<PAGE>   1
 
                                                                    EXHIBIT 13.1
 
                    SECURITY FIRST TECHNOLOGIES CORPORATION
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 
<TABLE>
<CAPTION>
                                                              PAGE
                                                              ----
<S>                                                           <C>
SECURITY FIRST TECHNOLOGIES CORPORATION
 
Independent Auditors' Report................................  F-2
Consolidated Balance Sheets as of December 31, 1997 and
  1998......................................................  F-3
Consolidated Statements of Operations for the years ended
  December 31, 1996, 1997 and 1998..........................  F-4
Consolidated Statements of Stockholders' Equity and
  Comprehensive Income (Loss) for the years ended December
  31, 1996, 1997 and 1998...................................  F-5
Consolidated Statements of Cash Flows for the years ended
  December 31, 1996, 1997 and 1998..........................  F-7
Notes to Consolidated Financial Statements for the years
  ended December 31, 1996, 1997
  and 1998..................................................  F-8
</TABLE>
 
                                       F-1
<PAGE>   2
 
                          INDEPENDENT AUDITORS' REPORT
 
The Board of Directors
Security First Technologies Corporation:
 
We have audited the accompanying consolidated balance sheets of Security First
Technologies Corporation and subsidiary as of December 31, 1997 and 1998, and
the related consolidated statements of operations, stockholders' equity and
comprehensive income (loss), and cash flows for each of the years in the three
year period ended December 31, 1998. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
 
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Security First
Technologies Corporation and subsidiary as of December 31, 1997 and 1998, and
the results of their operations and their cash flows for each of the years in
the three year period ended December 31, 1998 in conformity with generally
accepted accounting principles.
 
                                                              KPMG LLP
 
Atlanta, Georgia
February 4, 1999
 
                                       F-2
<PAGE>   3
 
             SECURITY FIRST TECHNOLOGIES CORPORATION AND SUBSIDIARY
 
                          CONSOLIDATED BALANCE SHEETS
 
<TABLE>
<CAPTION>
                                                                 DECEMBER 31,
                                                              -------------------
                                                                1997       1998
                                                              --------   --------
                                                                (IN THOUSANDS,
                                                               EXCEPT SHARE AND
                                                                PER SHARE DATA)
<S>                                                           <C>        <C>
ASSETS
Current assets:
Cash and cash equivalents...................................  $  3,137   $ 14,504
Investment securities available for sale (cost of $16,759 at
  December 31, 1997 and $1,800 at December 31, 1998,
  respectively) (note 4)....................................    16,814      3,936
Accounts receivable, net of allowance for doubtful accounts
  of $257 at December 31, 1997 and $415 at December 31,
  1998......................................................     4,633     17,520
Other current assets........................................       531      1,310
                                                              --------   --------
  Total current assets......................................    25,115     37,270
Premises and equipment, net (note 5)........................     5,797      5,355
Intangible assets, net (note 1).............................     4,622      2,914
  Other assets..............................................       658      2,754
                                                              --------   --------
  Total assets..............................................  $ 36,192   $ 48,293
                                                              ========   ========
 
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................  $    486   $  3,232
Accrued expenses............................................     1,550      4,386
Deferred revenues...........................................     6,659     10,378
Current portion of capital lease obligation (note 8)........        --        875
                                                              --------   --------
  Total current liabilities.................................     8,695     18,871
Deferred revenues...........................................     2,357     12,034
Capital lease obligation, excluding current portion (note
  8)........................................................        --        159
                                                              --------   --------
  Total liabilities.........................................    11,052     31,064
                                                              --------   --------
Stockholders' equity (notes 6 and 9):
Preferred stock, $0.01 par value. Authorized 5,000,000
  shares....................................................     2,679     11,911
Common stock, $0.01 par value. Authorized 60,000,000 shares.
  Issued and outstanding 10,487,245 and 12,263,502 shares at
  December 31, 1997 and 1998, respectively..................       105        123
Additional paid-in capital..................................    74,487     86,933
Accumulated deficit.........................................   (52,035)   (82,840)
Accumulated other comprehensive income:
  Net unrealized gains on investment securities available
     for sale, net of taxes.................................        55      1,325
  Cumulative foreign currency translation adjustment........      (151)      (223)
                                                              --------   --------
  Total stockholders' equity................................    25,140     17,229
                                                              --------   --------
Commitments (notes 8 and 10)
  Total liabilities and stockholders' equity................  $ 36,192   $ 48,293
                                                              ========   ========
</TABLE>
 
See accompanying notes to consolidated financial statements.
 
                                       F-3
<PAGE>   4
 
             SECURITY FIRST TECHNOLOGIES CORPORATION AND SUBSIDIARY
 
                     CONSOLIDATED STATEMENTS OF OPERATIONS
 
<TABLE>
<CAPTION>
                                                                         YEAR ENDED DECEMBER 31,
                                                            -------------------------------------------------
                                                                 1996             1997             1998
                                                            --------------   --------------   ---------------
                                                             (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S>                                                         <C>              <C>              <C>
Revenues (note 11):
Software licenses.........................................    $      512       $    4,142       $     4,781
Professional services.....................................           699            6,277            16,218
Data center...............................................            56              411             3,181
                                                              ----------       ----------       -----------
  Total revenues..........................................         1,267           10,830            24,180
                                                              ----------       ----------       -----------
Direct costs:
Software licenses.........................................           796            1,605               503
Professional services.....................................           535            5,346            10,527
Data center...............................................         2,266            6,947             7,218
                                                              ----------       ----------       -----------
  Total direct costs......................................         3,597           13,898            18,248
                                                              ----------       ----------       -----------
Gross margin..............................................        (2,330)          (3,068)            5,932
Operating expenses:
Selling and marketing.....................................         2,154            4,305             4,723
Product development.......................................         4,048           10,507            14,625
General and administrative................................         3,635            4,637             5,994
Depreciation and amortization.............................           256            1,741             5,347
Amortization of goodwill and acquisition charges..........         7,072            4,525             4,384
                                                              ----------       ----------       -----------
  Total operating expenses................................        17,165           25,715            35,073
                                                              ----------       ----------       -----------
Operating loss............................................       (19,495)         (28,783)          (29,141)
Interest income...........................................         1,672            1,481               583
                                                              ----------       ----------       -----------
Loss from continuing operations...........................       (17,823)         (27,302)          (28,558)
Discontinued operations (note 2):
Loss from operations......................................        (4,236)            (689)           (3,059)
Gain on sale..............................................            --               --               812
                                                              ----------       ----------       -----------
Loss from discontinued operations.........................        (4,236)            (689)           (2,247)
                                                              ----------       ----------       -----------
  Net loss................................................    $  (22,059)      $  (27,991)      $   (30,805)
                                                              ==========       ==========       ===========
Basic and diluted net loss per common share from
  continuing operations...................................    $    (3.03)      $    (3.06)      $     (2.59)
Basic and diluted net loss per common share from
  discontinued operations.................................    $    (0.73)      $    (0.08)      $     (0.21)
                                                              ----------       ----------       -----------
Basic and diluted net loss per common share...............    $    (3.76)      $    (3.14)      $     (2.80)
                                                              ==========       ==========       ===========
Weighted average number of shares of common stock
  outstanding.............................................     5,874,000        8,922,762        11,018,326
                                                              ==========       ==========       ===========
</TABLE>
 
See accompanying notes to consolidated financial statements.
 
