SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-Q

[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended July 31, 2001 or

[_] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ___ to ___

Commission File Number: 001-15010

CERTICOM CORP.
--------------------------------------------------------------
(Exact name of registrant as specified in its charter)

Yukon Territory, Canada Not Applicable
- ----------------------- --------------------
(Province or other (I.R.S. Employer
jurisdiction of Identification No.)
incorporation)

25821 Industrial Boulevard
Hayward, California 94545
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)

(510) 780-5400
-----------------------------------------
(Registrant's telephone number, including area code)

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

As of August 31, 2001, there were 31,423,004 of registrant's common shares, no
par value, outstanding.

TABLE OF CONTENTS

Page

Exchange Rate Information................................................................................ 1

Special Note Regarding Forward-Looking Statements........................................................ 1

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements............................................................................. 2

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............ 11

Factors That May Affect Operating Results........................................................ 19

Item 3. Quantitative and Qualitative Disclosure About Market Risk........................................ 30

PART II. OTHER INFORMATION

Item 1. Legal Proceedings................................................................................ 31

Item 6. Exhibits and Reports on Form 8-K................................................................. 32

Signatures............................................................................................... 33

Unless otherwise indicated, all information in this Form 10-Q gives effect
to the 2-for-1 split of the Company's outstanding common shares, which occurred
on July 12, 2000.

Certicom(R) and Security Builder(R) are our registered trademarks, and
certicom encryption(TM), SSL Plus(TM), WTLS Plus(TM), Certilock(TM),
Certifax(TM), MobileTrust(TM), Trustpoint(TM), movian(TM), movianVPN(TM) and
movianCrypt(TM) are our trademarks.

In this Form 10-Q, the terms "Certicom", "the Company", "we", "us", and
"our" refer to Certicom Corp., a Yukon Territory, Canada corporation, and/or its
subsidiaries.

EXCHANGE RATE INFORMATION

Unless otherwise indicated, all dollar amounts in this Form 10-Q are
expressed in United States dollars. References to "$" or "U.S.$" are to United
States dollars, and references to "Cdn.$" are to Canadian dollars. The following
table sets forth, for each period indicated, information concerning the exchange
rates between U.S. dollars and Canadian dollars based on the inverse of the noon
buying rate in the City of New York on the last business day of each month
during the period for cable transfers as certified for customs purposes by the
Federal Reserve Bank of New York (the "Noon Buying Rate"). The table illustrates
how many U.S. dollars it would take to buy one Canadian dollar. On July 31,
2001, the Noon Buying Rate was U.S. $0.6532 per Cdn.$1.00.

U.S.$ per Cdn.$ Noon Buying Rate
------------------------------------------------------
Average (1) Low High Period End
-------------- ---------- ---------- --------------

Fiscal year ended
-----------------
April 30, 2001 0.6616 0.6831 0.6333 0.6510

Three months ended
------------------
July 31, 2000 0.6740 0.6831 0.6629 0.6720
July 31, 2001 0.6527 0.6622 0.6435 0.6532

_____________
(1) The average of the daily Noon Buying Rates on the last business day of each
month during the period.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

Certain statements contained in this Form 10-Q constitute "forward-looking
statements" within the meaning of the United States Private Securities
Litigation Reform Act of 1995. When used in this document, the words "may,"
"would," "could," "will," "intend," "plan," "anticipate," "believe," "estimate,"
"expect" and similar expressions, as they relate to us or our management, are
intended to identify forward-looking statements. Such statements reflect our
current views with respect to future events and are subject to certain risks,
uncertainties and assumptions. Many factors could cause our actual results,
performance or achievements to be materially different from any future results,
performance or achievements that may be expressed or implied by such
forward-looking statements, including, among others, those which are discussed
in "Factors That May Affect Operating Results" beginning on page 19 of this Form
10-Q, in our Annual Report on Form 10-K and in other documents that we file with
the Securities and Exchange Commission and Canadian securities regulatory
authorities. Should one or more of these risks or uncertainties materialize, or
should assumptions underlying the forward-looking statements prove incorrect,
actual results may vary materially from those described herein as intended,
planned, anticipated, believed, estimated or expected. We do not intend, and do
not assume any obligation, to update these forward-looking statements.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

CERTICOM CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands of U.S. dollars, except number of shares)

July 31, April 30,
2001 2001
----------- ---------
(Unaudited)
ASSETS

Current assets:
Cash........................................................................ $ 1,675 $ 1,942
Marketable securities, available for sale .................................. 31,414 50,310
Accounts receivable (net of allowance for doubtful
accounts of $904 and $211, respectively) ................................ 5,383 7,149
Prepaid expenses and deposits .............................................. 3,074 3,428
------------- ---------
Total current assets .................................................... 41,546 62,829

Property and equipment, net ..................................................... 24,172 18,288
Intangibles, net ................................................................ 14,597 26,348
Restricted cash ................................................................. 2,009 2,009
------------- ---------
Total assets............................................................. $ 82,324 $ 109,474
============= =========

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
Accounts payable............................................................ $ 7,241 $ 9,240
Accrued liabilities ........................................................ 2,760 3,106
Accrued restructuring charges .............................................. 1,716 --
Deferred revenue ........................................................... 2,343 2,168
------------- ---------
Total current liabilities ............................................... 14,060 14,514

Other payables .................................................................. 510 510
Accrued restructuring charges ................................................... 1,102 --
Lease inducements ............................................................... 1,649 1,093
------------- ---------
Total liabilities ....................................................... 17,321 16,117

Shareholders' equity:
Common shares, no par value; shares authorized: unlimited;
shares issued and outstanding: 31,250,343 and 25,747,549, respectively.... 182,427 175,151
Additional paid-in capital ................................................. 13,862 19,945
Deferred compensation expense .............................................. (1,204) (4,314)
Accumulated other comprehensive loss ....................................... (2,704) (2,615)
Foreign currency translation adjustment .................................... 162 155
Retained deficit ........................................................... (127,540) (94,965)
------------- ----------
Total shareholders' equity .............................................. 65,003 93,357
------------- ---------
Total liabilities and shareholders' equity .............................. $ 82,324 $ 109,474
============= =========

See accompanying notes to condensed consolidated financial statements.

CERTICOM CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands of U.S. dollars, except number of shares and per share data)
(Unaudited)

Three months ended July 31,
2001 2000
-------------- -------------

Revenues:
Products .............................................................. $ 950 $ 4,396
Services .............................................................. 1,594 657
----------- -----------
Total revenues ...................................................... 2,544 5,053

Cost of revenues:
Products .............................................................. 76 232
Services (including deferred compensation amortization
expense of $774 and $0, respectively) ................................ 2,233 1,127
----------- -----------
Total cost of revenues .............................................. 2,309 1,359

----------- -----------
Gross margin .............................................................. 235 3,694

Operating expenses:
Sales and marketing ................................................... 5,610 3,031
Product development and engineering ................................... 2,776 2,428
General and administrative (including stock compensation
amortization credit of ($311) and expense of $111, respectively)...... 2,666 2,583
Depreciation and amortization ......................................... 3,589 2,748
Impairment of goodwill and other intangibles........................... 9,352 --
Restructuring costs ................................................... 9,533 --
----------- -----------
Total operating expenses ............................................ 33,526 10,790

Loss from operations ...................................................... (33,291) (7,096)

Other income (expense):
Interest income and other income and expense, net ..................... 716 952
Interest (expense) .................................................... -- (423)
----------- -----------
Total other income (expense) ........................................ 716 529

Loss before provision for income taxes .................................... (32,575) (6,567)

Provision for income taxes ................................................ -- 80

----------- -----------
Net loss .................................................................. $ (32,575) $ (6,647)
=========== ===========

Basic and diluted net loss per share ...................................... $ (1.06) $ (0.26)
=========== ===========

Shares used in basic and diluted net loss per share calculations .......... 30,772,332 25,571,708
=========== ===========

See accompanying notes to condensed consolidated financial statements.

CERTICOM CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of U.S. dollars)
(Unaudited)

Three months ended July 31,
2001 2000
------------- -------------

Cash flows from operating activities:
Net loss.......................................................................... $ (32,575) $ (6,647)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization.................................................. 3,589 2,748
Write-off of impaired goodwill................................................. 9,352 -
Non-cash restructuring costs................................................... 7,936 -
Stock compensation expense..................................................... 463 190
Non-cash interest expense...................................................... - 423
Changes in non-cash working capital items:
Accounts receivable, net..................................................... 1,766 254
Prepaid and other assets..................................................... 354 427
Account payable.............................................................. (1,999) 1,456
Accrued liabilities.......................................................... (346) 721
Deferred revenue............................................................. 175 213
------------- -------------
Net cash used in operating activities...................................... (11,285) (215)
------------- -------------

Cash flows from investing activities:
Purchase of equipment and software................................................ (9,314) (1,333)
Purchase of marketable securities, available for sale............................. (75,581) (1,035)
Sales and maturities of marketable securities, available for sale................. 94,484 -
------------- -------------
Net cash provided by (used in) investing activities........................ 9,589 (2,368)
------------- -------------

Cash flows from financing activities:
Issuance of common stock including the exercise of stock options, net............. 1,519 52,326
Notes payable..................................................................... - (10,000)
------------- -------------
Net cash provided by financing activities.................................. $ 1,519 $ 42,326
------------- -------------

Effect of exchange rate on cash and cash equivalents.................................. (90) -
------------- -------------
Net increase in cash and cash equivalents.................................. (267) 39,743
------------- -------------

Cash and cash equivalents, beginning of period........................................ 1,942 10,508
------------- -------------
Cash and cash equivalents, end of period.............................................. $ 1,675 $ 50,251
============= =============

Supplemental disclosure of cash flow information:
Income taxes paid................................................................. $ - $ -
Interest paid..................................................................... $ - $ 33

Non-cash investing and financing activities:
Warrant issued in connection with line of credit.................................. $ - $ 423
Deferred stock compensation....................................................... $ 463 $ 1,627

See accompanying notes to condensed consolidated financial statements.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Basis of Presentation

The condensed consolidated financial statements included in this document
are unaudited and reflect all adjustments (consisting only of normal recurring
adjustments, except as noted) which are, in the opinion of our management,
necessary for a fair presentation of the financial position, results of
operations and cash flows for the interim periods shown. These condensed
consolidated financial statements should be read in conjunction with our
consolidated financial statements and notes thereto, Management's Discussion
and Analysis of Financial Condition and Results of Operations contained in our
Annual Report on Form 10-K for the fiscal year ended April 30, 2001 and
Management's Discussion and Analysis of Financial Condition and Results of
Operations contained in Item 2 of this Form 10-Q. The results of operations for
the three months ended July 31, 2001 are not necessarily indicative of the
results for the entire fiscal year ending April 30, 2002.

Revenue Recognition and Deferred Revenues

We recognize software licensing revenue in accordance with all applicable
accounting regulations including the American Institute of Certified Public
Accountants Statement of Position (SOP) 97-2, "Software Revenue Recognition," as
amended by SOP 98-4 and SOP 98-9.

Following the requirements of SOP 97-2, we recognize license revenues when
all of the following have occurred:

. we have signed a non-cancelable license agreement with the customer;

. delivery of the software product to the customer has occurred;

. the amount of the fees to be paid by the customer are fixed or
determinable; and

. collection of these fees is probable.

