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

**FORM 20-F**

 

| **o****                                ****REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE  SECURITIES EXCHANGE ACT OF 1934** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                                                                         |
|                                                                                                                                                                                                                                                                                                         |   |   |
| **OR**                                                                                                                                                                                                                                                                                                       |
|                                                                                                                                                                                                                                                                                                         |   |   |
| **ý****                                ****ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE ACT OF 1934**      |
| **FOR THE FISCAL YEAR ENDED DECEMBER  31, 2003**                                                                                                                                                                                                                                                             |
|                                                                                                                                                                                                                                                                                                         |
| **OR**                                                                                                                                                                                                                                                                                                       |
|                                                                                                                                                                                                                                                                                                         |   |   |
| **o****                                ****TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES  EXCHANGE ACT OF 1934**      |
|                                                                                                                                                                                                                                                                                                         |
| **For the transition period from                     to                   .**                                                      |
| **Commission  File No. 001-14835**                                                                                                                                                                                                                                                                           |

 

**ADB SYSTEMS INTERNATIONAL LTD.**

(Exact name ofRegistrant as specified in its charter)

** **

**Not Applicable**(Translation of Registrant’s name into English)

** **

**ONTARIO, CANADA**

(Jurisdiction ofincorporation or organization)

** **

**6725 Airport Road, Suite 201Mississauga, Ontario L4V 1V2CANADA**(Address of principal executive offices)

 

Securities registered orto be registered pursuant to Section 12(b) of the Act.

 

**None**

 

Securities registered orto be registered pursuant to Section 12(g) of the Act.

 

**Common Shares**

** **

Securities for whichthere is a reporting obligation pursuant to Section 15(d) of the Act.

 

**None**

 

Indicate thenumber of outstanding shares of each of the issuer’s classes of capital orcommon stock as of the close of the period covered by the Annual Report.

 

**59,422,779Common****Shares as of December 31, 2003**

** **

Indicate by checkmark whether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.

 
| Yes |   | **ý** |   | No | o |
|-----|--------|------------|--------|----|---|

 

Indicate by checkmark which financial statement item the registrant has elected to follow.

 
| Item 17 |   | o |   | Item 18 | **ý** |
|---------|--------|---|--------|---------|------------|

 

 

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**ADB SYSTEMS INTERNATIONAL LTD.**

 

**Annual Report on Form 20-F for the FiscalYear**

**Ended December 31, 2003**

 

FORWARDLOOKING STATEMENTS

 

From time to time, we make oral and written statementsthat may be considered “forward looking statements” (rather than historicalfacts).  We are taking advantage of the“safe-harbour” provisions of the Private Securities Litigation Reform Act of1995 for any forward-looking statements we may make from time to time,including the forward-looking statements in this Annual Report.

 

You can identify these statements when you see wordssuch as “may”, “expect”, “anticipate”, “estimate”, “believe”, “intend”, andother similar expressions.  Theseforward-looking statements relate, among other items to:

 

•                                          our futurecapital needs;

 

•                                          futureexpectations as to profitability and operating results;

 

•                                          our abilityto further develop business relationships and revenues;

 

•                                          ourexpectations about the markets for our products and services;

 

•                                          acceptance ofour products and services;

 

•                                          competitivefactors;

 

•                                          our abilityto repay debt;

 

•                                          our abilityto attract and retain employees;

 

•                                          new productsand technological changes;

 

•                                          our abilityto develop appropriate strategic alliances;

 

•                                          protection ofour proprietary technology;

 

•                                          our abilityto acquire complementary products or businesses and integrate them into ourbusiness; and

 

•                                          geographicexpansion of our business.

 

We have based these forward-looking statements largelyon our current plans and expectations. Forward-looking statements are subject to risks and uncertainties, someof which are beyond our control.  Ouractual results could differ materially from those described in ourforward-looking statements as a result of the factors described in the “RiskFactors” included elsewhere in this Annual Report, including, among others:

 

•                                          the timing ofour future capital needs and our ability to raise additional capital whenneeded;

 

•                                          our limitedoperating history in our current business as a combined entity;

 

•                                          increasinglylonger sales cycles;

 

•                                          potentialfluctuations in our financial results and our difficulties in forecasting;

 

•                                          volatility ofthe stock markets and fluctuations in the market price of our stock;

 

•                                          your abilityto buy and sell our shares on the Over the Counter Bulletin Board;

 

•                                          our abilityto compete with other companies in our industry;

 

•                                          our abilityto repay our debt to lenders;

 

•                                          our abilityto retain and attract key personnel;

 

2

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•                                          riskof significant delays in product development;

 

•                                          failureto timely develop or license new technologies;

 

•                                          risksrelating to any requirement to correct or delay the release of products due tosoftware bugs or errors;

 

•                                          riskof system failure or interruption;

 

•                                          problemswhich may arise in connection with the acquisition or integration of newbusinesses, products, services, technologies or other strategic relationships;

 

•                                          risksassociated with international operations;

 

•                                          risksassociated with protecting our intellectual property, and potentiallyinfringing the intellectual property rights of others;

 

•                                          uncertaintyabout the continued acceptance of the Internet as a viable commercial medium;and

 

•                                          sensitivityto the overall economic environment.

 

We do not have, and do not undertake, any obligation to publicly updateor revise any forward-looking statements contained in this Annual Report,whether as a result of new information, future events or otherwise.  Because of these risks and uncertainties,the forward-looking statements and circumstances discussed in this AnnualReport might not transpire.

 

Trademarks or trade names which we own and are used inthis Annual Report include:  ADBTM;PROCUREMATETM; WORKMATETM; BID BUDDYTM; SEARCH BUDDYTM; DYNAMIC BUYERTM and DYNAMICSELLERTM. Each trademark, trade name, or service mark of any other companyappearing in this Annual Report belongs to its holder.

 

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**TABLE OFCONTENTS**

 
| PART I |                                                                                                                                                        |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                        |   |   |   |
|   | ITEM  1 - IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS                                                                                             | 6 |
|   |                                                                                                                                                        |   |   |   |
|   | ITEM 2  - OFFER STATISTICS AND EXPECTED TIMETABLE                                                                                                           | 6 |
|   |                                                                                                                                                        |   |   |   |
|   | ITEM  3 - KEY INFORMATION                                                                                                                                   | 6 |
|   |                                                                                                                                                        |   |   |   |
|   |                                                                                                                                                        | A. | Selected Financial Data | 6 |
|   |                                                                                                                                                        |   |   |   |
|   |                                                                                                                                                        | B. | Capitalization and  Indebtedness | 8 |
|   |                                                                                                                                                        |   |   |   |
|   |                                                                                                                                                        | C. | Reasons  For The Offer And Use Of Proceeds | 8 |
|   |                                                                                                                                                        |   |   |   |
|   |                                                                                                                                                        | D. | Risk Factors | 8 |
|   |                                                                                                                                                        |   |   |   |
|   | ITEM 4 -  INFORMATION ON THE COMPANY                                                                                                                        | 16 |
|   |                                                                                                                                                        |   |   |   |
|   | ITEM  5 - OPERATING AND FINANCIAL REVIEW AND PROSPECTS - MANAGEMENT’S DISCUSSION  AND ANALYSIS OF FINANCIAL CONDITION AND   RESULTS OF OPERATIONS | 25 |
|   |                                                                                                                                                        |   |   |   |
|   | ITEM  6 - DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES                                                                                                        | 35 |
|   |                                                                                                                                                        |   |   |   |
|   |                                                                                                                                                        | A. | Directors And Senior  Management | 35 |
|   |                                                                                                                                                        |   |   |   |
|   |                                                                                                                                                        | B. | Compensation | 37 |
|   |                                                                                                                                                        |   |   |   |
|   |                                                                                                                                                        | C. | Board  Practices | 39 |
|   |                                                                                                                                                        |   |   |   |
|   |                                                                                                                                                        | D. | Employees | 40 |
|   |                                                                                                                                                        |   |   |   |
|   |                                                                                                                                                        | E. | Share  Ownership | 41 |
|   |                                                                                                                                                        |   |   |   |
|   | ITEM  7 - MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS                                                                                                 | 42 |
|   |                                                                                                                                                        |   |   |   |
|   |                                                                                                                                                        | A. | Major  Shareholders | 42 |
|   |                                                                                                                                                        |   |   |   |
|   |                                                                                                                                                        | B. | Related Party  Transactions | 42 |
|   |                                                                                                                                                        |   |   |   |
|   | ITEM 8 - FINANCIAL  INFORMATION                                                                                                                             | 43 |
|   |                                                                                                                                                        |   |   |   |
|   | ITEM 9 - THE OFFER AND  LISTING                                                                                                                             | 43 |
|   |                                                                                                                                                        |   |   |   |
|   | ITEM 10 - ADDITIONAL  INFORMATION                                                                                                                           | 45 |
|   |                                                                                                                                                        |   |   |   |
|   |                                                                                                                                                        | A. | Share Capital | 45 |
|   |                                                                                                                                                        |   |   |   |
|   |                                                                                                                                                        | B. | Memorandum  and Articles of Association | 45 |
|   |                                                                                                                                                        |   |   |   |
|   |                                                                                                                                                        | C. | Material  Contracts | 48 |
|   |                                                                                                                                                        |   |   |   |
|   |                                                                                                                                                        | D. | Exchange  Controls | 50 |
|   |                                                                                                                                                        |   |   |   |
|   |                                                                                                                                                        | E. | Taxation | 50 |
|   |                                                                                                                                                        |   |   |   |
|   |                                                                                                                                                        | F. | Dividends and Paying  Agents | 55 |
|   |                                                                                                                                                        |   |   |   |
|   |                                                                                                                                                        | G. | Statements by Experts | 55 |
|   |                                                                                                                                                        |   |   |   |
|   |                                                                                                                                                        | H. | Documents  on Display | 55 |
|        |                                                                                                                                                             |  |  |  |  |  |

 

4

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|     |                                                                                     | I.     | Subsidiary Information | 56     |
|----------|------------------------------------------------------------------------------------------|--------|------------------------|--------|
|     |                                                                                     |   |                   |   |
|     | ITEM  11 - QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK                     | 56     |
|     |                                                                                     |   |                   |   |
|     | ITEM  12 - DESCRIPTION OF SECURITIES OTHER THAN DEBT SECURITIES                          | 56     |
|     |                                                                                     |   |                   |   |
| PART II  | 56                                                                                       |
|     |                                                                                     |   |                   |   |
|     | ITEM  13 - DEFAULT, DIVIDEND ARREARAGES AND DELINQUENCIES                                | 56     |
|     |                                                                                     |   |                   |   |
|     | ITEM  14 - MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF  PROCEEDS | 56     |
|     |                                                                                     |   |                   |   |
|     | ITEM 15 – CONTROLS  AND PROCEDURES                                                  | 56     |
|     |                                                                                     |   |                   |   |
|     | ITEM 16A – AUDIT COMMITTEE  FINANCIAL EXPERT                                        | 57     |
|     |                                                                                     |   |                   |   |
|     | ITEM 16B – CODE OF ETHICS                                                           | 57     |
|     |                                                                                     |   |                   |   |
|     | ITEM 16C – PRINCIPAL ACCOUNTANT  FEES AND SERVICES                                  | 57     |
|     |                                                                                     |   |                   |   |
| PART III | 57                                                                                       |
|     |                                                                                     |   |                   |   |
|     | ITEM 17- FINANCIAL  STATEMENTS                                                           | 57     |
|     |                                                                                     |   |                   |   |
|     | ITEM 18 - FINANCIAL  STATEMENTS                                                          | 57     |
|     |                                                                                     |   |                   |   |
|     | ITEM 19 –  EXHIBITS                                                                 | 58     |

 

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*Unlessotherwise indicated, all references in this Annual Report to “dollars” or “$”are references to Canadian dollars.  Ourfinancial statements are expressed in Canadian dollars.  Except as otherwise noted, certain financialinformation presented in this Annual Report has been translated from Canadiandollars to U.S. dollars at an exchange rate of Cdn$1.29 to US$1.00, the noon buying rate in New York City onDecember 31, 2003 for cable transfers in Canadian dollars as certified forcustoms purposes by the Federal Reserve Bank of New York.  These translations are not intended tosuggest that Canadian dollars have been or could be converted into U.S. dollarsat that or any other rate.*

 

*OnOctober 11, 2001, our shareholders approved a two-for-one shareconsolidation.  Unless otherwiseindicated, all share and option figures in this Annual Report that relate tothe period prior to October 11, 2001 have been adjusted retroactively toreflect the share consolidation.*

 

*Referencesto the “Company” and “ADB” refer to ADB Systems International Ltd., assuccessor to ADB Systems International Inc. as a result of the implementationof the plan of arrangement described on page 17 under the heading “MajorDevelopments.”*

 

**PART I**

 

**ITEM 1 - IDENTITY OF DIRECTORS, SENIORMANAGEMENT AND ADVISORS**

 

Not applicable.

 

**ITEM 2 - OFFER STATISTICS AND EXPECTEDTIMETABLE**

 

Not applicable.

 

**ITEM 3 - KEY INFORMATION**

 

**A.****                                   ****SELECTEDFINANCIAL DATA**

 

The selected financial data set forth below should beread in conjunction with, and is qualified by reference to, our consolidatedfinancial statements and the related notes, and the section “Operating andFinancial Review and Prospects” included elsewhere in this Annual Report.  The consolidated statement of operationsdata for the years ended December 31, 2003, 2002 and 2001 and consolidatedbalance sheet data as of December 31, 2003 and 2002, as set forth below,are derived from our consolidated audited financial statements and the relatednotes included elsewhere in this Annual Report.  The consolidated statement of operations data for the years endedDecember 31, 2000 and 1999 and the consolidated balance sheet data as atDecember 31, 2001, 2000 and 1999 have been derived from our consolidatedaudited financial statements for those years, which are not included in thisAnnual Report.

 

We have prepared our audited financial statements inaccordance with accounting principles generally accepted in Canada, whichdiffer in certain respects from accounting principles generally accepted in theUnited States.  However, as applied tous, for all fiscal periods for which financial data is presented in this AnnualReport, Canadian GAAP and U.S. GAAP were substantially identical in allmaterial respects, except as disclosed in Note 20 of our consolidated financialstatements.

 

Historical results are notnecessarily indicative of results to be expected for any future period.

 

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**STATEMENT OF OPERATIONS**

**DATA:**

 
|                                         |   | **Year Ended  December 31**                        |   |
|----------------------------------------------|--------|---------------------------------------------------------|--------|
|                                         |   | **2003**                                                |   | **2003** |   | **2002** |   | **2001** |   | **2000** |   | **1999** |   |
|                                         |   | **(Cdn$)**                                              |   | **(U.S.$)  (1)** |   | **(Cdn$)** |   | **(Cdn$)** |   | **(Cdn$)** |   | **(Cdn$)** |   |
|                                         |   | **(Audited)  (in thousands except for per share data)** |   |
| Revenue                                      |   | 5,853                                                   |   | 4,537 |   | 5,780 |   | 4,455 |   | 12,497 |   | 31,001 |   |
| Less:  Customer Acquisition Costs       |   | —                                                  |   | — |   | — |   | (60 | ) | (157 | ) | — |   |
| Net Revenue                                  |   | 5,853                                                   |   | 4,537 |   | 5,780 |   | 4,395 |   | 12,340 |   | 31,001 |   |
| Expenses Direct  expenses                    |   | —                                                  |   | — |   | — |   | — |   | 11,460 |   | 26,696 |   |
| Advertising and  promotion                   |   | —                                                  |   | — |   | — |   | — |   | 5,040 |   | 11,870 |   |
| General and  administrative                  |   | 4,648                                                   |   | 3,603 |   | 6,288 |   | 7,622 |   | 16,236 |   | 12,405 |   |
| Sales and  marketing                         |   | 1,098                                                   |   | 851 |   | 1,875 |   | 4,040 |   | 3,161 |   | — |   |
| Software  development and technology         |   | 2,817                                                   |   | 2,183 |   | 4,101 |   | 3,691 |   | 1,802 |   | 1,001 |   |
| Employee stock  options                      |   | 193                                                     |   | 150 |   | — |   | — |   | — |   | — |   |
| Depreciation and  amortization               |   | 1,901                                                   |   | 1,474 |   | 2,602 |   | 1,572 |   | 1,130 |   | 621 |   |
| Interest expense                             |   | 280                                                     |   | 217 |   | 155 |   | (345 | ) | (467 | ) | (767 | ) |
| Total expenses                               |   | 10,937                                                  |   | 8,478 |   | 15,021 |   | 16,580 |   | 38,362 |   | 51,826 |   |
| Loss from  operations                        |   | (5,084                                                  | )      | (3,941 | ) | (9,241 | ) | (12,185 | ) | (26,022 | ) | (20,825 | ) |
| Net Loss                                     |   | (2,815                                                  | )      | (2,182 | ) | (9,364 | ) | (18,714 | ) | (20,366 | ) | (20,825 | ) |
| Loss per common  share(2)                    |   | (0.05                                                   | )      | (0.04 | ) | (0.22 | ) | (0.64 | ) | (0.76 | ) | (0.84 | ) |
| Weighted average  number of common shares(2) |   | 54,324                                                  |   | 54,324 |   | 41,968 |   | 29,130 |   | 26,844 |   | 24,792 |   |

 

**BALANCESHEET DATA:(3)**

 
|                        |   | **As at  December 31** |   |
|-----------------------------|--------|-----------------------------|--------|
|                        |   | **2003**                    |   | **2003** |   | **2002** |   | **2001** |   | **2000** |   | **1999** |   |
|                        |   | **(Cdn$)**                  |   | **(U.S.$(1)** |   | **(Cdn$)** |   | **(Cdn$)** |   | **(Cdn$)** |   | **(Cdn$)** |   |
|                        |   | **(Audited)**               |   |
|                        |   | **(in thousands)**          |   |
| Working capital             |   | 486                         |   | 376 |   | (1,757 | ) | 3,115 |   | 13,671 |   | 21,523 |   |
| Total assets                |   | 3,211                       |   | 2,488 |   | 6,355 |   | 10,592 |   | 20,801 |   | 36,743 |   |
| Long-term  Deferred Revenue |   | —                      |   | — |   | — |   | 33 |   | 1,195 |   | 1,289 |   |
| Shareholders  equity        |   | 1,026                       |   | 794 |   | 1,198 |   | 8,014 |   | 15,860 |   | 28,985 |   |

 

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(1)                                  Conveniencetranslation into U.S. $. See Note 24 of our consolidated financial statements.

(2)                                  InOctober 2001, our shareholders approved a 2 for 1 share consolidation.  All per share amounts have been adjustedretroactively to reflect the consolidation. See Note 9(g) of our consolidated financial statements for a discussionregarding the calculation of common shares outstanding and loss per commonshare.

(3)                                  Wehave not paid dividends since our formation.

 

EXCHANGE RATES

 

The following tables set forth, for the periodsindicated, certain exchange rates based on the noon buying rate in New YorkCity for cable transfers in Canadian dollars, as certified for customs purposesby the Federal Reserve Bank of New York. Such rates are the number of U.S. dollars per one Canadian dollar andare the inverse

 

7

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of the ratesquoted by the Federal Reserve Board of New York for Canadian Dollars per U.S.$1.00.  On June 3, 2004, the exchangerate was US$1.00 = Cdn$1.3606**.**

** **
|                     |   | **Year Ended  December 31,** |   |
|--------------------------|--------|-----------------------------------|--------|
| **Rate**                 |   | **2003**                          |   | **2002** |   | **2001** |   | **2000** |   | **1999** |   |
|                     |   |                              |   |   |   |   |   |   |   |   |   |
| Average (1)  during year |   | .7205                             |   | .6344 |   | .6449 |   | .6725 |   | .6744 |   |

 

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(1) The averagerate is the average of the exchange rates on the last day of each month duringthe year.

                                                
| **Month**     |   | **High  during month** |   | **Low during  month** |   |
|---------------|--------|------------------------|--------|-----------------------|--------|
|          |   |                   |   |                  |   |
| November 2003 |   | .7692                  |   | .7484                 |   |
| December 2003 |   | .7738                  |   | .7522                 |   |
| January 2004  |   | .7880                  |   | .7496                 |   |
| February 2004 |   | .7629                  |   | .7439                 |   |
| March 2004    |   | .7645                  |   | .7418                 |   |
| April 2004    |   | .7633                  |   | .7293                 |   |
| May 2004      |   | .7364                  |   | .7158                 |   |

 

**B.****                                   ****CAPITALIZATIONAND INDEBTEDNESS**

 

Not applicable.

 

**C.****                                   ****REASONSFOR THE OFFER AND USE OF PROCEEDS.**

 

Not applicable.

 

**D.****                                   ****RISK FACTORS**

 

The following is asummary of certain risks and uncertainties which we face in our business.  This summary is not meant to beexhaustive.  These Risk Factors shouldbe read in conjunction with other cautionary statements which we make in thisAnnual Report and in our other public reports, registration statements andpublic announcements.

 

**WE WILL NEED ADDITIONAL CAPITAL AND IF WE ARE UNABLE TOSECURE ADDITIONAL FINANCING WHEN WE NEED IT, WE MAY BE REQUIRED TOSIGNIFICANTLY CURTAIL OR CEASE OUR OPERATIONS.**

** **

The Company is not yet profitable.  Since we began our operations, we have beenfunded primarily through the sale of securities to investors in a series ofprivate placements, sales of equity to, and investments from, strategicpartners, gains from investments, option exercises, convertible debtinstruments and, to a limited extent, through cash flow from operations. TheCompany’s ability to continue as a going concern will be dependent on management’sability to successfully execute its business plan, increase revenue and obtainadditional forms of debt or equity financing. As of June 18, 2004, we had cash and marketable securities ofapproximately $1.23 million dollars. The Company expects that additional debtor equity financing such as the issuance of loans or debentures, issuance ofshares, conversion of warrants and exercise of options in the amount of $3.7million will be required in order for the Company to be able to fund itsoperations through 2004.  The Companycannot provide assurance that efforts to raise such additional financings willbe successful.

 

8

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Management believes that continued existence beyond2004 is dependent on its ability to increase revenue from sales of existingproducts, and expand the scope of its product offering through the expansion ofinternally developed software and partnerships with third parties.

 

We do not have any committed sources of additionalfinancing at this time and we are uncertain whether additional funding will beavailable when we need it on terms that will be acceptable to us or at all. Ifwe are not able to obtain financing when we need it, we would be unable tocarry out our business plan and would have to significantly curtail or ceaseour operations. We have included in Note 2 to our financial statements, adiscussion about the ability of our company to continue as a going concern.

 

Potential sources of financing include strategicrelationships, public or private sales of our shares, debt, convertiblesecurities or other arrangements. If we raise funds by selling additionalshares, including common shares or other securities convertible into commonshares, the ownership interests of our existing shareholders will bediluted.  If we raise funds by sellingpreference shares, such shares may carry more voting rights, higher dividendpayments or more favorable rights upon distribution than those for the commonshares.  If we incur debt, the holders ofsuch debt may be granted security interests in our assets.  Because of our potential long term capitalrequirements, we may seek to access the public or private equity or debtmarkets whenever conditions are favorable, even if we do not have an immediateneed for additional capital at that time.

 

WE ARE NOT PROFITABLE AND WE MAY NEVER BECOME PROFITABLE.

*** ***

We have accumulated net losses of approximately $99.8million as of December 31, 2003.  Forthe year ended December 31, 2003 our net loss was $2.8 million.  We have never been profitable and expect tocontinue to incur losses for the foreseeable future.  We cannot assure you that we will earn profits or generatepositive cash flows from operations in the future.

 

OUR LIMITED OPERATING HISTORY IN OUR CURRENT BUSINESS AS A COMBINEDENTITY MAKES EVALUATING OUR BUSINESS DIFFICULT.

*** ***

From the time we were founded in September, 1995 until1999 we operated solely as an online retailer of computer and other goods.  Since 1999 we have shifted our focus toproviding dynamic pricing solutions..  In October 2001 weacquired ADB Systemer ASA of Norway, a provider of enterprise asset managementand electronic procurement software and services.   While ADB Systemer has operated since 1988, we have only alimited operating history as a combined entity on which you can base yourevaluation of our business and prospects.

 

Our business and prospects must be considered in lightof the risks, uncertainties and expenses frequently encountered by companies intheir early stages of development, particularly companies in new and rapidlyevolving markets.  Our business strategymay not be successful and we may not successfully address those risks.

 

WE MAY EXPERIENCE INCREASINGLY LONGER SALES CYCLES

*** ***

A significant portion of our revenue in any quarter isderived from a relatively small number of contracts.  We often experience sales cycles of six to eighteen months.  If the length of our sales cycles increases,our revenues may decrease and our quarterly results would be adversely affected.  In addition, our current and future expenselevels are based largely on our investment plans and estimates of futurerevenues and are, to a large extent, fixed. We may be unable to adjust spending in a timely manner to compensate forany unexpected revenue shortfall.   Anysignificant shortfall in revenues relative to our planned expenditures wouldhave a material adverse effect on our business, financial condition, cash flowsand results of operations.

 

POTENTIAL FLUCTUATIONS IN OUR FINANCIAL RESULTS MAKE FINANCIALFORECASTING DIFFICULT

*** ***

Our operating results have varied on a quarterly basisin the past and may fluctuate significantly as a result of a variety offactors, many of which are outside our control. Factors that may affect ourquarterly operating results include:

 

9

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•                                          generaleconomic conditions as well as economic conditions specific to our industry;

 

•                                          longsales cycles, which characterize our industry;

 

•                                          implementationdelays, which can affect payment and recognition of revenue;

 

•                                          anydecision by us to reduce prices for our solutions in response to pricereductions by competitors;

 

•                                          theamount and timing of operating costs and capital expenditures relating tomonitoring or expanding our business, operations and infrastructure; and

 

•                                          thetiming of, and our ability to integrate, any future acquisition, technologiesor products or any strategic investments or relationships into which we mayenter.

 

Due to these factors, our quarterly revenues andoperating results are difficult to forecast. We believe that period-to-period comparisons of our operating resultsmay not be meaningful and should not be relied upon as an indication of futureperformance. In addition, it is likely that in one or more future quarters, ouroperating results will fall below the expectations of securities analysts andinvestors.  In such event, the tradingprice of our common shares would almost certainly be materially adverselyaffected.

 

OUR SHARE PRICE HAS FLUCTUATED SUBSTANTIALLY AND MAY CONTINUE TO DO SO.

*** ***

The trading price of our common shares on The TorontoStock Exchange and on the NASDAQ Over the Counter Bulletin Board (“OTCBB”) hasfluctuated significantly in the past and could be subject to wide fluctuations inthe future. The market prices for securities of technology companies have beenhighly volatile.   These companies haveexperienced extreme price and volume fluctuations that have often beenunrelated or disproportionate to their operating performance.  Broad market and industry factors maymaterially and adversely affect the market price of our common shares,regardless of our operating performance. In addition, fluctuations in ouroperating results, and concerns regarding our competitive position can have anadverse and unpredictable effect on the market price of our shares.

 

In the past, following periods of volatility in themarket price of a company’s securities, securities class-action litigation hasoften been instituted against that company. Such litigation, if institutedagainst us, could result in substantial costs and a diversion of management’sattention and resources, which could have a material adverse effect on ourbusiness, results of operations, cash flow, financial condition and prospects.

*** ***

YOUR ABILITY TO BUY OR SELL OUR COMMON SHARES ON THE OTCBB MAY BELIMITED

*** ***

On June 3, 2002, we transferredthe listing of our common shares from the Nasdaq National Market to the NasdaqSmallCap Market.  On August 22, 2002,our common shares were delisted from the Nasdaq SmallCap Market because we didnot satisfy the minimum bid price per share requirement for continued listingon that market.  Our common sharesimmediately became eligible for and began trading on the OTCBB.  The OTCBB is generally considered to be aless efficient market than the Nasdaq National Market or the Nasdaq SmallCapMarket on which our shares previously traded. As a result, your ability to buy or sell our common shares on the OTCBBmay be limited.  In addition, since ourshares are no longer listed on the Nasdaq National Market or Nasdaq SmallCapMarket, our shares may be subject to the “penny stock” regulations describedbelow.  De-listing from the NasdaqNational Market and the Nasdaq SmallCap Market will not affect the listing ofthe common shares on The Toronto Stock Exchange.

 

OUR COMMON SHARES MAY BECOME SUBJECT TO “PENNY STOCK” REGULATIONS WHICHMAY AFFECT YOUR ABILITY TO BUY OR SELL OUR COMMON SHARES.

 

Our common shares have traded on the Nasdaq Nationaland Small Cap Markets and on the OTCBB at prices below US$5.00 since April 2000(on a pre-consolidation basis).  As aresult, our shares may become characterized as “penny stocks” which couldseverely affect market liquidity.  TheSecurities Enforcement and Penny Stock Reform Act of 1990 requires additionaldisclosure relating to the market for penny stocks in connection with trades inany stock defined as a penny stock.

 

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Securities and Exchange Commission regulations generallydefine a penny stock to be an equity security that has a market price of lessthan US$5.00 per share, subject to certain exceptions.  Such exceptions include any equity securitylisted on Nasdaq or a national securities exchange and any equity securityissued by an issuer that has:

 

•                                          nettangible assets of at least US$2,000,000, if such issuer has been in continuousoperation for three years;

 

•                                          nettangible assets of at least US$5,000,000, if such issuer has been in continuousoperation for less than three years; or

 

•                                          averageannual revenue of at least US$6,000,000, if such issuer has been in continuousoperation for less than three years.

 

Unless an exception is available, the regulationsrequire, prior to any transaction involving a penny stock, delivery of adisclosure schedule explaining the penny stock market and the risks associatedtherewith.  The penny stock regulationswould adversely affect the market liquidity of our common shares by limitingthe ability of broker/dealers to trade the shares and the ability of purchasersof our common shares to sell in the secondary market.  Certain institutions and investors will not invest in pennystocks.

 

THE MARKETS IN WHICH WE OPERATE ARE HIGHLY COMPETITIVE.

*** ***

The market for asset lifecycle management solutions israpidly evolving and intensely competitive. We face significant competition in each segment of our business(sourcing, procurement, enterprise asset management and asset disposition).  We expect that competition will furtherintensify as new companies enter the different segments of our market andlarger existing companies expand their product lines.  If the global economy continues to lag, we could face increasedcompetition, particularly in the form of lower prices.

 

Many of our competitors have longer operatinghistories, larger customer bases, greater brand recognition and significantlygreater financial, marketing and other resources than we.   We cannot assure you that we will be ableto compete with them effectively. If we fail to do so, it would have a materialadverse effect on our business, financial condition, cash flows and results ofoperations.

 

WE MAY NOT BE ABLE TO RETAIN OR ATTRACT THE HIGHLY SKILLED PERSONNEL WENEED.

*** ***

Our success is substantially dependent on the abilityand experience of our senior management and other key personnel.  We do not have long term employmentagreements with any of our key personnel and maintain no “key person” lifeinsurance policies.

 

In 2002, we implemented a workforce reduction.  We experienced some attrition during 2003 as a result of the reduction. Wemay need to hire new or additional personnel to respond to attrition or futuregrowth of our business.  However, thereis significant competition for qualified personnel. We cannot be certain we willbe able to retain existing personnel or hire additional, qualified personnelwhen needed.

 

SIGNIFICANT DELAYS INPRODUCT DEVELOPMENT WOULD HARM OUR REPUTATION AND RESULT IN LOSS OF REVENUE.

 

If we experience significant product developmentdelays, our position in the market would be harmed, and our revenues could besubstantially reduced, which would adversely affect our operating results.  As a result of the complexities inherent inour software, major new product enhancements and new products often requirelong development and test periods before they are released.  On occasion, we have experienced delays inthe scheduled release date of new or enhanced products, and we may experiencedelays in the future.  Delays may occurfor many reasons, including an inability to hire a sufficient number ofdevelopers, discovery of bugs and errors or a failure of our current or futureproducts to conform to industry requirements. Any such delay, or the failure of new products or enhancements inachieving market acceptance, could materially impact our business andreputation and result in a decrease in our revenues.

 

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WE MAY HAVE TO EXPEND SIGNIFICANT RESOURCES TO KEEP PACE WITH RAPIDTECHNOLOGICAL CHANGE

** **

Our industry is characterized by rapid technologicalchange, changes in user and customer requirements, frequent new service orproduct introductions embodying new technologies and the emergence of newindustry standards and practices.  Anyof these could hamper our ability to compete or render our proprietarytechnology obsolete.  Our future successwill depend, in part, on our ability to:

 

•                                          developnew proprietary technology that addresses the increasingly sophisticated andvaried needs of our existing and prospective customers;

 

•                                          anticipateand respond to technological advances and emerging industry standards andpractices on a timely and cost-effective basis;

 

•                                          continuallyimprove the performance, features and reliability of our products in responseto evolving market demands; and

 

•                                          licenseleading technologies.

 

We may be required tomake substantial expenditures to accomplish the foregoing or to modify or adaptour services or infrastructure.

 

OUR BUSINESS COULD BESUBTANTIALLY HARMED IF WE HAVE TO CORRECT OR DELAY THE RELEASE OF PRODUCTS DUETO SOFTWARE BUGS OR ERRORS

 

We sell complex software products.  Our software products may contain undetectederrors or bugs when first introduced or as new versions are released.  Our software products may also contain undetectedviruses.  Further, software we licensefrom third parties and incorporate into our products may contain errors, bugsor viruses.  Errors, bugs and virusesmay result in any of the following:

 

•                                          adversecustomer reactions;

 

•                                          negativepublicity regarding our business and our products;

 

•                                          harmto our reputation;

 

•                                          lossof or delay in market acceptance;

 

•                                          lossof revenue or required product changes;

 

•                                          diversionof development resources and increased development expenses;

 

•                                          increasedservice and warranty costs;

 

•                                          legalaction by our customers; and

 

•                                          increasedinsurance costs.