                                       F-4
<PAGE>   5
 
             SECURITY FIRST TECHNOLOGIES CORPORATION AND SUBSIDIARY
 
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS)
             FOR THE YEARS ENDED DECEMBER 31, 1996, 1997, AND 1998
 
                       (IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
                                        CONVERTIBLE PREFERRED STOCK
                                   --------------------------------------                                        RETAINED
                                        SERIES A            SERIES B           COMMON STOCK       ADDITIONAL    EARNINGS/
                                   ------------------   -----------------   -------------------    PAID-IN     (ACCUMULATED
                                    SHARES     AMOUNT   SHARES    AMOUNT      SHARES     AMOUNT    CAPITAL       DEFICIT)
                                   ---------   ------   -------   -------   ----------   ------   ----------   ------------
<S>                                <C>         <C>      <C>       <C>       <C>          <C>      <C>          <C>
Balance at December 31, 1995.....         --   $   --        --   $    --    2,400,000    $ 24     $ 2,328       $  1,015
  Net loss.......................         --       --        --        --           --      --          --        (22,059)
  Cash dividend declared.........         --       --        --        --           --      --          --         (3,000)
  Change in net unrealized gains
    on investment securities
    available for sale...........         --       --        --        --           --      --          --             --
  Proceeds from preferred and
    common stock offering, net of
    expenses.....................  1,637,832    2,047        --        --    3,772,792      38      56,783             --
  Issuance of common stock in
    acquisition..................         --       --        --        --    1,920,000      19       2,381             --
  Common stock issued upon
    exercise of stock options....         --       --        --        --      167,231       2         206             --
  Stock option compensation......         --       --        --        --           --      --         946             --
  Comprehensive income (loss)....
                                   ---------   ------   -------   -------   ----------    ----     -------       --------
Balance at December 31, 1996.....  1,637,832   $2,047        --   $    --    8,260,023    $ 83     $62,644       $(24,044)
  Net loss.......................         --       --        --        --           --      --          --        (27,991)
  Change in net unrealized gains
    on investment securities
    available for sale...........         --       --        --        --           --      --          --             --
  Conversion of preferred stock
    to common stock..............   (546,700)    (683)       --        --      546,700       5         678             --
  Proceeds from issuance of
    preferred and common stock,
    net of expenses..............    159,952    1,315        --        --      569,978       6       4,670             --
  Issuance of common stock in
    acquisition..................         --       --        --        --    1,000,000      10       5,691             --
  Common stock issued upon the
    exercise of stock options....         --       --        --        --      110,544       1         148             --
  Stock option compensation......         --       --        --        --           --      --         656             --
  Cumulative foreign currency
    translation adjustment.......         --       --        --        --           --      --          --             --
  Comprehensive income (loss)....
                                   ---------   ------   -------   -------   ----------    ----     -------       --------
Balance at December 31, 1997.....  1,251,084   $2,679        --   $    --   10,487,245    $105     $74,487       $(52,035)
 
<CAPTION>
 
                                    ACCUMULATED
                                       OTHER           TOTAL
                                   COMPREHENSIVE   STOCKHOLDERS'   COMPREHENSIVE
                                      INCOME          EQUITY          INCOME
                                   -------------   -------------   -------------
<S>                                <C>             <C>             <C>
Balance at December 31, 1995.....     $   30         $  3,397
  Net loss.......................         --          (22,059)       $(22,059)
  Cash dividend declared.........         --           (3,000)
  Change in net unrealized gains
    on investment securities
    available for sale...........         99               99              99
  Proceeds from preferred and
    common stock offering, net of
    expenses.....................         --           58,868
  Issuance of common stock in
    acquisition..................         --            2,400
  Common stock issued upon
    exercise of stock options....         --              208
  Stock option compensation......         --              946
                                                                     --------
  Comprehensive income (loss)....                                    $(21,960)
                                      ------         --------        --------
Balance at December 31, 1996.....     $  129         $ 40,859
  Net loss.......................         --          (27,991)        (27,991)
  Change in net unrealized gains
    on investment securities
    available for sale...........        (74)             (74)            (74)
  Conversion of preferred stock
    to common stock..............         --               --
  Proceeds from issuance of
    preferred and common stock,
    net of expenses..............         --            5,991
  Issuance of common stock in
    acquisition..................         --            5,701
  Common stock issued upon the
    exercise of stock options....         --              149
  Stock option compensation......         --              656
  Cumulative foreign currency
    translation adjustment.......       (151)            (151)           (151)
                                                                     --------
  Comprehensive income (loss)....                                    $(28,216)
                                      ------         --------        --------
Balance at December 31, 1997.....     $  (96)        $ 25,140
</TABLE>
 
                                       F-5
<PAGE>   6
 
             SECURITY FIRST TECHNOLOGIES CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS)
                                 -- (CONTINUED)
 
<TABLE>
<CAPTION>
                                        CONVERTIBLE PREFERRED STOCK
                                   --------------------------------------                                        RETAINED
                                        SERIES A            SERIES B           COMMON STOCK       ADDITIONAL    EARNINGS/
                                   ------------------   -----------------   -------------------    PAID-IN     (ACCUMULATED
                                    SHARES     AMOUNT   SHARES    AMOUNT      SHARES     AMOUNT    CAPITAL       DEFICIT)
                                   ---------   ------   -------   -------   ----------   ------   ----------   ------------
<S>                                <C>         <C>      <C>       <C>       <C>          <C>      <C>          <C>
Net loss.........................         --       --        --        --           --      --          --        (30,805)
Change in net unrealized gains on
  investment securities available
  for sale.......................         --       --        --        --           --      --          --             --
Conversion of preferred stock to
  common stock...................   (614,620)    (768)       --        --      614,620       6         762             --
Sale of common stock, net of
  expenses.......................         --       --        --        --       92,593       1         969             --
Sale of preferred stock..........         --       --   749,064    10,000           --      --          --             --
Common stock issued upon the
  exercise of stock options......         --       --        --        --      757,732       8       4,831             --
Stock option compensation........         --       --        --        --           --      --         787             --
Issuance of options to acquire
  common and preferred stock.....         --       --        --        --           --      --       1,300             --
Issuance of common stock in
  exchange for purchased
  technology.....................         --       --        --        --      181,610       2       1,998             --
Issuance of common stock in
  exchange for marketable equity
  securities.....................         --       --        --        --      129,702       1       1,799             --
Cumulative foreign currency
  translation adjustment.........         --       --        --        --           --      --          --             --
Comprehensive income (loss)......
                                   ---------   ------   -------   -------   ----------    ----     -------       --------
Balance at December 31, 1998.....    636,464   $1,911   749,064   $10,000   12,263,502    $123     $86,933       $(82,840)
                                   =========   ======   =======   =======   ==========    ====     =======       ========
 
<CAPTION>
 
                                    ACCUMULATED
                                       OTHER           TOTAL
                                   COMPREHENSIVE   STOCKHOLDERS'   COMPREHENSIVE
                                      INCOME          EQUITY          INCOME
                                   -------------   -------------   -------------
<S>                                <C>             <C>             <C>
Net loss.........................         --          (30,805)        (30,805)
Change in net unrealized gains on
  investment securities available
  for sale.......................      1,270            1,270           1,270
Conversion of preferred stock to
  common stock...................         --               --
Sale of common stock, net of
  expenses.......................         --              970
Sale of preferred stock..........         --           10,000
Common stock issued upon the
  exercise of stock options......         --            4,839
Stock option compensation........         --              787
Issuance of options to acquire
  common and preferred stock.....         --            1,300
Issuance of common stock in
  exchange for purchased
  technology.....................         --            2,000
Issuance of common stock in
  exchange for marketable equity
  securities.....................         --            1,800
Cumulative foreign currency
  translation adjustment.........        (72)             (72)            (72)
                                                                     --------
Comprehensive income (loss)......                                    $(29,607)
                                      ------         --------        ========
Balance at December 31, 1998.....     $1,102         $ 17,229
                                      ======         ========
</TABLE>
 
See accompanying notes to consolidated financial statements.
 