If an acceptance period is contractually provided, license revenues are
recognized upon the earlier of customer acceptance or the expiration of that
period. In instances where delivery is electronic and all other criteria for
revenue recognition has been achieved, the product is considered to have been
delivered when the customer either takes possession of the software via a
download or the access code to download the software from the Internet has been
provided to the customer. Our software does not require significant production,
customization or modification.

SOP 97-2, as modified, generally requires revenue earned on software
arrangements involving multiple elements such as software products, upgrades,
enhancements, post contract customer support, or PCS, installation and training
to be allocated to each element based on the relative fair values of the
elements. The fair value of an element must be based on evidence that is
specific to the vendor. If evidence of fair value does not exist for all
elements of a license agreement and PCS is the only undelivered element, then
all revenue for the license arrangement is recognized ratably over the term of
the agreement. If evidence of fair value of all undelivered elements exists but
evidence does not exist for one or more delivered elements, then revenue is
recognized using the residual method. Under the residual method, the fair value
of the undelivered elements is deferred, and the remaining portion of the
arrangement fee is recognized as revenue. When arrangements require us to
deliver specified additional upgrades the entire fee related to the arrangement
is deferred until delivery of the specified upgrade has occurred, unless we have
vendor-specific objective evidence of fair value for the upgrade. Fees related
to contracts that require us to deliver unspecified additional products are
deferred and recognized ratably over the contract term.

Revenue from consulting and training services are recognized using the
percentage-of-completion method for fixed fee development arrangements or as the
services are provided for time-and-materials arrangements.

maintenance and support service are deferred and recognized ratably over the
term of the support period. Revenues from professional services are recognized
when the services are performed.

Deferred revenues generally result from the following: deferred maintenance
and support service, cash received for professional services not yet rendered
and license revenues deferred relating to arrangements where we have received
cash and are required to deliver either unspecified additional products or
specified upgrades for which we do not have vendor-specific objective evidence
of fair value.

Impairment of Long-Lived Assets

We evaluate the recoverability of our property and equipment and intangible
assets in accordance with SFAS 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of." SFAS No. 121 prescribes the
accounting treatment for long-lived assets, identifiable intangibles and
goodwill related to those assets when there are indications that the carrying
value of those assets may not be recoverable. SFAS 121 requires recognition of
impairment of long-lived assets in the event the net book value of such assets
exceeds the future undiscounted cash flows attributable to such assets.
Accordingly, we evaluate asset recoverability at each balance sheet date or when
an event occurs that may impair recoverability of the asset.

Research and Product Development Cost

We expense all research and development costs as they are incurred.
Scientific research tax credits are recognized at the time the related costs are
incurred and recovery is reasonably assured. We have capitalized certain costs
associated with the filing of approximately fifty patent applications in various
jurisdictions. These patent filings relate to Elliptic Curve Cryptography, or
ECC, various mathematical computational methodologies, security protocols and
other cryptographic inventions. Once granted, we amortize the individual patent
cost over three years. We capitalize patents not yet granted at their cost less
a provision for the possibility of the patent not being granted or abandoned.

Reclassifications

Certain reclassifications have been made in the 2001 financial statement
presentation to conform to the 2002 presentation.

Note 2. Net Loss per Common Share

Basic net loss per common share is computed using the weighted average
number of common shares outstanding during the period. Diluted net loss per
common share is computed using the weighted average number of common shares
outstanding during the period and, when dilutive, potential common shares from
options and warrants to purchase common shares, using the treasury stock method.

The following potential common shares have been excluded from the
calculation of diluted net loss per share for all periods presented because the
effect would have been anti-dilutive:

Three months ended July 31,
---------------------------------
2001 2000
------------- --------------

Shares issuable under stock options................... 3,649,671 5,729,350
Shares of restricted stock subject to repurchase...... 46,384 -
Shares issuable pursuant to warrants.................. 30,000 30,000

The weighted average exercise price of stock options was $3.47 and $9.04
at July 31, 2001 and 2000, respectively. The purchase price of restricted stock
was $38.94. The exercise price of outstanding warrants was Cdn.$38.13 per share
($24.91 based on the exchange rate on July 31, 2001).

Note 3. Comprehensive Income (Loss)

Other comprehensive income refers to revenues, expenses, gains and losses
that under U.S. generally accepted accounting principles are recorded as an
element of shareholders' equity but are excluded from net income. The following
table sets forth the components of comprehensive loss for the three months ended
July 31, 2001 and 2000, respectively (in thousands of U.S. dollars):

Three months ended July 31,
2001 2000
------------- -------------
(Unaudited) (Unaudited)

Net loss................................................................ $ (32,575) $ (6,647)

Other comprehensive income:
Unrealized gain (loss) on marketable securities, available for sale.. (89) 33
----------- -----------

Comprehensive loss...................................................... $ (32,664) $ (6,614)
=========== ===========

Note 4. Impairment of Goodwill and Other Intangibles

In connection with our restructuring program announced on June 4, 2001, we
performed an impairment assessment of the identifiable intangibles and goodwill
recorded in connection with the acquisitions of DRG Resources Group, Inc. and
Uptronics, Inc. We performed the assessment primarily due to changes in the
economy, the overall decline in the industry growth rates, and our lower actual
and projected operating results, including those related to our acquisitions of
DRG Resources Group, Inc. and Uptronics Inc. As a result, we recorded an
impairment of goodwill and other intangible assets of $9.4 million, measured as
the amount by which the carrying amount exceeded the present value of the
estimated future cash flows for goodwill. The assumptions supporting the cash
flows, including the discount rate, were determined using our best estimates as
of June 4, 2001. We will continue to assess the recoverability of the remaining
goodwill and other intangible assets periodically in accordance with our policy.

Note 5. Restructuring Costs

On June 4, 2001, we announced a restructuring program to prioritize our
initiatives, reduce costs not directly associated with selling and product
development, decrease discretionary spending and improve efficiency. This
restructuring program includes a reduction of our full-time employee headcount,
consolidation of excess facilities and reengineering of certain business
functions.

As a result of the restructuring program, we recorded restructuring costs
of approximately $9.5 million for the three months ended July 31, 2001. We
recorded restructuring expenses in the following areas: 1) reduction in
workforce; 2) consolidation of excess facilities and non-productive property and
equipments; and 3) elimination of deferred compensation.

We reduced our work force by approximately 30% across all business
functions and geographic regions. We recorded an estimated charge of
approximately $2.1 million relating primarily to severance and fringe benefits.

We recorded a restructuring charge of approximately $5.1 million for
property and equipment that will be disposed of or removed from operations and
excess facilities relating primarily to non-cancelable lease costs under the
assumption that we will not be able to sublease certain of our excess facilities
in next two years.

In connection with the acquisition of DRG Resources Group, Inc., we
recorded approximately $7.7 million of deferred compensation expense in
connection with shares subject to restriction under employment agreements signed
with the former owners of DRG Resources Group, Inc. These amounts are being
amortized over an eighteen months period. As a result of the restructuring
program in June 2001, certain former owners of DRG Resources Group, Inc. left
our company. The unvested shares that were restricted under the terms of these
employment agreements were immediately vested upon terminations of the related
employees. As a result, approximately $2.3 million of deferred compensation
charges were recorded in the first quarter of fiscal 2002.

In the first quarter of fiscal 2002, we paid approximately $1.6 million in
cash for restructuring costs related to certain employee severance and other
employee payments. The accrued restructuring and related expenses during the
three months ended July 31, 2001 were comprised of the following (in thousands
of U.S. dollars):

Accrued
-------------------------------
Current Non-current
------------- ---------------

Work force reduction................................... $ 525 $ -
Consolidation of excess facilities .................... 1,191 1,102

-------- --------
Total restructuring expenses........................ $ 1,716 $ 1,102
======== ========

As of July 31, 2001, we anticipated paying these balances in the next 24
months.

Note 6. Segment Information and Significant Customer

We operate in one reportable segment. We are a developer, manufacturer and
vendor of digital information security products, technologies and services
within the industry segment of electronic commerce.

Information about our geographic operations is given below (in thousands of
U.S. dollars):

Three months ended July 31,
---------------------------------
2001 2000
--------------- --------------

U.S........................................... $ 1,899 $ 4,403
Canadian...................................... 548 30
International (non-Canadian/US)............... 97 620
------------ -----------
Total revenue............................... $ 2,544 $ 5,053
============ ===========

One of our customers accounted for approximately 11% of our revenue in the
first quarter of fiscal 2002 and one of our customers accounted for
approximately 24% of our revenue in the first quarter of fiscal 2001.

Note 7. Public Offering and Stock Split

In March 2001, we issued 4,000,000 of our common shares in Canada and the
United States at a per share price of Cdn.$12.50 (approximately$8.14 based on
the exchange rate on April 30, 2001). The common shares have not

been registered under the United States Securities Act of 1933, as amended. The
gross proceeds of this offering were Cdn.$50.0 million (approximately $32.5
million based on the exchange rate on April 30, 2001). After deducting
underwriting discounts and commissions and offering expenses, the net proceeds
of this offering were Cdn.$47.2 million (approximately $30.8 million based on
the exchange rate on April 30, 2001).

On July 12, 2000, we completed a two-for-one split of our outstanding
common shares. All share and per share amounts in this document have been
adjusted to give effect to this split.

Note 8. Stock Option Repricing

In March 2000, the FASB issued Interpretation No. 44, "Accounting for
Certain Transactions involving Stock Compensation," an interpretation of APB
Opinion No. 25, "Accounting for Stock Issued to Employees," which, among other
things, requires variable-award accounting for repriced options from the date
the options are repriced until the date of exercise. This interpretation became
effective on July 1, 2000 to cover specific events that occur after December 15,
1998. On March 17, 1999, our Board of Directors approved the exchange of options
to acquire an aggregate of 1,106,240 of our common shares for options having a
right to acquire 382,914 common shares. Because these options were repriced
after December 15, 1998, they are covered by the interpretation. Accordingly,
these options will be accounted for as variable until the date they are
exercised, forfeited or expire unexercised. Additional compensation cost will be
measured for the full amount of any increases in share price after July 1, 2001
and will be recognized over the remaining vesting period. Any adjustment to the
compensation cost for further changes in share price after the options vest will
be recognized immediately. Stock compensation amortization expense of $111
thousand was recorded for the three months ended July 31, 2000. As of July 31,
2001, price of our common shares was less than the exercise price of the
repriced stock options. As a result, a credit of approximately $311 thousand was
recorded to stock compensation amortization expenses in the first quarter of
fiscal 2002. Deferred compensation expense related to this repricing of options
was $0 at the end of first quarter of fiscal 2002.

On July 6, 2001, we announced voluntary stock option exchange program to be
offered to employees in which employees will be able to exchange current
outstanding options for new options to be issued no sooner than six months and
one day after the end of the exchange period. For existing options with exercise
prices over $23.00, program participants will receive one new option for each
two options tendered for exchange. For options with exercise prices between
$10.00 and $22.99, program participants will receive two new options for each
three options tendered for exchange. Options with exercise prices below $10.00
may not be voluntarily tendered for exchange under this new program. Each of the
new options will have a vesting schedule whereby 25% will vest immediately upon
issue, and the balance will vest monthly on a prorated basis for 24 months. The
new options will be exercisable for a period of 5 years from the date of grant.