 

SYSTEMS DEFECTS, FAILURES OR BREACHES OF SECURITY COULD CAUSE ASIGNIFICANT DISRUPTION TO OUR BUSINESS, DAMAGE OUR REPUTATION AND EXPOSE US TOLIABILITY.

*** ***

We host certain websites and sub-sites for ourcustomers.  Our systems are vulnerableto a number of factors that may cause interruptions in our ability to enable orhost solutions for third parties, including, among others:

 

•                                          damagefrom human error, tampering and vandalism;

 

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•                                          breachesof security;

 

•                                          fireand power losses;

 

•                                          telecommunicationsfailures and capacity limitations; and

 

•                                          softwareor hardware defects.

 

Despite the precautions we have taken and plan to take,the occurrence of any of these events or other unanticipated problems couldresult in service interruptions, which could damage our reputation, and subjectus to loss of business and significant repair costs.  Certain of our contracts require that we pay penalties or permita customer to terminate the contract if we are unable to maintain minimumperformance levels.   Although wecontinue to take steps to enhance the security of our systems and ensure thatappropriate back-up systems are in place, our systems are not now, nor willthey ever be, fully secure.

 

OUR BUSINESS HAS UNDERGONE DRAMATIC EXPANSION AND RETRACTION PHASESSINCE OUR FORMATION.  WE MAY NOT BE ABLETO MANAGE FURTHER DRAMATIC EXPANSIONS AND RETRACTIONS IN THE FUTURE.

*** ***

Our business has undergone dramatic expansion andretraction since our formation, which has placed significant strain on ourmanagement resources.  If we should growor retract dramatically in the future, there may be further significant demandson our management, administrative, operating and financial resources.  In order to manage these demandseffectively, we will need to expand and improve our operational, financial andmanagement information systems and motivate, manage and retain employees.  We cannot assure you that we will be able todo so, that our management, personnel or systems will be adequate, or that wewill be able to achieve levels of revenue commensurate with the resultinglevels of operating expenses.

 

INTERNATIONAL SALES ACCOUNT FOR A SIGNIFICANT PORTION OF OUR REVENUE,WHICH EXPOSES US TO CERTAIN RISKS.

*** ***

We currently operate in Canada, Norway, Ireland, theUnited States and England.  In the 2003fiscal year, sales to customers outside North America represented approximately79% of our revenues. There are risks inherent in doing business on a globallevel, including:

 

•                                          difficultiesin managing and staffing an organization spread across several continents;

 

•                                          differinglaws and regulatory requirements;

 

•                                          politicaland economic risks;

 

•                                          currencyand foreign exchange fluctuations and controls;

 

•                                          tariffs,customs, duties and other trade barriers;

 

•                                          longerpayment cycles and problems in collecting accounts receivable in certaincountries;

 

•                                          exportand import restrictions;

 

•                                          theneed for product compliance with local language and business customs;

 

•                                          seasonalreductions in business activity during the summer months in Europe andelsewhere; and

 

•                                          potentiallyadverse tax consequences.

 

Any of these risks couldadversely affect the success of our global operations.

 

**ACQUISITIONS OF COMPANIES OR TECHNOLOGIES MAY RESULT INDISRUPTIONS TO OUR BUSINESS AND/OR DISTRACTIONS FOR OUR MANAGEMENT.**

** **

We acquired ADB Systemer ASA of Norway in October2001.  In the future, we may seek toacquire other businesses or make investments in complementary businesses ortechnologies. We may not be able to acquire or

 

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manage additionalbusinesses profitably or successfully integrate any acquired businesses withour business.  Businesses that weacquire may have liabilities that we underestimate or do not discover duringour pre-acquisition investigations. Certain liabilities, even if we do not expressly assume them, may beimposed on us as the successor to the business.  Further, each acquisition may involve other special risks thatcould cause the acquired businesses to fail to meet our expectations.  For example:

 

•                                          theacquired businesses may not achieve expected results;

 

•                                          wemay not be able to retain key personnel of the acquired businesses;

 

•                                          wemay incur substantial, unanticipated costs, delays or other operational orfinancial problems when we try to integrate businesses we acquire with our own;

 

•                                          ourmanagement’s attention may be diverted; or

 

•                                          ourmanagement may not be able to manage the combined entity effectively or to makeacquisitions and grow our business internally at the same time.

 

The occurrence of one or more of these factors couldhave a material adverse effect on our business, financial condition, cash flowsand results of operations.

 

In addition, we may incur debt or issue equitysecurities to pay for any future acquisitions or investments, which coulddilute the ownership interest of our existing shareholders.

 

IF WE ARE UNABLE TO SUCCESSFULLY PROTECT OUR INTELLECTUAL PROPERTY OROBTAIN CERTAIN LICENSES, OUR COMPETITIVE POSITION MAY BE WEAKENED.

 

Our performance and ability to compete are dependentin part on our technology.  We rely on acombination of patent, copyright, trademark and trade secret laws as well asconfidentiality agreements and technical measures, to establish and protect ourrights in the technology we develop. We cannot guarantee that any patentsissued to us will afford meaningful protection for our technology.  Competitors may develop similar technologieswhich do not conflict with our patents. Others may challenge our patents and, as a result, our patents could benarrowed or invalidated.

 

Our software is protected by common law copyrightlaws, as opposed to registration under copyright statutes.  Common law protection may be narrower thanthat which we could obtain under registered copyrights.  As a result, we may experience difficulty inenforcing our copyrights against certain third parties.  The source code for our proprietary softwareis protected as a trade secret.  As partof our confidentiality protection procedures, we generally enter intoagreements with our employees and consultants and limit access to, anddistribution of, our software, documentation and other proprietary information.  We cannot assure you that the steps we takewill prevent misappropriation of our technology or that agreements entered intofor that purpose will be enforceable. In order to protect our intellectualproperty, it may be necessary for us to sue one or more third parties.  While this has not been necessary to date,there can be no guarantee that we will not be required to do so in the futureto protect our rights. The laws of other countries may afford us little or noprotection for our intellectual property.

 

We also rely on a variety of technology that welicense from third parties, including our database and Internet serversoftware, which is used to perform key functions.  These third party technology licenses may not continue to beavailable to us on commercially reasonable terms, or at all. If we are unableto maintain these licenses or obtain upgrades to these licenses, we could bedelayed in completing or prevented from offering some products or services.

 

OTHERS COULD CLAIM THAT WE INFRINGE ON THEIR INTELLECTUAL PROPERTYRIGHTS, WHICH MAY RESULT IN COSTLY AND TIME CONSUMING LITIGATION.

*** ***

Our success will also depend partly on our ability tooperate without infringing upon the proprietary rights of others, as well asour ability to prevent others from infringing on our proprietary rights.  We may be required at times to take legalaction in order to protect our proprietary rights.  Also, from time to time, we may receive notice from third partiesclaiming that we infringe their patent or other proprietary rights.  In the past, a certain third party

 

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has claimed that certain of our technology infringed their intellectualproperty rights, which claim has been resolved through a licensing arrangement thatremains in effect. There can be no assurances that other third parties will notmake similar claims in the future.

 

We believe that infringement claims will increase inthe electronic commerce sector as competition intensifies.  Despite our best efforts, we may be sued forinfringing on the patent or other proprietary rights of others.  Such litigation is costly, and even if weprevail, the cost of such litigation could harm us.  If we do not prevail or cannot fund a complete defense, inaddition to any damages we might have to pay, we could be required to stop theinfringing activity or obtain a license. We cannot be certain that any required license would be available to uson acceptable terms, or at all.  If wefail to obtain a license, or if the terms of a license are burdensome to us,this could have a material adverse effect on our business, financial condition,cash flows and results of operations.

 

OUR PRODUCT STRATEGY IS PARTIALLY DEPENDENT UPON THE CONTINUEDACCEPTANCE AND USE OF THE INTERNET AS A MEDIUM OF COMMERCE.

*** ***

Our success depends in part on the continued growth ofthe Internet and reliance on and use of the Internet by businesses.  Because use of the Internet as a source ofinformation, products and services is a relatively recent phenomenon, it isdifficult to predict whether the number of users drawn to the Internet willcontinue to increase and whether the market for commercial use of the Internetwill continue to develop and expand.

 

The Internet may not be commercially viable for a numberof reasons, including potentially inadequate development of the necessarynetwork infrastructure, delayed development of enabling technologies andinadequate performance improvements.  Inaddition, the Internet’s viability as a commercial marketplace could beadversely affected by delays in the development of services or due to increasedgovernment regulation.    Moreover,concern about the security of transactions conducted on the Internet and theprivacy of users may also inhibit the growth of commerce on the Internet. Ifthe use of the Internet does not continue to grow or grows more slowly thanexpected, or if the infrastructure for the Internet does not effectivelysupport growth that may occur, our business would be materially and adverselyaffected.

 

OUR BUSINESS IS SENSITIVE TO THE OVERALL ECONOMIC ENVIRONMENT. ANYSLOWDOWN IN INFORMATION TECHNOLOGY SPENDING BUDGETS COULD HARM OUR OPERATINGRESULTS

*** ***

Any significant downturn in our customers’ markets orin general economic conditions that results in reduced information technologyspending budgets would likely result in a decreased demand for our products andservices, longer selling cycles and lower prices, any of which may harm ourbusiness.

*** ***

WE ARE SUBJECT TO RISKS ASSOCIATED WITH EXCHANGE RATE FLUCTUATIONS.

*** ***

Substantially all of our revenues are in Europeancurrencies or U.S. dollars, while the majority of our operating expenses are inCanadian dollars, Norwegian kroner and Euros. We do not have any hedging programs in place to manage the potentialexposure to fluctuations in the Canadian dollar, Norwegian kroner or Euroexchange rates.  Fluctuations in theexchange rates of these currencies or the exchange rate of other currenciesagainst the Canadian dollar, Norwegian kroner or Euro could have a materialadverse effect on our business, financial condition, cash flows and results ofoperations.

 

OUR PREFERENCE SHARES COULD PREVENT OR DELAY A TAKEOVER THAT SOME OR AMAJORITY OF SHAREHOLDERS CONSIDER FAVORABLE.

*** ***

Our Board of Directors, without any further vote ofour shareholders, may issue preference shares and determine the price,preferences, rights and restrictions of those shares.  The rights of the holders of common shares will be subject to,and may be adversely affected by, the rights of the holders of any series ofpreference shares that may be issued in the future.  That means, for example, that we can issue preference shares withmore voting rights, higher dividend payments or more favorable rights upondistribution than those for our common shares. If we issue certain types of preference shares in the future, it mayalso be more difficult for a third party to acquire a majority of

 

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our outstanding votingshares and such issuance may, in certain circumstances, deter or delay mergers,tender offers or other possible transactions that may be favored by some or amajority of our shareholders.

*** ***

IT MAY BE DIFFICULT FOR YOU TO ENFORCE LEGAL CLAIMS AGAINST US OR OUROFFICERS OR DIRECTORS.

** **

We are incorporated under the laws of the Province ofOntario, Canada.  Certain of ourdirectors and officers are residents of Canada, Norway and Ireland, andsubstantially all of our assets and the assets of such persons are locatedoutside the United States.  As a result,it may be difficult for holders of common shares to effect service of legalprocess within the United States upon those directors and officers who are notresidents of the United States.  It mayalso be difficult to realize in the United States upon judgments of courts ofthe United States without enforcing such judgments in our home jurisdiction orthe jurisdiction of residence of the director or officer concerned.

 

**ITEM 4 - INFORMATION ON THE COMPANY**

 

**OVERVIEW**

 

We develop and sell software solutions and servicesthat allow our customers to source, manage, and sell their assets and capitalequipment.  We refer to our product andservices suite as asset lifecycle management solutions.  Our solutions help our customers reducesourcing, procurement and maintenance costs, improve asset utilization, reduceoperational downtime, and generate higher yields for surplus equipment.

 

In October, 2001, we acquired ADB Systemer ASA (“ADBSystemer”), a Norway-based software company with more than 10 years ofexperience developing enterprise asset management solutions to customersprimarily involved in the oil and gas industry.  Since the acquisition, ADB Systems has maintained sales anddevelopment offices in Canada, the United States, the United Kingdom, Irelandand Norway.

 

We work with a growing number of customers andpartners in a variety of sectors including oil and gas, government, healthcare,manufacturing and financial services.  Current customers include BP, GE Commercial Equipment Financing, HalliburtonEnergy Resources, National Health Service, permanent TSB, Talisman Energy, andVesta Insurance.

 

**COMPANY BACKGROUND**

 

The name of our company is ADB Systems InternationalLtd.  We are formed as a businesscorporation under the laws of Ontario, Canada. Our business began as Internet Liquidators Inc., a business corporationformed under the laws of Ontario, Canada, in September 1995.  In May 1996, Internet Liquidators InternationalInc., also an Ontario company, acquired all of the shares of Internet LiquidatorsInc.  These two companies wereamalgamated in January 1997.  In June1998, we changed our name from Internet Liquidators International Inc. toBid.Com International Inc.

 

Prior to October 24, 2000, we operated two nationalbusiness-to-consumer auction sites at www.bid.com, one in the United States andone in Canada. Following an extensive strategic review by ADB’s Board ofDirectors and management, ADB decided late in 2000 to focus on its softwarebusiness.

 

On October 11,2001, we acquired substantially all of the shares of ADB Systemer, aNorway-based provider of enterprise asset management and electronic procurementsoftware.  As part of the acquisition ofADB Systemer, we changed our name to ADB Systems International Inc. andcompleted a two for one share consolidation. In this report, we refer to ADB Systems International Inc. as “Old ADB.”

 

On August 30, 2002 weformed a new company called ADB Systems International Ltd., which we refer toin this report as the “Company” or “ADB” or “we” or “our company”.  On October 31, 2002, the shareholders of OldADB exchanged their shares of Old ADB for shares of the Company on aone-for-one basis.  This exchange was

 

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implemented pursuant to aplan of arrangement approved by the shareholders of Old ADB on October 22, 2002and by the Ontario Superior Court of Justice on October 24, 2002 (which werefer to in this report as the “Arrangement”). As a result of the Arrangement, the business of Old ADB, including allassets and liabilities of Old ADB (other than those related to retailactivities), was transferred to the Company in the form of a return ofcapital.  Old ADB subsequently changedits name to Bid.Com International Ltd. . In late 2002, Bid.Com International Ltd. resumed on-line retailactivities. For more details on the Arrangement, see the next section under theheading “Major Developments”.

 

We are governed by the Ontario Business CorporationsAct. Our principal business offices in North America are located at 6725Airport Road, Suite 201, Mississauga, Ontario L4V 1V2, Canada and our telephonenumber is (905) 672-7467.   In Norway,our principal business offices are located at Vingveien 2, 4050 Sola, Norwayand our telephone number is +47 51 64 71 00. In the United States, our principal business office is located at 3001North Rocky Point Drive East, Suite 200, Tampa, Florida 33607 and our telephonenumber is (813) 281-4825.

 

Our shares trade on the Toronto Stock Exchange underthe symbol “ADY” and are traded on the OTCBB under the symbol “ADBY”.  Additional information about our company canbe obtained at our web site – www.adbsys.com. The information contained on ourweb site is not deemed to be part of this Annual Report.

 

**MAJOR DEVELOPMENTS**

 

On August 30, 2002, weentered into a series of agreements with The Brick Warehouse Corporation (“TheBrick”) which contemplated a series of transactions among The Brick , Old ADBand ADB. We refer to those transactions in this report as “The Brick Transaction”.

 

Pursuant to The Brick Transaction:

 

•                  The Brick made a $2.0 million securedloan to Old ADB and ADB at an interest rate of 12% per annum;

 

•                  ADB and Old ADB agreed to enter intoArrangement; and

 

•                  The Brick and Old ADB agreed toutilize the online retail technology, experience and expertise of ADB developedand operated under the name “Bid.Com International Inc.” for the online sale ofconsumer products to be supplied by The Brick (which we refer to in this reportas the “Retail Business”).

 

The $2.0 million secured loan made by The Brickmatured on June 30, 2003 or upon earlier demand by The Brick.  At maturity, ADB had the right, at itsoption, to: (i) repay the loan in cash or (ii) transfer to The Brick all of theissued shares of Old ADB owned by ADB in satisfaction of the outstandingprincipal amount and accrued interest then owing to The Brick.  The obligations of Old ADB and ADB weresecured by a general security agreement delivered by ADB to The Brick coveringall the property and assets of ADB. On June 30, 2003, ADB exercised its optionto transfer to The Brick all of the issued shares of Old ADB in satisfaction ofthe outstanding principal amount and accrued interest then owing to The Brick.

 

The principal consequences of the Arrangement, whichwas effective as of October 31, 2002, are as follows:

 

1.                                       Shareholdersof Old ADB received from ADB one common share of ADB in exchange for each oftheir common shares of Old ADB.  As aresult (i) Old ADB became a wholly-owned subsidiary of ADB and (ii) each formershareholder of Old ADB owns the same number of shares in ADB that it owned inOld ADB prior to the exchange.

 

2.                                       OldADB transferred all of its assets to ADB and ADB assumed all of the liabilitiesand obligations of Old ADB, except that Old ADB retained specific assets andliabilities of the Retail Business.

 

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3.                                       Theregistered office, articles of incorporation, by-laws, directors and executiveofficers of Old ADB immediately prior to the Arrangement became the registeredoffice, articles, by-laws, directors and executive officers of ADB uponconsummation of the Arrangement.

 

4.                                       ADBadopted the Stock Option Plan of Old ADB. Upon consummation of the Arrangement, all options, warrants or debt thatwas exercisable or convertible into shares of Old ADB became convertible intothe same number of shares of ADB.

 

5.                                       Thearticles of amalgamation of Old ADB were amended to: (i) change the name of OldADB to Bid.Com International Ltd. and (ii) delete the authorized PreferenceShares (as defined in such articles) and the rights, preferences andrestrictions on the transfer of such Preference Shares.

 

The following diagrams illustrate the corporatestructure of our Company prior to the Arrangement and following theArrangement.

 

Prior to Arrangement

 

 

Following Arrangement

 

Upon completion of the Arrangement, the Toronto StockExchange approved the listing of the ADB common shares issued in exchange forOld ADB common shares or issuable upon the exercise of options or warrants orconversion of debt.  ADB common sharesare listed on the Toronto Stock Exchange for trading under the symbol“ADY”.  The shares of Old ADB ceased tradingon the Toronto Stock Exchange on November 5, 2002.  On April 2, 2003 an order was issued by the Ontario SecuritiesCommission pursuant to which Old ADB has ceased to be a reporting issuer in alljurisdictions in Canada in which it was a reporting issuer.

 

On December 31, 2003 ADBSystems USA, Inc. (“ADB USA”), a wholly-owned subsidiary of ADB, entered intoan Amended and Restated Operating Agreement (the “Operating Agreement”) withGeneral Electric Capital Corporation (“GE Capital”).  This agreement was entered into in connection with the establishmentof GE Asset Manager, LLC a joint business venture in which both GE Capital andADB USA each hold a 50% interest. Pursuant to this business venture, GE Capital and ADB USA also enteredinto the following agreements that are included as exhibits to the OperatingAgreement:  ADB License Agreement, ADBServices Agreement, GE License

 

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Agreement and GE Service Agreement. GE Asset Manager LLC, is anintegrated, web-based business enabling mid- and large-size organizations toreduce operating costs by simplifying and consolidating their asset managementprograms. GE Asset Manager will feature all-in-one capabilities designed forsourcing of new equipment, tracking and reallocation of existing assets,automated appraisal management and disposition of surplus equipment.

 

**PRINCIPAL CAPITAL EXPENDITURES AND DIVESTITURES**

 

For a description of principal capital expendituresand divestitures, see Item 5 - OPERATING AND FINANCIAL REVIEW AND PROSPECTS -REALIZED GAINS AND LOSSES ON MARKETABLE SECURITIES AND STRATEGIC INVESTMENTSand CAPITAL ASSETS.

 

**INDUSTRY BACKGROUND ANDOVERVIEW**

** **

Assetmanagement software has existed for more than thirty years, initially throughcomputerized maintenance management systems (CMMS), and more recently includingmore comprehensive and robust enterprise asset management (EAM) and enterpriseresource planning (ERP) solutions.  Theearly CMMS systems automated daily management of assets, while ERP solutionsconsolidate basic asset information with financial information at the corporatelevel. EAM solutions encompass elements of both, serving as the next evolutionof CMMS solutions by bridging the gap between asset management andcorporate-level planning and tracking requirements.

 

Thekey value proposition for EAM solutions is that they can provide a quick andquantifiable return on investment (ROI) and return on assets (ROA).  Cost and productivity improvements canimmediately and measurably benefit organizations, and thus are highly desirableto potential customers, particularly in difficult economic times where thefocus is increasingly bottom line oriented.

 

Inaddition to EAM solutions, we offer sourcing and procurement solutions as wellas sales solutions.    These are naturalextensions to EAM solutions, as organizations seek to extend asset managementand corporate-level planning and tracking onto other elements of the assetlifecycle.

 

**OUR PRODUCTS ANDOFFERINGS**

** **

**SOFTWARE SOLUTIONS**

** **

We offer solutions to manage all aspects of the assetlifecycle – sourcing/procurement, maintenance, materials management anddisposition.  Below is a detaileddescription of our offerings:

 

*Dyn@micBuyer* (TM) An on-line sourcing solution, Dyn@mic Buyerautomates the tendering process, and can be used to improve the decision-makingprocess involved in sourcing goods by providing automated analysis andselection among competing bids, based on a variety of pre-determined factors.The current release of Dyn@mic Buyer can be delivered on a hosted orclient-server (licensed) basis.

 

Key features include:

 

•                  Theability for buyers to create tenders using automated tools that accelerate thepurchasing process and reduce procurement costs.

•                  Capabilitiesfor buyers to post and distribute their tenders on-line to qualified suppliers

•                  Theability for buyers to assign values to criteria involved in the purchasedecision, such as price, product availability, post-sales support andcertification standards.  Suppliers’responses to tender questions are then weighed for evaluation by buyers.

•                  Functionalitythat allows for the posting of detailed technical information, question andanswer forums, and automatic e-mail notification of amended or new buyer-posteddocuments.

•                  Capabilitiesto allow for the use of sealed bid sourcing formats enabling users to posttheir product or service requirements to selected vendors.  The sealed bid system differs from therequest for quotation in that the vendors only have one opportunity to supply abid.  Only after the close of theauction is the user able to view the vendor bids.

 

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Dyn@mic Buyer is licensed to our customers. Fees forDyn@mic Buyer are determined on a per use basis, depending on the number ofsourcing events identified by customers. Service fees are charged separatelyfor implementation, systems integration, training and other consultingactivities. Dyn@mic Buyer can be bundled with our procurement solutions or usedseparately depending on customer requirements. Current customers using Dyn@mic Buyer include the National HealthService and Vesta Insurance.

 

*ProcureMate*(TM) ProcureMate is our web-based business-to-business e-Procurement solutiondesigned to reduce purchase costs, improve purchasing efficiencies and reducemaverick buying.  ProcureMate allows usersto select goods for purchase from a web-based catalog and automatically issuepurchase orders to their suppliers.

 

Key features of ProcureMate include:

 

•                  The ability tonotify suppliers automatically of purchase orders requiring processing.

•                  Functionalityfor allowing on-line dialogue to take place between buyers and suppliers.

•                  The ability tointegrate to enterprise resource planning and financial systems, reducingmanual efforts for processing and consolidating purchase orders, goods receiptand payment activities.

•                  Functionalityfor facilitating direct payment and electronic funds transfer.

•                  The ability tointegrate user workflow and approvals into the procurement process.

 

ProcureMate is licensed to customers and license feesfor ProcureMate are based on the number of users  named by the customer. Service fees are charged separately for implementation, systemsintegration, training and other consulting activities.  ProcureMate can be bundled with our otheron-line purchasing solutions or used separately depending on customerrequirements.  Existing ProcureMatecustomers include BP (Norway), NHS, Vesta Insurance, and Hordaland HFK County,a large local government entity in Norway.

 

*WorkMate*(TM) Our company’s flagship solution, WorkMate provides integrated capabilitiesfor enterprise asset management. WorkMate is a client-server solution that operates as an extension of(and can be fully integrated with) a customer’s existing ERP system.  The most advanced version of WorkMateincorporates asset maintenance, asset tracking, materials management andprocurement functionality.

 

WorkMate is designed for use by customers in assetintensive industries – typically those where maintenance, repair and operationspurchases outnumber raw material purchases by more than ten to one on atransaction volume basis.  Examples ofasset intensive industries are oil and gas, process industries (such as mining)and the utilities sector.

 

The three mainmodules (procurement, materials management and maintenance functionality) maybe licensed independently or together as a fully integrated system:

 

•                  ProcurementModule – for sophisticated domestic and international purchasingoperations.  Key capabilities include:order requisitioning, quotations, purchase orders, contracts, cost controls andvendor catalogues.  The procurementmodule also monitors supplier performance in terms of accuracy, punctuality andcost.

•                  MaterialsManagement Module – for managing inventory and logistics operations.  Key features include: inventory status,goods receipt, stock issue, reordering, packing/unpacking, transportation,goods return and equipment rentals. This Module will log all movements of an item and generates thenecessary financial transactions.

•                  MaintenanceModule – for all types of maintenance, including corrective, preventive orcondition-based activities. Customers can automate manual routines and trackmaintenance costs and equipment history. 

Each WorkMate module also includes workflow andreporting tools.

 

WorkMate is a licensed client-server application andpricing is based on the number of users named by the customer.  Service fees are charged separately forimplementation, systems integration, training and other consulting

 

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activities.  Our WorkMate customers include some of thelargest global players in the oil and gas sector, such as: BP (Norway),Halliburton Productus, Prosafe, and Talisman Energy (Canada).

 

*Dyn@micSeller* (TM) Dyn@mic Seller is an on-line sales solutiondesigned to help our customers with the disposition of surplus assets andequipment.  Dyn@mic Seller integratesmultiple pricing methods, such as fixed priced, top bid (auction), dutch(declining price) and hybrids, through private-labeled websites. Dyn@mic Selleris delivered through an application service provider model (remotely throughthe internet).

 

Keycapabilities include:

 

•                  Traditional rising price auctions,where the highest bids win the items being sold. The rising price auctionallows participants to competitively bid on available products by incrementallyadjusting their bid amounts.  Our userinterface allows users to easily identify current leading bidders, minimum newbids and initial bid pricing. Participants are informed of their bid status, stating whether they havewon, been outbid, approved or declined via electronic mail.

•                  A patented Dutch (declining) auctionformat, in which a starting price is set and a limited time period is allocatedfor a fixed quantity of the product to be sold.  As time advances, the price drops in small increments until theasset is sold.  The declining bidauction allows participants to bid in a real-time format utilizing on-screendata which provides the time and quantity remaining as well as the fallingprice of the items for sale.

•                  Hybrid auction formats that blendmultiple pricing formats to meet a customer’s particular needs.

•                  Fixed price sales where assets are sold in acatalogue or directory format.  Thepurchaser cannot bid on the price, but merely elects whether or not to purchasethe good or service.

 

Our customers pay monthlyhosting fees for use of Dyn@mic Seller and, typically, also enter into arevenue sharing arrangement with us. Service fees for implementation, systems integration, training and otherconsulting activities are charged separately. Current customers of Dyn@mic Seller include GE Capital (USA), andpermanent TSB (Ireland).

 

RELATEDSERVICES

 

In connection with our software offerings, we providethe following services to our customers:

 

*Consulting*.  A significant number of our customersrequest our advice regarding their business and technical processes, often inconjunction with a scoping exercise conducted both before and after theexecution of a contract.  This advicecan relate to development or streamline of assorted business processes, such assourcing or procurement activities, assisting in the development of technicalspecifications, and recommendations regarding internal workflow activities.

* *

*Customizationand Implementation*. Based generally upon the up-front scoping activities, we are able tocustomize our solutions as required to meet the customer’s particularneeds.  This process can vary in lengthdepending on the degree of customization, the resources applied by the customerand the customer’s business requirements. We work closely with our customers to ensure that features andfunctionality meet their expectations. We also provide the professional services work required for theimplementation of our customer solutions, including loading of data,identification of business processes, and integration to other systemsapplications.

 

*Training*.  Upon completion of implementation (and oftenduring implementation), we train customer personnel to utilize our Solutionsthrough our administrative tools.  Training can be conducted in one-on-one or group situations. We alsoconduct “train the trainer” sessions.

 

*Maintenanceand Support*.  Weprovide regular software upgrades and ongoing support to our customers.

 

THIRDPARTY OFFERINGS

 

In addition to the sale of our core solutions andservices, we have entered into marketing or co-marketing agreements with anumber of companies that offer services that are complementary to ourofferings.  We market

 

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thesecomplementary services to our customers and prospects and can earn a referralfee if these services are purchased.  Insome cases our marketing partner has agreed to market our solutions to itscustomers and prospects and can earn a referral fee.  Our marketing partners include:

 
| **Partner**             |   | **Service or Offering**               |
|-------------------------|--------|---------------------------------------|
|                    |   |                                  |
| AMEC Services Limited   |   | Engineering Services                  |
| RBT Consulting          |   | Healthcare Consulting Services        |
| Production Access, Inc. |   | Oil and Gas Data Management Solutions |

*** ***

**Seasonality**

 

We experience some seasonality as a result of loweractivity in European markets during the summer months.

 

**STRATEGY**

** **

Our business strategy is to expand our customer base,particularly in the oil and gas, health, public authorities, and financial servicessectors, through superior software functionality and through the industryexpertise of our employees.  Inparticular, our strategy is comprised of the following key components:

 

***Strengthen our position as an EAM vendorand improve our visibility in other areas of the asset lifecycle***.  Gartner Group ranked ADB within their ‘magicquadrant’ of sixteen leading asset intensive mid-market EAM vendors globally inApril 2002.  Based on the relativepricing and functionality of our products as compared with those of ourcompetitors, we believe our procurement and sourcing offerings are competitive,and we will strive to improve our ranking and visibility in our core industrysectors.

*** ***

***Maintainand Enhance Our Technology.***  Based on the relative pricing and functionality of our products ascompared with those of our competitors, we consider our proprietarysoftware offerings to be competitive, however it is critical that we continueto maintain and enhance our technology.

 

***Enter into andMaximize Alliances***. We have marketing and other relationships with AMEC Services Limited, GECapital, Production Access, RBT Consulting, Production Access, Inc.  and a number of other leading companies in abroad range of industries.  We believethat these and future relationships will help provide us with access toimportant industry participants and will help increase our brand awareness.

 

***SeekingAcquisitions and Strategic Investments*.** We plan to seek to expand by seekingtechnologies, products, and services that complement our existingbusiness.  If appropriate opportunitiesare available, we may acquire businesses, technologies or products or enterinto strategic relationships that may further diversify revenue sources andproduct offerings, expand our customer base or enhance our technology platform.

 

**CUSTOMERS**

 

We provide our solutions to customers in a variety ofindustries, including: oil and gas, health, public authorities, and financialservices.

 

The revenue structures and particular servicesprovided vary depending upon the needs of the customer and the solutionconcerned.  For licensed offerings wegenerally collect a license fee based on number of users, service fees forimplementation and training, and support and maintenance fees.  For hosted offerings, we generally collectan up-front implementation fee, monthly hosting fee, and a share of revenue ortransaction volumes.

 

The following is a representative list of some of thecustomers for whom we have implemented or are implementing our solutions:

 

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| **Customer**                               |   | **Solution(s)**        |   | **Industry  Segment** |   | **Geographic  Location** |
|--------------------------------------------|--------|------------------------|--------|-----------------------|--------|--------------------------|
| BP Norway AS                               |   | ProcureMate;  WorkMate |   | Oil and Gas           |   | Norway                   |
| Prosafe Drilling  Company (Prosafe)        |   | WorkMate               |   | Oil and Gas           |   | Norway                   |
| Halliburton Productos  (Halliburton)       |   | WorkMate               |   | Oil and Gas           |   | Brazil                   |
| AmecFluor                                  |   | WorkMate               |   | Oil and Gas           |   | Korea                    |
| Talisman Energy                            |   | WorkMate               |   | Oil and Gas           |   | Canada, UK               |
| Hordaland fylkeskommune  (HFK)             |   | ProcureMate            |   | Public Authority      |   | Norway                   |
| GE Commercial Equipment  Financing (GE)    |   | Dyn@mic Seller         |   | Financial Services    |   | US                       |
| Healthcare Purchasing Consortium (The NHS) |   | ProcureMate            |   | Health                |   | UK                       |
| permanent TSB                              |   | Dyn@mic Seller         |   | Financial Services    |   | Ireland                  |

 

**For information regarding theprincipal market segments in which the Company competes, see Note 21 to theFinancial Statements.**

 

**SALES AND MARKETING**

** **

We market our solutions primarily through our directsales force. Our sales organization is regional with personnel located in ourprincipal offices in Toronto, Dublin, London, Tampa and Stavanger.

 

Our marketing efforts are focused on targetedmarketing campaigns, rather than broad based “awareness” campaigns. Potentialcustomers are identified through direct contact, responses to requests forinformation, attendance at trade shows, and industry contacts.  We principally focus on trade showparticipation, seminar series for specific industries or professionals, andoutgoing lead generation.

 

We use reference customers to assist us in ourmarketing efforts, both through direct contact with potential customers and throughsite branding and case studies.  We alsorely on our alliance partners to assist in our marketing efforts.

 

**TECHNOLOGY PLATFORM**

** **

ADB has devoted significant resources to developingits proprietary software technology. The technology platform is constructedusing distributed software technologies which allow rapid redevelopment anddeployment of new software technology in order to take advantage of emergingbusiness opportunities.

 

Our company’s technology platform is based onMicrosoft core applications, including the Windows NT operating system and aSQL server relational database, all residing on scaleable hardware.  The software is constructed using anadvanced proprietary XML framework and resides on an N-tier architecture.  The support of open systems allowsintegration with a large variety of existing commercial, proprietary and legacyapplications.