                                       F-6
<PAGE>   7
 
             SECURITY FIRST TECHNOLOGIES CORPORATION AND SUBSIDIARY
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
 
<TABLE>
<CAPTION>
                                                                 YEAR ENDED DECEMBER 31,
                                                              ------------------------------
                                                                1996       1997       1998
                                                              --------   --------   --------
                                                                      (IN THOUSANDS)
<S>                                                           <C>        <C>        <C>
Cash flows from operating activities:
Net loss....................................................  $(22,059)  $(27,991)  $(30,805)
Adjustments to reconcile net loss to net cash used in
  operating activities:
Loss from discontinued operations...........................     4,236        689      3,059
Gain on sale of discontinued operations.....................        --         --       (812)
Depreciation and amortization including acquisition
  charges...................................................     1,471      4,996      9,958
Write-down of purchased technology..........................        --      1,400         --
Charge for in-process research and development..............     6,800         --         --
Compensation expense for stock options......................       946        656      1,592
Provision for doubtful accounts receivable..................        --        257        871
Increase in accounts receivable.............................    (1,216)    (3,252)   (14,213)
Decrease (increase) in other assets.........................       880       (807)       110
(Decrease) increase in accounts payable.....................    (2,423)    (1,920)     2,746
Increase (decrease) in accrued expenses.....................       674         (6)     2,194
Increase in deferred revenue................................     1,607      7,409     13,396
                                                              --------   --------   --------
  Net cash used in continuing operations....................    (9,084)   (18,569)   (11,904)
Net cash (used in) provided by discontinued operations......    (5,895)     3,213      3,310
                                                              --------   --------   --------
                                                               (14,979)   (15,356)    (8,594)
                                                              --------   --------   --------
Cash flows from investing activities:
Sale of banking operations..................................        --         --      1,500
Business acquisitions, net of cash and cash equivalents
  acquired..................................................    (4,876)        --         --
Purchases of investment securities available for sale.......   (58,330)    (8,736)        --
Sales of investment securities available for sale...........     8,956     14,979      1,983
Maturities of investment securities available for sale......    19,000      5,000      8,000
Purchases of premises and equipment.........................    (5,435)    (2,861)    (4,097)
                                                              --------   --------   --------
  Net cash (used in) provided by investing activities.......   (40,685)     8,382      7,386
                                                              --------   --------   --------
Cash flows from financing activities:
Sale of preferred stock.....................................     2,047      1,315     10,000
Sale of common stock, net of expenses.......................    56,821      4,676        970
Proceeds from exercise of stock options.....................       208        149      3,634
Dividends paid..............................................    (3,000)        --         --
Payments on capital lease obligations.......................        --         --     (1,070)
                                                              --------   --------   --------
  Net cash provided by financing activities.................    56,076      6,140     13,534
                                                              --------   --------   --------
Effect of exchange rate changes on cash and cash
  equivalents...............................................        --       (151)      (208)
Cash held in escrow, included in other assets...............        --         --       (751)
                                                              --------   --------   --------
Net increase (decrease) in cash and cash equivalents........       412       (985)    11,367
Cash and cash equivalents at beginning of period............     3,710      4,122      3,137
                                                              --------   --------   --------
Cash and cash equivalents at end of period..................  $  4,122   $  3,137   $ 14,504
                                                              ========   ========   ========
Noncash financing and investing activities:
Issuance of common stock for purchased technology...........        --         --      2,000
Issuance of common stock in exchange for marketable equity
  securities................................................        --         --      1,800
Capital lease obligations...................................        --         --      2,026
Conversion of preferred stock to common stock...............        --        683        768
Acquisition of businesses through issuance of common
  stock.....................................................     2,400      5,701         --
Investment securities transferred (from) to banking
  operations................................................    (1,659)     3,902      5,557
</TABLE>
 
See accompanying notes to consolidated financial statements.
 
                                       F-7
<PAGE>   8
 
             SECURITY FIRST TECHNOLOGIES CORPORATION AND SUBSIDIARY
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 1996, 1997 AND 1998
 
1. BUSINESS, PRESENTATION, AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
  Business and Presentation
 
     Security First Technologies Corporation, through its wholly-owned
subsidiary Security First Technologies, Inc. (collectively, "S1" or the
"Company"), develops integrated internet software applications that enable
financial service companies to offer products, services and transactions over
the internet in a secure environment. S1 also offers product integration,
training and data center processing services.
 
     S1 operates in three business segments, Professional Services, Data Center
and Product Development. The Professional Services segment provides integration,
training, consulting and product enhancement services related to S1's software
products. The Product Development segment creates new products to supplement the
existing product suite. The Data Center segment provides processing and support
services to the customers using S1's software products in the S1 data center. S1
manages the business based on these operating segments. The information
presented in the consolidated statements of operations reflects the revenues and
costs associated with these segments that management uses to make operating
decisions and assess performance.
 
     The consolidated financial statements include the accounts of Security
First Technologies Corporation and its wholly owned subsidiary, Security First
Technologies, Inc. Significant intercompany accounts and transactions have been
eliminated in consolidation. In preparing the consolidated financial statements,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosures of contingent
liabilities as of the date of the consolidated balance sheets and revenues and
expenses during the reporting periods. Actual results could differ from those
estimates.
 
     Security First Technologies Corporation is the successor company to
Security First Network Bank ("SFNB") as a result of the reorganization completed
on September 30, 1998. The reorganization has been accounted for in a manner
similar to a pooling of interests and, as a result, the historical financial
statements of SFNB have become the historical financial statements of the
Company. As more fully discussed in note 2, the Company sold its banking
operations, which have been presented as discontinued operations in the
accompanying consolidated financial statements.
 
     The technology market for internet related financial services is
characterized by significant risk as a result of rapid, evolving industry
standards, emerging competition and frequent new product and service
introductions. To a great extent, the Company's success is dependent on the
evolution of the technology markets for internet related banking services and on
its successful implementation of technology for internet related banking
services for certain large customers. Negative developments related to
technology for internet related banking services or problems in implementations
for large customers could have an adverse impact on the Company's financial
position and results of operations.
 
  Revenue Recognition and Deferred Revenues
 
     The Company derives revenues from licensing software to customers,
providing professional services to customers, and providing data center
processing services to customers.
 
     The Company recognizes revenue from software licensing agreements in
accordance with Statement of Position No. 97-2, "Software Revenue Recognition."
A substantial portion of the Company's software license revenue is being
recognized on a straight-line basis over either the term of the agreement or,
for contracts without a term, the estimated useful life of the Company's
software products, because of the Company's practice of bundling post-contract
support with its license agreements. If the software license fees are included
with other services which are essential to the functionality of the software,
the Company uses the percentage of completion method to recognize software
license revenue.
 