Note 9. Contingencies

We are subject to legal proceedings and claims that arise in the ordinary
course of our business. While management currently believes the amount of
ultimate liability, if any, with respect to these actions will not materially
affect the financial position, results of operations, or liquidity of our
company, the ultimate outcome of any litigation is uncertain. Were an
unfavorable outcome to occur, the impact could be material to us.

One of our suppliers, East West Imports, Inc. dba California Computers, has
filed suit against us in the Superior Court of the State of California, County
of Alameda, for payment of approximately $200,000 plus costs, attorney fees, and
interest. The focus of our dispute is whether or not a number of personal
computers and peripheral items were actually received by us. Both parties are
attempting to ascertain the proper amount owed, and we anticipate a settlement
on fair and reasonable terms is likely to occur shortly. In the event that no
such settlement is reached within a reasonable time, we intend to vigorously
defend any litigation over disputed amounts. In such case there can be no
assurance that we will be successful in doing so, or that such disputes will not
have a material adverse impact on us.

Note 10. Recent Accounting Pronouncement

In July 2001, the FASB issued SFAS No. 141, "Business Combinations". SFAS
No. 141 requires that all business combinations be accounted for under the
purchase method for business combinations initiated after June 30, 2001 for
which the date of acquisition is July 1, 2001 or later. Use of the
pooling-of-interest method is no longer permitted. In July 2001 the FASB issued
SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS No. 142 requires that
goodwill no longer be amortized to earnings, but instead be periodically
reviewed for impairment. SFAS No. 142 must be adopted starting with fiscal years
beginning after December 15, 2001. The impact of adopting SFAS 141 and SFAS 142
has not been determined.

In August 2001, the FASB issued SFAS No. 143 "Accounting for Asset
Retirement Obligations". This statement addresses Financial accounting and
reporting for obligations associated with the retirement of tangible long lived
assets and for the associated asset retirement costs. SFAS No. 143 is effective
for financial statements issued for fiscal years beginning after June 15, 2002.
The impact of adopting SFAS 143 has not been determined.

Note 11. Subsequent Events

On August 17, 2001, we announced that we would further reduce our workforce
by approximately 25% by the end of the second quarter of fiscal 2002.

On August 30, 2001, we issued and sold Cdn.$13.5 million (approximately
$8.7 million based on the exchange rate on August 30, 2001) aggregate principal
amount of 7.25% senior unsecured convertible notes (the "Notes") on a private
placement basis. The Notes are convertible by the holders thereof, without
payment of additional consideration, into an equal principal amount of 7.25%
senior convertible unsecured subordinated debentures (the "Debentures") at any
time and automatically at 5:00 pm (Toronto time) on the earlier of (i) the fifth
business day after a receipt is issued by the last of the relevant securities
regulatory authorities in Canada for a final prospectus qualifying the issuance
of the Debentures on the conversion of the Notes, and (ii) August 30, 2002. The
Debentures mature on August 30, 2004 and are convertible into our common shares
at the holder's option at any time before the close of business on the earlier
of August 30, 2004 and the last business day before the date specified for
redemption at a conversion price of Cdn.$3.85 per common share. The net proceeds
from the offering will be used for working capital and general corporate
purposes.

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

Certain statements contained in this Form 10-Q constitute "forward-looking
statements" within the meaning of the United States Private Securities
Litigation Reform Act of 1995. When used in this document, the words "may,"
"would," "could," "will," "intend," "plan," "anticipate," "believe," "estimate,"
"expect" and similar expressions, as they relate to us or our management, are
intended to identify forward-looking statements. Such statements reflect our
current views with respect to future events and are subject to certain risks,
uncertainties and assumptions. Many factors could cause our actual results,
performance or achievements to be materially different from any future results,
performance or achievements that may be expressed or implied by such forward-
looking statements, including, among others, those which are discussed in
"Factors That May Affect Operating Results" beginning on page 19 of this Form
10-Q, in our Annual Report on Form 10-K and in other documents that we file with
the Securities and Exchange Commission and Canadian securities regulatory
authorities. Should one or more of these risks or uncertainties materialize, or
should assumptions underlying the forward-looking statements prove incorrect,
actual results may vary materially from those described herein as intended,
planned, anticipated, believed, estimated or expected. We do not intend, and do
not assume any obligation, to update these forward-looking statements.

Overview

We are a leading provider of information security software and services,
specializing in solutions for mobile e-business. Our products and services are
specifically designed to address the challenges imposed by a wireless data
environment. We offer comprehensive solutions that incorporate our efficient
encryption technology and are based on industry standards for information
security that utilize public-key cryptography. We believe that the addition of
our products to wireless infrastructures will help to build the trust and
confidence necessary for the success of mobile e-business.

Historically, we have focused on the development and marketing of
cryptographic and information security protocol toolkits. Today, our
comprehensive product offering includes an enabling technologies suite, which
allows original equipment manufacturers, or OEMs, to develop secure e-business
applications; our trust services, which provide OEMs and enterprises with the
necessary public-key infrastructure, or PKI, management tools and certificate
services to authenticate users and servers; and our enterprise application
software, which provides virtual private network, or VPN, security and strong
personal digital assistant, or PDA, data security for enterprises wanting to
enable a mobile workforce. In addition, we provide consulting and systems
integration services to assist our customers in designing and implementing
efficient security solutions. Our products and services solve difficult security
problems for the world's leading providers of computing and communication
products. OEM customers integrate our enabling technologies into their hardware
and software products, then sell the finished products to consumers or
enterprise customers. In addition, we sell our enterprise application software
directly to Fortune 1000 companies.

We were founded in 1985 and are governed by the laws of the Yukon
Territory, Canada. We determined that commencing May 1, 1999 our functional
currency was the U.S. dollar and, accordingly, we began measuring and reporting
our results of operations in U.S. dollars from that date. We changed our
functional currency as we derive a majority of our revenues and incur a
significant portion of our expenses in U.S. dollars.

On January 26, 2000, we acquired all the outstanding shares of common stock
of Trustpoint, a corporation based in Mountain View, California. Trustpoint is a
private developer of PKI products. OEMs use PKI products to develop
authentication and certification applications and services. In connection with
this acquisition, we issued 201,120 of our common shares in exchange for all of
the outstanding shares of Trustpoint and we also assumed Trustpoint's
outstanding employee stock options. The transaction was accounted for as a
purchase and, accordingly, the total consideration of approximately $10.5
million has been allocated to the tangible and intangible assets acquired based
on their respective fair values on the acquisition date. Trustpoint's results of
operations have been included in the consolidated financial statements from the
date of acquisition. As a result of our acquisition of Trustpoint, we recorded
goodwill and other intangible assets of approximately $10 million. These amounts
will be amortized over a three to five year period.

On September 12, 2000, we completed our acquisition of DRG Resources Group,
Inc., a corporation based in Redwood City, California. DRG Resources Group, Inc.
is an e-commerce security consulting company. In

connection with this acquisition, we issued 397,595 of our common shares in
exchange for all of the outstanding shares of DRG Resources Group, Inc. and we
also assumed DRG Resources Group, Inc.'s outstanding stock options. The
transaction was accounted for as a purchase and, accordingly, the total
consideration of approximately $18.0 million has been allocated to the tangible
and intangible assets acquired based on their respective fair values on the
acquisition date. The results of operations of DRG Resources Group, Inc. have
been included in the consolidated financial statements from the date of
acquisition. As a result of our acquisition of DRG Resources Group, Inc., we
recorded goodwill, deferred compensation expense, and other intangible assets of
approximately $17.9 million. As a result of our restructuring program in June
2001, certain former owners of DRG Resources Group, Inc. left our company.

Our consolidated financial statements contained in this Form 10-Q are
reported in U.S. dollars and are presented in accordance with U.S. generally
accepted accounting principles, or U.S. GAAP. The following discussion and
analysis relates to our financial statements that have been prepared in
accordance with U.S. GAAP.

Results of Operations

Although we have experienced substantial growth in revenues in recent
periods, we have incurred substantial operating losses since our inception and
we expect to incur substantial operating losses for the foreseeable future. As
of July 31, 2001, we had an accumulated deficit of approximately $127.5 million
as determined in accordance with U.S. GAAP. We expect to incur additional losses
for the foreseeable future, and we may never achieve profitability.

The following table sets out, for the periods indicated, selected financial
information from our consolidated financial statements as a percentage of
revenue.

Three months ended July 31,
-------------------------------
2001 2000
------------- ------------
Consolidated Statement of Operations Data: (%) (%)
Revenues:
Products .......................... 37 87
Services .......................... 63 13
Total revenues .................. 100 100
Cost of revenues:
Products .......................... 3 5
Services .......................... 88 (1) 22
Total costs ..................... 91 27
Operating expenses:
Sales and marketing ............... 220 60
Product development and engineering 109 48
General and administrative ........ 105 51
Depreciation and amortization ..... 141 54
Goodwill impairment ............... 368 -
Restructuring costs ............... 375 -
Total operating expenses ........ 1,318 213
Loss from operations ................. (1,309) (140)
Other income:
Interest income ................... 28 18
Interest expense .................. - (8)
Total other income (expense) .... 28 10
Loss before provision for income taxes (1,281) (130)
Provision for income taxes ........... - 2
------- ------
Net loss ............................. (1,281) (132)
======= ======

____________
Note:
(1) Includes the amortization of deferred compensation expense in connection
with the acquisition of DRG Resources Group, Inc. for three months ended July
31, 2001.

Revenues

Following the requirements of SOP 97-2, we recognize license revenues when
all of the following have occurred:

. we have signed a non-cancelable license agreement with the customer;

. delivery of the software product to the customer has occurred;

. the amount of the fees to be paid by the customer are fixed or
determinable; and

. collection of these fees is probable.

The fair value of professional services, maintenance and support services
have been determined using specific objective evidence of fair value based on
the price charged when the elements are sold separately. Revenues for
maintenance and support service are deferred and recognized ratably over the
term of the support period. Revenues from professional services are recognized
when the services are performed.

We operate in one reportable segment. We derive our revenues from a variety
of sources that we generally classify as products and services. We earn products
revenues from one-time base license fees or technology access fees, royalties,
and hardware products. Our hardware products are manufactured by third parties
to our specifications and resold by us to our customers. In addition, we earn
revenues on a transaction basis through the sale of our authentication service
offerings, which are primarily digital certificates. Services revenues are
derived from the performance of contracted services for customers, maintenance,
and support and training fees.

We negotiate most of our customer contracts on a case-by-case basis. Prior
to June 2001, most of our contracts (other than our contracts for professional
services or hardware sales) include provisions for us to receive an up-front
license fee and royalties. Our royalties for software licenses for mobile and
wireless devices vary based on a number of factors, including the size of the
contract and the nature of the contract, the customer, the device and the
application.