 

**RESEARCH AND DEVELOPMENT**

** **

Based on the relative pricing and functionality of ourproducts as compared with those of competitors, we believe that our proprietarysoftware provides a competitive advantage, and that our future success depends,in part, on our ability to continue developing and enhancing thatsoftware.  Therefore, we have focusedour research and development efforts on the continued development of ourproprietary software offerings. Presently, 12 of our staff members are dedicated to product development.

 

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Our ongoing research and development efforts are aimedat the continued ‘productization’ of specific elements of our software,enhancing the features and functionality of our existing software components,the development of new software components, and the integration of superiorthird party technology into our environment. Productization involves the development of ‘generic’ applications toreduce programming time and costs for customer implementations.

 

Our research and development expenditures wereapproximately $2.817 million for the year ended December 31, 2003,  $4.101 million for the year endedDecember 31, 2002, and $3.691 million for the year ended December 31,2001, including salaries and related expenses of our personnel engaged inresearch and development. Research and development activities in 2002 includedthe development of version 2.0 of our DYNAMIC BUYER Solution and thedevelopment of a new materials tracking module within our WorkMate application.

 

Research and development activities in 2003 includeddevelopment of a new applications framework implemented in Microsoft .Net. Thenew framework will be used as the foundation all future Web based products. Asubstantial amount of time was also devoted to the extension of our integrationtool set, which allows us to connect our core product suite to pre-existingcustomer owned third party applications. In addition, version 1.0 of new assettracking and document management products were released.

 

**INTELLECTUAL PROPERTY**

** **

We rely on a combination of patent, copyright,trademark and trade secret laws, as well as confidentiality agreements andtechnical measures, to establish and protect our proprietary rights.

 

In March 1999 and July 2001, we received patents fromthe U.S. Patent and Trademark Office covering the process whereby we conductDutch auctions over electronic distribution channels. We have patentapplications pending in Canada covering the same technology.  We also continue to explore other patentopportunities, and may have other applications pending from time to time.  We do not believe, however, that our abilityto obtain patents is material to our success or results.

 

Our proprietary software is subject to common lawcopyright protection, but we do not have, and do not intend to pursue, anyregistered copyrights.  Common lawprotection may be narrower than that which we could obtain under registeredcopyrights.  As a result, we mayexperience difficulty in enforcing our copyrights against certain third partyinfringements.  The source code for ourproprietary software is protected as a trade secret.

 

Our major trademarks or tradenames include: ADB;POWERED BY ADB; PROCUREMATE, WORKMATE, DYNAMIC SELLER and DYNAMIC BUYER. Exceptfor DYNAMIC SELLER and DYNAMIC BUYER, which are unregistered, all of thesetrademarks and tradenames are the subject of pending applications for registrationin one or all of the United States, Canada and Norway. We also claim rights inother unregistered trademarks.

 

Our competitive position is also dependent upon ourunpatented trade secrets.  In an effortto protect our trade secrets, and as part of our confidentiality procedures, wegenerally enter into confidentiality and non-disclosure agreements with ouremployees and consultants and generally limit access to and distribution of oursoftware, documentation and other proprietary information.  Additionally, we limit physical access toour premises, software and hardware and employ security measures to protectagainst damage or theft.

 

**COMPETITION**

** **

The market for each solution comprising our assetlifecycle management suite is intensely competitive.  Many of the companies we compete with have much greaterfinancial, technical, research and development resources than us.

 

In order to remain andbecome more competitive, we will need to make continued investments in productdevelopment and improve our market visibility and financial situation.

 

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Although we offer a broad range of asset lifecyclemanagement solutions, we face significant competition in each of the componentproduct areas:

 

Sourcing – FreeMarkets, Inc., Procuri, Inc., B2EMarkets, Inc., Emptoris, Inc., Moai Technologies, Inc.

 

Procurement – MROSoftware, Inc., Ariba, Inc., Commerce One Operations, Inc. and broader ERPsolution providers such as SAP AG, and Oracle Corporation

 

EAM – relatedsolutions – Datastream, MRO Software, Inc., Indus International Inc., MincomLtd.,  (and broader ERP solutionproviders such as SAP AG, and Oracle Corporation)

 

Sales solutions – eBay inc.

 

In addition, manyorganizations use in-house developers to develop solutions for certain elementsof the asset lifecycle, or use third-party exchanges or industry-specificexchanges.

 

**PROPERTY, PLANT AND EQUIPMENT**

 

The table below lists the locations of our facilitiesand summarizes certain information about each location.

 
| **Location**                                                                                      |   | **Use**                                               |   | **Square  Feet  (Approximate)** |   | **Term of  Lease**    |
|---------------------------------------------------------------------------------------------------|--------|-------------------------------------------------------|--------|---------------------------------|--------|-----------------------|
| 6725 Airport Road,  Suite 201  Mississauga, Ontario                                               |   | Executive,  Administrative, Engineering and Marketing |   | 10,165                          |   | Expires October 2004  |
| Vingveien 2,  4050, Sola Norway                                                                   |   | Executive,  Administrative, Engineering and Marketing |   | 8,234 (1)                       |   | Expires July 2008     |
| AS Kontorsenter 2  Tonsberg, Norway                                                               |   | Not in Use                                            |   | 2,851                           |   | Expires October 2005  |
| 52 Broomhill Rd.,  Suite 112 & 113  Broomhill Industrial Estate  Tallaght, Dublin 24  Ireland |   | Administrative,  Engineering and Marketing            |   | 500                             |   | Expires December 2004 |
| 3000 Cathedral Hill  Guildford, Surrey, England                                                   |   | Marketing                                             |   | no dedicated space              |   | Month-by-Month        |
| 3001 North Rocky Point  Drive East,  Tampa, Florida                                               |   | Executive                                             |   | 143                             |   | Month-by-Month        |

 

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(1) We have sublet aportion (consisting of approximately 1,272 square feet) of these premises to athird party.

 

We believe that we haveadequate space for our current needs. As we expand, we expect that suitable additional space will be availableon commercially reasonable terms. We do not own any real estate nor do wecurrently own or lease warehouse space.

 

**ITEM 5 -OPERATING AND FINANCIAL REVIEW AND PROSPECTS******

**MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

YOU SHOULD READ THE FOLLOWING DISCUSSION AND ANALYSIS IN CONJUNCTIONWITH “ITEM 3.A - SELECTED FINANCIAL DATA” AND OUR CONSOLIDATED FINANCIALSTATEMENTS AND THE RELATED NOTES INCLUDED ELSEWHERE IN THIS ANNUAL REPORT.  IN ADDITION TO HISTORICAL INFORMATION, THEFOLLOWING DISCUSSION CONTAINS CERTAIN FORWARD-LOOKING

 

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STATEMENTS THAT INVOLVEKNOWN AND UNKNOWN RISKS AND UNCERTAINTIES, SUCH AS STATEMENTS OF OUR PLANS,OBJECTIVES, EXPECTATIONS AND INTENTIONS. SEE “FORWARD-LOOKING STATEMENTS”.

 

History and Overview

 

ADBSystems delivers asset lifecycle management solutions that help organizationssource, manage and sell their capital assets and equipment.  ADB works with a growing number of customersand partners in a variety of sectors including oil and gas, government,healthcare and financial services. Current customers and partners include BP,GE, Halliburton Energy Resources, National Health Service (U.K.), permanentTSB, Talisman Energy and Vesta Insurance.

 

InOctober 2001, ADB Systemer ASA (“ADB Systemer”) was acquired by Bid.ComInternational Inc. (“Bid.Com”), a provider of business-to-business softwaresolutions for the on-line sourcing and disposition of assets.  Following the acquisition, the Companybecame known as ADB Systems International Ltd.

 

ADBSystems is headquartered in Mississauga (Canada), and maintains offices inTampa (U.S.), Dublin (Ireland), London (U.K.), and Stanvanger (Norway).

 

Ourshares trade on both the Toronto Stock Exchange (TSX: ADY) and the OTC BulletinBoard (OTCBB:ADBY).

 

*Comparisonof Years Ended December 31, 2003 and December 31, 2002*

 

**Net Income (Loss).**  Our net loss for the year ended December 31,2003 was $2.815 million, an improvement of 69.9 percent over the net loss of$9.364 million reported for the year ended December 31, 2002.  Excluding items outside of the normal courseof operations, our loss was $5.084 million, as compared to $9.241 million in2002, an improvement of 45.0 percent. The improvement in expenses of more than $4.0 million was achieved in2003 when compared to 2002 in the areas of general and administrative of $1.6million, sales and marketing of $777,000, software development and technologyof $1.3 million and $700,000 in depreciation and amortization.  In addition, during 2003 the Companyrecorded a realized gain on the settlement of a demand loan of $2.2 million.

 

**Revenue.**  Revenue is derived from software licensingand related services from consulting, implementation, application hosting,training, maintenance and support activities.

 

Revenue increasedto $5.853 million for the year ended December 31, 2003 from $5.780 million forthe year ended December 31, 2002, representing an increase of 1.3 percent.

 

Revenue outsideNorth America was $4.642 million for the year ended December 31, 2003, comparedto $3.598 million for the year ended December 31, 2002.  The increase in revenue outside NorthAmerica is primarily attributable to an increase in customer acquisitions andactivity in our Ireland/UK region that resulted in year-over-year revenueimprovement of almost $800,000.

 

**General and Administrative.**  General and administrative expenses include,primarily: all salaries and related expenses (including benefits and payrolltaxes) other than technology staff compensation (which is included in softwaredevelopment and technology expenses), and sales and marketing staffcompensation (which is included in sales and marketing expenses); occupancycosts; foreign exchange gains or losses; professional fees; insurance; investorrelations; regulatory filing fees; and travel and related costs.

 

General andadministrative expenses decreased to $4.648 million for the year ended December31, 2003, as compared to $6.288 million for the year ended December 31, 2002,representing a decline of 26.1 percent.

 

Year-over-yearsavings resulting from salary reductions and a smaller workforce totaled$401,000.  Continued cost containmentefforts and greater reliance on internal staff resulted in $503,000 savings inprofessional fees and $271,000 in investor relations costs.  In addition, savings were achieved in rentand occupancy costs of $325,000 as office space was reduced in Norway as wellas the closing of a U.K. office in 2002.

 

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**Sales and Marketing.**  Sales and marketing costs include allsalaries and related expenses of sales and marketing personnel as well asbusiness development expenses such as advertising, sales support materials, andtrade show costs.

 

Sales andmarketing costs for the year ended December 31, 2003 amounted to $1.098million, as compared to $1.875 million for 2002, a decrease of 41.4percent.  This decrease is attributableto lower staffing levels in the sales department combined with decreased advertisingand tradeshow activities throughout 2003.

 

**Software Development and Technology.**  Software development and technology expensesconsist of costs associated with acquired and internally developed software,and research and development expenses, including fees to independentcontractors and salaries and related expenses of personnel engaged in theseactivities.

 

Softwaredevelopment and technology expenses decreased to $2.817 million for the yearended December 31, 2003 from $4.101 million for the year ended December 31,2002, a decrease of 31.3 percent.  Thisdecrease is attributable to government research and development claims made bythe Company and a decrease in technology personnel.

 

**Employee Stock Options.**  Effective January 1, 2003, the Companyadopted the accounting recommendations contained in the CICA handbook Section3870 – “Stock-based Compensation and Other Stock-based CompensationPayments”.  As a result, the Companyrecorded an employee stock option expense of $193,000 for the year ended December31, 2003.  Prior to 2003, no accountingrecognition was required for stock-based compensation expense however; theCompany was required to disclose the impact of stock option related expensesfor previous years on a pro-forma basis. In 2002, a pro-forma impact of $244,000 and $141,000 in 2003 related tooptions granted prior to January 1, 2003 is disclosed (Note 9(j)).

 

**Depreciation and Amortization.**  Depreciation and amortization expense was$1.901 million for the year ended December 31, 2003 as compared to $2.602million for the year ended December 31, 2002, a decrease of 26.9 percent.  This decrease reflects a maturing assetpool.

 

**Interest Expense.**  Interest expense reflects interest incurredfrom debt instruments and loans.

 

Interest expensefor the year ended December 31, 2003 was $289,000 compared to $200,000 forDecember 31, 2002.  During 2003, cashinterest expense of $50,000 and non-cash interest expense of $112,000 wasincurred related to secured subordinated notes.  Comparatively, cash interest expense of $23,000 and non-cash interestexpense of $108,000 was recorded in 2002. Interest related to the demand loan was $126,000 in 2003 compared to$68,000 in 2002.

 

**Interest Income.**  Interest income reflects interest frominvestments in cash and marketable securities.

 

Interest income was$9,000 for the year ended December 31, 2003, as compared to $45,000 for theyear ended December 31, 2002, a decline of 80.0 percent.  This decline was largely attributable tolower cash deposits and money market funds on hand throughout 2003.

 

**Realized Gains and Losses on Disposalof Marketable Securities, Strategic Investments and Capital Assets, andRecovery of Assets.** Realized gains on disposal of marketable securities and strategicinvestments amounted to $20,000 for the year ended December 31, 2003, comparedto a loss of $108,000 for the year ended December 31, 2002.  The gain recorded in 2003 resulted from thesale of shares of MegaWheels Technology Inc. These gains and losses are outside of the normal course of operationsbut are not considered extraordinary items.

 

During 2002, theCompany disposed of its remaining shares in America Online Inc. (“AOL”)resulting in a realized loss of $143,000. Realized gains in 2002 included $41,000 from the sale of strategicinvestments in SCS Solars and MegaWheels. In 2003, the Company realized a loss from the disposal of surpluscapital assets in the amount of $13,000 compared to a gain of $23,000 in 2002.

 

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**Unrealized Gains and Losses onRevaluation of Strategic Investments, and Provision for Impairment of Assets.**  Unrealized gains and losses on strategicinvestments, and provisions for impairment of assets are the result of anassessment by management as to the recoverability of the value of certainassets and are not realized losses. Unrealized gains and losses are outside the normal course of operationsbut are not considered extraordinary.

 

Unrealized lossesfor the year ended December 31, 2002 were $24,000.  We conduct an assessment of our strategic investment portfolio atthe end of each fiscal period by analyzing the financial performance of thecompanies we invested in as well as general market conditions.  In 2002, we recorded impairment provisionstotaling approximately $24,000.  As ourinvestments were all in companies in the technology sector, the marketperformance of these holdings had been dramatically affected by economicconditions.  In 2003, the Company didnot record an impairment provision as a result of the assessment.

 

**Goodwill Impairment**.  There was no goodwill impairment recorded in2003 as compared to $14,000 at December 31, 2002.  The goodwill impairment recorded in 2002 relates to a change ingoodwill arising on purchase of shares from minority interests during the year.

 

**Retail Activities.**  During 2003, the Company received a $67,000refund from a U.S.-based credit card institution formally engaged by theCompany when it operated its on-line retail activities in the U.S.  No similar refunds were received in 2002.

 

*Comparisonof Years Ended December 31, 2002 and December 31, 2001*

 

**Acquisition of ADB Systemer ASA.**On October 11, 2001, we acquired substantiallyall of the shares of ADB Systemer, a Norway-based provider of enterprise assetmanagement and electronic procurement software.

 

Theacquisition of ADB Systemer resulted in a significant broadening of our productofferings, customer base, and ability to penetrate new markets. The cost of theacquisition was $13.762 million, including a $2.293 million cash outlay.Approximately 93 percent of the purchase price was attributed to software andrelated intellectual property and goodwill, valued at $3.383 million and $9.476million respectively.

 

In2001, the acquisition contributed $818,000 in revenue and improved expensecontrol through the integration and restructuring of worldwide operations.

 

Withthe adoption of new standards in accounting for business combinations andgoodwill, we were required to test the fair value of the goodwill against itscarrying value. It was determined that a goodwill impairment of $9.476 millionbe recorded. This impairment charge represented a non-cash expense. No futuregoodwill amortization expense will be required to be recorded.

 

**Net Income (Loss).**Our net loss for the year ended December 31,2002 was $9.364 million, an improvement of 50.0 percent over the net loss of$18.714 million reported for the year ended December 31, 2001. Excluding itemsoutside of the normal course of operations, our loss was $9.241 million, ascompared to $12.185 million in 2001, an improvement of 24.2 percent.

 

The2002 year represented our first full year of operations as ADB SystemsInternational Ltd.  Expenses for thecombined entity for 2002 were substantially lower when compared to 2001 due tosynergies achieved as a result of the acquisition of ADB Systemer in Norwayalong with significant cost reduction that remained in effect sinceimplementation in 2001.  In addition,the inclusion of the first full year of revenues generated from our acquisitionof ADB Systemer in Norway resulted in increased revenue in 2002 when comparedto 2001.

 

Ascompared to 2001, we experienced a net savings of $2.165 million in sales andmarketing costs and $1.334 million in general and administrative expensesprimarily due to the impact of cost reductions for the full year that wereimplemented in 2001.

 

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**Revenue.**Revenue is derived from software licensing and related services fromconsulting, implementation, application hosting, training, maintenance andsupport activities. Revenue increased to $5.780 million for the year endedDecember 31, 2002 from $4.455 million for the year ended December 31, 2001,representing an increase of 29.7 percent.

 

Asmentioned, the increase in revenue is primarily due to the inclusion of thefirst full year of revenue generated from our acquisition of ADB Systemer inNorway.  Revenues generated in Norwayfor 2002 accounted for $3.126 million compared to $741,000 in 2001. Revenuedeclined in both North America and Ireland and UK during 2002 compared to 2001as these existing businesses refocused their marketing efforts on the newproduct offerings made available by the acquisition of ADB Systemer.

 

Revenueoutside North America was $3.598 million for the year ended December 31, 2002,compared to $1.634 million for the year ended December 31, 2001.  As mentioned above the acquisition of ADBSystemer in Norway contributed to the significant increase in revenue outsideNorth America.

 

**Customer Acquisition Costs.**Customer acquisition costs reflect non-cashexpenses incurred in securing customer agreements. Specifically, these costsrepresent the calculated value of share purchase warrants issued to GE Capitalin return for certain contracts using the Cox-Rubinstein binomial valuationmodel.

 

Therewere no customer acquisition costs recorded in 2002 compared to $60,000 for theyear ended December 31, 2001.

 

**General and Administrative.**General and administrative expenses include,primarily: all salaries and related expenses (including benefits and payrolltaxes) other than fees to independent contractors for research and development,technology staff compensation (which is included in software development andtechnology expenses), and sales and marketing staff compensation (which isincluded in sales and marketing expenses); occupancy costs; foreign exchangegains or losses; professional fees; insurance; investor relations; regulatoryfiling fees; and travel and related costs.

 

Generaland administrative expenses decreased to $6.288 million for the year endedDecember 31, 2002, as compared to $7.622 million for the year ended December31, 2001, representing a decline of 17.5 percent.

 

Asindicated previously, the organization-wide restructuring plan implementedduring the 2001 year resulted in substantial reductions that were maintainedthroughout the entire 2002 year. Savings resulting from the reduction in ourworkforce totaled $860,000. Cost containment efforts and greater reliance oninternal staff resulted in $437,000 savings in professional fees. Rent andoccupancies costs were also reduced by $136,000 as offices were closed in theU.S. and the U.K.

 

**Sales and Marketing.**Sales and marketing costs include all salariesand related expenses of sales and marketing personnel as well as businessdevelopment expenses such as advertising, sales support materials, and tradeshow costs. For the year ended December 31, 2002, sales and marketing costsamounted to $1.875 million, as compared to $4.040 million for 2001, a decreaseof 53.6 percent. This decrease is attributable to lower  staffing levels in the sales departmentcombined with decreased advertising, tradeshow and lead generation activitiesthroughout 2002.

 

**Software Development and Technology.**Software development and technology expensesconsist of costs associated with acquired and internally developed software,and research and development expenses, including fees to independentcontractors and salaries and related expenses of personnel engaged in theseactivities.

 

Softwaredevelopment and technology expenses increased to $4.101 million for the yearended December 31, 2002 from $3.691 million for the year ended December 31,2001, an increase of 11.1 percent. The increase in software developmentexpenses was largely attributable to the acquisition of ADB Systemer ASA in2001.  A large portion of the Norwegiansubsidiary’s expenses related to software development and technology even afterstaff reductions and budget cuts were implemented.

 

**Depreciation and Amortization.**Depreciation and amortization expense was$2.602 million for the year ended December 31, 2002 as compared to $1.572million for the year ended December 31, 2001, an increase of 65.5 percent. Thisincrease was primarily due to the continued depreciation of certain softwareacquired as a result of the ADB Systemer acquisition.

 

29

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**InterestExpense.** Interest expense reflects interest incurred fromdebt instruments and loans.

 

Interestexpense for the year ended December 31, 2002 was $200,000. Accrued interest of$68,000 was recorded during the year related to a demand loan while $132,000related to interest charges on secured subordinated notes**.**

 

**Interest Income.**Interest income reflects interest frominvestments in cash and marketable securities.

 

Interest income was $45,000 for the year ended December 31, 2002, ascompared to $345,000 for the year ended December 31, 2001, a decline of 87.0percent. This decline was largely attributable to lower cash deposits and moneymarket funds on hand throughout 2002.

 

**Realized Gains and Losses on Disposal of MarketableSecurities, Strategic Investments and Capital Assets, and Recovery of Assets.**Realized losses on disposal of marketablesecurities and strategic investments amounted to $85,000 for the year endedDecember 31, 2002, compared to a gain of $6.722 million for the year endedDecember 31, 2001. These losses are outside of the normal course of operationsbut are not considered extraordinary items.

 

Realizedgains generated in 2001 resulted from the disposal of equity interest in Point2Internet Systems Inc. and disposal of most of our shares in America Online Inc.(AOL). During 2002, the Company disposed of its remaining shares in AOLresulting in a realized loss of $143,000. Realized gains in 2002 included$41,000 from the sale of strategic investments in SCS Solars and MegaWheels and$23,000 from the sale of capital assets.

 

**Unrealized Gains and Losses on Revaluation ofMarketable Securities and Strategic Investments, and Provision for Impairmentof Assets.**Unrealizedgains and losses on marketable securities and strategic investments, andprovisions for impairment of assets are the result of an assessment bymanagement as to the recoverability of the value of certain assets and are notrealized losses. Unrealized gains and losses are outside the normal course ofoperations but are not considered extraordinary.

 

Unrealizedlosses for the year ended December 31, 2002 were $24,000 , compared to a lossof $2.435 million for the year ended December 31, 2001. We conduct anassessment of our strategic investment portfolio at the end of each fiscalperiod by analyzing the financial performance of the companies we invested inas well as general market conditions. In 2002, we recorded impairmentprovisions totaling approximately $24,000 compared to $1.510 million 2001. Asour investments are all in companies in the technology sector, the marketperformance of these holdings has been dramatically affected by economicconditions.

 

**Goodwill Impairment.**Goodwill impairment in 2002 was $14,000compared to $9.476 million in 2001. The goodwill impairment recorded in 2001was a result of our acquisition of ADB Systemer for a total consideration of$13.762 million. Of this amount, we attributed $9.476 million to goodwill. Withthe adoption of new accounting standards for business combinations andgoodwill, we were required to test the fair value of the goodwill against itscarrying value. It was determined that a goodwill impairment loss of $9.476 millionbe recorded. This impairment charge is a non-cash expense, and no futuregoodwill amortization expense will be recorded relating to this transaction.

 

Thegoodwill impairment recorded in 2002 relates to a change in goodwill arising onpurchase of shares from minority interests during the year.

 

**Restructuring Charges.**In April and September, 2001 we implementedcost-reduction measures intended to ensure future viability. The $959,000 inrestructuring charges for 2001 relate to these staff reductions and associatedmeasures. As there was no formal restructuring announcement in 2002, thesecharges were minimal and therefore included in general and administrativeexpenses.

 

**Retail Activities Settlement.**TheCompany ceased its on-line retail activities in October 2000, however, in 2001it was required to settle certain amounts payable relating to product sales ofprevious years. These amounts, which totaled $381,000, were not previouslyanticipated and did not reoccur in 2002.

 

The Company’snon-consolidated subsidiary, Bid.Com Ltd., recommenced on-line retailactivities in 2002.

 

30

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**Critical Accounting Policies.**The accounting policies followed by theCompany have a critical effect on the financial reporting of the Company. Thesepolicies involve complex judgments and estimates which affect the amount ofrevenue recognized, the recognition and amortization of assets and liabilitiesand the recoverability of assets. The valuation and recoverability of assets isgenerally based on the projected cash flows from these assets. Thesesignificant accounting policies are discussed in Notes 2, 3 and 20 of thefinancial statements. The Company does not have any off-balance sheet specialpurpose entities.

 

**Liquidityand Capital Resources**

 

**Liquidity.**  The Company has been funded to dateprimarily through a series of private placements of equity and convertibledebentures, sales of equity to and investments from strategic partners, gainsfrom investments and option exercises. Since inception, the Company has received aggregate net proceeds of$84.2 million from debt and equity financing and has realized $23.7 million ingains on investment disposals.

 

Cash, cashequivalents and marketable securities decreased by $912,000 to $445,000 as atDecember 31, 2003 from $1.357 million as at December 31, 2002.

 

Current assets of$1.947 million exceeded current liabilities (excluding deferred revenue) of$1.370 million in the current fiscal year by $577,000.  Current assets of $3.363 million exceededcurrent liabilities (excluding deferred revenue and demand loan) of $2.288million by $1.075 million in the prior year. Deferred revenue and demand loan have been excluded from currentliabilities as they are expected to be settled by resources other than cash.

 

31

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*i) Operating:*

Cash outflows fromoperating activities were $3.4 million in the current fiscal year compared tocash outflows from operating activities of $6.4 million in the prior year.  The primary factor in the reduction was thedecrease in expenses related to general and administrative, sales and marketingand software development and technology from the prior year.

 

Non-cash workingcapital resulted in outflows of $728,000 in fiscal 2003 versus cash inflows of$61,000 in the prior year, a decrease of $789,000, as summarized in thefollowing table:

 
| ** **                     |   | **2003**            |   | **2002** |   | **Working  capital  inflows (outflows)** |   |
|--------------------------------|--------|---------------------|--------|----------|--------|------------------------------------------|--------|
|                           |   | **(in  thousands)** |   |
|                           |   |                |   |     |   |                                     |   |
| Accounts  receivable           |   | $                   | 424    |     | $      | (522                                     | )      | $ | 946 |   |
| Deposits and  prepaid expenses |   | 56                  |   | (45      | )      | 101                                      |   |
| Accounts payable               |   | (63                 | )      | 224      |   | (287                                     | )      |
| Accrued  liabilities           |   | (453                | )      | 427      |   | (880                                     | )      |
| Deferred revenue               |   | (692                | )      | (23      | )      | (669                                     | )      |
|                           |   | $                   | (728   | )        | $      | 61                                       |   | $ | (789 | ) |

 

*ii) Investing:*

No significantcash flows were generated from investing activities in 2003.  Cash flows generated in the prior year frominvesting activities were $1.8 million, including $1.3 million in proceedsreceived from the disposition of shares held in America Online Inc. (“AOL”).

 

*iii) Financing:*

Cash flows generatedin financing activities were $2.5 million for 2003, including an equity privateplacement and a convertible debt private placement.  Cash flows generated in financing activities for fiscal 2002 were$3.4 million included a equity private placement, a demand loan and aconvertible debt private placement.

 

**Capital Resources.**  There were no significant additions tocapital assets for the year ended December 31, 2003.  Redundant capital assets were liquidated to improve the Company’sworking capital position.  Net proceedsfrom disposal of capital assets totaled $34,000 for the year ended December 31,2003 as compared to $167,000 for the year ended December 31, 2002.

 

During 2002, theCompany incurred $1,024,000 of costs associated with obtaining a demand loanand convertible debenture, which were recorded to deferred financingcharges.  The deferred financing chargeswere fully amortized by June 30, 2003 on a straight-line basis to coincide withthe maturing of the demand loan.  Noadditional deferred charges were incurred in 2003.

 

**Funding**

 

**Funding - Overview.**  The Company has been funded to dateprimarily through a series of private placements of equity and convertibledebentures, sales of equity to and investments from strategic partners, gainsfrom investments and option exercises. Since inception, the Company has received aggregate net proceeds of$84.2 million from debt and equity financing and has realized $23.7 million ingains on investment disposals.

 

**Funding - 2003.**  During the period from January 1 to June 26,2003, the Company issued 4,879,000 common shares at a price of $0.24 per shareand 2,733,000 common share-purchase warrants exercisable into one common shareat $0.40 for net proceeds of $1.148 million. The warrants expire on June 26, 2005. Included in this private placement were 2,146,000 shares issued to adirector and officer of the Company for total net proceeds of $505,000.  None of the 2,733,000 warrants had beenconverted into common shares at December 31, 2003.

 

32

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On August 19, 2003the Company issued Series E secured subordinated notes with a face value of$1.0 million for net proceeds of $994,000. The Series E notes have an annual rate of interest of 11 percent that ispaid quarterly in arrears, mature in August 2006 and are convertible intoequity units at a price of $0.35 per unit. Each equity unit consists of one common share and one half of ashare-purchase warrant with an exercise price of $0.50.  The Series E secured subordinated notes willautomatically convert into units when the share price of the Company closesabove $0.70 for five consecutive trading days during the term.  The holders of this Series E may convert atanytime following a four-month hold period. If the holder does not convert and no automatic conversion takes place,the Company must repay the principle amount to the holders of the Series Esecured subordinated notes in cash.  Aspart of this private placement, the Company issued 30,000 common share-purchasewarrants to an associate of Stonestreet Limited Partnership (“Stonestreet”) inconsideration for professional fees. Each such warrant entitles the holder to purchase one common share ofthe Company for $0.50 at any time up to and including August 18, 2006.  The Series E notes were issued to privateinvestors including an amount totaling $100,000 issued to directors and/orsenior officers of the Company.

 

**Funding – 2002.**  On April 25, 2002, the Company entered intoan agreement with Stonestreet for a $1.1 million private placement.  The Company issued 3.3 million common sharesat US $0.21 per share and warrants exercisable into 1 million common shares atUS $0.35 per share.  The warrants wereexercised on December 17, 2002, providing an additional $550,000 in grossproceeds to the Company.

 

On August 30,2002, the Company entered into a private placement agreement of securedsubordinated notes (Series A, B and D notes) with Stonestreet and a group ofprivate investors for total gross proceeds of $1 million.

 

Pursuant to theagreement with Stonestreet dated April 25, 2002, on August 30, 2002, theCompany also issued a $120,000 secured subordinated note (Series C note) inexchange for the waiver of certain US registration rights granted toStonestreet.

 

On August 30,2002, ADB entered into a series of agreements with a lender, an unrelatedparty, whereby the lender granted to ADB and ADB Systems International Inc.(“Old ADB”) a secured loan in the aggregate principal amount of $2,000,000 andbearing interest at the rate of 12 percent per annum.  As part of this transaction, ADB and Old ADB implemented theArrangement  (as defined below).

 

ADB SystemsInternational Ltd. was created on August 30, 2002.  Upon implementation of a plan of arrangement approved by theshareholders of ADB on October 22, 2002 and approved by the Ontario SuperiorCourt of Justice effective October 31, 2002 (the Arrangement), the shareholdersof ADB exchanged their shares for shares of the Company on a one-for-one basis.  All assets and liabilities of ADB, otherthan those related to its retail activities, were transferred to the Company asof that date in the form of a return of capital.  Old ADB subsequently changed its name to Bid.com InternationalLtd. (“Bid.Com Ltd.”)

 

The Company andthe lender entered into an arrangement whereby online retail operationsutilizing the online retail technology, experience and expertise of ADBdeveloped and operated under the name “Bid.Com International Inc.” in theon-line selling of consumer products to be supplied by the lender would beconducted by Bid.Com Ltd.  The loanmatured on June 30, 2003 or upon earlier demand and the Company had the rightafter the earlier of June 1, 2003 and demand for payment to repay the loan incash or to transfer to the lender 100 percent of the issued shared of Bid.ComLtd. acquired by the Company as a consequence of the Arrangement for proceedsequal to the outstanding principal amount and accrued interest then owing tothe lender.  The obligations of theCompany and Bid.Com Ltd. were secured by a general security agreement deliveredby the Company to the lender and a pledge of the shares of the Company’sNorwegian subsidiary.

 

On December 31,2002 the Company owned 100 percent of the issued and outstanding shares ofBid.Com Ltd., but had determined that, for accounting purposes, consolidationof Bid.Com Ltd. was not appropriate. This determination was based upon the Company’s evaluation of itscontinuing ability to determine the strategic operating policies of Bid.ComLtd. without the cooperation of others, its ability to obtain future economicbenefits from the resources of Bid.Com Ltd., and its exposure to the relatedrisks of ownership.  Therefore, theCompany accounted for its investment in Bid.Com Ltd. on the equity basis.  On October 22, 2002, after obtainingshareholder approval, the above-noted debt instruments became convertible intounits at $0.12 per unit at the option of the holder.  Each Series A, B, and D unit consists of one common share andone-half common share purchase warrant. Series C notes also

 

33

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became convertible intocommon shares at a conversion price of $0.12 per share at the option of theholder or at the option of the Company. Upon conversion, the Company will issue 9.333 million common shares forno additional consideration and 4.167 million warrants exercisable into anequal number of common shares at $0.14 per share.

 

On June 30, 2003,the Company exercised its put option to transfer 100 percent of the issuedshares of Bid.Com Ltd. in full settlement of the outstanding principal andaccrued interest owed to the lender.

 

**Funding – 2001.**  During 2001, the Company continued toliquidate its AOL position to fund operations. In addition, the Company disposed of its equity position in Point2 for$2.6 million and recovered an $811,000 receivable from Point2 that had beenprovided for in 2000.

 

In October 2001,with the acquisition of ADB Systemer, the Company paid $2.293 million in cashto the shareholders of ADB Systemer in connection with the acquisition.  As a result of that acquisition, cashof  $814,000 held by ADB Systemer wasacquired.

