to our hosting reserve of $900,000, as actual hosting related costs were lower than our original estimate. Included in our "Accrued Liabilities" as at December 31, 2003 is approximately $1.0 million in restructuring reserve. This includes severance costs of $292,000, lease exit costs of $140,000 and hosting exit costs of $591,000. See Note 15 to our annual audited consolidated financial statements for further details.

WRITE-DOWN OF GOODWILL, INTANGIBLES AND OTHER ASSETS

        SFAS No. 142 and CICA Handbook section 3062 require goodwill to be assessed for impairment only, rather than being amortized, on a prospective basis starting January 1, 2002 (see "Significant Accounting Policies," Note 2 to our consolidated financial statements). We assessed the value of goodwill at December 31, 2003 and recorded a write-down of $9.1 million.

        As described in Note 15 of our consolidated financial statements, at the end of 2003, the carrying value of goodwill was nil.

INTEREST INCOME

        Interest income decreased to $254,000 for the year ended December 31, 2003, compared to $751,000 in 2002. 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 a note payable. The note was fully repaid by the end of the first quarter of 2003. Interest income decreased in 2003 compared to 2002 due to declining interest rates and because we have reduced holdings of cash, cash equivalent balances and short-term investments.

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NET LOSS

        Our net loss decreased to $28.3 million for year ended December 31, 2003 compared to $87.4 million in 2002. Our net loss has decreased due to a number of factors. We incurred significant restructuring charges and write downs of intangible and fixed assets in 2002 related to our restructuring efforts. Stock-based compensation charges and depreciation expense decreased significantly in 2003 and our restructuring initiatives have resulted in significantly lower operating costs.

YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001

REVENUE

PRODUCT REVENUE

        In the year ended December 31, 2002, product revenue decreased to $8.8 million from $27.1 million in 2001. Due to poor economic conditions, our customers were reluctant to make large upfront commitments on license fees, and we experienced a reduction in the number of customers deploying our products and solutions.

SERVICE REVENUE

        Service revenue decreased to $11.9 million for the year ended December 31, 2002 from $16.8 million in 2001. The decrease in service revenue was due to the decline in the number of projects implemented by our customers and the general weakness in the economy.

OPERATING EXPENSES

COST OF REVENUE

        Cost of revenue was $7.3 million for the year ended December 31, 2002, compared to $19.3 million in 2001. COR decreased in 2002 as the number of projects deployed was down and because we eliminated costs not essential to our focus on our two key markets, the mobile network operator and financial services markets.

RESEARCH AND DEVELOPMENT

        Research and development (R&D) decreased to $16.6 million for the year ended December 31, 2002 compared to $39.1 million in 2001. The decrease was a result of our 2001 and 2002 restructuring initiatives 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. R&D expense, as a percentage of revenue, was 80% for the year ended December 31, 2002, compared to 89% in 2001.

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SALES AND MARKETING

        Sales and marketing (S&M) expenses were $17.2 million for the year ended December 31, 2002 compared to $36.8 million in 2001. The decrease is a result of the reduction in the number of sales and marketing personnel and reduced spending on discretionary marketing programs as part of our restructuring efforts in 2001 and 2002.

GENERAL AND ADMINISTRATIVE

        Our G&A expenses decreased to $7.0 million for the year ended December 31, 2002 compared to $15.9 million 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.

DEPRECIATION AND AMORTIZATION

        Depreciation expense was $5.1 million in the year ended December 31, 2002 compared to $8.1 million in 2001. The decrease was 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 $4.4 million for the year ended December 31, 2002, compared to $80.2 million in 2001. The decrease was attributable to lower amortization as a result of the write-down of intangibles and other assets in fiscal 2001 and the adoption of 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 expense in 2002 represents the amortization of acquired technology, which was being amortized over a period of two to five years.

STOCK-BASED COMPENSATION

        Stock-based compensation primarily represents amortization of deferred stock-based compensation that we recorded as a result of assuming, through our acquisitions, stock option plans that included unvested options and common shares. This stock based compensation is amortized on a straight-line basis over the remaining vesting period of these options, ending in 2003. Also included in stock-based compensation is the immediate recognition of stock compensation expense for those terminated employees who had options that immediately vested upon their termination, and the 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.

        Stock-based compensation decreased to $17.8 million for year ended December 31, 2002, compared to $47.2 million in 2001. The decrease in 2002 resulted mainly from the fact that the 2001 expense included significant charges related to the immediate recognition of deferred stock-based compensation associated with employees who were terminated as part of our restructuring plan in 2001.