In June 2001, we converted our enabling technologies products primarily to
subscription-based licenses. In addition, our trust services and enterprise
application software product lines are accounted for under the subscription
model. Under our subscription license model, we expect a significant percent of
customers to renew their licenses upon license expiration. The change from
perpetual licenses to subscription licenses has impacted our reported quarterly
and annual revenues and will continue to do so on a going-forward basis as
subscription license revenue will be amortized over the term of the subscription
license. In the past, the majority of our perpetual license revenues have been
recognized in the quarter of product delivery. Therefore, a subscription license
order will result in substantially less current-quarter revenue than an equal-
sized order for a perpetual license. We invoice our customers upfront for the
full amount of a twelve-month subscription license period and collect the
invoice within our standard payment terms. Although we expect that over the long
term our cash flow from operations under the subscription license model will be
equal to or greater than under the perpetual license model, in the near term we
expect our cash flow from operations to decrease and deferred revenue to
increase.

The following table sets forth our revenues by category and by geography
for the periods indicated:

Three months ended July 31,
------------------------------
2001 2000
----------- -----------
Products 37% 87%
Services 63 13
--- ---
Total revenue 100% 100%
=== ===

U.S. revenue 75% 87%
Canadian revenue 21 1
International (non-Canadian/US) revenue 4 12
--- ---
Total revenue 100% 100%
=== ===

Total revenues for the three months ended July 31, 2001 were $2.5 million,
a 50% decrease from $5.1 million for the three months ended July 31, 2000. The
decrease was primarily attributable to our transition from the perpetual license
model to the subscription license model. Under our new subscription license
model, only a fraction of the total value of the contract is recorded as revenue
in the quarter when the contract is signed and products are delivered. The
remainder of the total value is recognized ratably over the term of the
contract. In addition, the decrease was due to decreased sale size as larger
companies deferred their purchases due to capital constraints under the current
difficult economic environment.

Products revenues were $1.0 million for the three months ended July 31,
2001, a 78% decrease compared to $4.4 million for the three months ended July
31, 2000. The decrease was expected due to a portion of our new contracts being
recognized using our subscription license model. Under our new subscription
license model, we recognize revenue ratably over the term of the contract
whereas under the perpetual license model we recognize revenue when the product
is delivered. In addition, the decrease in revenue was also due to a reduction
in the number of deals with large companies as large companies deferred their
purchases due to capital constraints.

Services revenues were $1.6 million for the three months ended July 31,
2001, a 143% increase compared to $0.7 million for the three months ended July
31, 2000. The increase in services revenue was due to an increase in contract
development work by our professional services organization, a larger customer
base, and to a lesser extent, increases in maintenance fees.

Cost of Revenues

Cost of revenues consists of cost of products and services. Our cost of
products consists primarily of the component cost of our hardware products
manufactured by third parties to our specifications as well as the procured
costs of third-party hardware technology. Cost of services consists primarily of
costs related to professional services activities. These expenses include
salaries, travel and related expenses, and amortization of deferred compensation
expense in connection with the acquisition of DRG Resources Group, Inc.

Total cost of revenues increased 70% to $2.3 million for the three months
ended July 31, 2001 compared to $1.4 million for the three months ended July 31,
2000.

Cost of products was $76,000 for the three months ended July 31, 2001, a
67% decrease compared to $232,000 for the same period of fiscal 2001. The
decrease in cost of products in the first quarter of fiscal 2002 was primarily
due to the lower hardware costs as a result of lower hardware sales.

Cost of service was $2.2 million for the three months ended July 31, 2001,
a 98% increase over $1.1 million for the three months ended July 31, 2000. This
increase was primarily a result of the increase in the number of professional
services providers, the deferred compensation expense in connection with the
acquisition of DRG Resources Group, Inc. and launch of our trust services
product offerings.

Operating Expenses

Our operating expenses consist of sales and marketing, product development
and engineering, general and administrative expenses, depreciation and
amortization, and goodwill impairment and restructuring costs.

Sales and Marketing

Sales and marketing expenses consist primarily of employee salaries and
commissions, related travel, public relations and corporate communications
costs, trade shows, marketing programs and market research.

Sales and marketing expenses were $5.6 million for the three months ended
July 31, 2001 compared to $3.0 million for the same period in fiscal 2001, an
increase of 85%. These increased expenses in fiscal 2002 were primarily due to
an increase in personnel costs and sales and marketing programs.

Product Development and Engineering

Product development and engineering expenses consist primarily of employee
salaries, sponsorship of cryptographic research activities at various
universities, participation in various cryptographic, wireless and e-business
standards associations and related travel and other costs. We have capitalized
certain costs associated with the filing of patent applications in various
jurisdictions. These patent filings are in the areas of ECC, various
mathematical computational methodologies, security protocols and other
cryptographic inventions. Once granted, we amortize the individual patent cost
over three years. We capitalize patents not yet granted at their cost less a
provision for the possibility of the patent not being granted or abandoned.

Our product development and engineering expenses were $2.8 million for the
three months ended July 31, 2001 compared to $2.4 million for the same period in
fiscal 2001, an increase of 14%. These increases were the result of the addition
of personnel and related costs necessary to support new and on-going product
development in the first quarter of fiscal 2002.

General and Administrative

General and administrative expenses consist primarily of salaries and other
personnel-related expenses for executive, financial, legal, information services
and administrative functions, and amortization of stock compensation expense.

For the three months ended July 31, 2001, general and administrative
expenses increased 3% to $2.7 million compared to $2.6 million for the same
period in fiscal 2001. This increase was primarily due to the growth in
personnel and office space in California.

Depreciation and Amortization

Depreciation and amortization represent the allocation to income of the
cost of fixed assets and intangibles including patents cost over their estimated
useful lives.

Depreciation and amortization increased 31% to $3.6 million for the three
months ended July 31, 2001 compared to $2.7 million for the three months ended
July 31, 2000. This increase was due to additions to our property and equipment
assets.

Impairment of Goodwill and Other Intangibles

In connection with our restructuring program announced on June 4, 2001, we
performed an impairment assessment of the identifiable intangibles and goodwill
recorded in connection with the acquisitions of DRG Resources Group, Inc. and
Uptronics, Inc. We performed the assessment primarily due to changes in the
economy, the overall decline in the industry growth rates, and our lower actual
and projected operating results, including those related to our acquisitions of
DRG Resources Group, Inc. and Uptronics, Inc. As a result, we recorded
impairment of goodwill and other intangible assets of $9.4 million, measured as
the amount by which the carrying amount exceeded the present value of the
estimated future cash flows for goodwill. The assumptions supporting the cash
flows, including the discount rate, were determined using our best estimates as
of June 4, 2001. We will continue to assess the recoverability of the remaining
goodwill and other intangible assets periodically in accordance with our policy.

Restructuring Costs

On June 4, 2001, we announced a restructuring program. This restructuring
program included a reduction of our full-time employee headcount in most
functional areas, consolidation of excess facilities a reduction in
discretionary expenses and restructuring of certain business processes and
functions.

As a result of the restructuring program, we recorded approximately $9.5
million of restructuring costs for the three months ended July 31, 2001. We
recorded restructuring expenses in the following areas: 1) reduction in
workforce; 2) consolidation of excess facilities and non-productive property and
equipments; and 3) elimination of deferred compensation.

We reduced our workforce by approximately 30% across all business functions
and geographic regions. We recorded an estimated charge of approximately $2.1
million relating primarily to severance and fringe benefits.

We recorded a restructuring charge of approximately $5.1 million for excess
facilities relating primarily to non-cancelable lease costs under the assumption
that we will not be able to sublease certain of our excess facilities in next
two years.

In connection with the acquisition of DRG Resources Group, Inc., we
recorded approximately $7.7 million of deferred compensation expense in
connection with shares subject to restriction under employment agreements signed
with the former owners of DRG Resources Group, Inc. These amounts are being
amortized over an eighteen month period. As a result of the restructuring
program in June 2001, certain former owners of DRG Resources Group, Inc. left
our company. The unvested shares that were restricted under the terms of these
employment agreements were immediately vested upon terminations of the related
employees. As a result, approximately $2.3 million of deferred compensation
charges were recorded in the first quarter of fiscal 2002.

Accrued
----------------------------
Current Non-current
--------- -----------
Work force reduction.................. $ 525 $ -
Consolidation of excess facilities.... 1,191 1,102
------ ------
Total restructuring expenses ...... $1,716 $1,102
====== ======

As of July 31, 2001, we anticipated paying these balances in the next 24
months.

Interest and Other Income (Expense)

For the three months ended July 31, 2001, interest income was $0.7 million
compared to interest income of $1.0 million for the same period in fiscal 2001.
This decrease resulted from a decrease in the amount of cash and marketable
securities invested and lower interest rates on the short-term investments for
the quarter ended July 31, 2001 compared to the quarter ended July 31, 2000. As
of the end of fiscal year 2000, we had borrowed $10 million from Sand Hill
Capital II, LP (Sand Hill). In connection with this financing, we issued a
warrant which entitles Sand Hill to purchase 30,000 of our common shares at an
exercise price of Cdn$38.13 per share (U.S.$24.91 based on the exchange rate on
July 31, 2001) until April 27, 2005. The warrant was valued at $423,000 at the
time of issuance based on the Black-Scholes option valuation model. In the first
quarter of fiscal 2001, we recorded a one-time, non-cash interest expense of
$0.4 million related to the warrant issued to Sand Hill. The value of the
warrant was charged to interest expense in the first quarter of fiscal 2001 as
the loan was re-paid with proceeds from our public offering in May 2000.

Provision for Income Taxes

We pay taxes in accordance with U.S. federal, state and local tax laws and
Canadian federal, provincial and municipal tax laws. Income tax was $80 thousand
for the three months ended July 31, 2000. We do not expect to pay significant
corporate income taxes in both Canada and the United States in the foreseeable
future because we have significant tax credits and net operating loss
carryforwards for Canadian, U.S. federal and U.S. state income tax purposes.

Financial Condition, Liquidity and Capital Resources

In May 2000, we completed a public offering of 2,500,000 common shares at a
per share price of $23.15 in the United States and Canada for an aggregate
offering price of approximately $57.9 million. Our net proceeds from the
offering were approximately $51.5 million after deducting underwriting discounts
and commissions and offering expenses. On April 27, 2000, we borrowed $10
million from Sand Hill, at the prime rate of interest plus 3%. As partial
consideration for making advances to us under this credit facility, we granted
Sand Hill a warrant to purchase up to 30,000 of our common shares at an exercise
price of Cdn.$38.13 per share ($24.91 based on the exchange rate on July 31,
2001) until April 27, 2005. We repaid the loan and interest on May 5, 2000,
using a portion of the proceeds received from our public offering, and
terminated this facility.

In March 2001, we issued 4,000,000 of our common shares in Canada and the
United States at a per share price of Cdn.$12.50 (approximately $8.17 based on
the exchange rate on July 31, 2001). The common shares have not been registered
under the United States Securities Act of 1933, as amended. The gross proceeds
of this offering were

Cdn.$50.0 million (approximately $32.7 million based on the exchange rate on
July 31, 2001). After deducting underwriting discounts and commissions and
offering expenses, the net proceeds of this offering were Cdn.$47.2 million
(approximately $30.8 million based on the exchange rate on July 31, 2001).