 

**Trending Into Fiscal 2004**

 

The Company hasnot earned profits to date and, at December 31, 2003, has an accumulateddeficit of $99.762 million.  The Companyexpects to incur losses in 2004 and there can be no assurance that it will everachieve profitability.  Operatingresults have varied on a quarterly basis in the past and may fluctuatesignificantly in the future as a result of a variety of factors, many of whichare outside of the Company’s control.

 

The Company hasincurred negative annual cash flows from operations since inception and expectsto continue to expend substantial funds to continue to develop technology,build an infrastructure to support business development efforts and expandother areas of business including the acquisition of, or strategic investmentsin, complementary products, businesses or technologies.  Although the Company achieved positive cashflows from operations for the three months ended March 31, 2004, we estimatethat additional working capital in the amount of $3.7 million will be requiredfor 2004.  The Company expects to obtainthe additional working capital through additional debt or equity financingssuch as issuance of loans or debentures, issuance of shares, conversion ofwarrants and exercise options.  However,the Company cannot provide assurance that efforts to raise such additionalfinancings will be successful.  Theactual amount of funds that will be required during the interim period will bedetermined by many factors, some of which are beyond the Company’scontrol.  As a result, it may requirefunds sooner or in greater amounts than currently anticipated.

 

**Aggregate Contractual Obligations**

 

As at December 31, 2003 the Company’s contractual obligations,including payments due by periods over the next six years, are as follows:

 
|                           |   | **Total**           |   | **2004** |   | **2005** |   | **2006** |   | **2007** |   | **2008** |   | **2009** |   |
|--------------------------------|--------|---------------------|--------|----------|--------|----------|--------|----------|--------|----------|--------|----------|--------|----------|--------|
|                           |   | **(in  thousands)** |   |
|                           |   |                |   |     |   |     |   |     |   |     |   |     |   |     |   |
| Operating leases               |   | $                   | 436    |     | $      | 232      |   | $        | 113    |     | $      | 43       |   | $        | 24     |   | $ | 24 |   | — |   |
| License  agreements            |   | 677                 |   | 129      |   | 129      |   | 129      |   | 129      |   | 129      |   | 32       |   |
| Secured  subordinated notes(a) |   | 715                 |   | 115      |   | —   |   | 600      |   | —   |   | —   |   | —   |   |
|                           |   | $                   | 1,828  |     | $      | 476      |   | $        | 242    |     | $      | 772      |   | $        | 153    |   | $ | 153 |   | $ | 32 |   |
|                                |        |                     |        |          |        |          |        |          |        |          |        |          |        |          |        |  |  |  |  |  |  |  |  |

 

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(a)          These amounts do not include interest and the notes are assumed to beheld to maturity.  Subsequent toDecember 31, 2003, Notes with a face value of $400,000 were converted intoequity units, and accordingly this amount is excluded from table above.

 

**Foreign Currency Rate Fluctuations.**While the Company’s financial statements are in Canadian dollars, revenue isalso generated in Norwegian krone, US dollars and other currencies.  The Company incurs the majority of itsexpenses in Canadian dollars and Norwegian krone.  As a result, the Company may suffer losses due to fluctuations inexchange rates between the Canadian dollar or Norwegian krone and currencies ofother countries. The Company does not currently engage in foreign exchangehedging activities or use other financial instruments in this regard.

 

34

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**Interest Rate and Investment Risk.**  The primary objective of the Company’sinvestment activities is to preserve principal while at the same timemaximizing income received from investments without significantly increasingrisk.  The investment portfolio isprimarily comprised of cash, marketable securities, and short-term interestbearing certificates.

 

**Net Operating Losses for TaxPurposes.**  We haveavailable an aggregate of approximately $13.5 million of net operating lossesfor tax purposes that may be used to reduce taxable income in future years, ofwhich $3.157 million expires in 2009, 3.424 million expires in 2010, $1.116million expires in 2011, $966,000 expires in 2012, and $282,000 expires in2013.  In addition, there is $4.581million that do not expire related to tax losses in Ireland. Our net operatinglosses are subject to assessment of our tax returns by taxation authorities.

 

**ITEM 6** - **DIRECTORS,SENIOR MANAGEMENT AND EMPLOYEES**

 

**A.****                                    DIRECTORSAND SENIOR MANAGEMENT**

 

The following table sets forth the name, age andposition of each of our directors and executive officers.  This information is supplied based on ourrecords and information furnished by our executive officers and directors.

 

 
| **Name**                                                                     |   | **Age** |   | **Position**                                    |
|------------------------------------------------------------------------------|--------|---------|--------|-------------------------------------------------|
| *Directors*                                                                  |   |    |   |                                            |
|                                                                         |   |    |   |                                            |
| Jeffrey Lymburner(1)                                                         |   | 47      |   | Director and Chief Executive Officer            |
| T. Christopher Bulger(2)(3)                                                  |   | 47      |   | Director                                        |
| Paul Godin,(3)                                                               |   | 51      |   | Director                                        |
| Jim Moskos                                                                   |   | 41      |   | Director and President, ADB Technology Group    |
| Darroch (Rick) Robertson(2)                                                  |   | 52      |   | Director                                        |
| Jan Pedersen(4)                                                              |   | 46      |   | Director and President, Norwegian Operations    |
| Glen Whyte                                                                   |   | 47      |   | Director                                        |
|                                                                         |   |    |   |                                            |
| *Executive  Officers**(other  than Messrs. Lymburner,  Pedersen and Moskos)* |   |    |   |                                            |
| Michael Robb                                                                 |   | 41      |   | Chief Financial Officer and Corporate Secretary |
| Aidan Rowsome                                                                |   | 43      |   | Vice-President, Global Sales                    |

 

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(1) Mr. Lymburner isacting Chairman of the Board of Directors.

(2) Member of Audit Committee.

(3) Member of the Management Resources and Compensation Committee

(4) Nominee of certain ofthe prior shareholders of ADB Systemer ASA pursuant to a Board RepresentationAgreement.  See “Board Practices” below.

 

The business experienceof each of our directors and executive officers for at least the last fiveyears is as follows:

 

35

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*Directors *

 

**JEFFREY LYMBURNER**, Oldsmar, Florida

## **Director since May28, 1996**

*Acting Chairman*

 

Mr. Lymburner****hasbeen our Chief Executive Officer since August 1, 1999 and was a foundingshareholder of our company. He was President of our company from its foundingin 1995 to October 11, 2001. Prior to the founding of our company, Mr.Lymburner was President of Completely Mobile Inc., a cellular and wireless datacompany, from 1990 to 1995.

 

**T. CHRISTOPHER BULGER**, Toronto, Ontario

## **Director since May28, 1996**

*Chairmanof the Management Resources and Compensation Committee and Member of the AuditCommittee*

 

Mr. Bulger is the Chairman andCEO of Megawheels Technologies Inc., a web-centric classified advertisingplatform provider for newspapers, with enterprise systems for retailers in theautomotive and real estate sectors. Mr. Bulger served as Executive VicePresident of our company from September 1998 to December 1999 and Chief FinancialOfficer of our company from April 1996 to September 1998.

 

**PAUL GODIN**, Kleinburg, Ontario

**Directorsince May 28, 1996**

*Member of the ManagementResources and Compensation Committee and Member of the Audit Committee*

 

Mr. Godin is a privateinvestor.  From September 1999 to March2001, Mr. Godin was the Chairman of The Art Vault International Limited.  Aside from being one of the foundingshareholders of our company, Mr. Godin****was Chief Executive Officer from ourcompany’s inception to August 1, 1999, and Chairman of the Board of Directorsfrom June 17, 1996 to June 14, 2000. Prior to the founding of our company inSeptember, 1995, Mr. Godin was Senior Vice-President, Corporate Sales andMarketing for Completely Mobile Inc., a Canadian company which designed andimplemented wireless data systems.

 

**JIM MOSKOS**, Toronto, Ontario

## **Director sinceJune 7, 1999**

 

Mr. Moskos****has been President of theADB Technology Group since October 19, 1999. Mr. Moskos served as VicePresident - Technology of our company from September 1997 to October 19,1999.  From September 1994 to August1997, Mr. Moskos was Senior Technology Manager for the Canadian Department ofIndian Affairs and Northern Development responsible for setting the technicaldirection for all aspects of application development.

 

**JAN PEDERSEN**, Stavanger, Norway

**Director since June 12, 2002**

 

Mr. Pedersen has been adirector of our company since June 2002 and President of our NorwegianOperations since October 2001. Prior to that, Mr. Pedersen founded and acted asCEO of ADB Systemer ASA since 1988.

 

**DARROCH (RICK) ROBERTSON**, London, Ontario

**Director since June 25, 2003**

## ***Chairman of theAudit Committee***

## ** **

Mr. Robertson has been an Associate Professor ofBuisness at the Richard Ivey School of Business, The University of WesternOntario, for the past five years. He is also the Director of the undergraduateHBA program at the Ivey School. Mr. Robertson is a director and chair of theaudit committee of Stackpole Limited, a TSX listed company. Mr. Robertson isalso an elected member of the council for the Institute of CharteredAccountants of Ontario, where he currently serves on the audit committee andby-laws committee.

 

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**GLEN WHYTE**, Toronto, Ontario

**Director since April 16, 2003**

 

Mr. Whyte is Associate Dean, Curriculum, Rotman Schoolof Management, University of Toronto - a position he was appointed to in 2001.In 2000, Mr. Whyte was the Conway Chair in Business Ethics, Rotman School ofManagement.  From 1998 to 1999, Mr. Whytewas the Simon Reisman Chair at the Treasury Board of Canada Secretariat.  In 1998, Mr. Whyte was Full Professor,Organizational Behaviour and Human Resource Management, Rotman School ofManagement.

 

***Executive Officers***

***(other than Messrs. Lymburner,  Moskos, and Pedersen)***

 

***Michael Robb***,****joined the Company inNovember 2002 and was appointed as Chief Financial Officer on August 19, 2003and Corporate Secretary on October 21, 2003.  FromJune 2001 to June 2002, Mr. Robb served as Vice President of Finance forWestaim Partners, a Toronto venture capital firm. Mr. Robb was Director ofFinance for Classwave Wireless Inc. from**October 2000 toJune 2001 and Director of Finance for Bid.Com. from January 1999 to October2001.

 

***Aidan Rowsome***, our Vice-President, Global Sales, has been with our company sinceAugust 1999 when he joined as Managing Director, Europe. From June 1998 to July1999, Mr. Rowsome was Chief Operations Officer for Nua Internet Consultancy,responsible for all project operations. Prior to that, Mr. Rowsome spent 8years as General Manager, European Operations for Quarterdeck Corporation, nowpart of the Symantec Group.

 

Fora discussion of certain transactions involving directors and executiveofficers, see Item 7 – MAJOR SHAREHOLDERS and RELATED PARTY TRANSACTIONS andNote 19 to Consolidated Financial Statements.

** **

**B.****                                    COMPENSATION**

 

**Summary CompensationTable**

** **

The following tableprovides a summary of compensation earned during the most recently completedfiscal year by ourChief Executive Officer and our four highest paid executives, other than theChief Executive Officer, who earned in excess of $100,000.

 
|                                |   |     |   |                    |   |         |   |             |   | **Awards**  |   |            |   |       |   |
|-------------------------------------|--------|----------|--------|-------------------------|--------|--------------|--------|------------------|--------|-------------|--------|-----------------|--------|------------|--------|
|                                |   |     |   |                    |   |         |   | **Restricted**   |   |        |   |            |   |
|                                |   |     |   | **Annual Compensation** |   | **Options/** |   | **Shares or**    |   | **Payouts** |   |            |   |
|                                |   |     |   |                    |   |         |   | **Other Annual** |   | **SARs**    |   | **Restricted**  |   | **LTIP**   |   | **All Other** |   |
|                                |   |     |   | **Salary**              |   | **Bonus**    |   | **Compensation** |   | **Granted** |   | **Share Units** |   | **Payout** |   | **Compensation** |   |
| **Name And Principal Position**     |   | **Year** |   | **($)**                 |   | **($)**      |   | **($)(1)**       |   | **(#) (2)** |   | **($)**         |   | **($)**    |   | **($)** |   |
|                                |   |     |   |                    |   |         |   |             |   |        |   |            |   |       |   |   |   |
| Jeffrey Lymburner                   |   | 2003     |   | 140,150                 |   | 3,503        |   | 16,818           |   | Nil         |   | Nil             |   | Nil        |   | Nil |   |
| CEO (3)                             |   | 2002     |   | 157,760                 |   | Nil          |   | 25,242           |   | 110,000     |   | Nil             |   | Nil        |   | Nil |   |
|                                |   | 2001     |   | 317,987                 |   | Nil          |   | 12,720           |   | 271,875     |   | Nil             |   | Nil        |   | Nil |   |
|                                |   |     |   |                    |   |         |   |             |   |        |   |            |   |       |   |   |   |
| Mark Wallace                        |   | 2003     |   | 181,846                 |   | Nil          |   | 7,731            |   | Nil         |   | Nil             |   | Nil        |   | Nil |   |
| President (4)                       |   | 2002     |   | 200,000                 |   | Nil          |   | 22,800           |   | 226,667     |   | Nil             |   | Nil        |   | Nil |   |
|                                |   | 2001     |   | 250,000                 |   | Nil          |   | 12,000           |   | 115,625     |   | Nil             |   | Nil        |   | Nil |   |
|                                |   |     |   |                    |   |         |   |             |   |        |   |            |   |       |   |   |   |
| James Moskos                        |   | 2003     |   | 193,333                 |   | 15,000       |   | 12,000           |   | 220,202     |   | Nil             |   | Nil        |   | Nil |   |
| President, Technology Group         |   | 2002     |   | 200,000                 |   | Nil          |   | 12,000           |   | 214,167     |   | Nil             |   | Nil        |   | Nil |   |
|                                |   | 2001     |   | 250,000                 |   | Nil          |   | 12,000           |   | 115,625     |   | Nil             |   | Nil        |   | Nil |   |
|                                |   |     |   |                    |   |         |   |             |   |        |   |            |   |       |   |   |   |
| Jan Pedersen                        |   | 2003     |   | 181,843                 |   | 40,358       |   | Nil              |   | Nil         |   | Nil             |   | Nil        |   | Nil |   |
| President, Norwegian Operations (5) |   | 2002     |   | 165,500                 |   | 47,000       |   | Nil              |   | 214,167     |   | Nil             |   | Nil        |   | Nil |   |
|                                |   | 2001     |   | 205,276                 |   | 2,953        |   | 4,000            |   | 37,500      |   | Nil             |   | Nil        |   | Nil |   |
|                                |   |     |   |                    |   |         |   |             |   |        |   |            |   |       |   |   |   |
| Aidan Rowsome                       |   | 2003     |   | 173,430                 |   | 10,033       |   | 17,747           |   | 122,580     |   | Nil             |   | Nil        |   | Nil |   |
| Vice-President, Global Sales (6)    |   | 2002     |   | 168,000                 |   | 5,500        |   | 16,500           |   | 163,125     |   | Nil             |   | Nil        |   | Nil |   |
|                                |   | 2001     |   | 200,140                 |   | 75,163       |   | 15,595           |   | 44,530      |   | Nil             |   | Nil        |   | Nil |   |

 

37

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----

1.               Received on account of car reimbursement expenses,income derived from the exercise of options and automobile leases.

 

2.               All numbers have been adjusted to reflect the twofor one consolidation of our shares in October, 2001.

 

3.               Mr. Lymburner’s salary is U.S. $100,000.  He also served as President from August,1998 to October, 2001.

 

4.               Joined our company on May 17, 1999.  Mr. Wallace was Executive Vice President,General Counsel and Corporate Secretary from May 1999 to November 1999 andChief Operating Officer from November 1999 to October, 2001. Mr. Wallaceresigned from our company on August 22, 2003.

 

5.               Joined our company on October 11, 2001, upon  the acquisition of ADB Systemer.

 

6.**              **Joinedour company as Managing Director, Europe in August 1999. Became ourVice-President, Global Sales in October 2001.

 

Messrs.Lymburner, Moskos, Pedersen and Rowsome have volunteered salary reductions  in the 2002 and 2003 calendar years, rangingfrom fifteen percent to fifty percent. In exchange for the foregone salary, the executives were granted stockoptions, vesting quarterly in arrears, in an amount equal to the amount offoregone salary divided by the exercise price of the options (being the marketprice of the Company’s shares on the day prior to the date of the grant). Thesesalary reductions took effect January 1, 2002 and the options were grantedduring 2002.  The salary reductions willnot affect any severance entitlement for the individuals concerned.

 

Thefollowing table sets forth details of the option grants to our Chief ExecutiveOfficer and our four highest paid executives, other than the Chief ExecutiveOfficer, who earned in excess of $100,000 during the fiscal year ended December31, 2003.

 
| **Name**          |   | **Securities Under  Options/SARs  Granted****(#)** |   | **%****of Total****Options/SARs  Granted to  Employees in  Financial Year** |   | **Exercise or Base  Price****($/Security)** |   | **Market Value of****Securities  Underlying  Options/SARs on  the Date of Grant  ($/Security)** |   | **Expiration  Date** |   |
|-------------------|--------|----------------------------------------------------|--------|-----------------------------------------------------------------------------|--------|---------------------------------------------|--------|-------------------------------------------------------------------------------------------------|--------|----------------------|--------|
| Jeffrey Lymburner |   | Nil                                                |   | Nil                                                                         |   | Nil                                         |   | Nil                                                                                             |   | Nil                  |   |
|              |   |                                               |   |                                                                        |   |                                        |   |                                                                                            |   |                 |   |
| Mark Wallace      |   | Nil                                                |   | Nil                                                                         |   | Nil                                         |   | Nil                                                                                             |   | Nil                  |   |
|              |   |                                               |   |                                                                        |   |                                        |   |                                                                                            |   |                 |   |
| James Moskos      |   | 20,202                                             | (1)    | 1.8                                                                         | %      | 0.33                                        |   | 0.33                                                                                            |   | 7/03/06              |   |
|              |   | 100,000                                            | (2)    | 9.1                                                                         | %      | 0.35                                        |   | 0.35                                                                                            |   | 8/15/06              |   |
|              |   | 100,000                                            |   | 9.1                                                                         | %      | 0.35                                        |   | 0.35                                                                                            |   | 8/15/06              |   |
|              |   |                                               |   |                                                                        |   |                                        |   |                                                                                            |   |                 |   |
| Jan Pedersen      |   | 22,378                                             | (1)    | 2.0                                                                         | %      | 0.33                                        |   | 0.33                                                                                            |   | 7/03/06              |   |
|              |   |                                               |   |                                                                        |   |                                        |   |                                                                                            |   |                 |   |
| Aidan Rowsome     |   | 22,580                                             | (1)    | 2.1                                                                         | %      | 0.33                                        |   | 0.33                                                                                            |   | 7/03/06              |   |
|              |   | 100,000                                            |   | 9.1                                                                         | %      | 0.35                                        |   | 0.35                                                                                            |   | 8/15/06              |   |

 

----

(1) These options were grantedin respect of the salary reductions on the terms described above.

(2) These options wereperformance incentive options, most of which vest only upon the attainment ofspecified business and financial results and some of which vested and becameexercisable the date of their grant.

 

During 2003, we did notprovide any pension, retirement or similar benefits to our directors andofficers as a group.  Our employeesbased in Ireland and the United Kingdom participate in a retirement savingsarrangement where employee contributions to personal retirement savingsaccounts are matched by the Company to a maximum

 

38

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of six percent ofsalary.  This arrangement does notrepresent a future pension obligation to the Company.  Mr. Rowsome participates in this plan.

 

Jeff Lymburner has entered into a non-competition andsalary protection agreement with our company, dated February 21, 1997,which provides, among other things, that he (i) will not compete with ourcompany for a period of 12 months, which may be extended by us to 24 months,following the termination of his employment with our company, in considerationof which we will pay his full annual salary during such period; and(ii) if his employment with us is terminated other than by reason ofdeath, disability or cause (as such terms are defined in such agreements), wewill continue to pay his full annual salary for 12 months (or 24 months if weexercise our option to extend the non-competition restrictions for 24 months)following the date of termination.

 

Jan Pedersen entered into a new employment agreementwith our company in 2003 which sets out his salary and benefits as theCompany’s President of Norwegian operations, as described in Item 6. The newagreement does not provide for termination payments or retention bonuses.

 

**Compensation of Directors**

 

Our directors presently receiveno fees or other compensation for acting as directors, attending meetings ofthe Board or committees of the Board or for the signing of any resolution ofdirectors or documents on behalf of the Company.   All directors are reimbursed for reasonable out-of-pocket traveland other expenses incurred by them in attending meetings of the Board orcommittees of the Board.

 

**C.****                                    BOARDPRACTICES**

 

Our articles of incorporationcurrently provide for a Board of Directors consisting of not less than 3 andnot more than 15 directors, to be elected annually. The Ontario BusinessCorporations Act provides that, where a minimum and maximum number of directorsis provided for in the articles of a company, the directors of that companymay, if empowered by special resolution of the shareholders, by a resolutiondetermine the number of directors to be elected at each annual meeting of theshareholders. Our Board of Directors has the authority to fix the number ofdirectors to a number within the minimum and maximum number of directors as setforth in the articles, and has determined by resolution that the size of theBoard is 7 directors.

 

On September 7, 2001, we enteredinto an agreement (the “Board Representation Agreement”) with LimeRock PartnersLLC (“LR”), Jan Pedersen (“Pedersen”), and Sandnes Investering, RogalandInvestering, AIG Private Bank Ltd. and Karstein Gjersvik (together, the “OtherNominating Shareholders”) in connection with the acquisition of ADB SystemerASA of Sola, Norway.  LR, Pedersen andthe Other Nominating Shareholders were the largest shareholders of ADBSystemer.

 

Pursuant to the BoardRepresentation Agreement, LR and Pedersen were entitled, immediately followingthe acquisition of ADB Systemer, to nominate one person each to our Board ofDirectors.  Also pursuant to the BoardRepresentation Agreement, the Other Nominating Shareholders as a group wereentitled to nominate one person to our Board of Directors effective at our 2002annual shareholders meeting on June 12, 2002.

 

The Board representation rightsconferred on LR, Pedersen and the Other Nominating Shareholders are subject totheir continued ownership of at least 50% of the shares received by them uponthe acquisition of ADB Systemer.  Theserights are also subject to the satisfaction of Canadian residency and otherregulatory issues.

 

LR has sold all of itsshareholdings in ADB and, therefore, pursuant to the Board RepresentationAgreement, no longer has a right to nominate a person to the Board ofDirectors.

 

Our Board of Directors presently consists of 7 directors.Under Canadian law, a majority of our Board of directors and of each of ourBoard Committees must be residents of Canada, subject to certainexceptions.  Each of our directors holdsoffice until the next annual meeting of shareholders, until his successor hasbeen elected and qualified, or his earlier resignation or removal.  Our executive officers are appointed by ourBoard of directors and serve at the discretion of our Board of Directors.

 

39

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Except for Jeff Lymburner’s salary protectionagreements, no director has any contract or arrangement with us entitling themto benefits upon termination of their directorship.

 

The threecommittees of the Board are the Audit Committee, Management Resources and CompensationCommittee, and the Corporate Governance Committee.

 

The Audit Committee, all ofwhose members are unrelated as defined by the TSX Corporate GovernanceGuidelines, meets with our management and our auditors on a periodic basis,before the release of quarterly results and before submission of our annualfinancial statements to the Board. The committee is responsible for the reviewand assessment of our audit practices, financial reporting and internalcontrols, inquiry of the auditors as to cooperation in access and disclosure byour management and the ultimate approval of our annual financial statements forsubmission to the Board and to the shareholders. The committee is alsoresponsible for the appointment, compensation and oversight of the work of ourauditors (including resolution of disagreements between management and ourauditors regarding financial reporting).

 

The Management Resources andCompensation Committee, all of whose members are unrelated as defined by theTSX Corporate Governance Guidelines, is responsible for recommendations to theBoard regarding the appointment or removal of executive officers, reviewing theperformance of the executive officers and fixing their compensation. Thecommittee is also responsible for administering our stock option plan andensuring that salary and benefit programs are continuously suitable foracquiring, retaining and motivating employees.

 

The Corporate GovernanceCommittee, all of whose members are unrelated as defined by the TSX CorporateGovernance Guidelines, oversees the implementation of our governance guidelinesdescribed above and, where it deems appropriate, will develop modifications tosuch guidelines. The committee also oversees the process for nominations to theBoard and assesses the overall effectiveness of the Board.

 

**D.****                                    EMPLOYEES**

 

As of December 31, 2003 we employed a total of 50full-time employees and no part-time employees as follows:  

 
|                |   | **North  America** |   | **Ireland  and UK** |   | **Norway** |
|---------------------|--------|--------------------|--------|---------------------|--------|------------|
| Sales and Marketing |   | 5                  |   | 1                   |   | 1          |
| Technical Services  |   | 5                  |   | 2                   |   | 12         |
| Product Group       |   | 2                  |   | 0                   |   | 10         |
| Finance and Admin   |   | 4                  |   | 1                   |   | 2          |
| Executive           |   | 3                  |   | 1                   |   | 1          |
| TOTAL               |   | 19                 |   | 5                   |   | 26         |

 

As of December 31, 2002 we employed a total of 49full-time employees and no part-time employees as follows:

 
|                |   | **North  America** |   | **Ireland  and UK** |   | **Norway** |
|---------------------|--------|--------------------|--------|---------------------|--------|------------|
| Sales and Marketing |   | 5                  |   | 1                   |   | 2          |
| Technical Services  |   | 5                  |   | 1                   |   | 9          |
| Product Group       |   | 3                  |   | Nil                 |   | 10         |
| Finance and Admin   |   | 5                  |   | 1                   |   | 2          |
| Executive           |   | 3                  |   | 1                   |   | 1          |
| TOTAL               |   | 21                 |   | 4                   |   | 24         |

 

40

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As of December 31, 2001 we employed a total of 68full-time employees and no part-time employees as follows:  

 
|                |   | **North  America** |   | **Ireland  and UK** |   | **Norway** |
|---------------------|--------|--------------------|--------|---------------------|--------|------------|
| Sales and Marketing |   | 6                  |   | 4                   |   | 2          |
| Technical Services  |   | 9                  |   | 2                   |   | 12         |
| Product Group       |   | 6                  |   | Nil                 |   | 12         |
| Finance and Admin   |   | 6                  |   | 1                   |   | 2          |
| Executive           |   | 4                  |   | 1                   |   | 1          |
| TOTAL               |   | 31                 |   | 8                   |   | 29         |

 

The number of ouremployees as of December 31, 2003 represents a 27.9% decrease in our workforceas compared with the number of our employees as of December 31, 2001.

 

None of our employees isrepresented by a labor union, and we consider our employee relations to be good**.**

 

**E.**              SHAREOWNERSHIP

** **

**The following table sets forthcertain information concerning share and option ownership of each of ourdirectors and officers as of May 7, 2004:**

 
| **Name**           |   | **Number of Common  Shares Owned (1)** |   | **Number of Common  Underlying Options  (2)** |    | **Range  ofexercise  prices of options** |   | **Range of  Expiration Dates of  Options** |   | **Percentage of  Common  Shares  Beneficially  Owned (3)** |   |
|--------------------|--------|----------------------------------------|--------|-----------------------------------------------|---------|------------------------------------------|--------|--------------------------------------------|--------|----------------------------------------------------------------------|--------|
| Christopher Bulger |   | 15,000                                 |   |                                          | 62,000  |                                     |   | $0.36-$0.48                                |   | 05/10/04-07/03/06                                                    |   | * |   |   |
| Paul Godin         |   | 232,667                                |   |                                          | 25,000  |                                     |   | $0.36  - $0.48                             |   | 05/10/04-07/03/06                                                    |   | * |   |   |
| Jeffrey Lymburner  |   | 3,211,975                              |   |                                          | 50,000  |                                     |   | $0.36-$0.48                                |   | 05/10/04/11/27/04                                                    |   | 5.2 | % |   |
| Jim Moskos         |   | 21,375                                 |   |                                          | 434,369 |                                     |   | $0.33-$0.48                                |   | 05/10/04-08/15/09                                                    |   | * |   |   |
| Rick Robertson     |   | 5,000                                  |   |                                          | 30,000  |                                     |   | $0.37-                                     |   | 07/03/06                                                             |   | * |   |   |
| Glen Whyte         |   | 208,333                                |   |                                          | Nil     |                                     |   | N/A                                        |   | N/A                                                                  |   | * |   |   |
| Michael Robb       |   | Nil                                    |   |                                          | 43,250  |                                     |   | $0.22-$0.48                                |   | 11/27/04-08/15/06                                                    |   | * |   |   |
| Jan Pedersen       |   | 767,019                                |   |                                          | 206,545 |                                     |   | $033-$0.48                                 |   | 05/10/04-07/03/06                                                    |   | 1.6 | % |   |
| Aidan Rowsome      |   | Nil                                    |   |                                          | 255,705 |                                     |   | $0.33  - $0.48                             |   | 05/10/04-08/15/06                                                    |   | * |   |   |

** **

----

*** Represents less than 1%.**

 

**(1)**                                  All numbers adjusted to reflect the two for oneconsolidation of our shares in October 2001.

 

**(2)**                                  Represents shares owned beneficially by the namedindividual other than those shares which may be acquired under our company’soption plans.  Unless otherwise noted,all persons referred to above have sole voting and sole investment power.

 

**(3)**                                  Includes all shares which the named individual hasthe right to acquire under all vested and unvested options and warrants grantedto such individual under our company’s option plan.

 

**(4)**                                  This information is based on 61,420,621 commonshares outstanding as of May 7, 2004. Common shares subject to optionsexercisable within 60 days are deemed outstanding for computing the percentageownership of the person holding the options but are not deemed outstanding forcomputing the percentage ownership of any other person.

 

41

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**ITEM7 - MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS**

 

**A.**                                    MAJORSHAREHOLDERS

** **

To our knowledge, no person other than JeffreyLymburner beneficially owns, directly or indirectly, or exercises control ordirection over more than 5% of our issued and outstanding common shares.

 

This information is based on our records, informationprovided to us by directors and executive officers and a review of anySchedules 13D and 13G filed prior to June 14, 2004, by our shareholders withthe Securities and Exchange Commission and insider reports filed with theOntario Securities Commission.  TheCompany’s major shareholders do not have any voting rights that differ from therights of our other shareholders.

 

As of May 7, 2004, we had 1,210 shareholders of recordholding 61,420,621 common shares, of which 765 shareholders holding 3,743,124common shares had an address of record in the United States.  Common shares held by CEDE & Co. in theUnited States on such date amounted to 3,612,236 or 5.88% of our issued commonshares, which shares are held for participants’ accounts.

 

**We are notaware of any other corporation, foreign government, or other person or entitythat directly or indirectly owns or controls our company, severally or jointly.We are not aware of any arrangements which may result in a change in control ofour company.**

** **

**B.**                                    RELATED PARTY TRANSACTIONS

** **

On April 4, 2000, we completed a transaction with TheArt Vault International Limited, a company previously listed on the CanadianVenture Exchange, under which we agreed to provide our online auctiontechnology and related services to enable the implementation of The Art Vault’sonline auction of art and antiquities. In consideration for our license and services, we received 2,500,000shares of The Art Vault and a share of future profits. Paul Godin, a directorof our company, was the founding shareholder, an executive officer and adirector of The Art Vault. Azim Fancy, then one of our directors, was adirector and shareholder of The Art Vault. Charles Walker and James Moskos,also directors of our company, were shareholders of The Art Vault.  In March 2001, The Art Vault made anassignment in bankruptcy under the laws of the Province of Ontario, due toeconomic conditions and a lack of available funding.  As their license and services agreements were fully paid up, theassignment had no material economic effect on these agreements.  Our investment in The Art Vault was writtendown to zero.

 

On August 30, 2002, theCompany entered into a private placement agreement of secured subordinatednotes (Series A, B and D notes) with a group of private investors for totalgross proceeds of  $1.12 million.   The notes are secured by a general securityagreement on the property and assets of ADB.

 

The following officersand directors purchased the Series D notes: Chris Bulger, a director of theCompany, purchased $20,000 of Series D notes that have not yet beenconverted.  Paul Godin, a director ofthe Company, purchased $25,000 of Series D notes that were converted onDecember 13, 2002 to 208,333 common shares and 104,167 share purchase warrants.Jeff Lymburner, CEO and a director of the Company, purchased $75,000 of SeriesD notesof which $54,750 were converted on April 1, 2004  to 456,250 shares and 228,125 share purchasewarrants The 228,125 common share purchase warrants were exercised into anequal number of common shares by April 19, 2004. The remaining $20,250 ofSeries D notes have yet to be converted as of June 18, 2004. Aidan Rowsome, VPGlobal Sales of the Company, purchased $15,000 of Series D notes that wereconverted on February 3, 2003 to 125,000 common shares and 62,500 sharepurchase warrants.

 

OnMay 9, 2003, the Company issued 666,666 common shares to Jeff Lymburner, CEO ofthe Company, in consideration of gross proceeds of $200,000 as part of aprivate placement financing.

 

42

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On August 19, 2003, theCompany entered into a private placement agreement of secured subordinatednotes (Series E notes) with a group of private investors for total grossproceeds of  $1.0 million.   The notes are secured by a general securityagreement on the property and assets of ADB.

 

The following officersand directors purchased the Series E notes: Paul Godin, a director of theCompany, purchased $50,000 of Series E notes that have not yet been converted.Jim Moskos, President Technology Group and a director of the Company, purchased $35,000 of Series E notes thathave not yet been converted. Michael Robb, CFO and Corporate Secretary of theCompany, purchased $15,000 of Series E notes that have not yet been converted.

 

The following officersand directors purchased Series G notes: Jeff Lymburner, CEO of the Company,purchased $100,000 of Series G notes that have not yet been converted; JanPedersen, President, European Operations and a director of the Company, purchased$60,000 of Series G notes that have not yet been converted; and Jim Moskos,President Technology Group and a director of the Company, purchased $10,000 ofSeries G notes that have not yet been converted.