                                       F-8
<PAGE>   9
             SECURITY FIRST TECHNOLOGIES CORPORATION AND SUBSIDIARY
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     Revenues derived from contracts to provide services on a time and materials
basis are recognized as the related services are performed. Revenues from
professional services, provided on a fixed fee basis, are recognized using the
percentage of completion method, measured by the percentage of contract costs
incurred to date to estimated total contract costs for each contract. Provisions
for estimated losses on uncompleted contracts are made in the period in which
such losses are determined. Professional services revenues also include
reimbursable expenses and computer equipment sales.
 
     Data center processing revenues are recognized as the services are
performed, and are determined based on the number of billable customer accounts
processed during the period or based upon certain agreed upon contractual
minimum fees.
 
     Deferred revenues represent payments received from customers for software
licenses or services in advance of revenue recognition.
 
  Cash and Cash Equivalents
 
     For purposes of reporting cash flows, cash and cash equivalents include
deposits with commercial banks with original maturities of 90 days or less.
 
  Investment Securities
 
     The Company accounts for investment securities in accordance with Statement
of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain
Investments in Debt and Equity Securities". Under SFAS No. 115, investments in
equity and debt securities are classified as held to maturity, trading or
available for sale. Trading securities are reported at fair value, with changes
in fair value included in the statement of operations, while available-for-sale
securities are reported at fair value, with net unrealized gains or losses
included as a component of stockholders' equity. Held to maturity securities are
reported at amortized cost. Unrealized losses on all securities that are other
than temporary are reported in the statement of operations upon determination
that the loss is other than temporary. Amortization of premiums and accretion of
discounts are computed using the effective interest method and assumed
prepayment speeds. The specific identification method is used in determining
gains and losses on the sale of securities.
 
     Investment securities include marketable equity securities, U.S. Treasury
bills and debt securities of certain other U.S. government agencies with
original maturities of greater than 90 days and ranging up to five years.
 
  Premises and Equipment
 
     Premises and equipment are carried at cost, less accumulated depreciation
and amortization. Depreciation and amortization are computed using straight-line
and accelerated methods over the estimated useful lives of the related assets
ranging from 2 to 5 years. Leasehold improvements are amortized using the
straight-line method over the estimated useful life of the improvement or the
lease term, whichever is shorter. Amortization of assets held under capital
lease arrangements is included in depreciation and amortization.
 
  Product Development
 
     Product development includes all research and development expenses and
software development costs. All research and development expenses are expensed
as incurred. The Company's policy is to expense all software development costs
associated with establishing technological feasibility, which the Company
defines as completion of beta testing. Because of the insignificant amount of
costs incurred by the Company between completion of beta testing and customer
release, the Company has not capitalized any such software development costs in
the accompanying consolidated financial statements.
 
                                       F-9
<PAGE>   10
             SECURITY FIRST TECHNOLOGIES CORPORATION AND SUBSIDIARY
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
  Intangible Assets
 
     Intangible assets includes purchased technology of $3.1 million at December
31, 1998 and goodwill and other identifiable intangible assets of $6.0 million
at December 31, 1997 and 1998. Goodwill and other identifiable intangible assets
relate to the Company's acquisitions and are amortized over their estimated
useful lives (ranging from eight months to three years) using the straight-line
method. Purchased technology represents technology incorporated in the Company's
products and is amortized over the greater of the useful life of the purchased
technology (ranging from two to three years) or the ratio of current revenues to
anticipated total revenues. Accumulated amortization of intangible assets was
$1.4 million and $6.2 million at December 31, 1997 and 1998, respectively.
 
     The Company evaluates the recoverability of intangible assets at the end of
each period by comparing their carrying value to the undiscounted estimated
future net operating cash flows expected to be derived from such assets. If such
evaluation indicates a potential impairment, the Company uses fair value in
determining the amount of these intangible assets that should be written off.
 
  Stock Option Plans
 
     The Company accounts for its stock option plans in accordance with the
provisions of Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees", and related interpretations. As such,
compensation expense is recorded on the date of grant only if the current market
price of the underlying stock exceeded the exercise price. In 1996, the Company
adopted SFAS No. 123, "Accounting for Stock-Based Compensation", which
encourages entities to recognize as expense over the vesting period the fair
value of all stock-based awards on the date of grant. Alternatively, SFAS No.
123 also allows entities to continue to apply the provisions of APB Opinion No.
25 and provide pro forma disclosures for employee stock option grants made in
1995 and future years as if the fair-value-based method defined in SFAS No. 123
had been applied. The Company has elected to continue to apply the provisions of
APB Opinion No. 25 and provide the pro forma disclosures required by SFAS No.
123.
 
  Earnings Per Common Share
 
     Basic earnings per share is calculated as income available to common
stockholders divided by the weighted average number of common shares outstanding
during the period. Diluted earnings per share is calculated to reflect the
potential dilution that would occur if stock options or other contracts to issue
common stock were exercised and resulted in additional common stock that would
share in the earnings of the Company. Because of the Company's net losses, the
issuance of additional shares of common stock under stock options or upon the
conversion of preferred stock would be antidilutive. The total number of common
shares that would have been included in the Company's computation of diluted
earnings per share if they had been dilutive was 10,159,355 in 1996, 12,468,278
in 1997 and 15,718,256 in 1998.
 
  Income Taxes
 
     The Company accounts for income taxes in accordance with the asset and
liability method of accounting for income taxes. Under the asset and liability
method, deferred income tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and net operating loss and tax credit carryforwards. Deferred income tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred income tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date.
 
                                      F-10
<PAGE>   11
             SECURITY FIRST TECHNOLOGIES CORPORATION AND SUBSIDIARY
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
  Fair Values of Financial Instruments
 
     The Company uses financial instruments in the normal course of its
business. The carrying values of accounts receivable, accounts payable, accrued
expenses, and deferred revenues approximate fair value due to the short-term
maturities of these assets and liabilities. The fair values of the Company's
investment securities available for sale are included in Note 4 and are based on
quoted market prices. In addition, the carrying amount of the capital lease
obligation approximates fair value.
 
  Foreign Currency Translation
 
     Foreign currency financial statements of the Company's Australian
operations are translated into U.S. dollars at current exchange rates, except
for revenues, costs and expenses, which are translated at average exchange rates
during each reporting period. Net exchange gains or losses resulting from the
translation of assets and liabilities are accumulated in a separate section of
stockholders' equity titled accumulated other comprehensive income.
 
  Reclassifications
 
     Certain reclassifications have been made to the 1996 and 1997 consolidated
financial statements to conform to the presentation adopted in 1998.
 
  New Accounting Pronouncements
 
     In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income". This statement establishes standards for
reporting and display of comprehensive income and its components in a full set
of general purpose financial statements. SFAS No. 130 requires all items that
are recognized under accounting standards as components of comprehensive income
be reported in a financial statement that is displayed in equal prominence with
the other annual financial statements. Currently, other comprehensive income for
the Company consists of items previously recorded as a component of
stockholders' equity under SFAS No. 52, "Foreign Currency Translation", and SFAS
No. 115, "Accounting for Certain Investments in Debt and Equity Securities." The
Company adopted the financial statement reporting disclosure requirements of
SFAS No. 130 during 1998 and has restated all periods presented to provide the
presentation required under SFAS No. 130.
 
     The Company did not have any significant realized gains for the years ended
December 31, 1996, 1997 and 1998, therefore, no reclassification adjustments are
presented for gains realized in income.
 