On August 30, 2001, we issued and sold Cdn.$13.5 million (approximately
U.S.$8.7 million based on the exchange rate on August 30, 2001) aggregate
principal amount of 7.25% senior unsecured convertible notes (the "Notes") on a
private placement basis. The Notes are convertible by the holders thereof,
without payment of additional consideration, into an equal principal amount of
7.25% senior convertible unsecured subordinated debentures (the "Debentures") at
any time and automatically at 5:00 pm (Toronto time) on the earlier of (i) the
fifth business day after a receipt is issued by the last of the relevant
securities regulatory authorities in Canada for a final prospectus qualifying
the issuance of the Debentures on the conversion of the Notes, and (ii) August
30, 2002. The Debentures mature on August 30, 2004 and are convertible into our
common shares at the holder's option at any time before the close of business on
the earlier of August 30, 2004 and the last business day before the date
specified for redemption at a conversion price of Cdn.$3.85 per common share.

At July 31, 2001, total cash and available-for-sale marketable securities
were $33.1 million, excluding $2.0 million of restricted cash.

For the three months ended July 31, 2001, net cash used in operating
activities was $11.3 million. Net cash used in operating activities was
primarily due to our net loss of $32.6 million, which included total non-cash
charges of $21.3 million. The non-cash charges included $3.6 million of
depreciation and amortization, $9.4 million of impairment of goodwill and other
intangibles, $7.9 million of non-cash restructuring costs, and $0.5 million of
stock compensation expense.

For the three months ended July 31, 2001, net cash provided by investing
activities was $9.6 million. Net cash provided by investing activities was
primarily due to $18.9 million of net sales and maturities of marketable
securities, available for sale. The cash generated from sales and maturities of
marketable securities, available for sale, was offset by $9.3 million of capital
expenditures for property, equipment and patents. These consisted primarily of
$7.7 million of leasehold improvements and related costs and $1.1 million of
software.

For the three months ended July 31, 2001, net cash provided by financing
activities was $1.5 million. Net cash provided by financing activities was
primarily due to the issuance of common shares, including these related to the
exercise of stock options.

We lease premises totaling approximately 111,000 square feet in Hayward,
California. These leases expire on July 31, 2007. Through July 31, 2001, we have
capitalized leasehold improvements and related construction costs totaling
approximately $11.5 million for our Hayward facilities. In addition, we do not
anticipate any additional expenses subsequent to July 31, 2001 to complete the
build-out of our Hayward facilities. We also have a lease for approximately
30,300 square feet of office space in Mississauga, Ontario, which expires on
December 25, 2009. Currently, our Canadian offices occupy this space. We
recently signed a ten-year lease for approximately 130,000 square feet located
at 1980 Matheson Boulevard East, Mississauga, Ontario. At this time, the
facility is being constructed at our expense and we expect the total cost will
be approximately $8.1 million. Through July 31, 2001, we have capitalized
leasehold improvements and related construction costs totaling approximately
$2.7 million for the facility. In addition, we anticipate incurring
approximately an additional $5.4 million subsequent to July 31, 2001 to complete
the build-out of the facility. If the landlord intends to sell the leased
premises, we have a right of first refusal with respect of any sale of this
property on terms to be negotiated. In the fall of 2001, we intend to relocate
our Canadian operations from their current location to this new facility and to
sublease our current Canadian office space and approximately 40,000 square feet
space of new site, although there is no assurance that we will be able to do so
or at rates equal to our current obligations under the respective leases. The
annual rental fee for the new site varies between approximately Cdn.$10.85 to
Cdn.$13.05 per square foot ($7.09 to $8.52 per square foot based on the exchange
rate on July 31, 2001) over the life of the lease. We began paying rent on this
lease in May 2001. We also have a lease for approximately 6,000 square feet in
Herndon, Virginia that expires on October 5, 2007, and we occasionally execute
month-to-month leases for short-term office space. The total annual base rent
for all facilities is approximately $3.1 million.

The change from perpetual licenses to subscription licenses has impacted
our reported quarterly and annual revenues and will continue to do so on a go-
forward basis, as subscription license revenue will be amortized over the term
of the subscription license. In the past, the majority of our perpetual license
revenues have been recognized in

the quarter of product delivery. Therefore, a subscription license order will
result in substantially less current-quarter revenue than an equal-sized order
for a perpetual license. We invoice our customers upfront for the full amount of
a twelve-month subscription license period and collect the invoice within our
standard payment terms. Although we expect that over the long term our cash flow
from operations under the subscription license model will be equal to or greater
than under the perpetual license model, in the near term we expect our cash flow
from operations to decrease and deferred revenue to increase.

We believe our current cash and cash equivalents and marketable securities
position will be sufficient to meet our liquidity needs for the near term. In
the future, we may need to raise additional funds through public or private
financings, strategic partnerships, as well as collaborative relationships,
borrowings and other available sources. There can be no assurance that
additional or sufficient financing will be available, or, if available, that it
will be available on acceptable terms. If we raise funds by issuing additional
equity securities, the percentage of our stock owned by our then current
shareholders will be reduced. If adequate funds are not available, we may be
required to significantly curtail one or more of our research and development
programs or commercialization efforts or to obtain funds through arrangements
with collaborative partners or others on less favorable terms.

Factors That May Affect Operating Results

We operate in a dynamic, rapidly changing environment that involves risks
and uncertainties. You should carefully consider the risks described below and
the other information in this Form 10-Q. These risks and uncertainties are not
the only ones facing us. Additional risks and uncertainties not presently known
to us or that we currently deem immaterial may also impair our business
operations. If any of the following risks actually occur, our business,
financial condition or results of operations could be materially harmed.

Risks Related to Our Company

We have a limited operating history and have incurred losses since inception and
anticipate incurring losses for the foreseeable future

Although we have been engaged in the cryptographic security industry since
1985, we did not ship our first commercial toolkit or enter the U.S. market
until 1997. Accordingly, our business operations are subject to all of the risks
inherent in a new business enterprise, such as competition and viable operations
management. These risks and uncertainties are often worse for a company engaged
in new and evolving product markets.

Since our inception, we have incurred substantial net losses. As of July
31, 2001, we had an accumulated deficit of approximately $127.5 million (as
determined in accordance with U.S. generally accepted accounting principles). We
expect to incur additional losses for the foreseeable future and we may never
achieve profitability. If we do achieve profitability, we may not be able to
sustain it. You should not consider our historical growth indicative of our
future revenue levels or operating results. Our success will depend in large
part upon our ability to generate sufficient revenue to achieve profitability
and to maintain existing customer relationships and develop new customer
relationships.

Because our quarterly operating results are subject to fluctuations, period-to-
period comparisons of our operating results are not necessarily meaningful and
you should not rely on them as an indication of future performance

Our quarterly operating results have historically fluctuated and may
fluctuate significantly in the future. Accordingly, our operating results in a
particular period are difficult to predict and may not meet the expectations of
securities analysts or investors. If this were to occur, our share price would
likely decline significantly. Factors that may cause our operating results to
fluctuate include:

. our transition to a subscription license business model;

. the level of demand for our products and services as well as the
timing of new releases of our products;

. our dependence in any quarter on the timing of a few large sales;

. our ability to maintain and grow a significant customer base;

. the fixed nature of a significant portion of our operating expenses,
particularly personnel, research and development, and leases;

. costs related to the opening or expansion of our facilities;

. unanticipated product discontinuation or deferrals by our OEM
customers;

. changes in our pricing policies or those of our competitors;

. currency exchange rate fluctuations; and

. timing of acquisitions, our effectiveness at integrating
acquisitions with existing operations and related costs.

Accordingly, we believe that quarter-to-quarter comparisons of our results of
operations are not necessarily meaningful. You should not rely on the results of
one quarter as an indication of our future performance.

Our revenues are difficult to predict

We derive our revenue primarily from sales of our products and services to
our OEM customers. Our sales vary in frequency, and OEM customers may or may not
purchase our products and services in the future. The sale to, and
implementation by, OEMs of our products and services typically involve a lengthy
education process, along with significant technical evaluation and commitment of
capital and other resources by them. This process is also subject to the risk of
delays associated with (a) their internal budgeting and other procedures for
approving capital expenditures, (b) deploying new technologies and (c) testing
and accepting new technologies that affect key operations. As a result, the
sales and implementation cycles associated with many of our products and
services are generally lengthy, and we may not succeed in closing transactions
on a timely basis, if at all. If orders expected from a specific customer for a
particular period are not realized, our revenues could fail to materialize.

In addition, our customers may defer the purchase of, or stop using, our
products and services at any time, and certain license agreements may be
terminated by the customer at any time. We negotiate most of our customer
contracts on a case-by-case basis, which makes our revenues difficult to
predict. Our existing customer contracts typically provide for base license
fees, technology access fees and/or royalties based on a per-unit or per-usage
charge or a percentage of revenue from licensees' products containing our
technology. In June 2001, we converted our enabling technologies products to
primarily subscription-based licenses. Additionally, a number of our large
contracts provide that we will not earn additional royalty revenues from those
contracts until these customers' shipments exceed certain thresholds. As a
result, our revenues are not recurring from period to period, which makes them
more difficult to predict. In addition, estimating future revenue is difficult
because we generally ship our products soon after an order is received and, as
such, we do not have a significant backlog. Our expense levels are based, in
part, on our expectations of future revenues and are largely fixed in the short
term. We may not be able to adjust spending in a timely manner to compensate for
any unexpected shortfall in revenues.

The recent introduction of a subscription business model may result in a
decrease in our reported revenue and cash flow from operations

In June 2001, we converted our enabling technologies products to primarily
subscription-based licenses. In addition, our trust services and enterprise
application solutions product lines are accounted for under the subscription
model. Subscription licenses provide our customers with rights to use our
software for a specified period of time. Customers are entitled to use the
license and receive certain customer support services over the license term. In
addition, depending on the type of license, our customers have access to
unspecified upgrades on an "if and when available" basis. We expect the average
duration of the subscription licenses to be between one and two years. In
addition, we expect a significant percent of our customers to renew their
licenses upon license expiration.

The change from perpetual licenses to subscription licenses will impact our
reported quarterly and annual revenues on a going-forward basis, as subscription
license revenue will be amortized over the term of the

subscription license. In the past, the majority of our perpetual license
revenues have been recognized in the quarter of product delivery. Therefore, a
subscription license order will result in substantially less current-quarter
revenue than an equal-sized order for a perpetual license. We expect to invoice
our customers upfront for the full amount of a twelve-month subscription license
period and collect the invoice within our standard payment terms. Although we
expect that over the long term our cash flow from operations under the
subscription license model will be equal to or greater than under the perpetual
license model, in the near term we expect our cash flow from operations to
decrease and deferred revenue to increase.

The current economic downturn has reduced demand for our products and services,
increased the average length of our sales cycle and may adversely affect future
revenue

The majority of our revenue has been, and is expected to continue to be,
derived from customers in the United States. Recent economic indicators,
including growth in gross domestic product, reflect a decline in economic
activity in the United States. Some reports have indicated an even more
significant decline in spending by corporations in the area of information
technology, which includes the encryption technology market. While we cannot
specifically correlate the impact of macro-economic conditions on our sales
activities, we believe that the economic conditions in the United States have
resulted in decreased demand in our target markets and, in particular, have
increased the average length of our sales cycles. To the extent that the current
downturn continues or increases in severity, or results in a similar downturn
worldwide, we believe demand for our products and services, and therefore future
revenue, will be reduced.