 

For additional information regarding related partytransactions, see Part I - Item 5 under the heading “OPERATING AND FINANCIALREVIEW AND PROSPECTS – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS” and see Note 7(b) to Notes ConsolidatedFinancial Statements.

 

For additional information regarding related partytransactions, see Part I – Item 4 under the heading “MAJOR DEVELOPMENTS” andNote 19 to Notes to Consolidated Financial Statements.

 

**ITEM8 - FINANCIAL INFORMATION**

 

See the Consolidated Financial Statements and notes theretoaccompanying this Annual Report beginning on page F-1.

 

**LEGALPROCEEDINGS**

 

Neither we, nor any ofour subsidiaries, is a party to, or the subject of, any material legalproceedings.

 

**DIVIDEND POLICY**

 

We have not declared orpaid any cash dividends on our common shares. We currently intend to retain any future earnings for use in theoperation and expansion of our business. We do not anticipate paying any cash dividends on our common shares inthe foreseeable future.

 

We have not issued anypreference shares.  The dividendentitlement of any preference shares issued will be determined by our Board ofDirectors.

 

**SIGNIFICANT CHANGES**

 

None.

 

**ITEM 9 - THE OFFER AND LISTING**

 

Our common shares arelisted on The Toronto Stock Exchange and are quoted for trading on theOTCBB.  Our common shares were quoted onthe Nasdaq National Market from April 20, 1999 until June 3, 2002 and werequoted on the Nasdaq SmallCap Market from June 3, 2002 until August 21, 2002 atwhich time they were delisted because wedid not satisfy the minimum bid price per share requirement for continuedlisting on that market.  Theshares were listed on the Nasdaq exchanges from April 20, 1999 until October17, 2001 under the symbol “BIDS” and from October 18, 2001 until August 21,2002 under the symbol “ADBI”.  Ourcommon shares have been quoted for trading on the OTCBB since August 22, 2002under the symbol “ADBY”.

 

43

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From June 6, 1996 to February 8, 1998, our common shareswere quoted for trading on the Canadian Dealing Network under the symbol“ILII.”  Our common shares were tradedon The Toronto Stock Exchange from February 9, 1998 to July 17, 1998 under thesymbol “ILI” and from July 18, 1998 to October 17, 2001 under the symbol“BII”.  Since October 18, 2001, ourcommon shares have been traded on the Toronto Stock Exchange under the symbol“ADY”.

 

For additional information about the trading of ourcommon shares, see Item 3-D - Risk Factors - YOUR ABILITY TO BUY OR SELL OURCOMMON SHARES ON THE OTCBB  MAY BELIMITED.

 

The following tables set forth the range of high andlow sales prices (rounded to the nearest hundredth) as reported by The TorontoStock Exchange and Nasdaq (beginning April 20, 1999) during the calendar yearsand quarters indicated. Note that all numbers have been adjusted to reflect thetwo-for-one share consolidation completed in October 2001.

 

THE TORONTO STOCK EXCHANGE

 
|                     |   | **High**    |   | **Low**     |   |
|--------------------------|--------|-------------|--------|-------------|--------|
|                     |   | **(Cdn $)** |   | **(Cdn $)** |   |
| ANNUAL MARKET  PRICES    |   |        |   |        |   |
|                     |   |        |   |        |   |
| 1999 Calendar  Year      |   | 67.30       |   | 7.30        |   |
| 2000 Calendar  Year      |   | 26.20       |   | 1.94        |   |
| 2001 Calendar  Year      |   | 3.40        |   | 0.29        |   |
| 2002 Calendar  Year      |   | 0.93        |   | 0.07        |   |
| 2003 Calendar  Year      |   | 0.85        |   | 0.17        |   |
|                     |   |        |   |        |   |
| QUARTERLY MARKET  PRICES |   |        |   |        |   |
| 2002 CALENDAR  YEAR      |   |        |   |        |   |
| First Quarter            |   | 0.50        |   | 0.28        |   |
| Second Quarter           |   | 0.45        |   | 0.22        |   |
| Third Quarter            |   | 0.25        |   | 0.09        |   |
| Fourth Quarter           |   | 0.93        |   | 0.07        |   |
| 2003 CALENDAR  YEAR      |   |        |   |        |   |
| First Quarter            |   | 0.85        |   | 0.17        |   |
| Second Quarter           |   | 0.41        |   | 0.19        |   |
| Third Quarter            |   | 0.55        |   | 0.31        |   |
| Fourth Quarter           |   | 0.54        |   | 0.37        |   |
| 2004 CALENDAR  YEAR      |   |        |   |        |   |
| First Quarter            |   | 0.52        |   | 0.34        |   |
|                     |   |        |   |        |   |
| MONTHLY MARKET  PRICES   |   |        |   |        |   |
| November 2003            |   | 0.53        |   | 0.37        |   |
| December 2003            |   | 0.48        |   | 0.39        |   |
| January 2004             |   | 0.45        |   | 0.39        |   |
| February 2004            |   | 0.52        |   | 0.39        |   |
| March 2004               |   | 0.42        |   | 0.34        |   |
| April 2004               |   | 0.38        |   | 0.32        |   |
| May 2004                 |   | 0.38        |   | 0.25        |   |

 

44

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NASDAQ AND OTCBB

 
|                     |   | **High**    |   | **Low**     |   | **High**     |   | **Low**      |   |
|--------------------------|--------|-------------|--------|-------------|--------|--------------|--------|--------------|--------|
|                     |   | **(Cdn $)** |   | **(Cdn $)** |   | **(U.S. $)** |   | **(U.S. $)** |   |
| ANNUAL MARKET  PRICES    |   |        |   |        |   |         |   |         |   |
| 1999 Calendar  Year      |   | 57.12       |   | 11.18       |   | 38.62        |   | 7.50         |   |
| 2000 Calendar  Year      |   | 26.60       |   | 1.60        |   | 19.26        |   | 1.06         |   |
| 2001 Calendar  Year      |   | 3.30        |   | 0.30        |   | 2.18         |   | 0.19         |   |
| 2002 Calendar  Year      |   | 0.93        |   | 0.06        |   | 0.59         |   | 0.04         |   |
| 2003 Calendar  Year      |   |        |   |        |   |         |   |         |   |
|                     |   |        |   |        |   |         |   |         |   |
| QUARTERLY MARKET  PRICES |   |        |   |        |   |         |   |         |   |
| 2002 CALENDAR  YEAR      |   |        |   |        |   |         |   |         |   |
| First Quarter            |   | 0.53        |   | 0.27        |   | 0.34         |   | 0.17         |   |
| Second Quarter           |   | 0.42        |   | 0.22        |   | 0.27         |   | 0.16         |   |
| Third Quarter            |   | 0.25        |   | 0.06        |   | 0.16         |   | 0.04         |   |
| Fourth Quarter           |   | 0.93        |   | 0.08        |   | 0.59         |   | 0.05         |   |
| 2003 CALENDAR  YEAR      |   |        |   |        |   |         |   |         |   |
| First Quarter            |   | 0.79        |   | 0.16        |   | 0.54         |   | 0.11         |   |
| Second Quarter           |   | 0.39        |   | 0.16        |   | 0.29         |   | 0.12         |   |
| Third Quarter            |   | 0.57        |   | 0.27        |   | 0.42         |   | 0.20         |   |
| Fourth Quarter           |   | 0.58        |   | 0.34        |   | 0.45         |   | 0.26         |   |
| 2004 CALENDAR  YEAR      |   |        |   |        |   |         |   |         |   |
| First Quarter            |   | 0.54        |   | 0.34        |   | 0.41         |   | 0.26         |   |
|                     |   |        |   |        |   |         |   |         |   |
| MONTHLY MARKET PRICES    |   |        |   |        |   |         |   |         |   |
| November 2003            |   | 0.52        |   | 0.38        |   | 0.40         |   | 0.29         |   |
| December 2003            |   | 0.45        |   | 0.36        |   | 0.35         |   | 0.28         |   |
| January 2004             |   | 0.48        |   | 0.40        |   | 0.36         |   | 0.28         |   |
| February 2004            |   | 0.55        |   | 0.40        |   | 0.41         |   | 0.30         |   |
| March 2004               |   | 0.42        |   | 0.34        |   | 0.32         |   | 0.26         |   |
| April 2004               |   | 0.44        |   | 0.34        |   | 0.32         |   | 0.25         |   |
| May 2004                 |   | 0.38        |   | 0.27        |   | 0.28         |   | 0.20         |   |

 

United States dollar amounts are converted to Canadiandollars at the noon buying rate in New York City for cable transfers inCanadian dollars as certified for customs purposes by the Federal Reserve Bankof New York for the date of such sales prices.

 

**ITEM10 - ADDITIONAL INFORMATION**

 

**A.****                                    ShareCapital**

 

Not applicable.

 

**B.****                                    Memorandumand Articles of Association**

 

The Articles ofArrangement for ADB are on file with the Ministry of Consumer and CommercialRelations for the Province of Ontario under Ontario Corporation Number1539169.  Our articles do not include astated purpose.

 

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*Directors*

 

Directors of our companyneed not be shareholders.  In accordancewith our by-laws and the Ontario Business Corporations Act, a majority of ourdirectors must be residents of Canada, subject to certain exceptions.  In addition, directors must be at least 18years of age, of sound mind, and not bankrupt. Neither our articles or by-laws, nor the Ontario Business CorporationsAct, impose any mandatory retirement age for directors.

 

A director who isa party to, or who is a director or officer of or has a material interest inany person who is a party to, a material contract or transaction or proposedmaterial contract or transaction with our company shall disclose to our companythe nature and extent of his interest at the time and in the manner provided bythe Ontario Business Corporations Act. The Ontario Business Corporations Actprohibits such a director from voting on any resolution to approve the contractor transaction unless the contract or transaction:

 

•                                          is  an arrangement by way of security for moneylent to or obligations undertaken by the director for the benefit of ourcompany or an affiliate;

 

•                                          relatesprimarily to his or her remuneration as a director, officer, employee or agentof our company or an affiliate;

 

•                                          isfor indemnity or insurance; or

 

•                                          iswith an affiliate.

 

Our Board of Directors may, on behalf of our company and withoutauthorization of our shareholders:

 

•                                          borrowmoney upon the credit of our company;

 

•                                          issue,reissue, sell or pledge bonds, debentures, notes or other evidences orindebtedness or guarantees of our company, either secured or unsecured;

 

•                                          subjectto certain disclosure requirements of the Ontario Business Corporations Act,give, directly or indirectly, financial assistance to any person by means of aloan, a guarantee or otherwise on behalf of our company to secure performanceor any present or future indebtedness, liability or obligation of any person;and

 

•                                          mortgage,hypothecate, pledge or otherwise create a security interest in all or anycurrently owned or subsequently acquired real or personal property of ourcompany, movable or immovable, including without limitation book debts, rights,powers, franchises and undertakings, to secure any bonds, debentures, notes orother evidences of indebtedness or guarantee or any other obligation of ourcompany.

 

*CommonShares*

 

Our articlesauthorize the issuance of an unlimited number of common shares. The holders ofthe common shares of our company are entitled to receive notice of and toattend all meetings of the shareholders of our company and have one vote foreach common share held at all meetings of the shareholders of our company,except for meetings at which only holders of another specified class or seriesof shares of our company are entitled to vote separately as a class or series.Subject to the prior rights of the holders of preference shares of our companyand to any other shares ranking senior to the common shares with respect topriority in the payment of dividends, the holders of common shares are entitledto receive dividends and our company will pay dividends, as and when declaredby our Board of Directors, out of moneys properly applicable to the payment ofdividends, in such amount and in such form as our Board of Directors may fromtime to time determine, and all dividends which our Board of Directors may declareon the common shares shall be declared and paid in equal amounts per share onall common shares at the time outstanding. In the event of the dissolution,liquidation or winding-up of our company, whether voluntary or involuntary, orany other distribution of assets of our company among its shareholders for thepurpose of winding up its affairs, subject to the prior rights of the holdersof preference shares and to any other shares ranking senior to the commonshares with respect to priority in the distribution of assets upon dissolution,liquidation or winding-up, the holders of the common shares will be entitled toreceive the remaining property and assets of our company.  There

 

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are no redemption or sinking-fundprovisions that attach to the common shares, nor are there any provisions thatdiscriminate against existing or prospective holders of common shares as aresult of owning a substantial number of shares.  The holders of our common shares are not liable to furthercapital calls by our company.

 

*PreferenceShares*

 

Our articles ofincorporation authorize the issuance of an unlimited number of preferenceshares, in one or more series. The Ontario Business Corporations Act does notimpose restrictions upon our Board of Directors issuing preference shares ofthe type authorized by our articles of incorporation. Our Board of Directorsmay fix, before issuing, the number of preference shares of each series, thedesignation, rights, privileges, restrictions and conditions attaching to thepreference shares of each series, including any voting rights, any right toreceive dividends (which may be cumulative or non-cumulative and variable orfixed) or the means of determining the dividends, the dates of payment, anyterms and conditions of redemption or purchase, any conversion rights, and anyrights on the liquidation, dissolution or winding-up of our company, anysinking fund or other provisions, the whole to be subject to the issue of aCertificate of Amendment setting forth the designation, rights, privileges,restrictions and conditions attaching to the preference shares of the series.Our articles of incorporation require that preference shares of each seriesmust, with respect to the payment of dividends and the distribution of assetsor the return of capital in the event of the liquidation, dissolution orwinding-up of our company, whether voluntary or involuntary, rank on a paritywith the preference shares of every other series and be entitled to preferenceover the common shares and over any other shares ranking junior to thepreference shares. The preference shares of one series shall participateratably with the preference shares of every other series in respect of alldividends and similar amounts.  Theholders of our preference shares are not liable to further capital calls by ourcompany.  None of our preference sharesare currently issued or outstanding.

 

*ActionNecessary to Change the Rights of Shareholders*

 

In order to changethe rights of our shareholders, we would need to amend our articles ofincorporation to effect the change. Such an amendment would require the approval of holders of two-thirds ofthe shares cast at a duly called special meeting. If we wish to amend therights of holders of a specific class of shares, such approval would also berequired from the holders of that class. A shareholder is entitled to dissentin respect of such a resolution and, if the resolution is adopted and ourcompany implements such changes, demand payment of the fair value of itsshares.

 

*Meetingsof Shareholders*

 

An annual meetingof shareholders is held each year for the purpose of considering the financialstatements and reports, electing directors, appointing auditors and for thetransaction of other business as may be brought before the meeting. ThePresident, the Chairman of the Board or the Board of Directors has the power tocall a special meeting of shareholders at any time. Notice of the time andplace of each meeting of shareholders must be given not less than 21 days, normore than 50 days, before the date of each meeting to each director, to theauditor and to each shareholder who at the close of business on the record datefor notice is entered in the securities register as the holder of one or moreshares carrying the right to vote at the meeting. Notice of a meeting ofshareholders called for any other purpose other than consideration of financialstatements and auditors’ report, election of directors and reappointment of theincumbent auditor, must state the nature of the business in sufficient detailto permit the shareholder to form a reasoned judgment on, and must state thetext of, any special resolution or by-law to be submitted to the meeting. Theonly persons entitled to be present at a meeting of shareholders are thoseentitled to vote thereat, the directors of our company, the auditor of ourcompany and others who although not entitled to vote are entitled or requiredto be present at the meeting. Any other person may be admitted only on theinvitation of the chairman of the meeting or with the consent of the meeting.If a corporation is winding-up, the Ontario Business Corporations Act permits aliquidator appointed by the shareholders, during the continuance of a voluntarywinding-up, to call and attend meetings of the shareholders. In circumstanceswhere a court orders a meeting of shareholders, the court may direct how themeeting may be held, including the parties entitled, or required, to attend themeeting.

 

*Limitationson Rights to Own Securities*

 

There is no limitation imposed by Canadian law or bythe articles or other charter documents on the right of a non-resident to holdor vote common shares or preference shares with voting rights, other than asprovided in the

 

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Investment CanadaAct, as amended by the World Trade Organization Agreement ImplementationAct.  The Investment Canada Actgenerally prohibits implementation of a reviewable investment by an individual,government or agency thereof, corporation, partnership, trust or joint venturethat is not a “Canadian,” as defined in the Investment Canada Act (a“non-Canadian”), unless, after review, the minister responsible for theInvestment Act is satisfied that the investment is likely to be a net benefitto Canada.

 

An investment in our voting shares by a non-Canadian(other than a “World Trade Organization Investor,” as defined below) would bereviewable under the Investment Canada Act if it were an investment to acquiredirect control of our company, and the value of our assets were $5.0 million ormore.  An investment in our votingshares by a World Trade Organization Investor would be reviewable under theInvestment Canada Act if it were an investment to acquire direct control of ourcompany, and the value of our assets equaled or exceeded $209 million.  A non-Canadian, whether a World TradeOrganization Investor or otherwise, would acquire control of us for purposes ofthe Investment Canada Act if he or she acquired a majority of our votingshares.  The acquisition of less than amajority, but at least one-third of our voting shares, would be presumed to bean acquisition of control of our company, unless it could be established that wewere not controlled in fact by the acquirer through the ownership of votingshares.  In general, an individual is aWorld Trade Organization Investor if he or she is a “national” of a country(other than Canada) that is a member of the World Trade Organization (“WorldTrade Organization Member”) or has a right of permanent residence in a WorldTrade Organization Member.  Acorporation or other entity will be a World Trade Organization investor if itis a “World Trade Organization investor-controlled entity” pursuant to detailedrules set out in the Investment Canada Act. The United States is a World Trade Organization Member.

 

Certain transactions involving our voting shares wouldbe exempt from the Investment Canada Act, including:  (a) an acquisition of our voting shares if the acquisition weremade in connection with the person’s business as a trader or dealer insecurities; (b) an acquisition of control of our company in connection with therealization of a security interest granted for a loan or other financialassistance and not for any purpose related to the provisions of the InvestmentCanada Act; and (c) an acquisition of control of our company by reason of anamalgamation, merger, consolidation or corporate reorganization, followingwhich the ultimate direct or indirect control in fact of our company, throughthe ownership of voting interests, remains unchanged.

 

*Changeof Control*

 

Our authorized capital consists of an unlimited numberof common shares and an unlimited number of preference shares. The Board ofDirectors, without any further vote by the common shareholders, has theauthority to issue preference shares and to determine the price, preferences,rights and restrictions, including voting and dividend rights, of these shares.The rights of the holders of common shares are subject to the rights of holdersof any preference shares that the Board of Directors may issue in the future.That means, for example, that we can issue preference shares with more votingrights, higher dividend payments or more favorable rights upon dissolution,than the common shares. If we issued certain types of preference shares in thefuture, it may also be more difficult for a third-party to acquire a majorityof our outstanding voting shares.

 

Our articles do not contain any provisions that governthe ownership threshold above which shareholder ownership must be disclosed.

 

**C.****                                    MaterialContracts**

 

The following is a summary of our company’s materialcontracts entered into since January 1, 2002.

 

1.  Subscription Agreement, dated as of April25, 2002, between ADB Systems International Inc. and Stonestreet LimitedPartnership, whereby we agreed to issue 3.3 million common shares at a purchaseprice of US $0.21 per share, and warrants exercisable into 1,050,000 commonshares at an exercise price of US $0.35 per share. The warrants have a term ofthree years.  We agreed to register theshares and warrants with the Securities and Exchange Commission. The purchase price was determined in thecontext of the market.

 

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2.                                       Warrant issued April 25, 2002 toStonestreet Limited Partnership by ADB Systems International Inc.  entitling the holder to acquire 1 millioncommon shares of ADB at an exercise price of US $0.35 per share. The warranthad a term of three years and was exercised in full on December 17, 2002.

 

3.                                       Warrant issued April 25, 2002 toStonestreet Limited Corporation by ADB Systems International Inc. entitling theholder to acquire 50,000 common shares of ADB at an exercise price of US $0.35per share. The warrant has a term of three years and as of June 18, 2004 havenot been exercised.

 

4.                                       Aspart of the Arrangement and pursuant to a general conveyance and assumptionagreement (the “General Conveyance and Assumption Agreement”) dated as ofAugust 30, 2002 between Old ADB and ADB, Old ADB transferred all of its assets(excluding only the assets of the Retail Business) to ADB and ADB assumed allof the liabilities of Old ADB (excluding only specified liabilities inconnection with the Retail Business), including Old ADB’s liabilities under theLoan Agreement.

 

5.                                       Underthe terms of a supply, services and licensing agreement (the “Supply Servicesand Licensing Agreement”) dated as of August 23, 2002 between ADB SystemsInternational Inc. (“Bid.Com”) and The Brick Warehouse Corporation (“TheBrick”), ADB will provide administrative and technical services to Old ADB forthe Bid.Com  online retailingactivities.

 

6.                                       Pursuantto subscription agreements dated August 30, 2002, ADB issued a total ofCDN$1,120,000 principal amount of secured subordinated convertible notes infour series, Series A, B, C, and D. For a description of the material terms andconditions attaching to each series, see part I – Item 5 under the heading‘OPERATING AND FINANCIAL REVIEW AND PROSPECTS – MANAGEMENT DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS” and see Note 7(b) toNotes to Consolidated Financial Statements.

 

7.                                       On  May 19, 2004, the Company issued Series Fsecured subordinated notes with a face value of C$500,000 to a privateinvestor.  The Series F notes mature May19, 2007, have an annual rate of interest of 7% paid quarterly in arrears, andare convertible into equity units at a price of $0.31 per unit.  Each equity unit consists of one commonshare and one half of a share-purchase warrant with an exercise price of$0.50.  The warrants have an expiry dateof May 19, 2007.  The Series F notes aresecured by a general security agreement granting a security interest in all ofthe Company’s property and assets and by a direction to pay proceeds under theCompany’s receivable insurance policy with Export Development Canada.  Holders may convert the notes into units atanytime following a four-month hold period. These notes will automatically convert into units when the share priceof the Company closes above $0.70 for five consecutive trading days during theterm, following the hold period.  If theholder does not convert and no automatic conversion takes place, the Company mustrepay the principal amount in cash.

 

8.                                       OnMay 11, 2004, ADB entered into an Agreeement with First Associates InvestmentsInc. (“FAI”) as sole agent and exclusive financial advisor for an offering ofsecurities of ADB of up to C$5 million on a best efforts basis. If an offeringis completed with gross proceeds of C$1 million or more, ADB will grant a rightof first refusal to provide services to lead any future Canadian-led financingfor a period set out as follows; a) one year if gross proceeds are at least C$1million but less than $2 million and b) two years if gross proceeds are atleast C$2 million.

 

9.                                       OnJune 15, 2004, the Company issued Series G secured subordinated notes with aface value of $1,600,000 through their agent, First Associates Investments Inc.(“FAI”).  The Series G notes mature June15, 2007 and have an interest rate of 7% calculated annually and paid on theearlier of conversion or maturity.  Thenotes are convertible into equity units at a price of $0.31 per unit.  Each equity unit consists of one commonshare and one half of a share-purchase warrant with an exercise price of$0.50.  The warrants have an expiry dateof May 19, 2008.  The Series G notes aresecured by a general security agreement granting a security interest in all ofthe Company’s property and assets.  Holdersmay convert the notes into units at anytime following a four-month holdperiod.  These notes will automaticallyconvert into units when the weighted average trading price of the Company’scommon shares reaches $0.70 for ten consecutive trading days during the term,following the hold period.  If theholder does not convert and no automatic conversion takes place, the Companymust repay the principal amount in cash.

 

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Issuance costsassociated with the Series G notes include a commission payable to FAI equal toeight percent of the gross proceeds from non-designated purchasers and fourpercent of the gross proceeds from designated purchasers.  Additionally, FAI received an option topurchase 139,500 equity units, as described above, at a price of $0.31 perunit.

 

The Series G noteswere issued to private investors, including an amount totaling $170,000 issuedto directors and/or senior officers of the Company.

 

**D.****                                    ExchangeControls**

 

There is no law,government decree or regulation in Canada restricting the export or import ofcapital or affecting the remittance of dividends, interest or other payments toa non-resident holder of common shares, other than withholding tax requirements.

 

**E.****                                      Taxation**

 

**CanadianFederal Income Tax Considerations**

** **

The following summarydescribes material Canadian federal income tax consequences generallyapplicable to a holder of our common shares who is not a resident of Canada,and who, for purposes of the Income Tax Act (Canada), (i) holds such shares ascapital property and (ii) deals at arm’s length with us.  Generally, common shares will be consideredcapital property to a holder provided that such holder does not hold suchsecurities in the course of carrying on a business and has not acquired suchsecurities in a transaction or transactions considered to be an adventure orconcern in the nature of trade which includes a transaction or transactions ofthe same kind and carried on in the same manner as a transaction ortransactions of an ordinary trader or dealer in property of the same kind.

 

This summary is basedupon the current provisions of the Income Tax Act and the regulationsthereunder and on an understanding of the published administrative practices ofthe Canadian Customs and Revenue Agency. This summary does not take intoaccount or anticipate any possible changes in law, or the administrationthereof, whether by legislative, governmental or judicial action, exceptproposals for specific amendment thereto which have been publicly announced bythe Canadian Minister of Finance prior to the date hereof.

 

This summary does notaddress all aspects of Canadian federal income tax law that may be relevant toshareholders based upon their particular circumstances, and does not deal withprovincial, territorial or foreign income tax consequences, which might differsignificantly from the consequences under Canadian federal income tax law.

 

Shareholders are advisedto consult their tax advisors regarding the application of the Canadian federalincome tax law to their particular circumstances, as well as any Canadianprovincial, territorial or other tax consequences or any U.S. federal, state orlocal tax consequences or other foreign income tax consequences of theacquisition, ownership and disposition of our common shares.

 

***Taxation of Dividends.***

*** ***

A holder of a commonshare who is not resident in Canada for purposes of the Income Tax Act will besubject to Canadian withholding tax on dividends paid or credited, or deemedunder the Income Tax Act to be paid or credited, to the holder of the commonshare. The rate of withholding tax under the Income Tax Act on dividends is 25%of the amount of the dividend. Such rate may be reduced under the provisions ofan applicable international tax treaty to which Canada is a party. Under thetax treaty that Canada has entered into with the United States, the rate ofCanadian withholding tax applicable in respect of dividends paid or credited bya Canadian corporation to a shareholder resident in the United States, isgenerally reduced to 15%, or 5% in the case of a corporate holder which owns10% or more of the voting shares. A foreign tax credit for the tax withheld maybe available under applicable US tax law to a US holder against U.S. federalincome tax liability.  Moreover,pursuant to Article XXI of the Canada-U.S. Treaty, an exemption fromCanadian withholding tax generally is available in respect of dividends

 

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received bycertain trusts, companies and other organizations whose income is exempt fromtax under the laws of the United States.

 

***Disposition of commonshares.***

*** ***

A non-resident holder ofa common share will not be subject to tax under the Income Tax Act in respectof a capital gain realized on the disposition of a common share unless thecommon share constitutes or is deemed to constitute “taxable Canadian property”as defined in the Income Tax Act. Shares of a corporation that are listed on a prescribedstock exchange (which includes shares traded on certain U.S. stock exchanges,including the Nasdaq National Market), are generally not considered to betaxable Canadian property. However, such shares are considered taxable Canadianproperty in the hands of a non-resident holder if, at any time during the60-month period immediately preceding disposition by the holder, 25% or more ofour issued shares of any class were owned by the non-resident holder togetherwith persons with whom the non-resident did not deal at arm’s length.

 

An interest in or optionin respect of common shares or other securities convertible into orexchangeable for common shares could constitute taxable Canadian property ifthe common shares that could be acquired upon the exercise of the option, theconversion or exchange rights or in which there is such interest are themselvestaxable Canadian property.  TaxableCanadian property also includes any common share held by a non-resident if thenon-resident used the common share in carrying on a business (other than aninsurance business) in Canada, or, if the non-resident is a non-residentinsurer, any common share that is its “designated insurance property” for theyear. A non-resident whose common shares constitute or are deemed to constitutetaxable Canadian property will realize upon the disposition or deemeddisposition of a common share, a capital gain (or a capital loss) to the extentthat the proceeds of disposition are greater than (or less than) the aggregateof the adjusted cost base to the holder of a common share and any reasonablecosts of disposition.

 

One-half of any capitalgain realized by a holder (a taxable capital gain) will be included incomputing the holder’s income. One-half of any capital loss realized by aholder may, subject to certain restrictions applicable to holders that arecorporations, normally be deducted from the holder’s taxable capital gainsrealized in the year of disposition, the three preceding taxation years or anysubsequent taxation years, subject to detailed rules contained in the IncomeTax Act.

 

A purchase by us of ourcommon shares (other than a purchase of our common shares on the open market ina manner in which shares would normally be purchased by any member of thepublic in the open market) will give rise to a deemed dividend under the IncomeTax Act equal to the difference between the amount we paid on the purchase andthe paid-up capital of such shares determined in accordance with the Income TaxAct. The paid-up capital of such shares may be less than the cost of suchshares to the holder. Any such dividend deemed to have been received by anon-resident holder will be subject to non-resident withholding tax asdescribed above. The amount of any such deemed dividend will reduce theproceeds of disposition of the common share to the non-resident holder for thepurpose of computing the amount of the non-resident holder’s capital gain orloss under the Income Tax Act.

 

Even if the commonshares constitute taxable Canadian property to a non-resident holder and theirdisposition would give rise to a capital gain, an exemption from tax under theIncome Tax Act may be available under the terms of an applicable internationaltax treaty to which Canada is a party. A holder resident in the United Statesfor purposes of the Canada-U.S. Treaty will generally be exempt from Canadiantax in respect of a gain on the disposition of common shares provided that thevalue of the common shares is not derived principally from real propertysituated in Canada. Our common shares would qualify for this exemption, howeverArticle XIII paragraph 5 of the Canada-U.S. Treaty provides that thetreaty exemption does not apply where the U.S. resident holder was anindividual who was a Canadian resident for 120 months during any period of 20consecutive years preceding the time of the sale and was resident in Canada atany time during the ten years immediately preceding the sale and owned theshares at the time he/she ceased to be resident in Canada. If the exemptionfrom such Canadian tax in respect of such gain is not available under theCanada-U.S. Treaty, a foreign tax credit may be available under applicable UStax law for U.S. federal income tax purposes. Non-residents are advised toconsult their tax advisers with regard to the availability of a treatyexemption.

 

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**U.S. Federal Income Tax Considerations**

 

The following summarydescribes material United States federal income tax consequences arising fromthe purchase, ownership and sale of common shares. This summary is based on theprovisions of the Internal Revenue Code of 1986, as amended, final, temporaryand proposed United States Treasury Regulations and the administrative andjudicial interpretations of the regulations, all as in effect as of the date ofthis Annual Report and all of which are subject to change, possibly on aretroactive basis. The consequences to any particular shareholder may differfrom those described below by reason of that shareholder’s particularcircumstances. This summary does not address the considerations that may beapplicable to any particular shareholder based on such shareholder’s particularcircumstances (including potential application of the alternative minimum tax),to particular classes of shareholders (including financial institutions,broker-dealers, insurance companies, shareholders who have electedmark-to-market accounting, tax-exempt organizations, shareholders who holdordinary shares as part of a straddle, “hedge” or “conversion transaction” withother investments, shareholders who own (directly, indirectly or throughattribution) 10% or more of our company’s outstanding voting shares,shareholders whose functional currency is not the U.S. dollar, persons who arenot citizens or residents of the United States, or persons which are foreigncorporations, foreign partnerships or foreign estates or trusts as to theUnited States, or any aspect of state, local or non-United States tax laws.Additionally, the discussion does not consider the tax treatment of persons whohold common shares through a partnership or other pass-through entity or thepossible application of United States federal gift or estate tax. This summaryis addressed only to a holder of common shares who is (i) a citizen or residentof the United States who owns less than 10% of our company’s outstanding votingshares, (ii) a corporation organized in the United States or under the laws ofthe United States or any state thereof, (iii) an estate, the income of which isincludable in gross income for United States federal income tax purposesregardless of source, or (iv) a trust, if (1) a court within the UnitedStates is able to exercise primary supervision over the administration of thetrust and one or more U.S. persons have the authority to control allsubstantial decisions of the trust or (2) has a valid election in effect underapplicable United States Treasury Regulations to be treated as a U.S. person (a“U.S. Holder”). This summary is for general information purposes only and doesnot purport to be a comprehensive description of all of the tax considerationsthat may be relevant to a decision to purchase common shares. This summarygenerally considers only U.S. Holders that will own their common shares ascapital assets.

 

Each shareholder shouldconsult with such shareholder’s own tax advisor as to the particular taxconsequences to such shareholder of the purchase, ownership and sale of theircommon shares including the effects of applicable state, local, foreign orother tax laws and possible changes in the tax laws.

 

**Treatment of Dividend Distributions**

 

Subject to the discussionbelow under “Tax Status Of The Company – *Passive Foreign Investment Companies*,” adistribution by our company to a U.S. Holder in respect of the common shares(including the amount of any Canadian taxes withheld thereon) will generally betreated for United States federal income tax purposes as a dividend to theextent of our company’s current and accumulated earnings and profits, asdetermined under United States federal income tax principles. To the extent, ifany, that the amount of any such distribution exceeds our company’s current andaccumulated earnings and profits, as so computed, it will first reduce the U.S.Holder’s tax basis in the common shares owned by him, and to the extent itexceeds such tax basis, it will be treated as capital gain from the sale ofcommon shares.