2. DISCONTINUED OPERATIONS
 
     On September 30, 1998, the Company completed the sale of its banking
operations to the Royal Bank of Canada, through one of its U.S. based
subsidiaries ("Royal Bank"). Royal Bank paid $3 million in excess of the net
assets sold less a $1.5 million holdback for indemnification which will be
received eighteen months from the closing date and is included in other assets
in the 1998 consolidated balance sheet. The banking operations included
substantially all of the loans and investment securities and deposit
relationships of SFNB and were legally separated from the technology operations
through the formation of a holding company. The Company recorded a gain of
$812,000 on the sale of the banking operations which included a $1.3 million
charge related to the estimated fair value of options to purchase the Company's
capital stock issued to Royal Bank in connection with the sale of the banking
operations. The options give Royal Bank the right to purchase 733,818 shares of
common and preferred stock for an aggregate of $10.0 million at prices ranging
from $11.88 to $15.81 per share at specified periods through June 2000. The
first option for 210,438 shares of common stock with a per share exercise price
of $11.88 was exercised in December 1998.
 
                                      F-11
<PAGE>   12
             SECURITY FIRST TECHNOLOGIES CORPORATION AND SUBSIDIARY
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     The losses from the banking operations are reflected in the accompanying
consolidated statements of operations as discontinued operations. Net interest
income for the nine month period ended September 30, 1998 was $1.3 million and
the net loss, excluding the gain on disposal, was $3.1 million.
 
     In addition to the sale of the banking operations, the Company has entered
into technology licensing and consulting arrangements with Royal Bank for $6
million, which were effective September 30, 1998.
 
3. BUSINESS ACQUISITIONS
 
     On November 24, 1997, the Company completed the acquisition of Solutions By
Design, Inc. ("SBD"), a technology consulting firm. The Company exchanged
999,999 shares of restricted common stock with a value of approximately $5.7
million for all of the outstanding shares of SBD. The recipients of the shares
issued in the transaction were contractually restricted from selling any of the
common stock received for six months after issuance after which time they were
able to sell up to 25% of the total shares received annually thereafter. The
value of the common stock issued was discounted to reflect such restrictions. Of
the $6.2 million total purchase price, which included common stock valued at
$5.7 million and transaction costs and liabilities assumed of $500,000, $4.2
million was assigned to identifiable intangible assets and $2.0 million was
assigned to goodwill. The identifiable intangible assets include employment
contracts, which are amortized over the contract life of eight months,
exclusivity and non-solicitation agreements, which are amortized over the term
of the contract of 18 months, and assembled workforce, which is being amortized
over three years. The Company is amortizing goodwill over a period of two years,
which is the period that it will receive benefit from the projects that were
developed by the former SBD employees. Additionally, the Company has included
$489,000 of nonrecurring charges associated with the SBD acquisition in
amortization of goodwill and acquisition charges in the accompanying 1997
consolidated statement of operations. These amounts represent the premium paid
to SBD by the Company for services rendered during the fourth quarter of 1997
prior to consummation of the SBD acquisition. The acquisition was accounted for
using the purchase method of accounting and, accordingly, the results of
operations of SBD have been included in the results of operations of the Company
since the effective date of the acquisition.
 
     On November 4, 1996, the Company completed the acquisition of SecureWare,
Inc. ("SecureWare"), a computer software company which developed security and
encryption technology allowing users to conduct safe transactions over the
internet. SecureWare was merged into Five Paces, Inc. ("FPI") after the
acquisition. The Company exchanged cash consideration in the amount of $5.0
million and stock options for all of the outstanding common stock and stock
options of SecureWare. Of the total purchase price, which included $5.0 million
in cash and liabilities assumed of approximately $477,000, $3.3 million was
allocated to in-process research and development and charged to the consolidated
statement of operations at the acquisition date; $1.4 million was allocated to
purchased technology; and $777,000 was allocated to goodwill. Prior to the
acquisition, SecureWare was substantially owned by Michael F. McChesney, who
resigned as the Chairman of the Board of the Company in February 1999. The
acquisition was accounted for using the purchase method of accounting and,
accordingly, the results of operations of SecureWare have been included in the
results of operations of the Company since the effective date of the
acquisition.
 
     On May 23, 1996, the Company completed the acquisition of FPI, a computer
software company which developed computer banking technology. The Company
exchanged 1,920,000 shares of common stock with a value of $2.4 million for all
of the outstanding common stock of FPI. Of the total purchase price, which
included common stock valued at $2.4 million and liabilities assumed of
approximately $1.8 million, $3.5 million was allocated to in-process research
and development and charged to the consolidated statement of operations at the
acquisition date; $420,000 was allocated to purchased technology; and $234,000
was allocated to goodwill. Prior to the acquisition, FPI was substantially owned
by Mr. McChesney, who was appointed Chairman of the Company subsequent to the
acquisition. The acquisition was accounted for using
 
                                      F-12
<PAGE>   13
             SECURITY FIRST TECHNOLOGIES CORPORATION AND SUBSIDIARY
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
the purchase method of accounting and, accordingly, the results of operations of
FPI have been included in the results of operations of the Company since the
effective date of the acquisition.
 
     During 1997, the Company expensed the unamortized balance of goodwill and
purchased technology resulting from the FPI and SecureWare acquisitions of
approximately $1.4 million which has been included in amortization of goodwill
and acquisition charges in the accompanying 1997 consolidated statement of
operations. The Company made this assessment after determining that there was
limited future cash flows associated with the intangible assets acquired. Fair
value was determined as the present value of the future cash flows. S1 made the
strategic decision to refocus the resources which had been involved in the
development and marketing of the network security products acquired from
SecureWare towards the Virtual Financial Manager suite of products and related
services and, therefore, it did not believe there would be significant future
revenues from the acquired products. As a result, the unamortized balances for
purchased technology and goodwill related to the SecureWare acquisition of $0.6
million and $0.4 million, respectively, were charged off in the 1997 Statement
of Operations. Because of a significant rewrite of S1's Virtual Bank Manager
product, management did not anticipate that there would be any future sales of
the version of Virtual Bank Manager which was acquired from FPI. As a result,
the Company wrote off the balance of $0.2 million of purchased technology and
$0.2 million of goodwill related to the FPI acquisition.
 
     The following unaudited pro forma financial information presents the
combined results of operations of the Company, SBD, SecureWare, and FPI as if
the acquisitions had occurred as of January 1, 1996 with respect to the 1996
amounts and January 1, 1997 with respect to the 1997 amounts. The unaudited pro
forma results do not necessarily represent results of operations which would
have occurred if the acquisitions had occurred on the dates indicated nor are
they necessarily indicative of the results of future operations.
 
<TABLE>
<CAPTION>
                                                                        YEAR ENDED
                                                                       DECEMBER 31,
                                                                    -------------------
                                                                      1996       1997
                                                                    --------   --------
                                                                      (IN THOUSANDS)
      <S>                                                           <C>        <C>
      Revenues....................................................  $  5,118   $ 13,838
      Net loss....................................................   (25,100)   (28,602)
      Basic net loss per common share.............................     (3.59)     (2.93)
</TABLE>
 
4. INVESTMENT SECURITIES AVAILABLE FOR SALE
 
     The amortized cost and fair value of investment securities available for
sale and gross unrealized gains and losses at December 31, 1997 are summarized
as follows:
 
<TABLE>
<CAPTION>
                                                                         DECEMBER 31, 1997
                                                                ------------------------------------
                                                                              UNREALIZED
                                                                AMORTIZED   --------------    FAIR
                                                                  COST      GAINS   LOSSES    VALUE
                                                                ---------   -----   ------   -------
                                                                           (IN THOUSANDS)
      <S>                                                       <C>         <C>     <C>      <C>
      U.S. Treasury and U.S. Government agencies..............   $22,802    $ 97     $ 22    $22,877
      Less investment securities allocated to discontinued
        banking operations....................................    (6,043)    (30)     (10)    (6,063)
                                                                 -------    ----     ----    -------
      U.S. Treasury and U.S. government agencies allocated to
        continuing operations.................................   $16,759    $ 67     $ 12    $16,814
                                                                 =======    ====     ====    =======
</TABLE>
 
     At December 31, 1998, investment securities available for sale consisted
entirely of marketable equity securities (123,001 shares of BroadVision, Inc.)
with a cost of $1.8 million, fair value of $3,936,000, and an unrealized gain of
$2,136,000. The Company is restricted from selling these securities through
December 1999.
 