Our restructuring of operations may not achieve the results we intend and may
harm our business

In June 2001, we announced a restructuring of our business, which included
a reduction in work force of approximately 30% as well as other steps to reduce
expenses. In August 2001, we announced additional workforce reductions to
further reduce costs to a level commensurate with our expected revenues. The
planning and implementation of our restructuring has placed, and may continue to
place, a significant strain on our managerial, operational, financial and other
resources. Additionally, the restructuring may negatively affect our employee
turnover, recruiting and retention of important employees. If we are unable to
implement our restructuring effectively or if we experience difficulties in
effecting the restructuring, our expenses could increase more quickly than we
expect. If we find that our restructuring activities announced in June and
August do not sufficiently decrease the growth of our expenses, we may find it
necessary to implement further streamlining of our expenses, to perform further
reductions in work force or to undertake another restructuring of our business.
If our restructuring activities are not successful in effectively reducing our
expenses or result in the loss of key personnel or employee morale, our
business, financial condition and results of operations would be materially
adversely affected.

A limited number of customers account for a high percentage of our revenue and
the failure to maintain or expand these relationships could harm our business

Five customers comprised approximately 42% of our revenue for the fiscal
year ended April 30, 2001, and approximately 31% of our revenue for the fiscal
year ended April 30, 2000. For the three months ended July 31, 2001, five
customers accounted for approximately 37% of our revenue. One of our customers
accounted for approximately 11% of our revenue in the first quarter of fiscal
2002 and one of our customers accounted for approximately 24% of our revenue in
the first quarter of fiscal 2001. The loss of one or more of our major
customers, the failure to attract new customers on a timely basis, or a
reduction in usage and revenue associated with the existing or proposed
customers would harm our business and prospects.

We are contractually obligated to complete certain leasehold improvements

We lease premises totaling approximately 111,000 square feet in Hayward,
California. This lease expires on July 31, 2007. Through July 31, 2001, we have
capitalized leasehold improvements and related construction costs totaling
approximately $11.5 million for our Hayward facilities. In addition, we do not
anticipate any additional expenses subsequent to July 31, 2001 to complete the
build-out of our Hayward facilities. In addition, we have signed a ten-year
lease for approximately 130,000 square feet located at 1980 Matheson Boulevard
East, Mississauga, Ontario. At this time, the facility is being constructed at
our expense and we expect the total cost will be approximately $8.1 million.
Through July 31, 2001, we have capitalized leasehold

improvements and related construction costs totaling approximately $2.7 million
for the facility. In addition, we anticipate incurring approximately an
additional $5.4 million subsequent to July 31, 2001 to complete the build-out of
the facility.

We may be unable to find sub-tenants to sublease currently leased and vacant
space

In March 2000, we entered into a lease covering 68,000 square feet of
office space adjacent to our then existing 43,000 square foot Hayward facility.
The term of this new lease is seven years at an initial monthly rent of
approximately $61,000, with 3% annual increases. The lease on our prior Hayward
facility expires in July 2007 and provides for current monthly base rent
payments of approximately $54,000, increasing to approximately $57,000 in March
2002 and approximately $60,000 in March 2004. In August 2001, we relocated our
Hayward operations to the new facility. We intend to sublease our prior 43,000
square foot Hayward office space, although there can be no assurance that we
will be able to do so or at rates equal to our current obligations under the
lease.

We recently signed a ten-year lease for approximately 130,000 square feet
located at 1980 Matheson Boulevard East, Mississauga, Ontario. If the landlord
intends to sell the leased premises, we have a right of first refusal with
respect of any sale of this property on terms to be negotiated. In the fall of
2001, we intend to relocate our Canadian operations from their current location
to this new facility and to sublease our current Canadian office space and
approximately 40,000 square feet space located at 1980 Matheson Boulevard East,
Mississauga, Ontario, although there can be no assurance that we will be able to
do so or at rates equal to our current obligations under the lease. The annual
rental fee for the new site varies between approximately Cdn.$10.85 to
Cdn.$13.05 per square foot ($7.09 to $8.52 per square foot based on the exchange
rate on July 31, 2001) over the life of the lease. We began paying rent on this
lease in May 2001.

We are currently searching for tenants to sublease our current Hayward and
Mississauga spaces and portion of our new Mississauga space. We may not be able
to find suitable sub-tenants to occupy this space in a timely manner in the
future, if at all, or otherwise sublease these properties without a loss. If we
are unable to find suitable sub-tenants, we may experience greater than
anticipated operating expenses in the future, which could materially adversely
affect our financial condition and operating results.

Our success depends on an increase in the demand for digital signatures in
m-business transactions and ECC-based technology becoming accepted as an
industry standard

For handheld devices, many of the advantages our ECC-based technology has
over conventional security technology are not applicable to a transaction that
does not involve the creation of a digital signature on a handheld device.
Currently, the vast majority of e-business and m-business transactions do not
involve such digital signatures. Participants in mobile e-business have only
recently begun to require client digital signatures in some applications, such
as enterprise data access and certain high-value transactions. Unless the number
of mobile e-business transactions involving client digital signatures increases,
the demand for our products and services, and consequently, our business,
financial condition and operating results could be materially adversely
affected.

In order for our business to be successful, ECC technology must become
accepted as an industry standard. This has not happened to date, and may never
happen. The technology of our principal competitor, RSA Security Inc., is and
has been for the past several years, the de facto standard for security over
open networks like the Internet. The patent related to this competing technology
expired in September 2000, making this technology freely available. The free
availability of such security technology could significantly delay or prevent
the acceptance of ECC as a security standard.

Some of our products are new, unproven and currently generate little or no
revenue

In late 2000 and early 2001, we launched our PKI products, CA service and
VPN client software product. We continue to invest in and develop future
versions of these products which add features and functionality and to support
our current versions of these products. We cannot predict the future level of
acceptance, if any, of these new products, and we may be unable to generate
significant revenue from these products.

We have only recently begun to sell directly to enterprise customers, and we may
not be successful in developing the products and services necessary to serve
this new customer base

We have recently started to expand our sales efforts to encompass sales of
certain products directly to enterprises other than OEMs. The expansion of our
direct sales efforts will require that we attract, hire, train, manage and
adequately compensate a larger group of professionals. We may not be successful
in expanding and managing our sales effort or that the revenues produced by our
direct sales will offset our increased expenses.

These non-OEM, or enterprise, customers will require different products,
support services and integration services than our existing OEM customer base.
We may not be successful in developing the products and services necessary to
serve this new customer base.

Our business depends on continued development of the Internet and the continued
growth of m-business

Our future success is substantially dependent upon continued growth in
Internet usage and the acceptance of mobile and wireless devices and their use
for m-business. The adoption of the Internet for commerce and communications,
particularly by individuals and companies that have historically relied upon
alternative means of commerce and communication, generally requires the
understanding and acceptance of a new way of conducting business and exchanging
information. In particular, companies that have already invested substantial
resources in other means of conducting commerce and exchanging information may
be reluctant or slow to adopt a new, Internet-based strategy that may make their
existing infrastructure obsolete. To the extent that individuals and businesses
do not consider the Internet to be a viable commercial and communications
medium, our business may not grow.

Furthermore, building a wireless-based strategy requires significant
investment. Many companies may not have resources and capital to build the
infrastructure required to support a wireless-based strategy. If this
infrastructure build out does not occur, our revenue may not grow. In addition,
our business may be harmed if the number of users of mobile and wireless devices
does not increase, or if e-business and m-business do not become more accepted
and widespread. The use and acceptance of the Internet and of mobile and
wireless devices may not increase for any number of reasons, including:

. actual or perceived lack of security for sensitive information, such
as credit card numbers;

. traffic or other usage delays on the Internet;

. competing technologies;

. governmental regulation; and

. uncertainty regarding intellectual property ownership.

Capacity constraints caused by growth in the use of the Internet may impede
further development of the Internet to the extent that users experience delays,
transmission errors and other difficulties. If the necessary infrastructure,
products, services and facilities are not developed, if the Internet does not
become a viable and widespread commercial and communications medium, or if
individuals and businesses do not increase their use of mobile and wireless
devices for mobile e-business, our business, financial condition and operating
results could be materially adversely affected.

We have recently issued convertible notes, and our increased debt may place
restrictions on our operations and limit our growth

On August 30, 2001, we issued and sold Cdn.$13.5 million (approximately
U.S.$8.7 million based on the exchange rate on August 30, 2001) aggregate
principal amount of 7.25% senior unsecured convertible notes (the "Notes") on a
private placement basis. The Notes are convertible by the holders thereof,
without payment of additional consideration, into an equal principal amount of
7.25% senior convertible unsecured subordinated debentures (the "Debentures") at
any time and automatically at 5:00 p.m. (Toronto time) on the earlier of (i) the
fifth business day after a receipt is issued by the last of the relevant
securities regulatory authorities in Canada for a final prospectus qualifying
the issuance of the Debentures on the conversion of the Notes, and (ii)
August 30, 2002. The Debentures mature on August 30, 2004 and are convertible
into our common shares at the holder's option at any time before the close of
business on the earlier of August 30, 2004 and the last business day before the
date specified for redemption at a conversion price of Cdn.$3.85 per common
share.

Our total liabilities on a consolidated basis as at July 31, 2001 were
approximately $17.3 million. The level of our indebtedness could have important
consequences on our ability to operate and grow our business including the
following: (i) our ability to obtain additional financing in the future could be
restricted: (ii) our cash flow from operations dedicated to the payment of the
principal of, an interest on, our indebtedness will not be available for other
purpose; (iii) our flexibility in planning for, or reacting to, changes in our
business and market conditions could be restricted. In addition, we may be more
highly leveraged than certain of our competitors which might place us at a
competitive disadvantage, and we could be more vulnerable in the event of
further downturns in our business.

We may not generate the required cash flow to service our debt

We will be required to make our first payment of interest on the Debentures
on February 28, 2002. Annual cash interest requirements on the Debentures will
be approximately Cdn.$978,750 (approximately $633,085 based on the exchange rate
on August 30, 2001) There can be no assurance that we will achieve or sustain
profitability or positive cash flow from operating activities, we may not be
able to meet our debt service or working capital requirements or to obtain
additional capital required in order to execute our business plan.

We must manage our growth

Despite our recent workforce reductions, we have experienced a period of
significant growth in our sales and personnel that has placed strain upon our
management systems and resources. Subject to future prevailing economic
conditions, we may pursue potential market opportunities. Our growth has placed,
and will place, demands on our management and operational resources,
particularly with respect to:

. training, supervising and retaining skilled technical, marketing and
management personnel;

. expanding our treasury and accounting functions and information
systems to meet the demands of a growing company;

. strengthening our financial and management controls in a manner
appropriate for a larger enterprise;

. maintaining a cutting edge research and development staff;

. developing and managing a larger, more complex international
organization; and

. preserving our culture, values and entrepreneurial environment.

Our revenue may not continue to grow at a pace that will support our
planned costs and expenditures. To the extent that our revenue does not increase
at a rate commensurate with these additional costs and expenditures, our results
of operations and liquidity would be materially adversely affected.

Our management has limited experience managing a business of our size and,
in order to manage our growth effectively, we must concurrently develop more
sophisticated operational systems, procedures and controls. If we fail to
develop these systems, procedures and controls on a timely basis, it could
impede our ability to deliver products in a timely fashion and fulfill existing
customer commitments and, as a result, our business, financial condition and
operating results could be materially adversely affected.