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RESTRUCTURING COSTS

        With the downturn in general economic conditions, in the second quarter of 2001 we began to identify areas to reduce costs and to implement a restructuring initiative. We eliminated duplicate resources and positions, narrowed our product offerings and streamlined our operating processes. As a result of these efforts, in the year ended December 31, 2001, we recorded $16.5 million in restructuring costs. We continued with this restructuring in 2002 and, as a result, we recorded a restructuring charge of $20.6 million for year ended December 31, 2002. This was comprised of $5.7 million in hosting exit costs, mostly related to fees to be paid to CSC to assume the obligation to provide services under our hosting contracts; $8.0 million in employee severance charges; $4.2 million in lease exit costs mostly related to the closing of several of our offices; and $2.7 million for the write-down of inventory assets that are no longer a part of our current business strategy. In addition, we recorded a $6.3 million charge in 2002 related to the decommissioning of our redundant fixed assets compared to $3.2 million in 2001. Included in our "Accrued Liabilities" as at December 31, 2002 was approximately $5.0 million in restructuring reserve. This included severance costs of $1.0 million, lease exit costs of $1.5 million and hosting exit costs of $2.5 million.

INTEREST INCOME

        Interest income decreased to $751,000 for the year ended December 31, 2002, compared to $5.8 million 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 note payable. Interest income decreased in 2002 compared to 2001 because we had reduced holdings of cash and cash equivalent balances and short-term investments and due to a significant decline in interest rates.

EQUITY IN LOSS OF AFFILIATE

        Until October 2002, we owned 24.9% of the equity of Maptuit, Inc. We accounted for our investment in Maptuit using the equity method, which required us to adjust the original cost of the investment for our share of post-acquisition income and losses, less dividends, but only to the extent that the carrying value of the investment was not 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 year ended December 31, 2002. The loss was $1.6 million for the year ended December 31, 2001. In October 2002, we sold our interest in Maptuit for proceeds of $150,000.

NET LOSS

        Our net loss decreased to $87.4 million for the year ended December 31, 2002 compared to $554.2 million in 2001. Our net loss decreased due to the significant restructuring charges and write down of intangible assets recorded in 2001 and the substantial reduction in our operating expenses resulting from our restructuring initiatives.

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LIQUIDITY AND CAPITAL RESOURCES

        Net cash used in operating activities decreased to $22.9 million for the year ended December 31, 2003, compared to $46.5 million in 2002 as we have significantly reduced our workforce and expense structure as a result of our restructuring efforts. Net cash used in operating activities for 2003 consisted of our net loss of $28.3 million plus $283,000 related to the gain on sale of an investment, cash outflows of $6.8 million related to severance, historic acquisition, hosting exit and deferred consideration payments and $2.7 million related to other working capital changes offset by non-cash items, primarily depreciation and amortization charges of $4.4 million, stock-based compensation expense of $1.7 million, and the write-down of goodwill of $9.1 million.

        As at December 31, 2003, we had commitments to make $540,000 in minimum lease payments up to 2005, primarily related to our facilities. As a result of our restructuring initiative, we have vacated some of our premises and we have been successful in reducing our total future lease commitments to our landlords.

        Cash used in financing activities was $600,000 for the year ended December 31, 2003, compared to a $2.9 million in 2002. The $600,000 represents the final two payments of our note payable that was repaid in the first quarter of 2003. There were no common share issuances in 2003. In 2002, principal payments on the note totaled $3.1 million and we had a cash source of $224,000 resulting from the exercise of options.

        Cash inflow from investing activities, before the sale (purchase) of short-term investments, business acquisitions and restricted cash was $183,000 in 2003, compared to a cash use of $854,000 for the year ended December 31, 2002. The 2003 amount is comprised of a gain on sale of long-term investments of $283,000 less purchases of fixed assets of $100,000. The 2002 total includes a gain on the sale of long-term investments of $150,000, less purchases of fixed assets of $547,000 and purchases of intangible and other assets of $457,000. We have significantly curtailed purchases of capital and intangible assets in 2003.

        Total cash used, excluding the sale (purchase) of short-term investments and restricted cash changes, was $23.3 million for the year ended December 31, 2003, compared to $50.2 million for the year 2002. This was mainly due to our significantly lower operating costs.

        As a result of the operational savings resulting from our restructurings and based on current estimates, we expect that cash from the sales of our products 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, if our costs unexpectedly increase, if our revenues decrease or if we seek to effect one or more significant acquisitions.

41

CONTRACTUAL OBLIGATIONS

        Contractual obligations at December 31, 2003 are as follows:

        *    As of December 31, 2003, we did not have any long-term debt obligations, capital lease obligations, purchase obligations or other long-term liabilities, as defined by FASB.

QUARTERLY RESULTS OF OPERATIONS

        The following tables set forth certain unaudited consolidated statements of operations data for each of the eight most recent quarters 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 the information presented. These operating results are not necessarily indicative of results for any future period. You should not rely on them to predict our future performance.