                                      F-13
<PAGE>   14
             SECURITY FIRST TECHNOLOGIES CORPORATION AND SUBSIDIARY
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     Proceeds from the sales of investment securities were $8,956,000,
$14,979,000 and $1,983,000 in 1996, 1997 and 1998, respectively. Gross gains of
approximately $6,000 in 1996, $5,000 in 1997 and $4,000 in 1998 and gross losses
of approximately $14,000 in 1996 and $4,000 in 1997 were realized on sales of
investment securities.
 
5. PREMISES AND EQUIPMENT
 
     A summary of premises and equipment at December 31, 1997 and 1998 follows:
 
<TABLE>
<CAPTION>
                                                                     1997      1998
                                                                    -------   -------
                                                                     (IN THOUSANDS)
      <S>                                                           <C>       <C>
      Leasehold improvements......................................  $ 1,758   $ 2,215
      Furniture and fixtures......................................    1,572     1,720
      Computer equipment..........................................    4,113     5,739
      Software....................................................    1,250     1,663
                                                                    -------   -------
                                                                      8,693    11,337
      Accumulated depreciation and amortization...................   (2,896)   (5,982)
                                                                    -------   -------
                                                                    $ 5,797   $ 5,355
                                                                    =======   =======
</TABLE>
 
     During 1998, the Company terminated a data center facilities management
agreement and, as a result, purchased approximately $1.8 million of computer
equipment. Immediately thereafter, the Company entered into a sale-leaseback
arrangement for this computer equipment with a third party which is accounted
for as a capital lease. The Company recorded a charge which has been included in
depreciation and amortization of approximately $1.2 million to adjust the
carrying value of the leased computer equipment to its fair market value.
Additionally, the Company recorded a write-down of computer equipment of
$500,000 in 1998 to reflect the results of a physical inventory of computer
equipment.
 
6. STOCKHOLDERS' EQUITY
 
  Spin-Off from Cardinal Bancshares, Inc.
 
     A spin-off of the Company from Cardinal Bancshares, Inc. ("Cardinal")
occurred on May 23, 1996. The spin-off was effected pursuant to the Cardinal
Bancshares, Inc. Amended and Restated Plan of Distribution ("Plan of
Distribution"). Under the Plan of Distribution, following a payment of a $3.0
million cash dividend from the Company to Cardinal, Cardinal distributed pro
rata to each Cardinal stockholder of record on the record date 2,398,908 shares
of the Company's common stock and paid cash in lieu of fractional shares.
 
  Initial Public Offering
 
     On May 23, 1996, the Company sold 2,806,000 shares of common stock for
$52.8 million, net of offering expenses, in an underwritten initial public
offering.
 
  Sales of Common and Preferred Stock
 
     During 1996, immediately following the spin-off and distribution described
above, the Company sold 967,884 shares of common stock and 1,637,832 shares of
Class A convertible preferred for approximately $6 million.
 
     During 1997, the Company sold 569,978 shares of common stock and 159,952
shares of Class A convertible preferred stock for approximately $6 million.
 
     During 1998, the Company sold 92,593 shares of common stock for
approximately $1 million and 749,064 shares of Series B convertible redeemable
preferred stock for approximately $10 million.
 
                                      F-14
<PAGE>   15
             SECURITY FIRST TECHNOLOGIES CORPORATION AND SUBSIDIARY
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     In 1998, the Company entered into a relationship with BroadVision, Inc.
("BroadVision") where BroadVision purchased 181,610 shares of the Company's
common stock for $2.0 million by granting to the Company a software license and
prepaid royalty agreement which gives the Company the right to resell the
software by integrating the software with S1's software products. In addition,
the Company exchanged 129,702 shares of common stock valued at $1.8 million for
123,001 shares of BroadVision, based upon the average closing price of the
respective shares for the ten business days preceding July 31, 1998.
 
  Preferred Stock
 
     The Company has authorized 5,000,000 shares of $0.01 par value preferred
stock, of which 1,637,832 shares have been designated as Series A Convertible
Preferred Stock and 749,064 shares have been designated as Series B Redeemable
Convertible Preferred Stock. There were 1,251,084 and 636,464 shares of Series A
preferred outstanding at December 31, 1997 and 1998, respectively. There were
749,064 shares of Series B preferred outstanding at December 31, 1998. The terms
of the Series A and Series B preferred (the "Preferred Stock") provide the
holders with identical rights to common stockholders with respect to dividends
and distributions in the event of liquidation, dissolution, or winding up of the
Company. Except as described below, the Series A and Series B preferred is
nonvoting. Each series is entitled to vote as a single class on the following
matters: (i) any amendment to any charter provision that would change the
specific terms of that series which would adversely affect the rights of the
holders of that series and (ii) the merger or consolidation of the Company with
another corporation or the sale, lease, or conveyance (other than by mortgage or
pledge) of the properties or business of the Company in exchange for securities
of another corporation if that series of Preferred Stock is to be exchanged for
securities of such other corporation and if the terms of such securities are
less favorable in any respect. Action requiring the separate approval of the
preferred stockholders requires the approval of two-thirds of the shares of
Preferred Stock then outstanding voting as a separate class. In addition,
holders of the Series A and Series B preferred are entitled to vote with the
holders of common stock as if a single class, on any voluntary dissolution or
liquidation of the Company. Holders of Series B preferred also are entitled to
vote with the holders of the common stock on any merger, acquisition,
consolidation or other business combination involving the Company and the sale,
lease or conveyance other than by mortgage or pledge of all or substantially all
of the Company's assets or properties. When the Series A preferred votes with
the common stock on a dissolution or liquidation, each share of Series A
preferred is entitled to one vote. When the Series B preferred is entitled to
vote with the common stock, the holders of Series B preferred are entitled to
the number of votes equal to the number of shares of common stock into which the
Series B preferred could be converted. Subject to certain limitations related to
ownership, each share of Series A preferred is convertible into one share of
common stock at the option of the holder. The 749,064 shares of Series B
preferred are convertible at the option of the holder after October 1, 2000 into
535,045 shares of common stock based on a conversion price of $18.69. The number
of shares of common stock into which the Series A preferred and Series B
preferred are convertible is subject to adjustment. The Series B preferred is
redeemable at the option of the Company through September 2000 by paying the
holder $10,000,000 plus interest.
 
  Capital Stock Option
 
     As part of the sale of the banking operations to Royal Bank, the Company
has issued to Royal Bank four separate options to purchase up to an aggregate
$10 million in capital stock of the Company. The first option for 210,438 shares
of common stock has a per share exercise price of $11.88 and was exercised by
Royal Bank in December 1998. The second option for 191,278 shares has a per
share exercise price of $13.07 and expires at the end of June 1999. The third
option for 173,974 shares has a per share exercise price of $14.38 and expires
at the end of December 1999. The fourth option for 158,128 shares has a per
share exercise price of $15.81 and expires at the end of June 2000. As of
December 31, 1998, options to acquire 523,380 shares of the Company's capital
stock remain outstanding.
 