Acquisitions could harm our business

We acquired Consensus Development Corporation and Uptronics Incorporated in
fiscal year 1999, Trustpoint in fiscal year 2000, and DRG Resources Group, Inc.
in fiscal year 2001. We may acquire additional businesses, technologies, product
lines or services in the future either in the United States or abroad.
Acquisitions involve a number of risks, potentially including:

. disruption to our business;

. inability to integrate, train, retain and motivate key personnel of
the acquired business;

. diversion of our management from our day-to-day operations;

. inability to incorporate acquired technologies successfully into our
products and services;

. additional expense associated with completing an acquisition and
amortization of any acquired intangible assets;

. impairment of relationships with our employees, customers and
strategic partners; and

. inability to maintain uniform standards, controls, procedures and
policies.

In addition, we may not be able to maintain the levels of operating
efficiency that any acquired company achieved or might have achieved separately.
Successful integration of the companies we acquire will depend upon our ability
to eliminate redundancies and excess costs. As a result of difficulties
associated with combining operations, we may not be able to achieve cost savings
and other benefits that we might hope to achieve with these acquisitions.

We may satisfy the purchase price of any future acquisitions through the
issuance of our common shares, which may result in dilution to our existing
shareholders. We may also incur debt or assume liabilities. We cannot assure you
that we will be able to obtain any additional financing on satisfactory terms,
or at all. Incurring debt or assuming additional liabilities would make us more
vulnerable to economic downturns and may limit our ability to withstand
competitive pressures. The terms of any additional indebtedness may include
restrictive financial and operating covenants, which could limit our ability to
compete and expand our business.

Our business strategy also includes entering into strategic investments and
joint ventures with other companies. These transactions are subject to many of
the same risks identified above for acquisitions.

Our success depends on attracting and retaining skilled personnel

Our success is largely dependent on the performance of our management team
and other key employees. Our success also depends on our ability to attract,
retain and motivate qualified personnel. Most of our key technical and senior
management personnel are not bound by employment agreements. Loss of the
services of any of these key employees would harm our business, financial
condition and operating results. We do not maintain key person life insurance
policies on any of our employees.

Competition for qualified personnel in the digital information security
industry is intense, and finding and retaining qualified personnel in the San
Francisco Bay Area and the Greater Toronto Area are difficult. We believe there
are only a limited number of individuals with the requisite skills to serve in
many of our key positions, and it is becoming increasingly difficult to hire and
retain such persons. Competitors and others have in the past and may attempt in
the future to recruit our employees. A major part of our compensation to our key
employees is in the form of stock option grants. A prolonged depression in our
share price could make it difficult for us to retain employees and recruit
additional qualified personnel. In addition, the volatility and current market
price of our common shares may make it difficult to attract and retain
personnel.

We face risks related to our international operations

We are currently in the process of expanding our international operations.
For the three months ended July 31, 2001 and the fiscal year ended April 30,
2001, we derived approximately 4% and 10%, respectively, of our revenue from
international operations. An important component of our long-term strategy is to
further expand into international markets, and we must continue to devote
resources to our international operations in order to succeed in these markets.
To date, we have limited experience in international operations and may not be
able to compete effectively in international markets. This expansion is expected
to involve opening foreign sales offices, which may

cause us to incur substantial costs. International sales and operations may be
limited or disrupted by increased regulatory requirements, the imposition of
government and currency controls, export license requirements, political
instability, labor unrest, transportation delays and interruptions, trade
restrictions, changes in tariffs and difficulties in staffing and coordinating
communications among international operations. In addition, these foreign
markets may require us to develop new products or modify our existing products.
There can be no assurance that we will be able to manage effectively the risks
associated with our international operations or that those operations will
contribute positively to our business, financial condition or operating results.

We face risks related to intellectual property rights

We rely on one or more of the following to protect our proprietary rights:
patents, trademarks, copyrights, trade secrets, confidentiality procedures and
contractual provisions. Despite our efforts to protect our proprietary rights,
unauthorized parties may attempt to copy and may succeed in copying aspects of
our product designs, products or trademarks, or obtain and use information we
regard as proprietary. Preventing the unauthorized use of our proprietary
technology may be difficult in part because it may be difficult to discover such
use. Stopping unauthorized use of our proprietary technology may be difficult,
time-consuming and costly. In addition, the laws of some countries in which our
products are licensed do not protect our products and services and related
intellectual property to the same extent as the laws of Canada, the United
States and countries of the European Union. While we believe that at least some
of our products are covered by one or more of our patents and these patents are
valid, a court may not agree if the matter is litigated. There can be no
assurance that we will be successful in protecting our proprietary rights and,
if we are not, our business, financial condition and operating results could be
materially adversely affected.

The industry in which we compete has many participants who own, or claim to
own, intellectual property. We indemnify our licensees against third-party
intellectual property claims based on our technology. At this time, we are
defending one of our licensees for a claim filed against them by Leon Stambler.
Claims relating to intellectual property by any third-party business, individual
or university, whether or not with merit, could be time-consuming to evaluate,
result in costly litigation, cause shipment delays for products or the cessation
of the use and sale of products or services, or require us to obtain licenses by
paying license fees and/or royalties to the owners of the intellectual property.
Such licensing agreements, if required, may not be available on royalty or other
terms acceptable to us. Any of these situations could materially adversely
affect our business, financial condition and operating results. We also
currently license third party technology for use in some of our products and
services. These third party technology licenses may not continue to be available
on commercially reasonable terms or may not be available at all. Our business,
financial condition and operating results could be materially adversely affected
if we lose the right to use certain technology.

We are engaged in joint development projects with certain companies. One of
these projects has resulted in the issuance of jointly owned patents. There is a
risk that the companies with which we are working could decide not to
commercialize the joint technology and that we may be unable to commercialize
joint technology without their consent and/or involvement.

We belong to certain organizations that set standards. As part of the
standards process, the participants are requested to file statements identifying
any patents they consider to be essential to implementation of the standard. As
such, we may be required to disclose and license patents that we own which are
necessary for practice of the standard. Further, to provide products that are
compliant with standards that have been adopted or will be adopted in the
future, we may have to license patents owned by others. As a part of some
standards processes, other companies have disclosed patents that they believe
are required to implement those standards. We cannot assure you that we will be
able to gain licenses to these patents, if needed, on terms acceptable to us.
Such licensing requirements may materially adversely affect the value of our
products, and, consequently, our business, financial condition and operating
results.

Our products could have defects which could delay their shipment, harm our
reputation and increase costs

Our products are highly complex and, from time to time, may contain design
defects that are difficult to detect and correct. Errors, failures or bugs may
be found in our products after commencement of commercial shipments. Even if
these errors are discovered, we may not be able to correct such errors in a
timely manner or at all. The occurrence of errors and failures in our products
could result in damage to our reputation, lost revenue and the loss of, or delay
in achieving, market acceptance of our products, and correcting such errors and
failures in our products could require significant expenditure of capital by us.
The sale and support of these products may entail the risk of product liability
or warranty claims based on damage to such equipment. In addition, the failure
of our products to perform to customer expectations could give rise to warranty
claims. Our insurance may not cover or its coverage may be insufficient to cover
any such claims successfully asserted against us, and therefore the consequences
of such errors, failures and claims could have a material adverse effect on our
business, financial condition and operating results.

System interruptions and security breaches could harm our business

We are in the process of constructing a secure data center for issuing
certificates. We will depend on the uninterrupted operation of that data center.
We will need to protect this center and our other systems from loss, damage, or
interruption caused by fire, power loss, telecommunications failure or other
events beyond our control. In addition, most of our systems and the data center
are located, and most of our customer information is stored, in the San
Francisco Bay Area, which is susceptible to earthquakes. Any damage or failure
that causes interruptions in our data center and our other computer and
communications systems could materially adversely affect our business, financial
condition and operating results.

Our success also depends upon the scalability of our systems. Our systems
have not been tested at the usage volumes that we expect will be required in the
future. As a result, a substantial increase in demand for our products and
services could cause interruptions in our systems. Any such interruptions could
materially and adversely affect our ability to deliver our products and services
and our business, financial condition and operating results.

Although we intend to periodically perform, and retain accredited third
parties to perform, evaluations of our operational controls, practices and
procedures, we may not be able to meet or remain in compliance with our internal
standards or those set by these third parties. If we fail to maintain these
standards, we may have to expend significant time and money to return to
compliance, and our business, financial condition and operating results could be
materially adversely affected.

We will retain certain confidential customer information in our planned
data center. It is important to our business that our facilities and
infrastructure remain secure and be perceived by the marketplace to be secure.
Despite our security measures, our infrastructure may be vulnerable to physical
break-ins, computer viruses, attacks by hackers or other disruptive problems. It
is possible that we may have to expend additional financial and other resources
to address these problems. Any physical or electronic break-ins or other
security breaches or compromises of the information stored at our planned data
center may jeopardize the security of information stored on our premises or in
the computer systems and networks of our customers. In such an event, we could
face significant liability and damage to our reputation, and customers could be
reluctant to use our products and services. Such an occurrence could also result
in adverse publicity and adversely affect the market's perception of our
products and services, which could materially adversely affect our business,
financial condition and operating results.

We must continue to develop and maintain strategic and other relationships

One of our business strategies has been to enter into strategic or other
collaborative relationships with many of our OEM customers to develop new
technologies and leverage their sales and marketing organizations. We may need
to enter into additional relationships to execute our business plan. We may not
be able to enter into additional, or maintain our existing, strategic
relationships on commercially reasonable terms. As a result, we may have to
devote substantially more resources to the development of new technology and the
distribution, sales and marketing of our security products and services than we
would otherwise. The failure of one or more of our strategic relationships could
materially adversely affect our business, financial condition and operating
results.

We compete with some of our customers

We regularly license some of our products to customers who compete with us
in other product categories. For example, we license our Security Builder(R)
cryptographic toolkit to Baltimore Technologies for incorporation into its
UniCERT(TM) product, which competes with our Trustpoint(TM) product line. This
potential conflict may deter existing and potential future customers from
licensing some of our component products, most notably our Security Builder(R)
cryptographic toolkit. We expect to compete with a greater number of our
customers as we further expand our product line.

Our share price has been, and will likely continue to be, volatile

The market price of our common shares has declined significantly in recent
months, and we expect that the market price of our common shares may fluctuate
substantially as a result of variations in our quarterly operating results.
These fluctuations may be exaggerated if the trading volume of our common shares
is low. In addition, due to the technology-intensive and emerging nature of our
business, the market price of our common shares may fall dramatically in
response to a variety of factors, including:

. announcements of technological or competitive developments;

. acquisitions or entry into strategic alliances by us or our
competitors;

. the gain or loss of a significant customer or strategic relationship;

. changes in estimates of our financial performance;

. changes in recommendations from securities analysts regarding us, our
industry or our customers' industries; and

. general market or economic conditions.

This risk may be heightened because our industry is new and evolving, is
characterized by rapid technological change and is susceptible to the
introduction of new competing technologies or competitors.