 

While it is notanticipated that our company will pay dividends in the foreseeable future, thegross amount of any distribution from our company received by a U.S. Holderwhich is treated as a dividend for United States federal income tax purposes(before reduction for any Canadian tax withheld at source) will be included insuch U.S. Holder’s gross income as ordinary income and generally will notqualify for the dividends received deduction applicable in certain cases toUnited States corporations. Pursuant to recently enacted legislation, if youare an individual, dividends that we pay you through 2008 will be subject totax at long-term capital gain rates, provided certain holding period and otherrequirements are satisfied and provided that in the year such dividends arepaid, or the preceding taxable year, we are not a foreign personal holdingcompany, a foreign investment company or a passive foreign investment company.For United States federal income tax purposes, the amount of any dividend paidin Canadian dollars by our company to a U.S. Holder will equal the U.S. dollarvalue of the amount of the dividend paid in Canadian dollars, at the exchangerate in effect on the date of the distribution, regardless of whether theCanadian dollars are actually converted into United States dollars at thattime. Canadian dollars received by a U.S. Holder will have a tax basis equal tothe U.S. dollar value thereof determined at the exchange rate on the date ofthe distribution. Currency exchange gain or loss, if any, recognized by a U.S.Holder on the conversion of 

 

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Canadian dollars intoU.S. dollars will generally be treated as U.S. source ordinary income or lossto such holder. U.S. Holders should consult their own tax advisors concerningthe treatment of foreign currency gain or loss, if any, on any Canadian dollarsreceived which are converted into dollars subsequent to distribution.

 

A U.S. Holder generallywill be entitled to deduct any Canadian taxes withheld from dividends incomputing United States taxable income, or to credit such withheld taxes againstthe United States federal income tax imposed on such U.S. Holder’s dividendincome. No deduction for Canadian taxes may be claimed, however, by anindividual (noncorporate) U.S. Holder that does not itemize deductions. Theamount of foreign taxes for which a U.S. Holder may claim a credit in any yearis subject to complex limitations and restrictions, which must be determined onan individual basis by each shareholder. Distributions with respect to commonshares that are taxable as dividends will generally constitute foreign sourceincome for purposes of the foreign tax credit limitation. The limitation onforeign taxes eligible for credit is calculated separately with respect tospecific classes of income. For this purpose, dividends distributed by our companywith respect to the common shares will generally constitute “passive income.”Foreign income taxes exceeding a shareholder’s credit limitation for the yearof payment or accrual of such tax can be carried back for two taxable years andforward for five taxable years, subject to the credit limitation applicable ineach of such years. Additionally, the foreign tax credit in any taxable yearmay not offset more than 90% of a shareholder’s liability for United Statesindividual or corporate alternative minimum tax. The total amount of allowableforeign tax credits in any year generally cannot exceed regular U.S. taxliability for the year attributable to foreign source taxable income. A U.S.Holder will be denied a foreign tax credit with respect to Canadian income taxwithheld from dividends received on the common shares to the extent such U.S.Holder has not held the ordinary shares for at least 16 days of the 30-dayperiod beginning on the date which is 15 days before the ex-dividend date or tothe extent such U.S. Holder is under an obligation to make certain relatedpayments with respect to substantially similar or related property. Any daysduring which a U.S. Holder has substantially diminished its risk of loss on thecommon shares are not counted toward meeting the 16 day holding period requiredby the statute.

 

**Sale or Exchange of a Common Share**

 

Subject to the discussionbelow under “Tax Status Of The Company – *Passive Foreign Investment Companies*,” thesale or exchange by a U.S. Holder of a common share generally will result inthe recognition of gain or loss by the U.S. Holder in an amount equal to thedifference between the amount realized and the U.S. Holder’s basis in thecommon share sold. Such gain or loss will be capital gain or loss provided thatthe common share is a capital asset in the hands of the holder. The gain orloss realized by an individual (noncorporate) U.S. Holder on the sale orexchange of a common share will be long-term capital gain or loss subject to areduced rate of tax if the common share had been held for more than oneyear.  If the common share had been heldby such individual U.S. Holder for not more than one year, such gain will beshort-term capital gain.  Gainsrecognized by a U.S. Holder on a sale, exchange or other disposition of commonshares generally will be treated as United States source income for UnitedStates foreign tax credit purposes. A loss recognized by a U.S. Holder on thesale, exchange or other disposition of common shares generally is allocated to U.S.source income.  However, such loss mustbe allocated to foreign source income to the extent certain dividends werereceived by the U.S. Holder within the 24-month period preceding the date onwhich the U.S. Holder recognized the loss. The deductibility of a capital lossrecognized on the sale, exchange or other disposition of common shares issubject to limitations. A U.S. Holder that receives foreign currency upondisposition of common shares and subsequently converts the foreign currencyinto U.S. dollars generally will have foreign exchange gain or loss based onany appreciation or depreciation in the value of the foreign currency againstthe U.S. dollar. U.S. Holders should consult their own tax advisors regardingtreatment of any foreign currency gain or loss on any Canadian dollars receivedin respect of the sale, exchange or other disposition of common shares.

 

**Tax Status of the Company**

 

*Personal Holding Companies.*  A non-U.S. corporation may be classified asa personal holding company for United States federal income tax purposes ifboth of the following two tests are satisfied: (i) if at any time during thelast half of the company’s taxable year, five or fewer individuals (withoutregard to their citizenship or residency) own or are deemed to own (undercertain attribution rules) more than 50% of the stock of the corporation byvalue and (ii) 60% or more of such non-U.S. corporation’s gross income derivedfrom U.S. sources or effectively connected with a U.S. trade or business, asspecifically adjusted, is from certain passive sources such as dividends

 

53

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and royalty payments.Such a corporation generally is taxed on the amounts of such passive sourceincome, after making adjustments such as deducting dividends paid and incometaxes, that are not distributed to shareholders. We believe that our companywas not a personal holding company in 2003 and is not currently a personalholding company.  However, no assurancecan be given that either test will not be satisfied in the future.

 

*Foreign Personal Holding Companies.*  A non-U.S. corporation will be classified asa foreign personal holding company for United States federal income taxpurposes if both of the two following tests are satisfied: (i) five or fewerindividuals who are United States citizens or residents own or are deemed toown (under certain attribution rules) more than 50% of all classes of thecorporation’s stock measured by voting power or value and (ii) the corporationreceives at least 60% (50% if previously an foreign personal holding company)of its gross income (regardless of source), as specifically adjusted, fromcertain passive sources. If such a corporation is classified as a foreignpersonal holding company, a portion of its “undistributed foreign personalholding company income” (as defined for United States federal income taxpurposes) would be imputed to all of its shareholders who are U.S. Holders onthe last taxable day of the corporation’s taxable year, or, if earlier, thelast day on which it is classifiable as a foreign personal holding company.Such income would be taxable as a dividend, even if no cash dividend isactually paid. U.S. Holders who dispose of their shares prior to such datewould not be subject to tax under these rules. We believe that our company wasnot a foreign personal holding company in 2003 and is not currently a foreignpersonal holding company. However, no assurance can be given that our companywill not qualify as a foreign personal holding company in the future.

 

*Passive Foreign InvestmentCompanies.*  A companywill be a passive foreign investment company if 75% or more of its gross income(including the pro rata share of the gross income of any company (United Statesor foreign) in which the company is considered to own 25% or more of the shares(determined by market value)) in a taxable year is passive income.Alternatively, the company will be considered to be a passive foreigninvestment company if at least 50% of the value of the company’s assets(averaged over the year) (including the pro rata share of the value of theassets of any company in which the company is considered to own 25% or more ofthe shares (determined by market value)) in a taxable year are held for theproduction of, or produce, passive income. For these purposes, the value of ourassets is calculated based on our market capitalization. Passive incomegenerally includes, among others, interest, dividends, royalties, rents andannuities.

 

If our company is apassive foreign investment company for any taxable year, a U.S. Holder, in theabsence of an election by such U.S. Holder to treat our company as a “qualifiedelecting fund” (a “QEF election”), as discussed below, would, upon certaindistributions by our company and upon disposition of the common shares at again, be liable to pay tax at the highest tax rate on ordinary income in effectfor each period to which the income is allocated, plus interest on the tax, asif the distribution or gain had been recognized ratably over the days in theU.S. Holder’s holding period for the common shares during which our company wasa passive foreign investment company. Additionally, if our company is a passiveforeign investment company, U.S. Holders who acquire ordinary shares from decedentswould be denied the normally available step-up of the income tax basis for suchcommon shares to fair market value at the date of death and instead would havea tax basis equal to the decedent’s basis, if lower.

 

If our company is treatedas a passive foreign investment company for any taxable year, U.S. Holdersshould consider whether to make a QEF election for United States federal incometax purposes. If a U.S. Holder has a QEF election in effect for all taxableyears that such U.S. Holder has held the common shares and our company was apassive foreign investment company, distributions and gain will not berecognized ratably over the U.S. Holder’s holding period or subject to aninterest charge, gain on the sale of common shares will be characterized ascapital gain and the denial of basis step-up at death described above would notapply. Instead, each such U.S. Holder is required for each taxable year thatour company is a qualified electing fund to include in income a pro rata shareof the ordinary earnings of our company as ordinary income and a pro rata shareof the net capital gain of our company as long-term capital gain, subject to aseparate election to defer payment of taxes, which deferral is subject to aninterest charge. Consequently, in order to comply with the requirements of aQEF election, a U.S. Holder must receive from our company certain information.We intend to supply U.S. Holders with the information needed to report incomeand gain pursuant to a QEF election in the event our company is classified as apassive foreign investment company. The QEF election is made on ashareholder-by-shareholder basis and can be revoked only with the consent ofthe Internal Revenue Service.  Ashareholder makes a QEF election by attaching a completed IRS Form 8621(including the passive foreign investment company annual information statement)to a timely filed

 

54

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United States federalincome tax return and by filing such form with the IRS Service Center inPhiladelphia, Pennsylvania. Even if a QEF election is not made, a shareholderin a passive foreign investment company who is a U.S. Holder must file acompleted IRS Form 8621 every year.

 

As an alternative tomaking a QEF election, a U.S. Holder may elect to make a mark-to-marketelection with respect to the common shares owned by him. If the mark-to-marketelection were made, then the rules set forth above would not apply for periodscovered by the election. Under such election, a U.S. Holder includes in incomeeach year an amount equal to fair market value of the common shares owned bysuch U.S. Holder as of the close of the taxable year over the U.S. Holder’sadjusted basis in such shares. The U.S. Holder would be entitled to a deductionfor the excess, if any, of such U.S. Holder’s adjusted basis in his commonshares over the fair market value of such shares as of the close of the taxableyear; provided however, that such deduction would be limited to the extent ofany net mark-to-market gains with respect to the common shares included by theU.S. Holder under the election for prior taxable years. The U.S. Holder’s basisin his common shares is adjusted to reflect the amounts included or deductedpursuant to this election. Amounts included in income pursuant to themark-to-market election, as well as gain on the sale or exchange of the commonshares, will be treated as ordinary income. Ordinary loss treatment applies tothe deductible portion of any mark-to-market loss, as well as to any lossrealized on the actual sale or exchange of the common shares to the extent thatthe amount of such loss does not exceed the net mark-to-market gains previouslyincluded with respect to such common shares.

 

The mark-to-marketelection applies to the tax year for which the election is made and all latertax years, unless the common shares cease to be marketable or the IRS consentsto the revocation of the election.

 

We do not believe ourcompany was a passive foreign investment company during 2003. However, therecan be no assurance that our company will not be classified as a passiveforeign investment company in 2004 or thereafter because the tests fordetermining passive foreign investment company status are applied annually andit is difficult to make accurate predictions of future income and assets, whichare relevant to this determination. U.S. Holders who hold common shares duringa period when our company is a passive foreign investment company will besubject to the foregoing rules, even if our company ceases to be a passiveforeign investment company, subject to certain exceptions for U.S. Holders whomade a QEF election. U.S. Holders are urged to consult with their own taxadvisors about making a QEF election or mark-to-market election and otheraspects of the passive foreign investment company rules.

 

**Back-Up Withholding and Information Reporting**

 

U.S. Holders generallyare subject to information reporting requirements and back-up withholding withrespect to dividends paid in the United States on common shares, or proceedspaid from the disposition of common shares, unless the U.S. Holder provides anIRS Form W-9 or otherwise establishes an exemption.

 

The amount of any back-upwithholding will be allowed as a credit against a U.S. Holder’s federal incometax liability and may entitle such holder to a refund, provided that certainrequired information is furnished to the IRS.

 

**F.****                                      Dividendsand Paying Agents**

 

Not applicable.

 

**G.****                                    Statementsby Experts**

 

Not applicable.

 

**H.****                                    Documentson display.**

 

We have filed this AnnualReport on Form 20-F with the Securities and Exchange Commission under theSecurities Exchange Act of 1934. Statements made in this Annual Report as tothe contents of any contract, agreement or other document referred to are notnecessarily complete. With respect to each such contract, agreement or otherdocument filed as an exhibit to this Annual Report, reference is made to theexhibit for a more complete

 

55

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description of thematter involved, and each such statement shall be deemed qualified in itsentirety by such reference.

 

We are subject to theinformational requirements of the Exchange Act and file reports and otherinformation with the Securities and Exchange Commission.  Reports and other information which we filewith the Securities and Exchange Commission, including this Annual Report onForm 20-F, may be inspected and copied at the public reference facilitiesof the Securities and Exchange Commission at:

 

| 450 Fifth Street N.W.  Room 1024  Washington D.C.  20549 |   | 500 West Madison Street  Suite 1400  Chicago, Illinois 60661 |
|---------------------------------------------------------------|--------|--------------------------------------------------------------|

 

You can alsoobtain copies of this material by mail from the Public ReferenceSection of the Securities and Exchange Commission, 450 Fifth Street, N.W.,Washington, D.C. 20549, at prescribed rates. Additionally, copies of this material may also be obtained from theSecurities and Exchange Commission’s Internet site at http://www.sec.gov.  The Commission’s telephone number is1-800-SEC-0330.

 

**I.****                                         SubsidiaryInformation.**

 

Not applicable.

 

**ITEM 11 -QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK**

** **

(a)          Quantitative Informationabout Market Risk

 

See Item 5 -Operating and Financial Review and Prospects - Liquidity and Capital Resources- Foreign Currency Rate Fluctuations; Interest Rate and Investment Risk.

 

(b)         Qualitative Informationabout Market Risk

 

See Item 5 -Operating and Financial Review and Prospects - Liquidity and Capital Resources- Foreign Currency Rate Fluctuations; Interest Rate and Investment Risk.

 

**ITEM12 - DESCRIPTION OF SECURITIES OTHER THAN DEBT SECURITIES**

 

Not applicable.

 

**PARTII**

 

**ITEM 13- DEFAULT, DIVIDEND ARREARAGES AND DELINQUENCIES**

 

None.

 

**ITEM14 - MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OFPROCEEDS**

 

Therewere no material modifications to the rights of our security holders during thefiscal year ended December 31, 2003.

 

**ITEM15 – CONTROLS AND PROCEDURES**

 

The Company’s management,with the participation of the Company’s Chief Executive Officer and its ChiefFinancial Officer has evaluated the effectiveness of the Company’s disclosurecontrols and procedures as of December 31, 2003.  Based on that evaluation, the Company’s management, including theChief Executive Officer and the Chief Financial Officer, concluded that theCompany’s disclosure controls and procedures were effective.

 

The Company’s managementdid not identify any change in the Company’s internal control over financial

 

56

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reporting that occurredduring the Company’s last fiscal year that has materially affected, or isreasonably likely to materially affect, the Company’s internal control overfinancial reporting.

 

**ITEM16A – AUDIT COMMITTEE FINANCIAL EXPERT**

 

TheCompany’s Board of Directors has determined that it has at least one auditcommittee financial expert serving on its audit committee.  The Board of Directors has determined thatDarroch Robertson is an audit committee financial expert.  Mr. Robertson has been an Associate Professor of Business at the RichardIvey School of Business, The University of Western Ontario, for the past fiveyears. He is also the Director of the undergraduate HBA program at the IveySchool. Mr. Robertson is a director and chair of the audit committee ofStackpole Ltd., a TSX-listed company. Mr. Robertson is also an elected memberof council for the Institute of Chartered Accountants of Ontario, where hecurrently serves on the audit committee and by-laws committee

 

**ITEM 16B– CODE OF ETHICS**

 

TheCompany has adopted a Code of Ethics that applies to its principal executiveofficer, principal financial officer, principal accounting officer, controllerand persons performing similar functions. The Code of Ethics is attached as anexhibit to this report.

 

**ITEM16C – PRINCIPAL ACCOUNTANT FEES AND SERVICES**

 

Thefollowing table sets forth the aggregate fees billed for each of the last twofiscal years for professional services rendered by our auditors for the auditof our annual financial statements and other services.

 

**FEES OF AUDITORS**

 
| **Year** |   | **Audit  Fees(1)** |    | **Review  Fees(2)** |   | **Tax  Fees(3)** |   | **Other  Fees(4)** |   |
|----------|--------|--------------------|---------|---------------------|--------|------------------|--------|--------------------|--------|
| 2002     |   | $                  | 184,500 |                | $      | 54,000           |   | $                  | 31,203 |   | $ | 18,190 |   |
| 2003     |   | $                  | 160,000 |                | $      | 66,000           |   | $                  | 71,450 |   | $ | 18,750 |   |

 

----

(1)          Audit Fees representcosts associated with the audit of the Company’s financial statements includingU.S. GAAP and U.S. GAAS.

 

(2)          Review Fees representcosts associated with reviews of the Company’s quarterly financial pressreleases and shareholders reports.

 

(3)          Tax Fees represent costsassociated with the preparation of the Company’s annual tax filings.

 

(4)          Other fees representcosts associated with the review and recommended accounting treatment relatedto complicated contracts or arrangements.

 

**ITEM 16D – EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDITCOMMITTEES**

 

Notapplicable.

 

**PARTIII**

 

**ITEM17- FINANCIAL STATEMENTS**

 

Not applicable.

 

**ITEM18 - FINANCIAL STATEMENTS**

 

See the Index toConsolidated Financial Statements accompanying this report on page F-1.

 

57

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**ITEM 19- EXHIBITS**

 

**Exhibits filed as part of this Annual Report.**

 
| 1.1    |   | Articles of Arrangement  of the Company filed with the Ontario Ministry of Consumer and Business  Services on October 31, 2002. (1)                                                                                                       |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                           |
| 1.2    |   | By-laws of the Company. (2)                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                           |
| 2.1    |   | Form  of Series D Note. (6)                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                           |
| 2.2    |   | Registration  Rights Agreement, dated as of June 16, 2000, between Bid.Com  International and Acqua Wellington Value Fund Ltd. (4)                                                                                                        |
|   |   |                                                                                                                                                                                                                                           |
| 2.3    |   | Form  of Series G Convertible Secured Note.*                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                           |
| 2.4    |   | Warrant  issued April 25, 2002 to Stonestreet Limited Partnership by ADB Systems  International Inc. (5)                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                           |
| 2.5    |   | Warrant  issued April 25, 2002 to Stonestreet Corporation by ADB Systems  International Inc. (5)                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                           |
| 2.6    |   | Form  of Warrant issued or issuable upon the exercise of the Series A Notes, Series  B Notes, Series C Notes and Series D Notes. (6)                                                                                                           |
|   |   |                                                                                                                                                                                                                                           |
| 2.7    |   | Series  F Convertible Secured Note dated May 19, 2004 between ADB Systems  International Ltd. and Stonestreet Limited Partnership.*                                                                                                            |
|   |   |                                                                                                                                                                                                                                           |
| 2.8    |   | Form  of Warrant issued or issuable upon exercise of the Series F Notes.*                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                           |
| 4.1    |   | Salary  Protection Letter, dated February 12, 1997, between the Company and  Jeffrey Lymburner. (3)                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                           |
| 4.2    |   | Option  Agreement dated February 19, 2001 between Bid.Com International Inc. and  Wendell Willick. (5)                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                           |
| 4.3    |   | Amendment  to Option Agreement dated May 2, 2001 between Bid.Com International Inc. and  Wendell Willick. (5)                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                           |
| 4.4    |   | Board  Support Agreement, dated as of September 7, 2001 between Bid.Com  International Inc. and ADB Systemer ASA. (5)                                                                                                                     |
|   |   |                                                                                                                                                                                                                                           |
| 4.5    |   | Board  Representation Agreement, dated as of September 7, 2001 between Bid.Com  International Inc. and LimeRock Partners LLC, Jan Pedersen, Sandnes  Investering, Rogaland Investering, AIG Private Bank Ltd. and Karstein  Gjersvik. (5) |
|   |   |                                                                                                                                                                                                                                           |
| 4.6    |   | Employment  Agreement, dated as of September 18, 2001 between Bid.Com International  Inc. and Jan Pedersen.(5)                                                                                                                            |
|   |   |                                                                                                                                                                                                                                           |
| 4.7    |   | Subscription  Agreement, dated as of April 25, 2002, between ADB Systems International  Inc. and Stonestreet Limited Partnership. (5)                                                                                                     |
|   |   |                                                                                                                                                                                                                                           |
| 4.8    |   | Arrangement  Agreement, dated as of August 23, 2002, between ADB Systems  International Inc. and ADB Systems International Ltd. (1)                                                                                                       |
|   |   |                                                                                                                                                                                                                                           |
| 4.9    |   | General  Conveyance and Assumption Agreement, dated August 23, 2002, between ADB  Systems International Inc. and ADB Systems International Ltd. (2)                                                                                       |
|   |   |                                                                                                                                                                                                                                           |
| 4.10   |   | Loan  Agreement, dated August 23, 2002, and Loan Agreement Amending Agreement  entered into as of August 30, 2002 among The Brick Warehouse  Corporation, ADB Systems International Inc., and ADB Systems International  Ltd. (6)    |
|   |   |                                                                                                                                                                                                                                           |
| 4.11   |   | Form  of Supply Services and Licensing Agreement, dated August 23, 2002, among  The Brick Warehouse Corporation, ADB Systems International Inc., and ADB  Systems International Ltd. (6)                                                  |
|   |   |                                                                                                                                                                                                                                           |
| 4.12   |   | Form  of General Security Agreement, dated as of April 30, 2002, between ADB  Systems International Inc. and each of Stonestreet Limited Partnership and  Greenwich Growth Fund Ltd. (6)                                                  |

 

58

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| 4.13   |   | Form  of Subscription Agreement, dated August 30, 2002, between ADB Systems  International Inc. and Stonestreet Limited Partnership. (6)                            |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                     |
| 4.14   |   | Form  of Subscription Agreement, dated August 30, 2002, between ADB Systems  International Inc. and Greenwich Growth Fund Ltd. (6)                                  |
|   |   |                                                                                                                                                                     |
| 4.15   |   | Co-operation  Agreement made as of August 23, 2002 between ADB Systems International  Inc., ADB Systems International Ltd. and The Brick Warehouse Corporation. (6) |
|   |   |                                                                                                                                                                     |
| 4.16   |   | Agency  Agreement dated June 15, 2004 between ADB Systems International Ltd. and  First Associates Investments Inc.*                                                |
|   |   |                                                                                                                                                                     |
| 4.17   |   | General  Security Agreement, dated as of May 19, 2004 between ADB Systems  International and Stonestreet Limited Partnership.*                                           |
|   |   |                                                                                                                                                                     |
| 4.18   |   | Subscription  Agreement, dated June 3, 2004, between ADB Systems International and  First Associates Investments Inc.*                                              |
|   |   |                                                                                                                                                                     |
| 4.19   |   | Subscription  Agreement, dated June 1, 2004, between ADB Systems International and  First Associates Investments Inc.*                                              |
|   |   |                                                                                                                                                                     |
| 4.20   |   | Subscription  Agreement, dated May 19, 2004, between ADB Systems International and  Stonestreet Limited Partnership.*                                                    |
|   |   |                                                                                                                                                                     |
| 8.1    |   | List  of Subsidiaries.*                                                                                                                                                  |
|   |   |                                                                                                                                                                     |
| 10.1   |   | Certification  pursuant to 18 U.S.C. Section 1350.*                                                                                                                 |
|   |   |                                                                                                                                                                     |
| 11.1   |   | Code  Of Ethics for ADB Systems International Ltd.*                                                                                                                      |

 

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| *      |   | Filed herewith                                                                                                                                                                                                             |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                       |
| (1)    |   | Incorporated by reference from Exhibit 1 to the Company’s Current  Report on Form 6-K, Filing No. 1 for the Month of November 2002, filed  with the Securities and Exchange Commission on November 5, 2002. |
|   |   |                                                                                                                                                                                                                       |
| (2)    |   | Incorporated by reference from Exhibit 1.2 of Amendment No. 1 to the  Company’s Registration Statement on Form 20-F, File No. 001-14835, filed with  the Securities and Exchange Commission on March 30, 1999.   |
|   |   |                                                                                                                                                                                                                       |
| (3)    |   | Incorporated by reference from Exhibit 3.27 of Amendment No. 1 to the  Company’s Registration Statement on Form 20-F, File No. 001-14835, filed with  the Securities and Exchange Commission on March 30, 1999.  |
|   |   |                                                                                                                                                                                                                       |
| (4)    |   | Incorporated by reference from the Exhibits to the Company’s Annual  Report on Form 20-F, File No. 001-14835, filed with the Securities and  Exchange Commission on May 23, 2001.                                     |
|   |   |                                                                                                                                                                                                                       |
| (5)    |   | Incorporated by reference from the Exhibits to the Company’s Annual  Report on Form 20-F, File No. 001-14835, filed with the Securities and  Exchange Commission on May 17, 2002.                                     |
|   |   |                                                                                                                                                                                                                       |
| (6)    |   | Incorporated by reference from Exhibits to the Company’s Annual Report  on Form 20-F, File No. 001-14835, filed with the Securities and Exchange  Commission on May 20, 2003.                                         |

 

SIGNATURES

 

The registrant herebycertifies that it meets all of the requirements for filing on Form 20-F and hasduly caused and authorized the undersigned to sign this Annual Report on itsbehalf.

 

59

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|                       | ADB SYSTEMS  INTERNATIONAL INC. |
|----------------------------|---------------------------------|
|                       |                            |
|                       |                            |
|                       | By:                             | /s/ Jeffrey  Lymburner |
|                       |                            | Name: | Jeffrey  Lymburner |
|                       |                            | Title: | Chief Executive  Officer |
|                       |                            |   |
|                       |                            |   |
| Dated: June 29,  2004 | By:                             | /s/ Michael Robb |
|                       |                            | Name: | Michael Robb |
|                       |                            | Title: | Chief Financial Officer  and |
|                       |                            |   | Corporate Secretary |
|                            |                                 |  |  |  |

 

60

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**Certification**

 

I, Jeffrey Lymburner,certify that:

 

1.  I have reviewed the annual report on Form20-F of ADB Systems International Ltd.;

 

2.  Based on my knowledge, this report does notcontain any untrue statement of a material fact or omit to state a materialfact necessary to make the statements made, in light of the circumstances underwhich such statements were made, not misleading with respect to the periodcovered by this report;

 

3.  Based on my knowledge, the financialstatements, and other financial information included in this report, fairlypresent in all material respects the financial condition, results of operationsand cash flows of the company as of, and for, the periods presented in thisreport;

 

4. The company’s othercertifying officers and I are responsible for establishing and maintainingdisclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)and 15d-15(e)) for the company and have:

 

a) Designed suchdisclosure controls and procedures, or caused such disclosure controls andprocedures to be designed under our supervision, to ensure that materialinformation relating to the company, including its consolidated subsidiaries,is made known to us by others within those entities, particularly during theperiod in which this report is being prepared;

 

b) not applicable;

 

c) Evaluated theeffectiveness of the company’s disclosure controls and procedures and presentedin this report our conclusions about the effectiveness of the disclosurecontrols and procedures, as of the end of the period covered by this reportbased on such evaluation; and

 

d) Disclosed in thisreport any change in the company’s internal control over financial reportingthat occurred during the period covered by the annual report that hasmaterially affected, or is reasonably likely to materially affect, thecompany’s internal control over financial reporting; and

 

5. The company’s othercertifying officers and I have disclosed, based on our most recent evaluationof internal control over financial reporting, to the company’s auditors and theaudit committee of the company’s board of directors (or persons performing theequivalent functions):

 

a) All significantdeficiencies and material weaknesses in the design or operation of internalcontrol over financial reporting which are reasonably likely to adverselyaffect the company’s ability to record, process, summarize and report financialinformation; and

 

b) Any fraud, whether ornot material, that involves management or other employees who have asignificant role in the company’s internal control over financial reporting.

 

 
| Dated:  June 29, 2004 | /s/ Jeffrey Lymburner   |   |
|---------------------------------|-------------------------|--------|
|                            | Jeffrey Lymburner       |
|                            | Chief Executive Officer |

 

61

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**Certification**

 

I, Michael Robb, certifythat:

 

1.  I have reviewed this annual report on Form20-F of ADB Systems International Ltd.;

 

2.  Based on my knowledge, this report does notcontain any untrue statement of a material fact or omit to state a materialfact necessary to make the statements made, in light of the circumstances underwhich such statements were made, not misleading with respect to the periodcovered by this report;

 

3.  Based on my knowledge, the financialstatements, and other financial information included in this report, fairlypresent in all material respects the financial condition, results of operationsand cash flows of the company as of, and for, the periods presented in thisreport;

 

4. The company’s othercertifying officers and I are responsible for establishing and maintainingdisclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)and 15d-15(e)) for the company and have:

 

a) Designed suchdisclosure controls and procedures, or caused such disclosure controls andprocedures to be designed under our supervision, to ensure that materialinformation relating to the company, including its consolidated subsidiaries,is made known to us by others within those entities, particularly during theperiod in which this report is being prepared;

 

b) not applicable;

 

c) Evaluated theeffectiveness of the company’s disclosure controls and procedures and presentedin this report our conclusions about the effectiveness of the disclosurecontrols and procedures, as of the end of the period covered by this reportbased on such evaluation; and

 

d) Disclosed in thisreport any change in the company’s internal control over financial reportingthat occurred during the period covered by the annual report that hasmaterially affected, or is reasonably likely to materially affect, thecompany’s internal control over financial reporting; and

 

5. The company’s othercertifying officers and I have disclosed, based on our most recent evaluationof internal control over financial reporting, to the company’s auditors and theaudit committee of the company’s board of directors (or persons performing theequivalent functions):

 

a) All significantdeficiencies and material weaknesses in the design or operation of internalcontrol over financial reporting which are reasonably likely to adverselyaffect the company’s ability to record, process, summarize and report financialinformation; and

 

b) Any fraud, whether ornot material, that involves management or other employees who have asignificant role in the company’s internal control over financial reporting.

 
| Dated:  June 29, 2004 | /s/  Michael Robb  |   |
|---------------------------------|-------------------------|--------|
|                            | Michael Robb            |
|                            | Chief Financial Officer |

 

62

----

 

**INDEX TOCONSOLIDATED FINANCIAL STATEMENTS**

 
| Audited  Consolidated Financial Statements for the years ended December 31, 2003,  2002 and 2001 |   |
|-------------------------------------------------------------------------------------------------------|--------|
| Report  of Independent Registered Chartered Accountants                                               | F-1    |
| Consolidated  Balance Sheets as at December 31, 2003 and 2002                                    | F-3    |
| Consolidated  Statements of Operations for the years ended December 31, 2003, 2002 and  2001     | F-5    |
| Consolidated  Statements of Deficit for the years ended December 31, 2003, 2002 and  2001        | F-6    |
| Consolidated  Statements of Cash Flows for the years ended December 31, 2003, 2002 and  2001     | F-7    |
| Notes  to Consolidated Financial Statements                                                           | F-8    |

 

**Management’s Report**

 

Preparation of the consolidated financial statements accompanying thisannual report and the presentation of all other information in this report isthe responsibility of management.  Thefinancial statements have been prepared in accordance with appropriate andgenerally accepted accounting principles and reflect management’s best estimatesand judgments.  All other financial informationin the report is consistent with that contained in the financialstatements.  The Company maintainsappropriate systems of internal control, policies and procedures which providemanagement with reasonable assurance that assets are safeguarded and thatfinancial records are reliable and form a proper basis for preparation offinancial statements. 

 

The Board of Directors ensures that management fulfills itsresponsibilities for financial reporting and internal control through an AuditCommittee which is composed of non-executive directors. The Audit Committeereviewed the consolidated financial statements with management and externalauditors and recommended their approval by the Board of Directors.  The consolidated financial statements havebeen audited by Deloitte & Touche LLP, Chartered Accountants.  Their report stating the scope of theiraudit and their opinion on the consolidated financial statements is presentedbelow.

 
| Jeff Lymburner | Michael Robb            |
|----------------|-------------------------|
| CEO            | Chief Financial Officer |

 

**Report of Independent Registered Chartered Accountants**

 

We have audited the consolidated balance sheets of ADB SystemsInternational Ltd. as at December 31, 2003 and 2002, and the consolidatedstatements of operations, deficit and cash flows for each of the three years inthe period ended December 31, 2003. These financial statements are the responsibility of the Company’smanagement.  Our responsibility is toexpress an opinion on these financial statements based on our audits. 

 

We conducted our audits in accordance with the standards of the PublicCompany Accounting Oversight Board (United States).  Those standards require that we plan and perform an audit toobtain reasonable assurance whether the financial statements are free ofmaterial misstatement.  An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements.  An audit alsoincludes assessing the accounting principles used and significant estimatesmade by management, as well as evaluating the overall financial statementpresentation.  We believe that ouraudits provide a reasonable basis for our opinion. 

 

In our opinion, these consolidated financial statements present fairly,in all material respects, the financial position of the Company as at December31, 2003 and 2002 and the results of its operations and its cash flows for eachof the three years in the period ended December 31, 2003 in accordance withCanadian generally accepted accounting principles.

 

Chartered Accountants

Toronto, Ontario, Canada

February 6, 2004 (except for Notes 2 and 23which are as of May 11, 2004)

 

F-1

----

 

***Comments by Auditors on Canada –United States Reporting Differences***

United Statesreporting standards for auditors require the addition of an explanatoryparagraph following the opinion paragraph when the financial statements areaffected by conditions and events that cast substantial doubt on the Company’sability to continue as a going concern, such as those described in Note 2 tothe financial statements.  Although weconducted our audits in accordance with both Canadian and United Statesgenerally accepted auditing standards, our report to the Shareholders datedFebruary 6, 2004 is expressed in accordance with Canadian reporting standardswhich do not permit a reference to such conditions and events in the auditors’report when these are adequately disclosed in the financial statements.