                                      F-15
<PAGE>   16
             SECURITY FIRST TECHNOLOGIES CORPORATION AND SUBSIDIARY
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
7. INCOME TAXES
 
     The Company was included in the consolidated Federal income tax returns
filed by Cardinal Bancshares, Inc. through the effective date of the spin-off of
May 23, 1996. The Company has filed its own separate consolidated Federal income
tax returns since that time. Income tax benefits applicable to the Company
through the date of the spin-off were paid to the Company by Cardinal. The
Company has provided for income taxes for all periods included herein as if it
were filing separate income tax returns.
 
     The Company has not recorded an income tax benefit for 1996, 1997 or 1998
because operating losses were incurred and a valuation allowance has been
recorded against substantially all deferred income tax assets, primarily
comprised of the net operating loss carryforwards.
 
     The components of income tax benefit for 1996, all of which relates to the
discontinued operations, are as follows:
 
<TABLE>
<CAPTION>
                                                                    (IN THOUSANDS)
      <S>                                                           <C>
      Current income tax benefit..................................      $ (87)
      Deferred income tax benefit.................................       (289)
                                                                        -----
                Total income tax benefit..........................      $(376)
                                                                        =====
</TABLE>
 
     The income tax effects of the temporary differences that give rise to the
Company's deferred income tax assets and liabilities as of December 31, 1997 and
1998 are as follows:
 
<TABLE>
<CAPTION>
                                                                     1997      1998
                                                                    -------   -------
                                                                     (IN THOUSANDS)
      <S>                                                           <C>       <C>
      Deferred income tax assets:
           Net operating loss carryforwards.......................  $13,577   $17,403
           Deferred compensation..................................      742     1,063
           Deferred revenue.......................................    3,426     8,516
           Other..................................................       96     1,249
                                                                    -------   -------
                Total gross deferred income tax assets............   17,841    28,231
                                                                    -------   -------
           Valuation allowance for deferred income tax assets.....  (16,932)  (27,808)
                                                                    -------   -------
                Total deferred income tax assets..................      909       423
                                                                    -------   -------
      Deferred income tax liabilities:
           Unrealized gains on investment securities available for
            sale..................................................       --       812
           Other..................................................      909       286
                                                                    -------   -------
                Total gross deferred income tax liabilities.......      909     1,098
                                                                    -------   -------
      Net deferred income tax liability, included in accrued
        expenses..................................................       --      $675
                                                                    =======   =======
</TABLE>
 
     The valuation allowance increased $7,077,000, $9,855,000, and $10,876,000
during the years ended December 31, 1996, 1997 and 1998, respectively. Deferred
income tax assets and liabilities are recognized for differences between the
financial statement carrying amounts and the tax bases of assets and liabilities
which will result in future deductible or taxable amounts and for net operating
loss and tax credit carryforwards. A valuation allowance is then established to
reduce the deferred income tax assets to the level at which it is "more likely
than not" that the tax benefits will be realized. Realization of tax benefits of
deductible temporary differences and operating loss and tax credit carryforwards
depends on having sufficient taxable income within the carryback and
carryforward periods. Sources of taxable income that may allow for the
realization of tax benefits include (1) taxable income in the current year or
prior years that is available through carryback, (2) future taxable income that
will result from the reversal of existing taxable temporary differences, and (3)
future taxable income generated by future operations. Because of the
uncertainties with
 
                                      F-16
<PAGE>   17
             SECURITY FIRST TECHNOLOGIES CORPORATION AND SUBSIDIARY
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
respect to the Company's ability to achieve and sustain profitable operations in
the future, the Company has recorded a valuation allowance to offset
substantially all of its net deferred income tax assets.
 
     At December 31, 1998, the Company has net operating loss carryforwards of
approximately $49.3 million which begin to expire as indicated below, unless
utilized. Of this amount, $3.5 million related to stock option tax deductions
will be reflected as additional paid-in capital when realized.
 
<TABLE>
<CAPTION>
YEAR                                      CARRYFORWARD AMOUNT    EXPIRATION DATE
----                                      -------------------    ---------------
<S>                                       <C>                    <C>
1995..................................        $    47,000             2010
1996..................................         13,402,000             2011
1997..................................         21,965,000             2012
1998..................................         13,836,000             2018
                                              -----------
                                              $49,250,000
                                              ===========
</TABLE>
 
8. COMMITMENTS
 
  Lease Commitment
 
     The Company leases office facilities and computer equipment under
noncancelable operating lease agreements which expire in 2002. Future minimum
annual payments under all operating lease agreements with remaining terms
greater then one year for the next four years as of December 31, 1998 are as
follows:
 
<TABLE>
<S>                                                           <C>
1999........................................................  $1,888,000
2000........................................................   1,545,000
2001........................................................   1,080,000
2002........................................................      19,000
                                                              ----------
                                                              $4,532,000
                                                              ==========
</TABLE>
 
     Included in premises and equipment is computer equipment under a capital
lease with original cost and accumulated amortization of approximately $1.8
million and $1.2 million, respectively. Future minimum annual lease payments for
the capital lease as of December 31, 1998 are as follows:
 
<TABLE>
<S>                                                           <C>
1999........................................................  $  911,000
2000........................................................     165,000
                                                              ----------
                                                              $1,076,000
Less amount representing interest...........................      42,000
                                                              ----------
Present value of minimum lease payments including current
  portion of $875,000.......................................  $1,034,000
                                                              ==========
</TABLE>
 
     Rent expense under all noncancelable operating lease agreements for the
years ended December 31, 1996, 1997 and 1998 was approximately $250,000,
$1,004,000 and $1,638,000, respectively.
 
Cash Held in Escrow
 
     At December 31, 1998, the Company had $751,000 in cash in an escrow account
which was established as a result of the termination of a data center facilities
management agreement. The amount required to be held in escrow will be reduced
by $250,000 each year following the termination, provided there have been no
indemnification claims.
 
                                      F-17
<PAGE>   18
             SECURITY FIRST TECHNOLOGIES CORPORATION AND SUBSIDIARY
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
  Contractual Commitments
 
     In the normal course of its business, the Company enters into contracts
with customers. These contracts contain commitments including, but not limited
to, minimum standards and time frames against which the Company's performance is
measured. In the event the Company does not meet its contractual commitments
with its customers, the Company may incur penalties and/or certain customers may
have the right to terminate their contracts with the Company. The Company does
not believe that it will fail to meet its contractual commitments to an extent
that will result in a material adverse effect on its financial position or
results of operations.
 
9. STOCK OPTION PLANS
 
     The Company maintains certain stock option plans providing for the grant of
stock options to officers, directors and employees. The plans provide for
5,340,000 shares of the Company's common stock to be reserved for issuance under
the plans. All stock options granted under the plans have ten-year terms and
generally vest and become exercisable ratably over four years from the date of
grant. At December 31, 1998, there were 807,000 shares available for future
grants under the plans.
 
     In addition to stock options issued to officers, directors and employees,
the Company issued approximately 630,400 stock options in conjunction with the
SecureWare acquisition.
 
     Upon the acquisition of SBD, the Company granted 275,000 stock options to
the former SBD employees which are exercisable upon the achievement of certain
performance and software development goals. In the event that the performance
and software development goals are not achieved, the options will vest at the
end of a five year period.
 