In addition, equity securities of many technology companies have
experienced significant price and volume fluctuations. These price and volume
fluctuations are sometimes unrelated to the operating performance of the
affected companies. Volatility in the market price of our common shares could
result in securities class action litigation. This type of litigation,
regardless of the outcome, could result in substantial costs to us as well as a
diversion of our management's attention and resources.

We have limited financial resources and may require additional financing that
may not be available on acceptable term or at all

We may require additional equity or debt financing in the future. There can
be no assurance that we will be able to obtain on satisfactory terms, or at all,
the additional financing required to compete successfully. Failure to obtain
such financing could result in the delay or abandonment of some or all of our
business plans, which could have a material adverse effect on our business,
financial condition and operating results.

Risks Related to Our Industry

Public key cryptographic technology is subject to risks

Our products and services are largely based on public-key cryptographic
technology. With public-key cryptographic technology, a user has both a
public-key and a private-key. The security afforded by this technology depends
on the integrity of a user's private-key and on it not being stolen or otherwise
compromised. The integrity of private keys also depends in part on the
application of certain mathematical principles such as factoring and elliptic
curve discrete logarithms. This integrity is predicated on the assumption that
solving problems based on these principles is difficult. Should a relatively
easy solution to these problems be developed, then the security of

encryption products using public-key cryptographic technology could be reduced
or eliminated. Furthermore, any significant advance in techniques for attacking
cryptographic systems could also render some or all of our products and services
obsolete or unmarketable. Even if no breakthroughs in methods of attacking
cryptographic systems are made, factoring problems or elliptic curve discrete
logarithm problems can theoretically be solved by computer systems that are
significantly faster and more powerful than those currently available. In the
past, there have been public announcements of the successful decoding of certain
cryptographic messages and of the potential misappropriation of private keys.
Such publicity could also adversely affect the public perception as to the
safety of public-key cryptographic technology. Furthermore, an actual or
perceived breach of security at one of our customers, whether or not due to our
products, could result in adverse publicity for us and damage to our reputation.
Such adverse public perception or any of these other risks, if they actually
occur, could materially adversely affect our business, financial condition and
operating results.

Our future success will depend upon our ability to anticipate and keep pace with
technological changes

The information security industry is characterized by rapid technological
change. Technological innovation in the marketplace, such as in the areas of
mobile processing power or wireless bandwidth, or the development of new
cryptographic algorithms, may reduce the comparative benefits of our products
and could materially adversely affect our business, financial condition and
operating results. Our inability, for technological or other reasons, to
enhance, develop and introduce products in a timely manner in response to
changing market conditions, industrial standards, customer requirements or
competitive offerings could result in our products becoming obsolete, or could
otherwise have a material adverse effect on our business, financial condition
and operating results. Our ability to compete successfully will depend in large
measure on our ability to maintain a technically competent research and
development staff and to adapt to technological changes and advances in the
industry, including providing for the continued compatibility of our products
with evolving industry standards and protocols.

We face significant competition, which could harm our ability to maintain or
increase sales of our products or reduce the prices we can charge for our
products

We operate in a highly competitive industry. Many of our competitors have
greater name recognition, larger customer bases and significantly greater
financial, technical, marketing, public relations, sales, distribution and other
resources than we do. We anticipate that the quality, functionality and breadth
of our competitors' product offerings will improve, and there can be no
assurance that we will be able to compete effectively with such product
offerings. In addition, we could be materially adversely affected if there were
a significant movement towards the acceptance of open source solutions or other
alternative technologies that compete with our products. We expect that
additional competition will develop, both from existing businesses in the
information security industry and from new entrants, as demand for information
products and services expands and as the market for these products and services
becomes more established. Moreover, as competition increases, the prices that we
charge for our products may decline. If we are not able to compete successfully,
our business, financial condition and operating results could be materially
adversely affected. Our most significant direct competitors include RSA
Security, Inc., VeriSign, Inc., Baltimore Technologies plc, and Entrust Inc.

Our business could be adversely affected by United States and foreign government
regulation

The information security industry is governed by regulations that could
have a material adverse effect on our business. Both the U.S. and Canadian
governments regulate the export of cryptographic equipment and software,
including many of our products. It is also possible that laws could be enacted
covering issues such as user privacy, pricing, content, and quality of products
and services in these markets. Such regulations and laws could cause us to
compromise our source code protection, minimize our intellectual property
protection, negatively impact our plans for global expansion, and consequently
materially adversely affect our business.

Risks Related to Our Corporate Charter; Limitations on Dividends

The anti-takeover effect of certain of our charter provisions could delay or
prevent our being acquired

Our authorized capital consists of an unlimited number of common shares and
an unlimited number of preferred shares issuable in one or more series. Although
we currently do not have outstanding any preferred shares,

our board of directors has the authority to issue preference shares and
determine the price, designation, rights, preferences, privileges, restrictions
and conditions, including voting and dividend rights, of these shares without
any further vote or action by shareholders. The rights of the holders of common
shares will be subject to, and may be adversely affected by, the rights of
holders of any preferred shares that may be issued in the future. The issuance
of preferred shares, while providing desirable flexibility in connection with
possible acquisitions and other corporate purposes, or the issuance of
additional common shares could make it more difficult for a third party to
acquire a majority of our outstanding voting shares. This could deprive our
shareholders of a control premium that might otherwise be realized in connection
with an acquisition of our company.

Our shareholder rights plan could delay or prevent our being acquired

We have adopted a shareholder rights plan. The provisions of this plan
could make it more difficult for a third party to acquire a majority of our
outstanding voting shares, the effect of which may be to deprive our
shareholders of a control premium that might otherwise be realized in connection
with an acquisition of our company.

We do not currently intend to pay any cash dividends on our common shares in the
foreseeable future

We have never paid or declared any cash dividends on our common shares and
we currently intend to retain any future earnings to finance the development and
expansion of our business. We do not anticipate paying any cash dividends on our
common shares in the foreseeable future. In addition, any dividends paid to
residents of the United States would be subject to Canadian withholding tax,
generally at the rate of 15%.

Item 3. Quantitative and Qualitative Disclosure About Market Risk

Foreign Exchange Risk

Currency fluctuations may materially adversely affect us. In fiscal 2000,
approximately 33% of our total operating expenses were paid in currencies other
than the U.S. dollars. In fiscal 2001, approximately 29% of our total operating
expenses were paid in currencies other than the U.S. dollar. Fluctuations in the
exchange rate between the U.S. dollar and such other currencies may have a
material adverse effect on our business, financial condition and operating
results. In particular, we may be materially adversely affected by a significant
strengthening of the Canadian dollar against the U.S. dollar.

We currently do not use financial instruments to hedge operating expense in
foreign currencies. We intend to assess the need to utilize financial
instruments to hedge currency exposures on an ongoing basis.

Interest Rate Risk

We hold a significant portion of our cash in interest-bearing instruments
and are exposed to the risk of changing interest rates. The primary objective of
our investment activities is to preserve principal while at the same time
maximizing the income we receive from our investments without significantly
increasing risk. We place our investment with high credit quality issuers and,
by policy, limit the amount of the credit exposure to any one issuer.

All highly liquid investments with a maturity of less than three months at
the date of purchase are considered to be cash equivalent. All investments with
maturities of three months or greater are classified as available-for-sale and
considered to be short-term investments. Some of the securities that we have
invested in may be subject to market risk. This means that a change in
prevailing interest rates may cause the principal amount of the investment to
fluctuate. We believe that the immediate 100 basis point move in interest rates
would not materially affect the fair market value of our portfolio. To minimize
this risk, we maintain our portfolio of cash equivalent and short-term
investments in a variety of securities, including commercial paper, medium-term
notes, and corporate bonds. As of July 31, 2001, our interest rate risk was
further limited by the fact that approximately 99% of our investments mature in
less than one year. We do not use any derivative instruments to reduce our
exposure to interest rate fluctuations.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

The nature of our business subjects us to numerous regulatory
investigations, claims, lawsuits and other proceedings in the ordinary course of
our business. The results of these legal proceedings cannot be predicted with
certainty. There can be no assurance that these matters will not have a material
adverse effect on our results of operations in any future period, depending
partly on the results for that period, and a substantial judgment could have a
material adverse impact on our financial condition.

In April 2000 we received a letter on behalf of Carnegie Mellon University
asserting that it owns the trademark "CERT", and that it believes our use of the
stock symbol "CERT" will cause confusion with and/or dilute its purported
trademark. Although we intend to defend our use of the stock symbol "CERT"
vigorously, there can be no assurance that we will be successful in doing so, or
that this dispute with the University will not have a material adverse impact on
us.

We have also received a letter on behalf of Geoworks Corporation asserting
that it holds a patent on certain aspects of technology that are part of the WAP
standard. Our WTLS Plus(TM) toolkit may be used to implement WAP-compliant
technology. After an internal investigation based upon the description of
Geoworks' purportedly patented technology provided by GeoWorks, it is our belief
that our toolkits do not include implementation of the Geoworks technology. We
have also become aware of a letter circulated on behalf of a Mr. Bruce Dickens
asserting that he holds a patent on certain aspects of technology that are
implemented within certain portions of the SSL standard. After an internal
investigation, it is our belief that we do not implement any validly patented
technology. We have received a letter on behalf of eSignX Corporation drawing
our attention to a patent which it purports to hold on certain aspects of
technology related to the use of WAP-enabled portable electronic authorization
devices for approving transactions. The letter states that, based upon a review
of a press release announcing our Trustpoint(TM) PKI product, that our product
may be covered by eSignX's patent. We have conducted an initial investigation
and due to the vague description of the suggested infringement by our products,
we were unable to determine the validity of such suggestions. We have requested
further elaboration from eSignX, and so far none has been provided. Although we
intend to vigorously defend any litigation that may arise in connection with
these matters, there can be no assurance that we will be successful in doing so,
or that such disputes will not have a material adverse impact on us.

In addition, we have become aware of a lawsuit commenced by Mr. Leon
Stambler against one of our customers and certain other parties asserting that
Mr. Stambler holds patents on certain aspects of technology related to online
transactions. Although we have not been named in this legal action, under the
terms of the license agreement we have entered into with this customer, we have
agreed to defend and are currently defending our customer against any claim that
our licensed product, when used within the scope of the license agreement,
infringes any U.S. or Canadian patent and to indemnify the customer in certain
circumstances for related costs and expenses it incurs as a result of such a
claim. We had previously reviewed the Stambler patent and prepared documentation
indicating a possible prior use of the subject matter purportedly claimed in the
referenced patent. We continue to investigate the scope of protection afforded
by the claims detailed in the complaint and effect, if any, of these claims on
the products supplied by Certicom. Continued litigation is likely to be
expensive and time-consuming. There can be no assurance that such asserted
patent will not have a material adverse impact on us.

Item 6. Exhibits and Reports on Form 8-K

(a) Index to Exhibits

None

(b) Reports on Form 8-K

None

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on this 14th day of
September 2001.

Certicom Corp.

By: /s/ Richard P. Dalmazzi
-----------------------
Richard P. Dalmazzi
President, Chief Executive Officer
and Director (Principal Executive
Officer)

/s/ Gregory M. Capitolo
-----------------------
Gregory M. Capitolo
Vice President, Finance, Chief
Financial Officer and Secretary
(Principal Financial and Accounting
Officer)