 

Chartered Accountants

Toronto, Ontario, Canada

*February 6, 2004 (except for Notes 2and 23 which are as of May 11, 2004)*

 

F-2

----

 

**Consolidated Balance Sheets**

**December 31, 2003 and 2002**

**(in thousands of Canadian dollars)**

 
|                                                       |   | **2003** |   | **2003**                                             |   | **2002** |   |
|------------------------------------------------------------|--------|----------|--------|------------------------------------------------------|--------|----------|--------|
|                                                       |   |     |   | **Convenience  Translation into  U.S. $ (Note  24)** |   |     |   |
|                                                       |   |     |   |                                                 |   |     |   |
| **ASSETS**                                                 |   |     |   |                                                 |   |     |   |
|                                                       |   |     |   |                                                 |   |     |   |
| CURRENT                                                    |   |     |   |                                                 |   |     |   |
| Cash                                                       |   | $        | 432    |                                                 | $      | 335      |   | $ | 1,337 |   |
| Marketable  securities                                     |   | 13       |   | 10                                                   |   | 20       |   |
| Accounts  receivable                                       |   | 1,384    |   | 1,073                                                |   | 1,828    |   |
| Deposits and  prepaid expenses                             |   | 118      |   | 91                                                   |   | 178      |   |
|                                                       |   | 1,947    |   | 1,509                                                |   | 3,363    |   |
|                                                       |   |     |   |                                                 |   |     |   |
| CAPITAL ASSETS  (Note 4)                                   |   | 266      |   | 206                                                  |   | 443      |   |
| ACQUIRED SOFTWARE (Note 16)                                |   | 846      |   | 656                                                  |   | 1,974    |   |
| DEFERRED CHARGES (NET) (Note 5)                            |   | —   |   | —                                               |   | 513      |   |
| ACQUIRED AGREEMENTS (Note 17(a))                           |   | 150      |   | 116                                                  |   | 57       |   |
| TRADEMARKS AND INTELLECTUAL PROPERTY (NET)                 |   | 2        |   | 1                                                    |   | 5        |   |
|                                                       |   | $        | 3,211  |                                                 | $      | 2,488    |   | $ | 6,355 |   |
|                                                       |   |     |   |                                                 |   |     |   |
| **LIABILITIES**                                            |   |     |   |                                                 |   |     |   |
|                                                       |   |     |   |                                                 |   |     |   |
| CURRENT                                                    |   |     |   |                                                 |   |     |   |
| Accounts payable                                           |   | $        | 700    |                                                 | $      | 543      |   | $ | 1,059 |   |
| Accrued  liabilities                                       |   | 670      |   | 519                                                  |   | 1,229    |   |
| Current portion  of deferred revenue                       |   | 91       |   | 71                                                   |   | 832      |   |
| Demand loan  (Notes 6 and 19(a))                           |   | —   |   | —                                               |   | 2,000    |   |
|                                                       |   | 1,461    |   | 1,133                                                |   | 5,120    |   |
|                                                       |   |     |   |                                                 |   |     |   |
| SECURED  SUBORDINATED NOTES (Note 7)                       |   | 721      |   | 559                                                  |   | 34       |   |
|                                                       |   | 2,182    |   | 1,692                                                |   | 5,154    |   |
|                                                       |   |     |   |                                                 |   |     |   |
| NON-CONTROLLING INTEREST                                   |   | 3        |   | 2                                                    |   | 3        |   |
| **COMMITMENTS  AND CONTINGENCIES (Notes 2 and 11)**        |   |     |   |                                                 |   |     |   |
|                                                       |   |     |   |                                                 |   |     |   |
| **SHAREHOLDERS’  EQUITY**                             |   |     |   |                                                 |   |     |   |
| Share capital  (Note 9(b))                                 |   | 97,674   |   | 75,716                                               |   | 95,633   |   |
| Contributed  surplus (Note 9(d))                           |   | 1,289    |   | 999                                                  |   | —   |   |
| Warrants (Note  9(d))                                      |   | 324      |   | 251                                                  |   | 1,599    |   |
| Stock options  (Note 9(c))                                 |   | 898      |   | 696                                                  |   | 706      |   |
| Conversion  feature on secured subordinated notes (Note 7) |   | 497      |   | 385                                                  |   | 175      |   |
| Cumulative  translation account                            |   | 106      |   | 82                                                   |   | 32       |   |
| Deficit                                                    |   | (99,762  | )      | (77,335                                              | )      | (96,947  | )      |
|                                                       |   | 1,026    |   | 794                                                  |   | 1,198    |   |
|                                                       |   | $        | 3,211  |                                                 | $      | 2,488    |   | $ | 6,355 |   |

 

F-3

----

 
| ON BEHALF OF THE BOARD    |     |
|---------------------------|----------|
| /s/ T. Christopher Bulger | Director | /s/ Darroch Robertson | Director |
|                           |          |  |  |

 

F-4

----

 

**Consolidated Statements of Operations**

**Years ended December 31, 2003, 2002and 2001**

**(in thousands of Canadian dollars,except per share amounts)**

 
|                                                                                                                                              |   | **2003** |   | **2003**                                             |   | **2002** |   | **2001** |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------|--------|------------------------------------------------------|--------|----------|--------|----------|--------|
|                                                                                                                                              |   |     |   | **Convenience  translation into  U.S. $ (Note  24)** |   |     |   |     |   |
|                                                                                                                                              |   |     |   |                                                 |   |     |   |     |   |
| Revenue                                                                                                                                           |   | $        | 5,853  |                                                 | $      | 4,537    |   | $        | 5,780  |   | $ | 4,455 |   |
| Less: Customer  acquisition costs                                                                                                                 |   | —   |   | —                                               |   | —   |   | (60      | )      |
| Net revenue  (Note 21)                                                                                                                            |   | 5,853    |   | 4,537                                                |   | 5,780    |   | 4,395    |   |
|                                                                                                                                              |   |     |   |                                                 |   |     |   |     |   |
| General and  administrative                                                                                                                       |   | 4,648    |   | 3,603                                                |   | 6,288    |   | 7,622    |   |
| Sales and  marketing                                                                                                                              |   | 1,098    |   | 851                                                  |   | 1,875    |   | 4,040    |   |
| Software  development and technology                                                                                                              |   | 2,817    |   | 2,183                                                |   | 4,101    |   | 3,691    |   |
| Employee stock  options (Note 9(j))                                                                                                               |   | 193      |   | 150                                                  |   | —   |   | —   |   |
| Depreciation and  amortization                                                                                                                    |   | 1,901    |   | 1,474                                                |   | 2,602    |   | 1,572    |   |
| Interest expense                                                                                                                                  |   | 289      |   | 224                                                  |   | 200      |   | —   |   |
| Interest income                                                                                                                                   |   | (9       | )      | (7                                                   | )      | (45      | )      | (345     | )      |
|                                                                                                                                              |   |     |   |                                                 |   |     |   |     |   |
|                                                                                                                                              |   | 10,937   |   | 8,478                                                |   | 15,021   |   | 16,580   |   |
|                                                                                                                                              |   |     |   |                                                 |   |     |   |     |   |
| Loss before the  undernoted                                                                                                                       |   | (5,084   | )      | (3,941                                               | )      | (9,241   | )      | (12,185  | )      |
|                                                                                                                                              |   |     |   |                                                 |   |     |   |     |   |
| Realized gain on  settlement of demand loan (Note 6)                                                                                              |   | 2,195    |   | 1702                                                 |   | —   |   | —   |   |
| Realized gains and losses on disposal of marketable securities,  strategic investments and capital assets and recovery of assets (Note 14)        |   | 7        |   | 5                                                    |   | (85      | )      | 6,722    |   |
| Unrealized gains  and losses on revaluation of marketable securities and strategic investments,  and provision for impairment of assets (Note 15) |   | —   |   | —                                               |   | (24      | )      | (2,435   | )      |
| Goodwill  impairment (Note 18)                                                                                                                    |   | —   |   | —                                               |   | (14      | )      | (9,476   | )      |
| Restructuring  charges                                                                                                                            |   | —   |   | —                                               |   | —   |   | (959     | )      |
| Retail  activities settlement (Note 13)                                                                                                           |   | 67       |   | 52                                                   |   | —   |   | (381     | )      |
|                                                                                                                                              |   | 2,269    |   | 1,759                                                |   | (123     | )      | (6,529   | )      |
|                                                                                                                                              |   |     |   |                                                 |   |     |   |     |   |
| NET LOSS FOR THE  YEAR                                                                                                                            |   | $        | (2,815 | )                                                    | $      | (2,182   | )      | $        | (9,364 | ) | $ | (18,714 | ) |
|                                                                                                                                              |   |     |   |                                                 |   |     |   |     |   |
| LOSS PER SHARE (Note 9(i))                                                                                                                        |   | $        | (0.05  | )                                                    | $      | (0.04    | )      | $        | (0.22  | ) | $ | (0.64 | ) |

 

F-5

----

 

**Consolidated Statements of Deficit**

**Years ended December 31, 2003, 2002and 2001**

**(inthousands of Canadian dollars)**

** **
|                        |   | **2003** |    | **2003**                                            |   | **2002** |   | **2001** |    |
|-----------------------------|--------|----------|---------|-----------------------------------------------------|--------|----------|--------|----------|---------|
|                        |   |     |    | **Convenience  Translation into  U.S. $ (Note 24)** |   |     |   |     |    |
|                        |   |     |    |                                                |   |     |   |     |    |
| DEFICIT,  BEGINNING OF YEAR |   | $        | (96,947 | )                                                   | $      | (75,153  | )      | $        | (87,583 | ) | $ | (68,869 | ) |
|                        |   |     |    |                                                |   |     |   |     |    |
| NET LOSS FOR THE  YEAR      |   | (2,815   | )       | (2,182                                              | )      | (9,364   | )      | (18,714  | )       |
|                        |   |     |    |                                                |   |     |   |     |    |
| DEFICIT, END OF  YEAR       |   | $        | (99,762 | )                                                   | $      | (77,335  | )      | $        | (96,947 | ) | $ | (87,583 | ) |

 

F-6

----

 

**Consolidated Statements of Cash Flows**

**Years ended December 31, 2003, 2002and 2001**

**(inthousands of Canadian Dollars)**

 
|                                                                                                                                              |   | **2003** |   | **2003**                                              |   | **2002** |   | **2001** |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------|--------|-------------------------------------------------------|--------|----------|--------|----------|--------|
|                                                                                                                                              |   |     |   | **Convenience  Translation  into  U.S. $ (Note  24)** |   |     |   |     |   |
| **NET  INFLOW (OUTFLOW) OF CASH RELATED TO THE FOLLOWING ACTIVITIES**                                                                             |   |     |   |                                                  |   |     |   |     |   |
|                                                                                                                                              |   |     |   |                                                  |   |     |   |     |   |
| OPERATING                                                                                                                                         |   |     |   |                                                  |   |     |   |     |   |
| Net loss for the  year                                                                                                                            |   | $        | (2,815 | )                                                     | $      | (2,182   | )      | $        | (9,364 | ) | $ | (18,714 | ) |
| Items not  affecting cash                                                                                                                         |   |     |   |                                                  |   |     |   |     |   |
| Depreciation and  amortization                                                                                                                    |   | 1,901    |   | 1,474                                                 |   | 2,602    |   | 1,572    |   |
| Non cash  customer acquisition costs                                                                                                              |   | 38       |   | 29                                                    |   | —   |   | 60       |   |
| Non cash  interest expense                                                                                                                        |   | 239      |   | 185                                                   |   | 108      |   | —   |   |
| Employee stock  options                                                                                                                           |   | 193      |   | 150                                                   |   | —   |   | —   |   |
| Stock  compensation to third parties                                                                                                              |   | —   |   | —                                                |   | 25       |   | 115      |   |
| Realized gain on  settlement of demand loan (Note 6)                                                                                              |   | (2,195   | )      | (1,702                                                | )      | —   |   | —   |   |
| Realized gains  and losses on disposal of marketable securities, strategic investments and  capital assets, and recovery of assets (Note 14)      |   | (7       | )      | (5                                                    | )      | 85       |   | (6,722   | )      |
| Unrealized gains  and losses on revaluation of marketable securities and strategic investments,  and provision for impairment of assets (Note 15) |   | —   |   | —                                                |   | 24       |   | 2,435    |   |
| Goodwill  impairment (Note 18)                                                                                                                    |   | —   |   | —                                                |   | 14       |   | 9,476    |   |
|                                                                                                                                              |   | (2,646   | )      | (2,051                                                | )      | (6,506   | )      | (11,778  | )      |
| Changes in non  cash operating working capital (Note 12)                                                                                          |   | (728     | )      | (564                                                  | )      | 61       |   | (2,917   | )      |
|                                                                                                                                              |   | (3,374   | )      | (2,615                                                | )      | (6,445   | )      | (14,695  | )      |
|                                                                                                                                              |   |     |   |                                                  |   |     |   |     |   |
| INVESTING                                                                                                                                         |   |     |   |                                                  |   |     |   |     |   |
| Capital assets                                                                                                                                    |   | (45      | )      | (35                                                   | )      | (43      | )      | (317     | )      |
| Strategic  investments                                                                                                                            |   | —   |   | —                                                |   | —   |   | (328     | )      |
| Capitalized  software, trademarks and intellectual property                                                                                       |   | —   |   | —                                                |   | (7       | )      | (5       | )      |
| Marketable  securities                                                                                                                            |   | 8        |   | 6                                                     |   | 1,556    |   | 10,142   |   |
| Proceeds from  disposal of capital assets                                                                                                         |   | 34       |   | 26                                                    |   | 167      |   | —   |   |
| Acquisition of  ADB Systemer ASA (Note 16)                                                                                                        |   | —   |   | —                                                |   | —   |   | (2,244   | )      |
| Proceeds from  disposal of joint venture and strategic investments (Note 14(a) and (e))                                                           |   | 20       |   | 16                                                    |   | 126      |   | 2,706    |   |
| Purchase of  non-controlling interest                                                                                                             |   | —   |   | —                                                |   | (14      | )      | —   |   |
|                                                                                                                                              |   | 17       |   | 13                                                    |   | 1,785    |   | 9,954    |   |
|                                                                                                                                              |   |     |   |                                                  |   |     |   |     |   |
| FINANCING                                                                                                                                         |   |     |   |                                                  |   |     |   |     |   |
| Issuance of  common shares for cash (Note 9(d) and (e)(i))                                                                                        |   | 1,458    |   | 1,130                                                 |   | 1,506    |   | —   |   |
| Repayment of  capital lease                                                                                                                       |   | —   |   | —                                                |   | (42      | )      | (65      | )      |
| Secured  subordinated notes (Note 7)                                                                                                              |   | 994      |   | 770                                                   |   | 1,000    |   | —   |   |
| Deferred charges  (Note 5)                                                                                                                        |   | —   |   | —                                                |   | (1,024   | )      | —   |   |
| Demand loan  (Note 6)                                                                                                                             |   | —   |   | —                                                |   | 2,000    |   | —   |   |
|                                                                                                                                              |   | 2,452    |   | 1,900                                                 |   | 3,440    |   | (65      | )      |
|                                                                                                                                              |   |     |   |                                                  |   |     |   |     |   |
| NET CASH OUTFLOW  DURING THE YEAR                                                                                                                 |   | (905     | )      | (702                                                  | )      | (1,220   | )      | (4,806   | )      |
|                                                                                                                                              |   |     |   |                                                  |   |     |   |     |   |
| CASH, BEGINNING  OF YEAR                                                                                                                          |   | 1,337    |   | 1,037                                                 |   | 2,557    |   | 7,363    |   |
| CASH, END OF  YEAR                                                                                                                                |   | $        | 432    |                                                  | $      | 335      |   | $        | 1,337  |   | $ | 2,557 |   |
|                                                                                                                                              |   |     |   |                                                  |   |     |   |     |   |
| SUPPLEMENTAL  DISCLOSURE                                                                                                                          |   |     |   |                                                  |   |     |   |     |   |
| Interest expense                                                                                                                                  |   | $        | 48     |                                                  | $      | 37       |   | $        | 24     |   | $ | — |   |
| Income taxes                                                                                                                                      |   | $        | — |                                                  | $      | —   |   | $        | — |   | $ | — |   |

 

See notes to consolidated financial statements.

 

F-7

----

 

**Notes to the Consolidated****Financial Statements - Yearsended December 31, 2003, 2002 and 2001 (in Canadian dollars)**

 

**1.****             ****DESCRIPTION OF BUSINESS**

 

ADB Systems InternationalLtd. (“ADB” or the “Company”) delivers asset lifecycle management solutionsthat enable companies to source, manage and sell assets for maximum value.  ADB works with a growing number of customersand partners in a variety of sectors including the asset-intensive oil and gasindustry to improve operational efficiencies. ADB also enables customers in government, manufacturing and financialservices sectors to reduce purchasing costs and improve procurement processes. 

 

ADB Systems InternationalLtd. was created on August 30, 2002. Upon implementation of a special resolution of the shareholder of theCompany and shareholders of ADB Systems International Inc. (“Old ADB”, formerlyBid.Com International Inc. (“Bid.Com”)), pursuant to Section 182 of theBusiness Corporations Act (Ontario), the shareholders of Old ADB exchangedtheir shares for shares of the Company on a one-for-one basis on October 22,2002.  All assets and liabilities of OldADB, other than those related to retail activities (Note 13) were transferredto the Company on that date in the form of a return of capital.  ADB Systems International Ltd. conducted noactivities prior to October 22, 2002. Old ADB subsequently changed its name to Bid.Com International Ltd.(“Bid.Com Ltd.”).

 

These consolidated financialstatements reflect the financial position of the Company as at December 31,2003 and 2002, and results of its operations and its cash flows subsequent toOctober 22, 2002, and the financial position of Old ADB as at December 31, 2001and results of operations and of cash flows of Old ADB for the 2002 periodprior to October 22, 2002 and the year ended December 31, 2001 based uponcontinuity of interests accounting as no substantive change of ownershipoccurred.

 

Bid.Com was an on-lineauction service provider and e-tailer. During 2000, the Company refocused its business model to become anon-line enabling service to other businesses seeking to use its on-lineretailing technologies.  The Companyprovides businesses with the use of its software and hardware technology over aspecific term in addition to consulting, implementation, and trainingservices.  In October 2001, Bid.Comacquired ADB Systemer ASA (“ADB Systemer”), a Norway-based software vendor ofenterprise asset management and electronic procurement applications.  The Company changed its name to ADB SystemsInternational Inc. to reflect its expanded product offering.

 

**2.****             ****CONTINUATION OF THE BUSINESS**

 

While the accompanyingconsolidated financial statements have been prepared on a going concern basis,which contemplates the realization of assets and liquidation of liabilitiesduring the normal course of operations, certain adverse conditions and eventscast substantial doubt upon the validity of this assumption. The Company hasnot yet realized profitable operations and has relied on non-operationalsources of financing to fund operations. The Company’s ability to continue as a going concern will be dependenton management’s ability to successfully execute its business plan including anincrease in revenue and seeking additional forms of debt or equityfinancing.  Additional debt or equityfinancings such as issuance of loans or debentures, issuance of shares,conversion of warrants and exercise of options in the amount of $3.7 millionare estimated to be required for 2004.  TheCompany cannot provide assurance that efforts to raise such additionalfinancings will be successful. 

 

These financial statements donot include adjustments or disclosures that may result from the Company’sinability to continue as a going concern. If the going concern assumption were not appropriate for these financialstatements, then adjustments would be necessary in the carrying value of assetsand liabilities, and the reported net losses and balance sheet classificationsused.

 

Management believes thatcontinued existence beyond 2004 is dependent on its ability to increase revenuefrom existing products, and to expand the scope of its product offering whichentails a combination of internally developed software and partnerships withthird parties.

 

F-8

----

 

**3.****             ****SIGNIFICANT ACCOUNTINGPOLICIES**

 

The accompanying consolidatedfinancial statements are prepared in accordance with accounting principlesgenerally accepted in Canada, which are substantially the same as generallyaccepted accounting principles in the United States (U.S. GAAP), except asdisclosed in Note 20.  The accompanyingconsolidated financial statements are prepared using accounting principlesapplicable to a going concern, which assumes that the Company will continue inoperation for a reasonable period of time and will be able to realize itsassets and discharge its liabilities in the normal course of operations (seeNote 2).

 

PRINCIPLES OF CONSOLIDATION

The accompanying consolidatedfinancial statements include the accounts of the Company and subsidiaries overwhich it exercises control and its proportionate share of the assets,liabilities, revenue and expenses of a jointly controlled company during theperiod of ownership, September 1999 to May 2001.  Business acquisitions are accounted for under the purchase methodand operating results are included in the consolidated financial statements asof the date of the acquisition of control. All material intercompany transactions have been eliminated. 

 

INVESTMENT IN ASSOCIATEDCOMPANY

The investment in associatedcompany was accounted for under the equity method (see Note 19(a)).  This method was considered appropriate basedupon management’s evaluation of its ability to determine the strategicoperating policies of the associated company without the cooperation of others,its ability to obtain future economic benefits from the associated company, andits exposure to the related risks of ownership.  U.S. GAAP required consolidation of the investment in associatedcompany.  The impact of this differencein U.S. GAAP from Canadian GAAP is disclosed in these financial statements inNote 20 – Reconciliation of United States GAAP. 

 

MARKETABLE SECURITIES

Marketable securities includeregistered equity instruments, all of which are carried at the lower of costand quoted market value.  Net unrealizedlosses on marketable securities related to an impairment, determined to beother than temporary in nature, are determined on the specific identificationbasis and are included in the Consolidated Statements of Operations.  Marketable securities also includeinterest-bearing certificates carried at cost plus accrued interest whichapproximate market value.

 

CAPITAL ASSETS ANDAMORTIZATION

Capital assets are carried atcost less accumulated amortization. Amortization is calculated on a straight-line basis in amountssufficient to amortize the cost of capital assets over their estimated usefullives as follows: 
| Computer hardware              |   | 3 years                       |
|--------------------------------|--------|-------------------------------|
| Computer software and licenses |   | 1 year or life of the license |
| Furniture and fixtures         |   | 5 years                       |
| Building                       |   | 20 years                      |
| Leasehold improvements         |   | life of the lease             |

 

STRATEGIC INVESTMENTS

Strategic investments arecarried at the lower of cost and estimated net realizable value.  Management has assessed the carrying valueof the investments and recorded an impairment provision based on management’sbest estimate of net realizable value.

 

SOFTWARE DEVELOPMENT COSTS

The cost of non-core softwareinternally developed for client applications through e-commerce enablingagreements and software licensing is expensed as incurred.  The cost of core software internallydeveloped for client applications through e-commerce enabling agreements iscapitalized and is amortized over two years. The cost of core software internally developed for software licensingcontracts is expensed as incurred.  Thecost of acquired software and internally developed software for use in on-lineretail operations is expensed as incurred.

 

F-9

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ACQUIRED SOFTWARE

The cost of core softwareacquired as a result of the acquisition of ADB Systemer ASA has beencapitalized and is amortized over three years, the estimated useful life of thesoftware.

 

ACQUIRED AGREEMENTS

Acquired agreements have beencapitalized based on the estimated fair value of common share purchase warrantsissued in exchange for entering into certain agreements and are amortized overthe initial term of the agreements.  Thefair value of these warrants is calculated based on the Cox-Rubinstein binomialvaluation model.

 

TRADEMARKS AND INTELLECTUALPROPERTY

Trademarks and intellectualproperty are recorded at cost and amortized on a straight-line basis over twoyears.  Trademarks and intellectualproperty acquired as a result of the acquisition of ADB Systemer ASA, anddirectly attributable to core software, have been capitalized and are amortizedover three years, the estimated useful life of the related software.

 

GOODWILL

In 2001, the Company adoptedthe provisions of the Canadian Institute of Chartered Accountants Handbooksections 1581 and 3062, whereby the purchase price of an acquired business isallocated to all assets and liabilities, including identifiable intangibleassets, based on their fair values.  Anypurchase price in excess of those fair values is recorded as goodwill.  Goodwill must be tested annually forimpairment on a fair value basis, and where the carrying value exceeds fairvalue, a goodwill impairment loss must be recorded.  This accounting policy became effective January 1, 2002 with atransition provision beginning July 1, 2001. Management assessed the carrying value of the goodwill arising from theacquisition of ADB Systemer, and determined that a permanent decline hadoccurred in the fair value of goodwill at December 31, 2001 based on estimatedfuture cash flows from the business acquired. 

 

TRANSLATION OF FOREIGNCURRENCIES

The accompanying consolidatedfinancial statements are prepared in Canadian dollars.  All foreign denominated transactions, otherthan those of self-sustaining subsidiaries, are translated using the temporalmethod whereby monetary assets and liabilities are translated at the rates ineffect on the balance sheet date, non-monetary items at historical rates and revenueand expenses at the average monthly rate. Gains and losses from foreign exchange translations are included in thestatements of operations. 

 

The Company’s foreignsubsidiaries in the United States, Ireland, the United Kingdom, and Australiaare classified as fully integrated with the functional currency being theCanadian dollar.  The Company uses thetemporal method of foreign currency translation for these operations.  Monetary assets and liabilities aretranslated at the exchange rates in effect on the balance sheet date.  Non-monetary assets are translated athistoric exchange rates.  Revenue andexpense amounts are translated using the average exchange rate for the yearexcept amortization of capital assets which is translated at historic exchangerates.  Gains and losses from foreignexchange translations are included in the statement of operations. 

 

The Company’s subsidiary inNorway is classified as a self-sustaining operation whereby the functionalcurrency of the operation is the Norwegian krone.  The Company uses the current rate method of translation for theseoperations.  Assets and liabilities aretranslated at the rate of exchange in effect at the balance sheet date.  Revenue and expenses (including depreciationand amortization) are translated using the average exchange rate for theyear.  Gains and losses from foreignexchange translations are included as a separate component of shareholders’equity.

 

LOSS PER SHARE

On January 1, 2001, theCompany adopted the provisions of The Canadian Institute of CharteredAccountants Handbook section 3500, “Earnings per Share,” whereby the treasurystock method of calculating diluted earnings per share is used.  For the years presented, all stock options,convertible debentures and warrants are anti-dilutive, therefore diluted lossper share is equal to basic loss per share. The basic loss per share calculation is based on the weighted averagenumber of shares outstanding during the year.

 

F-10

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REVENUE RECOGNITION

*a) Licenseand related services agreements*

The Company has agreements toprovide software licenses for client-server-based software applications.  The Company adopted the provisions ofStatement of Position 97-2 “Software Revenue Recognition,” and Statement ofPosition 98-9 “Software Revenue Recognition With Respect to CertainTransactions,” in its accounting for revenue recognition on delivery ofsoftware licenses.  Revenue isrecognized on physical delivery for software licenses when undelivered elementsare not essential to the functionality of the license. When software licensesare delivered and require additional elements essential to the functionality ofthe license, such as consulting and implementation services, license revenue isrecognized on a percentage of completion basis until all services requisite tothe functionality of the license have been delivered and vendor- specificobjective evidence of the fair value of each component exists.  Software licenses are granted for an indefiniteterm. 

 

The Company has agreements toprovide maintenance, support, and training services.  Revenue from maintenance and support agreements is recognizedover the term of the agreement.  Revenuefrom training services is recognized when these services are provided. 

 

The Company also hasagreements that principally include the provision of a software license, butalso contain additional deliverable elements, such as the provision of upgradesand hosting services. For these contracts, where vendor-specific objectiveevidence criteria for independent recognition of revenue elements do not exist,revenue is recognized over the term of the agreement or three years when arevenue sharing arrangement exists. Revenue from net revenue sharingarrangements is recorded as received.

 

*b)E-commerce enabling agreements*

The Company has agreementswhere it has become an e-commerce enabler to various businesses.  The Company adopted the provisions ofStatement of Position 97-2, “Software Revenue Recognition,” issued by theAmerican Institute of Certified Public Accountants in its accounting formultiple element e-commerce enabling agreements.  The Company’s multiple element e-commerce enabling agreements arecomprised of revenue for providing consulting, implementation, training, andhosting services.  Revenue fromindividual elements of each contract is recognized when vendor-specificobjective evidence exists to determine the fair value of individual contractelements.  When vendor-specificobjective evidence exists, consulting, implementation, and training elementsare recognized on a percentage of completion basis and the hosting element isrecognized ratably over the term of the contract.  In the absence of vendor-specific objective evidence, the Companydefers and amortizes all revenue from individual contract elements ratably overthe term of the contract.

 

*c) Sale ofretail products and related activities*

Revenue from product sales,commission, shipping, and handling was recognized when goods were shipped tocustomers.  The Company curtailed itson-line retail operations in October 2000. During 2002, the non-consolidated investee, Bid.Com Ltd. resumed on-lineretail activities (Note 19(a)).

 

DEFERRED REVENUE

Deferred revenue is comprisedof the unrecognized portion of consulting and implementation fees received frommaintenance and support e-commerce enabling agreements, and the unrecognizedportion of license, installation, and consulting revenue on the sale ofsoftware licenses and related services.

 

CUSTOMER ACQUISITION COSTS

Customer acquisition costsare comprised of the calculated fair value of common share purchase warrantsissued to customers in return for certain agreements.  These amounts are deducted from gross revenue to the extent thatrevenue is earned, and are otherwise included in general and administrativeexpenses.  The fair value of thesewarrants is calculated based on the Cox-Rubinstein binomial valuation model.

 

DEFERRED CHARGES

Deferred charges arecomprised of expenditures incurred in obtaining a demand loan and the issuanceof secured subordinated notes.  Theexpenditures relating to the demand loan are amortized over the term of theloan on a straight-line basis; expenditures relating to the subordinated noteswere recorded as a reduction to the equity component of those notes.

 

F-11

----

 

SECURED SUBORDINATED NOTES

Financial instruments thatcontain both a liability and an equity element are required to have theinstrument’s component parts classified separately under Canadian GAAP.  The Company uses the Cox-Rubinstein binomialvaluation model to determine the fair value of the conversion feature at theissue dates of convertible secured subordinated notes and discloses theliability and equity components separately on its balance sheet.  United States GAAP does not permit separatedisclosure of different elements of a financial instrument in the financialstatements.  The impact of thisdifference in United States GAAP from Canadian GAAP is disclosed in the notesto these financial statements under Reconciliation of U.S. GAAP (Note 20).

 

STOCK-BASED COMPENSATION

The Canadian Institute ofChartered Accountants issued Handbook section 3870, “Stock-based Compensationand Other Stock-based Payments,” effective January 1, 2002.  During the fourth quarter of fiscal 2003,the Company elected to adopt the fair value method for stock-based compensationon a prospective basis.  As a result,the annual financial statements reflect the cost of stock-based compensation toemployees effective January 1, 2003. The impact of this standard is disclosed in Note 9 to the financialstatements.  The impact of Statement ofFinancial Accounting Standards (SFAS) 123, “Accounting for Stock-BasedCompensation,” is disclosed in the notes to these financial statements underReconciliation of U.S. GAAP (Note 20). 

 

Prior to January 1, 2003,under Canadian GAAP, stock options granted to employees were not required to berecorded in the accounts of the Company. Stock options to employees under U.S. GAAP are accounted for inaccordance with the provisions of Accounting Principles Board (APB) Opinion No.25, “Accounting for Stock Issued to Employees”.  Because options granted to employees have been fixed options withthe exercise price equal to the market price of stock, under US GAAP noaccounting recognition was given to stock options granted to employees at fairmarket value until they are exercised.  

 

Stock-based compensation tothird parties is recognized and recorded in the accounts of the Company at thefair market value of the equity instrument as determined by the Cox-Rubinsteinbinomial valuation model. 

 

INCOME TAXES

The Company accounts forincome taxes in accordance with the liability method.  The determination of future tax assets and liabilities is basedon differences between the financial statement and income tax bases of assetsand liabilities, using substantively enacted tax rates in effect for the periodin which the differences are expected to reverse.  Future tax assets are recorded to recognize tax benefits only tothe extent that, based on available evidence, it is more likely than not thatthey will be realized.

 

USE OF SIGNIFICANT ACCOUNTINGESTIMATES

The preparation of financialstatements in conformity with generally accepted accounting principles requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities and disclosure of contingent assets and liabilitiesat the date of the financial statements and the reported amounts of revenue andexpenses during the reporting periods. Actual results could differ from those estimates.

 

**4.****             ****CAPITAL ASSETS**

 
|                    |   | **2003**            |   | **2002**                      |   |
|-------------------------|--------|---------------------|--------|-------------------------------|--------|
|                    |   | **Cost**            |   | **Accumulated  Amortization** |   | **Net Book  Value** |   | **Cost** |   | **Accumulated  Amortization** |   | **Net Book  Value** |   |
|                    |   | **(in  thousands)** |   |
| Computer  hardware      |   | $                   | 2,588  |                          | $      | 2,428 |   | $ | 160 |   | $ | 2,659 |   | $ | 2,423 |   | $ | 236 |   |
| Computer  software      |   | 28                  |   | —                        |   | 28 |   | — |   | — |   | — |   |
| Furniture and  fixtures |   | 411                 |   | 333                           |   | 78 |   | 465 |   | 268 |   | 197 |   |
| Leasehold  improvements |   | 151                 |   | 151                           |   | — |   | 151 |   | 141 |   | 10 |   |
|                    |   | $                   | 3,178  |                          | $      | 2,912 |   | $ | 266 |   | $ | 3,275 |   | $ | 2,832 |   | $ | 443 |   |

 

F-12

----

 

**5.****             ****DEFERRED CHARGES**

 

During 2002, the Company incurred $874,000 ofexpenditures in obtaining a demand loan (Note 6).  These expenditures were amortized on a straight-line basis overthe term of the loan, which matured on June 30, 2003.  In 2002, the Company also incurred financing costs of $150,000 inobtaining convertible debt financing (Note 7). In 2003, deferred charges were reduced by an amortization expense of$513,000 with a reduction of $511,000 occurring in 2002 comprised of anamortization expense of $361,000 and a reduction to the equity component of thesecured notes of $150,000.