42

The historic common share numbers have been adjusted to reflect the 10 for 1 share consolidation completed in the second quarter of 2003

43

        The historic common share numbers have been adjusted to reflect the 10 for 1 share consolidation completed in the second quarter of 2003

44

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

IMPACT OF INTEREST RATE EXPOSURE

        As of December 31, 2003, we had approximately $15.4 million in cash, cash equivalents, short-term investments and restricted cash, of which $1.9 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.

IMPACT OF FOREIGN EXCHANGE RATE EXPOSURE

        Our functional currency is the U.S. dollar. In the past, the majority of our non-US dollar denominated expenses were incurred in Canadian dollars. As a result of our recent restructuring efforts, in the foreseeable future the majority of our non-US dollar denominated expenses will be incurred in Euros. 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 year ended December 31, 2003, we incurred realized and unrealized foreign currency losses relating to the translation of our non-US denominated monetary assets and liabilities of approximately $200,000.

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.

ITEM 9A.    CONTROLS AND PROCEDURES.

        Prior to the filing date of this report, management, including the Company's Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness and operation of the Company's disclosure controls and procedures. The Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2003, the disclosure controls and procedures were effective, in all material respects, to ensure that information required to be disclosed in the reports the Company files and submits under the Exchange Act is recorded, processed, summarized and reported as and when required. There have been no significant changes in the Company's internal controls or in other factors, which could significantly affect internal controls subsequent to the date the Company carried out its evaluation. There were no significant deficiencies or material weaknesses identified in the evaluation and therefore, no corrective actions were taken.

45

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 for its Annual and Special Meeting of Shareholders, which will be filed with the Securities and Exchange Commission on or before 120 days after December 31, 2003, 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 for its Annual and Special Meeting of Shareholders, which will be filed with the Securities and Exchange Commission on or before 120 days after December 31, 2003, 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 for its Annual and Special Meeting of Shareholders, which will be filed with the Securities and Exchange Commission on or before 120 days after December 31, 2003, 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 for its Annual and Special Meeting of Shareholders, which will be filed with the Securities and Exchange Commission on or before 120 days after December 31, 2003, and which is incorporated by reference herein.

ITEM 14.    PRINCIPAL ACCOUNTANT FEES AND SERVICES.

        The information required by this Item is contained in the Company's Management Information Circular and Proxy Statement for its Annual and Special Meeting of Shareholders, which will be filed with the Securities and Exchange Commission on or before 120 days after December 31, 2003, and which is incorporated by reference herein.

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PART IV

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.

(b)

Reports on Form 8-K:

        During the three months ended December 31, 2003, the Company furnished one report on Form 8-K:

        October 30, 2003: reporting the Company's results of operations for the three and nine months ended September 30, 2003.

(c)

The exhibits included in this report or incorporated herein by reference are as follows:

47

(1)

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

(2)

Incorporated by reference to the Registrant's definitive Management Information Circular and Proxy Statement for the Annual and Special Meeting of Shareholders, filed on March 31, 2003.

(3)

Incorporated by reference to the Registrant's Form 8-K, dated February 24, 2003.

(4)

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

(5)

Incorporated by reference to the Registrant's Annual Report on Form 10-K, filed on March 29, 2002.

(6)

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

(7)

Incorporated by reference to the Registrant's Annual Report on Form 10-K, filed on March 31, 2002.

48

SIGNATURES

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

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

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Consolidated Financial Statements
(Expressed in U.S. dollars)

724 SOLUTIONS INC.

Years ended December 31, 2003, 2002 and 2001

F-1

AUDITORS' REPORT TO THE SHAREHOLDERS

        We have audited the consolidated balance sheets of 724 Solutions Inc. as at December 31, 2003 and 2002 and the consolidated statements of operations, shareholders' equity and cash flows for each of the years in the three-year period ended December 31, 2003. 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.

        We conducted our audits in accordance with Canadian generally accepted auditing standards and auditing standards generally accepted in the United States of America. 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, 2003 and 2002 and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2003 in accordance with Canadian generally accepted accounting principles.

/s/ KPMG LLP

Chartered Accountants
Toronto, Canada
January 22, 2004

F-2

724 SOLUTIONS INC.

CONSOLIDATED BALANCE SHEETS

(In thousands of U.S. dollars)
December 31, 2003 and 2002

The historic common share numbers have been adjusted to reflect the 10 for 1 share consolidation completed in the second quarter of 2003.

See accompanying notes to consolidated financial statements.

F-3

724 SOLUTIONS INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands of U.S. dollars, except per share amounts)
Years ended December 31, 2003, 2002 and 2001

See accompanying notes to consolidated financial statements.

F-4

724 SOLUTIONS INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

(In thousands of U.S. dollars, except number of shares and per share amounts)
Years ended December 31, 2003, 2002 and 2001