     For stock options granted where the exercise price was less than the market
price of the stock on the date of grant, the per share weighted-average exercise
price was $7.15 and $1.04 and the per share weighted average grant date fair
value was $13.51 and $6.60 for stock options granted during 1996 and 1997,
respectively. For stock options granted where the exercise price equaled the
market price of the stock on the date of grant, the per share weighted-average
exercise price was $12.16, $6.55 and $8.42 and the per share weighted-average
grant date fair value was $12.28, $4.33 and $8.08 for stock options granted
during 1996, 1997 and 1998, respectively. The fair values were determined using
the Black Scholes option-pricing model with the following weighted-average
assumptions: expected dividend yield -0-%, risk-free interest rate of 6.5% in
1996 and 5.2% in 1997 and 1998, expected volatility of 70.4% in 1996, 79.2% in
1997 and 94.2% in 1998, and an expected life of 10 years.
 
     The Company applies APB Opinion No. 25 in accounting for its stock option
plans and, accordingly, compensation cost in the amount of approximately
$946,000, $656,000 and $1,992,000 (including approximately $448,000 included in
discontinued operations) has been recognized in 1996, 1997 and 1998,
respectively, relating to stock options granted with exercise prices less than
the market price. Had the Company determined compensation cost based on the fair
value at the grant date for its stock options under SFAS No. 123, the Company's
net loss would have been increased to the pro forma amounts indicated below:
 
<TABLE>
<CAPTION>
                                                                    1996       1997       1998
                                                                  --------   --------   --------
      <S>                                                         <C>        <C>        <C>
      Net loss:
        As reported.............................................  $(22,059)  $(27,991)  $(30,805)
        Pro forma...............................................   (22,366)   (29,749)   (33,118)
      Basic and diluted net loss per common share:
        As reported.............................................  $  (3.76)  $  (3.14)  $  (2.80)
        Pro forma...............................................     (3.81)     (3.33)     (3.01)
</TABLE>
 
                                      F-18
<PAGE>   19
             SECURITY FIRST TECHNOLOGIES CORPORATION AND SUBSIDIARY
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     A summary of the Company's stock options as of December 31, 1996, 1997 and
1998, and changes during the years ended on those dates is presented below:
 
<TABLE>
<CAPTION>
                                                     1996                 1997                 1998
                                              ------------------   ------------------   ------------------
                                                       WEIGHTED-            WEIGHTED-            WEIGHTED-
                                                        AVERAGE              AVERAGE              AVERAGE
                                              SHARES   EXERCISE    SHARES   EXERCISE    SHARES   EXERCISE
                                              (000)      PRICE     (000)      PRICE     (000)      PRICE
                                              ------   ---------   ------   ---------   ------   ---------
      <S>                                     <C>      <C>         <C>      <C>         <C>      <C>
      Outstanding at Beginning of Year......  2,690      $0.83     3,334     $ 3.59     3,877     $ 2.78
      Granted...............................    816      12.16     1,397       5.64     1,004       8.42
      Exercised.............................   (167)      1.21      (111)      1.27      (547)      2.17
      Forfeit/Canceled......................     (5)      1.25      (743)     12.26      (458)      4.27
                                              -----      -----     -----     ------     -----     ------
      Outstanding at End of Year............  3,334      $3.59     3,877     $ 2.78     3,876     $ 4.15
                                              -----      -----     -----     ------     -----     ------
      Exercisable at End of Year............    712      $0.86     1,444     $ 2.18     1,999     $ 2.46
                                              =====      =====     =====     ======     =====     ======
</TABLE>
 
     The following table summarizes information about stock options outstanding
at December 31, 1998:
 
<TABLE>
<CAPTION>
                                                       OPTIONS OUTSTANDING              OPTIONS EXERCISABLE
                                              -------------------------------------   -----------------------
                                                             WEIGHTED-
                                                              AVERAGE     WEIGHTED-                 WEIGHTED-
                                               NUMBER OF     REMAINING     AVERAGE      NUMBER       AVERAGE
                                              OUTSTANDING   CONTRACTUAL   EXERCISE     EXCISABLE    EXERCISE
             RANGE OF EXERCISE PRICE             (000)         LIFE         PRICE        (000)        PRICE
             -----------------------          -----------   -----------   ---------   -----------   ---------
      <S>                                     <C>           <C>           <C>         <C>           <C>
      $0.01-1.89............................     2,184          6.58       $ 0.81        1,565       $ 0.80
       4.46-6.67............................       463          8.39         5.95          158         5.83
       7.00-10.50...........................       860          7.12         8.20          186         8.49
       10.875-14.25.........................       327          9.09        11.62           90        12.91
       16.735-25.875........................        42          9.88        17.40           --           --
                                                 -----         -----       ------        -----       ------
      $0.01-25.875..........................     3,876          7.17       $ 4.15        1,999       $ 2.46
                                                 =====         =====       ======        =====       ======
</TABLE>
 
10. EMPLOYEE BENEFIT PLAN
 
     The Company provides a 401(k) Retirement Savings Plan (the "Plan") for
substantially all of its full-time employees. Each participant in the Plan may
elect to contribute from 1% to 15% of his or her annual compensation to the
Plan. The Company, at its discretion, may make matching contributions to the
Plan. The Company is currently matching up to 4% of the employees compensation
first to the Company's stock fund $1 for each dollar contributed by the employee
and second to the remaining investment funds $.25 for each dollar contributed by
the employee. The Company's contributions to the Plan charged to expense for
1996, 1997 and 1998 were $83,000, $171,000 and $286,000, respectively.
 
11. MAJOR CUSTOMERS AND INTERNATIONAL REVENUES
 
  Major Customers
 
     For the year ended December 31, 1996, three customers represented 16%, 16%,
and 13% of total revenues, respectively. For the year ended December 31, 1997,
two customers represented 18% and 10% of total revenues, respectively. For the
year ended December 31, 1998, two customers represented 39% and 12% of total
revenues, respectively.
 
  International Revenues
 
     Revenues from international customers represented 6% and 19% of total
revenues and are serviced primarily from the United States for the years ended
December 31, 1996 and 1997, respectively.
 
                                      F-19
<PAGE>   20
             SECURITY FIRST TECHNOLOGIES CORPORATION AND SUBSIDIARY
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
12. RELATED PARTY TRANSACTIONS
 
     The Company performed certain administrative and technical services for a
company known as Webtone amounting to approximately $80,000 in 1997 and $192,000
in 1998. The Company's former Chairman of the Board (who resigned in February
1999) who is also a principal shareholder owns Webtone. As of December 31, 1998
the Company had a receivable from Webtone related to these services of $173,000.
 
     During 1998, the Company paid a technology consulting company, called
McCall Consulting Group, approximately $1.1 million and as of December 31, 1998,
S1 has a payable to McCall Consulting Group of $282,000. The president of McCall
Consulting Group is a director of the Company.
 
13. SUBSEQUENT EVENTS
 
     On February 19, 1999, S1 entered into alliances with Hewlett-Packard and
Andersen Consulting. As part of the alliances, Hewlett-Packard has agreed to
make a $10.0 million equity investment and Andersen Consulting has agreed to
make a $4.0 million equity investment in common stock of the Company and has
received warrants to acquire 100,000 shares of the Company's common stock.
 
     On February 25, 1999, S1 entered into an agreement with Royal Bank of
Canada that includes an equity instrument that enables the holder to acquire up
to 615,000 shares of the Company's common stock.
 
                                    *  *  *
 
                                      F-20