 

**6.****             ****DEMAND LOAN**

 

During the year ended December 31, 2002, the Companyentered into a series of agreements which resulted in the completion of aseries of transactions (collectively the “Transaction”) whereby the Companyreceived a secured demand loan in the aggregate principal amount of $2,000,000.  The loan carried an interest rate of 12percent compounded monthly, and was secured by a general security agreement onthe assets of the Company and a pledge of the shares of the Company’s Norwegiansubsidiary.  The loan matured on June30, 2003.  The Company could, at itsdiscretion, repay the loan in cash or transfer to the lender 100 percent of theissued shares of its investment in an associated company in full settlement ofthe outstanding principal amount and accrued interest then owing to the lender(Note 19(a)).

 

On June 30, 2003, the Company exercised its option to transferits investment in the associated company, which had a nominal carrying value,to the lender in full settlement of the outstanding principal and accruedinterest amounts.  This transfer resultedin a gain on settlement of the demand loan in the amount of $2,195,000.

 

**7.****             ****SECURED SUBORDINATED NOTES**

 

a) During the year ended December 31, 2003, theCompany issued Series E secured subordinated notes with a face value of $1.0million for net proceeds of $994,000. The Series E notes have an annual rate of interest of 11percent that ispaid quarterly in arrears, mature August 19, 2006 and are convertible intoequity units at a price of $0.35 per unit. Each equity unit consists of one common share and one half of ashare-purchase warrant with an exercise price of $0.50.  The Series E secured subordinated notes willautomatically convert into units when the share price of the Company closesabove $0.70 for five consecutive trading days during the term.  Note holders may convert into units atanytime following a four-month hold period. If the holder does not convert and no automatic conversion takes place,the Company must repay the principal amount to the holders of the Series Esecured subordinated notes in cash.  Aspart of this private placement, the Company issued 30,000 common share-purchasewarrants to an associate of Stonestreet Limited Partnership (“Stonestreet”) inconsideration for professional fees. Each such warrant entitles the holder to purchase one common share ofthe Company for $0.50 at any time up to and including August 18, 2006.  

 

The Series E notes were issued to private investorsincluding an amount totaling $100,000 issued to directors and/or seniorofficers of the Company.  Costs in theamount of $6,000 associated with the issuance of the Series E securedsubordinated notes were recorded as a reduction of the equity component ofthese notes.

 

As required by Canadian GAAP, the Company hasseparated the liability and equity components of the Series E securedsubordinated notes.  The Company hasdetermined the fair value of the debt component of the Series E notes bycalculating the present value of the associated cash flows, using a discountrate that reflects the Company’s underlying rate of borrowing.  The Company has determined the fair value ofthe conversion feature at the issue date of the Series E notes using theCox-Rubinstein binomial valuation model. The resulting pro rata fair value of the liability component of the securedsubordinated notes and the conversion features of the units, comprised ofshares and attached warrants, was $596,000, $292,000 and $106,000,respectively.  The liability componentwill be accreted to $1 million over the term of the Series E notes through therecording of non-cash interest expense until such date at which the underlyingnotes are converted into common shares.

 

F-13

----

 

b) During the year ended December 31, 2002, theCompany issued a total of $1.12 million in principal of secured subordinatednotes (collectively the “Notes”) in four series.  Series A, B, and C notes were issued to Stonestreet and Series Dnotes were issued to private investors including directors and/or seniorofficers.  Series A, B, and D notes aredue December 31, 2004, at an interest rate of 8 percent.  Series C notes are due December 31, 2004,and bear interest at 8 percent only from and after maturity or in an event ofdefault.  On October 22, 2002, afterobtaining shareholder approval, Series A, B, and D notes became convertibleinto equity units at $0.12 per unit at the option of the holder.  Each Series A, B, and D equity unit consistsof one common share and one-half common share purchase warrant, with each wholewarrant exercisable into one common share at $0.14.  Series C notes also became convertible into common shares at aconversion price of $0.12 per share at the option of the holder or at theoption of the Company.

 

The Company issued $120,000 in Series C notes inexchange for the waiver of certain US registration rights granted toStonestreet pursuant to a subscription agreement dated April 25, 2002.  Accordingly, the Company has recorded theissuance of the Series C notes as secured subordinated notes in shareholders’equity.  

 

The Series D secured subordinated notes included$135,000 issued to four directors or senior officers of the Company.

 

As part of this private placement, the Company issued150,000 common share purchase warrants to an associate of Stonestreet inpartial consideration for securing such placement and for due diligenceservices.  Each such warrant entitlesthe holder to purchase one common share of the Company for $0.14 at any time upto and including December 31, 2004.

 

As required by Canadian GAAP, the Company hasseparated the liability and equity components of the Series A, B, and D securedsubordinated notes.  Using theCox-Rubinstein binominal valuation model, the Company has determined the fair valueof the conversion feature and attached warrants at the issue dates of thesecured subordinated notes.  The fairvalues of the conversion feature of the units, comprised of shares attached,warrants and liability components of the secured subordinated notes issued were$636,000, $300,000 and $64,000 respectively. The $64,000 liability component will be accreted to $1 million over theterm of the Series A, B, and D notes through the recording of non cash interestexpense until such date at which the underlying notes are converted into commonshares or mature.

 

In fiscal 2002, the Company incurred $150,000 of costsassociated with the issuance of the Series A, B and D secured subordinatednotes, which was recorded as a reduction of the equity component of thesenotes.

 

c) The following summarizes the nominal and fairvalues of the liability and equity components of the Series A through E securedsubordinated notes.

 

**Secured subordinated notes**

 
|                 |   | **2003**            |   | **2002**        |   |
|----------------------|--------|---------------------|--------|-----------------|--------|
|                 |   | **Nominal  Value**  |   | **Fair  Value** |   | **Nominal  Value** |   | **Fair  Value** |   |
|                 |   | **(in  thousands)** |   |
| Opening balance      |   | $                   | 205    |            | $      | 34 |   | $ | — |   | $ | — |   |
| Issuance of  notes   |   | 1,000               |   | 596             |   | 1,120 |   | 64 |   |
| Non-cash  interest   |   | —              |   | 112             |   | — |   | 21 |   |
| Conversion of  notes |   | (90                 | )      | (21             | )      | (915 | ) | (51 | ) |
| Closing balance      |   | $                   | 1,115  |            | $      | 721 |   | $ | 205 |   | $ | 34 |   |

 

F-14

----

 

**Conversionfeatures on secured subordinated notes including conversion features ofattached warrants**

 
|                 |   | **2003**            |   | **2002**        |   |
|----------------------|--------|---------------------|--------|-----------------|--------|
|                 |   | **Common  Shares**  |   | **Fair  Value** |   | **Common  Shares** |   | **Fair  Value** |   |
|                 |   | **(in  thousands)** |   |
| Opening balance      |   | 2,562               |   | $               | 175    |   | — |   | $ | — |   |
| Issuance of  notes   |   | 4,286               |   | 398             |   | 13,500 |   | 936 |   |
| Conversion of  notes |   | (1,125              | )      | (76             | )      | (10,938 | ) | (761 | ) |
| Closing balance      |   | 5,723               |   | $               | 497    |   | 2,562 |   | $ | 175 |   |

 

**8.****             ****INCOME TAXES**

 

The Company adoptedaccounting for income taxes under the liability method.  Under the liability method, a future taxasset is recorded based upon tax losses carried forward and differences in taxand accounting values in the Company’s assets and liabilities.  The tax asset is reduced by a valuation allowanceto the extent that it is more likely than not that the asset would not berealized.  The valuation allowance willbe reviewed and adjusted as appropriate for each reporting period.  At December 31, 2003 and 2002, the Companyestablished the valuation allowance at 100 percent of the future tax asset.

 
|                                                                            |   | **2003**            |   | **2002** |   |
|---------------------------------------------------------------------------------|--------|---------------------|--------|----------|--------|
|                                                                            |   | **(in  thousands)** |   |
| FUTURE TAX ASSET                                                                |   |                |   |     |   |
| Tax losses  carried forward                                                     |   | $                   | 3,229  |     | $      | 4,215 |   |
| Difference in  tax and accounting valuations for capital assets and investments |   | 55                  |   | (305     | )      |
|                                                                            |   | 3,284               |   | 3,910    |   |
| Valuation  allowance                                                            |   | (3,284              | )      | (3,910   | )      |
| Future tax asset                                                                |   | $                   | — |     | $      | — |   |
|                                                                            |   |                |   |     |   |
| PROVISION FOR  INCOME TAXES                                                     |   |                |   |     |   |
| Income taxes at  statutory rate                                                 |   | $                   | (467   | )        | $      | (2,781 | ) |
| Adjustments to  loss                                                            |   | (316                | )      | —   |   |
| Net reduction in  tax rates                                                     |   | (896                | )      | —   |   |
| Reduction to  valuation allowance on future tax asset                           |   | 1,212               |   | —   |   |
| Tax losses  carried forward                                                     |   | 226                 |   | 2,665    |   |
| Difference in  tax and accounting valuations for capital assets and investments |   | 360                 |   | 111      |   |
| Permanent  differences for tax and accounting income                            |   | (119                | )      | 5        |   |
| Provision for  income taxes                                                     |   | $                   | — |     | $      | — |   |

 

F-15

----

 

TaxLoss Carryforwards at December 31, 2003 expire as follows:

 
|                                          |   | **(in  thousands)** |   |
|-----------------------------------------------|--------|---------------------|--------|
|                                          |   |                |   |
| 2009                                          |   |                | $      | 3,157 |   |
| 2010                                          |   |                | 3,424  |   |
| 2011                                          |   |                | 1,116  |   |
| 2012                                          |   |                | 966    |   |
| 2013                                          |   |                | 282    |   |
| Tax loss carryforwards that do not expire (a) |   |                | 4,581  |   |
|                                          |   |                | $      | 13,526 |   |

 

----

(a)          Under Irish local taxlaws, tax loss carryforwards do not expire.

 

**9.****             ****SHARE CAPITAL**

 

*a)**                              *AUTHORIZED

 
| Unlimited number of common shares                                |
|------------------------------------------------------------------|
| Unlimited number of preference shares – issuable in  series |

 

*b)**                              *COMMON SHARES

 
|                        |   | **2003**                                  |   | **2002**   |   |
|-----------------------------|--------|-------------------------------------------|--------|------------|--------|
|                        |   | **Number**                                |   | **Amount** |   | **Number** |   | **Amount** |   |
|                        |   | **(in  thousands of shares and dollars)** |   |
|                        |   |                                      |   |       |   |   |   |   |   |
| Opening balance             |   | 50,140                                    |   | $          | 95,633 |   | 38,185 |   | $ | 93,568 |   |
|                        |   |                                      |   |       |   |   |   |   |   |
| Shares issued  pursuant to: |   |                                      |   |       |   |   |   |   |   |
| Exercise of  options        |   | 39                                        |   | 12         |   | 30 |   | 11 |   |
| Private  placement          |   | 5,181                                     |   | 1,254      |   | 3,300 |   | 945 |   |
| Exercise of  warrants       |   | 3,313                                     |   | 703        |   | 1,000 |   | 550 |   |
| Conversion of  debentures   |   | 750                                       |   | 72         |   | 7,625 |   | 559 |   |
|                        |   |                                      |   |       |   |   |   |   |   |
| Closing balance             |   | 59,423                                    |   | $          | 97,674 |   | 50,140 |   | $ | 95,633 |   |

 

The conversion of the remaining secured subordinatednotes would result in the issuance of 958,000 (2002 – 1,708,000) common sharesfor Series A, B and D notes, and 2,857,000 (2002 – Nil) common shares forSeries E notes. 

 

F-16

----

 

c)*                               *STOCK OPTIONS

 

The Canadian Institute ofChartered Accountants issued Handbook section 3870, “Stock-based Compensationand Other Stock-based Payments,” effective January 1, 2002.  During the fourth quarter of fiscal 2003,the Company elected to adopt the fair value method for stock-based compensationon a prospective basis. As a result, the annual financial statements reflectthe stock-based compensation expense to employees effective January 1, 2003.

 

(i)             Stock options arecomprised of the following components:

 
|          |   | **2003**                                   |   | **2002**   |   |
|---------------|--------|--------------------------------------------|--------|------------|--------|
|          |   | **Number**                                 |   | **Amount** |   | **Number** |   | **Amount** |   |
|          |   | **(in  thousands of options and dollars)** |   |
|          |   |                                       |   |       |   |   |   |   |   |
| Employees     |   | 2,645                                      |   | $          | 782    |   | 2,793 |   | $ | 590 |   |
| Non-employees |   | 27                                         |   | 116        |   | 253 |   | 116 |   |
| Total         |   | 2,672                                      |   | $          | 898    |   | 3,046 |   | $ | 706 |   |

 

(ii)          The Company has a stock option plan which provides for the issuance ofstock options to employees, which may expire as much as 10 years from the dateof grant, at prices not less than the fair market value of the common shares onthe date of grant.  The aggregateexercise price for employee options outstanding at December 31, 2003 wasapproximately $1.8 million (2002 – $5.2 million).  The Management Resources and Compensation Committee of the Boardof Directors reserves the right to attach vesting periods to stock optionsgranted.  Certain of the stock optionsoutstanding at the end of 2003 are exercisable immediately, while the remainderhave vesting periods attached which range from six months to 36 months. Theoptions expire between 2003 and 2006.  

 

A summary of changes in the stock option plan for thetwo years ended December 31, 2003 is as follows:

 
|                                                    |   | **Number of  Options** |   | **Weighted  Average  Exercise Price** |   |
|---------------------------------------------------------|--------|------------------------|--------|---------------------------------------|--------|
|                                                    |   | **2003**               |   | **2002**                              |   | **2003** |   | **2002** |   |
|                                                    |   | **(in  thousands)**    |   |                                  |   |   |   |
|                                                    |   |                   |   |                                  |   |   |   |   |   |
| Opening balance                                         |   | 2,793                  |   | 2,884                                 |   | $ | 1.84 |   | $ | 5.19 |   |
| Granted                                                 |   | 1,095                  |   | 1,299                                 |   | 0.37 |   | 0.43 |   |
| Exercised                                               |   | (39                    | )      | (30                                   | )      | 0.30 |   | 0.36 |   |
| Cancelled                                               |   | (1,204                 | )      | (1,360                                | )      | 3.38 |   | 6.78 |   |
| Closing balance                                         |   | 2,645                  |   | 2,793                                 |   | $ | 0.68 |   | $ | 1.84 |   |
| Exercisable, end  of year                               |   | 2,057                  |   | 1,981                                 |   | $ | 0.74 |   | $ | 2.51 |   |
| Options  remaining for issuance under stock option plan |   | 1,224                  |   | 853                                   |   |   |   |   |   |

 

F-17

----

 
| **Range of  Exercise  Prices** |   | **Number  Outstanding at  December 31, 2003** |   | **Weighted  Average  Remaining  Contractual  Life** |   | **Weighted  Average  Exercise  Price** |   | **Number  Exercisable at  December 31, 2003** |   | **Weighted  Average  Exercise Price** |   |
|--------------------------------|--------|-----------------------------------------------|--------|-----------------------------------------------------|--------|----------------------------------------|--------|-----------------------------------------------|--------|---------------------------------------|--------|
|                           |   | **(in  thousands)**                           |   |                                                |   |                                   |   | **(in  thousands)**                           |   |                                  |   |
| $0.22-$0.33                    |   | 178                                           |   | 2.1 years                                           |   | $                                      | 0.32   |                                          | 178    |                                  | $      | 0.32 |   |
| $0.34-$0.51                    |   | 2,266                                         |   | 1.4 years                                           |   | $                                      | 0.40   |                                          | 1,686  |                                  | $      | 0.40 |   |
| $0.52-$0.78                    |   | 2                                             |   | 1.0 years                                           |   | $                                      | 0.76   |                                          | 2      |                                  | $      | 0.76 |   |
| $0.99-$1.48                    |   | 9                                             |   | 0.5 years                                           |   | $                                      | 1.41   |                                          | 7      |                                  | $      | 1.41 |   |
| $1.83-$2.74                    |   | 146                                           |   | 0.1 years                                           |   | $                                      | 2.62   |                                          | 146    |                                  | $      | 2.62 |   |
| $3.91-$5.86                    |   | 28                                            |   | 0.6 years                                           |   | $                                      | 5.02   |                                          | 28     |                                  | $      | 5.02 |   |
| $15.33-$23.00                  |   | 16                                            |   | 0.2 years                                           |   | $                                      | 23.00  |                                          | 10     |                                  | $      | 23.00 |   |
|                           |   | 2,645                                         |   |                                                |   |                                   |   | 2,057                                         |   |                                  |   |

 

(iii)            The Company also had stock options outstandingto third parties at December 31, 2003. The aggregate exercise price for third-party stock options outstandingat December 31, 2003 was $69,000 (2002 – $730,000).  These options expire in 2004. A summary of changes in the stock options to third parties for the twoyears ended December 31, 2003 is as follows: 

 
|                      |   | **Number of  Options** |   | **Weighted  Average  Exercise Price** |   |
|---------------------------|--------|------------------------|--------|---------------------------------------|--------|
|                      |   | **2003**               |   | **2002**                              |   | **2003** |   | **2002** |   |
|                      |   | **(in  thousands)**    |   |                                  |   |   |   |
|                      |   |                   |   |                                  |   |   |   |   |   |
| Opening balance           |   | 253                    |   | 289                                   |   | $ | 2.88 |   | $ | 5.13 |   |
| Granted                   |   | —                 |   | 2                                     |   | — |   | 0.34 |   |
| Exercised                 |   | —                 |   | —                                |   | — |   | — |   |
| Cancelled                 |   | (226                   | )      | (38                                   | )      | 2.91 |   | 17.76 |   |
| Closing balance           |   | 27                     |   | 253                                   |   | $ | 2.56 |   | $ | 2.88 |   |
| Exercisable, end  of year |   | 27                     |   | 253                                   |   | $ | 2.56 |   | $ | 2.88 |   |

 

d) SHARE-PURCHASE WARRANTS

 

A summary of changes in the warrants issued and vestedfor the two years ended December 31, 2003 is as follows:

 
|                                             |   | **2003**            |   | **2002**   |   |
|--------------------------------------------------|--------|---------------------|--------|------------|--------|
|                                             |   | **Number**          |   | **Amount** |   | **Number** |   | **Amount** |   |
|                                             |   | **(in  thousands)** |   |
| Opening balance                                  |   | 6,121               |   | $          | 1,599  |   | 1,300 |   | $ | 1,349 |   |
| Issued to key  customer (Note 9(g))              |   | —              |   | 226        |   | 2,000 |   | — |   |
| Issued in  private equity placement (Note 9 (e)) |   | 2,733               |   | —     |   | 1,000 |   | — |   |
| Issued upon  conversion of debt (Note 9(h))      |   | 375                 |   | 27         |   | 3,313 |   | 239 |   |
| Issued in lieu  of fees (Note 7 and 9(e))        |   | 30                  |   | —     |   | 200 |   | 11 |   |
| Cancelled (Note  9(e), (f) and (g))              |   | (608                | )      | (1,289     | )      | (692 | ) | — |   |
| Exercised                                        |   | (3,313              | )      | (239       | )      | (1,000 | ) | — |   |
| Closing balance                                  |   | 5,338               |   | $          | 324    |   | 6,121 |   | $ | 1,599 |   |

 

The conversion of theremaining secured subordinated notes would result in the issuance of 479,000(2002 – 854,000) common share-purchase warrants for Series A, B and D notes,and 1,429,000 (2002 – Nil) common share-purchase warrants for Series E notes. 

 

F-18

----

 

e) PRIVATE COMMON SHAREPLACEMENT

 

OnJune 26, 2003, the Company completed a transaction resulting in the issuance of4,879,000 common shares at a price of $0.24 and 2,733,000 common share-purchasewarrants exercisable into one common share at $0.40 for net proceeds of $1.148million.  The warrants expire on June26, 2005.  Included in this privateplacement were 2,146,000 shares issued to a director and officer of the Companyfor total net proceeds of $505,000. None of the 2,733,000 warrants had been converted into common shares atDecember 31, 2003.

 

OnSeptember 19, 2003 the Company issued 302,250 shares in settlement of anaccount payable in the amount of $106,000. 

 

OnApril 25, 2002, the Company entered into an agreement with Stonestreet for a$1.1 million private placement resulting in net proceeds of $945,000 afterdeducting costs of issue of approximately $155,000.  As a result, the Company issued 3.3 million common shares and 1million common share-purchase warrants exercisable into common shares atUS$0.35 per share.  

 

OnDecember 17, 2002, Stonestreet exercised all of these warrants for proceeds of$550,000.  Pursuant to the April 25,2002 private placement, the Company issued 50,000 share-purchase warrants to anassociate of Stonestreet for partial consideration in securing the funding anddue diligence services.  These warrantsexpire on April 25, 2005 and are exercisable into common shares at US$ 0.35 percommon share.

 

Asthe result of a private placement of common shares in 2000, the Company issued180,158 share-purchase warrants with an exercise price of US$5.36 pershare.  These warrants expired on June16,2002.   

 

f) ACQUISITION OF ADB SYSTEMER ASA

 

On October 11, 2001, theCompany acquired 98.3 percent of the outstanding common shares of ADB SystemerASA.  As a result of the acquisition,the Company issued 607,600 share-purchase warrants with a strike price of twoNorwegian krone, in exchange for 700,000 share purchase warrants in ADBSystemer ASA.  These warrants retainedall of the characteristics of the original warrants and had specific exercisedates of March 31, 2002 and March 31, 2003, expiring March 31, 2003 (see Note16).  All of the 607,600 warrants werecancelled on March 31, 2003.

 

g) STRATEGIC MARKETING AGREEMENT

 

On March 28, 2000, pursuantto a strategic marketing agreement with one of its key customers, the Companyissued 512,500 common share-purchase warrants at a price of $15.80 per warrant.Each common share-purchase warrant entitled the holder to acquire one commonshare.  These warrants had been fullyvested and were cancelled on December 13, 2002.  

 

On December 13, 2002, the Company issued 2 millionwarrants convertible into common shares of the Company to this customer at anexercise price of $0.45 per warrant under a two-year term from date ofissuance.  Warrants that have vested areto be automatically exercised when the share price of the Company closes at orabove $1.02 for three consecutive trading days.  The vesting of warrants is based on achieving a number ofperformance objectives associated with the GE Asset Manager LLC joint venture(See Note 17).  

 

During 2003, a total of 1.25 million of the abovewarrants vested; 250,000 warrants vested when three initial customers of thejoint venture were identified and the remaining 1 million warrants vested uponthe legal establishment of the joint venture. The remaining 750,000 warrants have not vested as at December 31,2003.  Vesting is contingent upon theachievement of certain performance and business related goals, which arecurrently undefined, associated with the GE Asset Manager joint venture.

 

F-19

----

 

h) CONVERTIBLESECURED SUBORDINATED DEBENTURES

 

Duringthe year, the Company issued a total of 375,000 (2002 – 3,312,500) share-purchasewarrants with an exercise price of $0.50 per share (2002 - $0.14 per share) asthe result of the conversion of secured subordinated debentures.

 

i) The following table sets forth the computation of basic and dilutedloss per share.

 
|                                                                       |   | **2003**                                     |   | **2002** |   | **2001** |   |
|----------------------------------------------------------------------------|--------|----------------------------------------------|--------|----------|--------|----------|--------|
|                                                                       |   | **(in thousands, except per share amounts)** |   |
| **Numerator:**                                                             |   |                                         |   |     |   |     |   |
| Net Loss  (numerator for basic loss per share applicable to common shares) |   | $                                            | (2,815 | )        | $      | (9,364   | )      | $ | (18,714 | ) |
|                                                                       |   |                                         |   |     |   |     |   |
| **Denominator:**                                                           |   |                                         |   |     |   |     |   |
| Weighted average  shares denominator for basic loss per share              |   | 54,324                                       |   | 41,968   |   | 29,130   |   |
|                                                                       |   |                                         |   |     |   |     |   |
| Basic loss per  share                                                      |   | $                                            | (0.05  | )        | $      | (0.22    | )      | $ | (0.64 | ) |

 

For each fiscal year, theCompany excluded the effect of all convertible debt, stock options andshare-purchase warrants, as their impact would have been anti-dilutive.

 

j) STOCK-BASED COMPENSATION TO EMPLOYEES

* *

During the fourth quarter of fiscal 2003, the Companyadopted the accounting recommendations contained in the CICA Handbook Section3870 – “Stock-based Compensation and Other Stock-based Payments” effectiveJanuary 1, 2003.  This Sectionestablishes standards for the recognition, measurement and disclosure ofstock-based compensation and other stock-based payments made in exchange forgoods and services, and applies to transactions, including non-reciprocaltransactions, in which an enterprise grants shares of common stock, stockoptions, or other equity instruments, or incurs liabilities based on the priceof common stock or other equity instruments. Commencing in fiscal 2003, the Company records a compensation expensefor stock options granted to employees on or after January 1, 2003, based onthe fair value method of accounting. For the year ended December 31, 2003, the employee stock option expensewas $193,000.  As a result of the earlyadoption of these recommendations, expenses in the first, second and thirdquarters increased by $2,000, $1,000 and $130,000, respectively.  Accordingly, quarterly net income (loss) insuch quarters previously reported as ($1,755,000), $527,000 and ($460,000),respectively are revised to ($1,757,000), $526,000 and ($590,000),respectively.

 

For the year ended December 31, 2002, the Company didnot record a compensation expense for stock options granted to employees.  Instead, the Company disclosed the pro formanet income (loss) and the pro forma income (loss) per share had the Companyadopted the fair value method of accounting for stock-based compensationawarded on or after January 1, 2002.

 

The Company determined the fair value of employee stockoption grants using the Cox-Rubinstein binomial valuation model with thefollowing assumptions on a weighted average basis:

 
|                     |   | **2003** |   | **2002** |   |
|--------------------------|--------|----------|--------|----------|--------|
| Dividend yield           |   | —   |   | —   |   |
| Risk free  interest rate |   | 3.53     | %      | 3.69     | %      |
| Volatility               |   | 137.51   | %      | 131.51   | %      |
| Expected term, in  years |   | 2.94     |   | 2.00     |   |

 

F-20

----

 

For the years ended December31, 2003 and 2002, the amortization of the value of the stock-basedcompensation granted by the Company to employees in 2002, over the vesting periodof the awards as specified under CICA 3870, would have resulted in thefollowing pro forma loss attributable to common shareholders and pro formabasic and diluted loss per share:

 
|                                     |   | **2003** |   | **2002** |   |
|------------------------------------------|--------|----------|--------|----------|--------|
| Loss attributable to common shareholders |   |     |   |     |   |
| As reported                              |   | $        | (2,815 | )        | $      | (9,364 | ) |
| Pro forma                                |   | $        | (2,956 | )        | $      | (9,608 | ) |
|                                     |   |     |   |     |   |
| Basic and  diluted net loss per share:   |   |     |   |     |   |
| As reported                              |   | $        | (0.05  | )        | $      | (0.22 | ) |
| Pro forma                                |   | $        | (0.05  | )        | $      | (0.23 | ) |

 

**10.****                ****FINANCIAL INSTRUMENTS**

 

*Foreignexchange risk*

The Company’s revenue from software licensing andrelated services and e-commerce enabling agreements is transacted in variouscurrencies including the Canadian dollar, U.S. dollar, UK pound, EURO, andNorwegian krone.  Correspondingly, operatingexpenses related to these activities are transacted in the above-denotedcurrencies.  The Company does not usederivative instruments to manage exposure to foreign exchangefluctuations.  The Company incurred $84,000in foreign exchange losses in 2003 (2002-$29,000; 2001-$95,000).  

 

The Company transacted the majority of its retailproduct sales and purchases in U.S. dollars.

 

*Interestrate risk*

The Company has limited exposure to fluctuations ininterest rates.  The Company does notuse derivative instruments to reduce its exposure to interest rate risk. 

 

*Creditrisk*

Credit risk arises from the potential that a customerwill fail to meet its contractual obligations under a software licensing andrelated services agreement or an e-commerce enabling agreement.

 

*Fairvalue*

The fair value of monetary assets and liabilitiesapproximates amounts at which they would be exchanged between knowledgeable andunrelated persons.  The amounts recordedin the financial statements approximate fair value.

 

*Equityinstruments*

During 2001, the Company was exposed to fair valuefluctuations of publicly traded common shares received in connection with thedisposal of one of its strategic investments. To mitigate this risk, the Company engaged in the purchase of call and thesale of put options.  The Company didnot engage in the purchase of call or put options exceeding the number ofshares held.  As at January 31, 2002,all common shares and related call and put options had been disposed of.

 

**11.****      ****COMMITMENTS AND CONTINGENCIES**

 

(a)              Minimum paymentsunder operating leases during the next five years are as follows:

 
|   |   | **(in  thousands)** |   |
|--------|--------|---------------------|--------|
| 2004   |   | $                   | 232    |   |
| 2005   |   | 113                 |   |
| 2006   |   | 43                  |   |
| 2007   |   | 24                  |   |
| 2008   |   | $                   | 24     |   |

 

F-21

----

 

(b)             As a result of areview of statutory reporting obligations regarding employee benefits, theCompany has identified a potential for non-compliance.  The employees and regulators concerned havebeen notified.  The probability andamount of any potential liability relating to this situation is presently notdeterminable.

 

(c)              The Company hasentered into compensation arrangements with certain of its employees.  In the event of involuntary termination, theCompany may be liable for potential payments totaling $295,000 to theseemployees.

 

(d)             The Company enteredinto a licensing agreement with NCR Corporation on April 29th, 2002.  The agreement provides the Company withaccess to specific technology patents over a seven-year period for US$100,000annually.

 

**12.****      ****CHANGE IN NON CASH OPERATINGWORKING CAPITAL**

 
|                           |   | **2003**            |   | **2002** |   | **2001** |   |
|--------------------------------|--------|---------------------|--------|----------|--------|----------|--------|
|                           |   | **(in  thousands)** |   |
|                           |   |                |   |     |   |     |   |
| Accounts  receivable           |   | $                   | 424    |     | $      | (522     | )      | $ | (12 | ) |
| Deposits and  prepaid expenses |   | 56                  |   | (45      | )      | 251      |   |
| Accounts payable               |   | (63                 | )      | 224      |   | (1,040   | )      |
| Accrued  liabilities           |   | (453                | )      | 427      |   | 5        |   |
| Deferred revenue               |   | (692                | )      | (23      | )      | (2,121   | )      |
|                           |   | $                   | (728   | )        | $      | 61       |   | $ | (2,917 | ) |

 

**13.****      ****RETAIL ACTIVITIES**

 

The Company ceased itson-line retail activities in October 2000; however, in 2001 it was required tosettle certain amounts payable relating to product sales of previousyears.  These amounts were not previouslyanticipated and did not reoccur in 2002. During 2003, the Company received a $67,000 refund from a U.S.-basedcredit card institution formally engaged by the Company when it operated itson-line retail activities in the U.S.

 

The Company’s non-consolidatedinvestment, Bid.Com, recommenced on-line retail activities in 2002 (Note19(a)).  The shares of Bid.Com weretransferred in settlement of a demand loan (Note 6) on June 30, 2003.

 

F-22

----

 

**14.****      ****REALIZED GAINS AND LOSSES ON DISPOSAL OF MARKETABLESECURITIES, STRATEGIC INVESTMENTS AND CAPITAL ASSETS, AND RECOVERY OF ASSETS**

 
|                                                           |   | **2003**            |   | **2002** |   | **2001** |   |
|----------------------------------------------------------------|--------|---------------------|--------|----------|--------|----------|--------|
|                                                           |   | **(in  thousands)** |   |
| Gain on disposal  of strategic investment (Note 14(a))         |   | $                   | 20     |     | $      | 41       |   | $ | 6 |   |
| (Loss) gain on disposal  of capital assets (Note 14(b))        |   | (13                 | )      | 23       |   | —   |   |
| (Loss) gain on  disposal of marketable securities (Note 14(c)) |   | —              |   | (149     | )      | 3,656    |   |
| Gain on disposal  on Point 2 (Note 14(d))                      |   | —              |   | —   |   | 2,249    |   |
| Recovery of  Point2 receivable (Note 14(d))                    |   | —              |   | —   |   | 811      |   |
|                                                           |   | $                   | 7      |     | $      | (85      | )      | $ | 6,722 |   |

 

----

(a)              During 2003, the Company sold shares inMegawheels Technologies Inc. for proceeds of $20,000.  During 2002, the Company disposed of its strategic investments,resulting in cash proceeds of $126,000 and a realized gain of $41,000.

 

(b)             During 2003, the Company disposed of capitalassets that were no longer required resulting in a loss of $13,000.  Similar disposals in 2002 resulted in a gainof $23,000.

 

(c)              In January 2001, the Company’s unregisteredAOL shares became freely trading and the Company sold 122,801 shares for grossproceeds of $10.0 million, realizing a gain of $3.7 million.  In January 2002, the Company sold itsremaining AOL shares for gross proceeds of $1.3 million and a realized loss of$143,000.

 

(d)             In May 2001, the Company sold its equityinterest in Point2 Internet Systems Inc. (Point2) for $2.7 million incash.  The Company realized a gain of$2.2 million, and recovered a receivable in the amount of $811,000 from Point2that had been provided for in 2000. 

 

**15.****      ****UNREALIZED GAINS AND LOSSES ON REVALUATION OF STRATEGICINVESTMENTS, AND PROVISON FOR IMPAIRMENT OF ASSETS**

 
|                                               |   | **2003**            |   | **2002** |   | **2001** |   |
|----------------------------------------------------|--------|---------------------|--------|----------|--------|----------|--------|
|                                               |   | **(in  thousands)** |   |
| Revaluation of  strategic investments (Note 15(a)) |   | $                   | — |     | $      | (24      | )      | $ | (1,510 | ) |
| Provision for  impaired assets (Note 15(b))        |   | —              |   | —   |   | (925     | )      |
|                                               |   | $                   | — |     | $      | (24      | )      | $ | (2,435 | ) |

 

----

(a)               During 2002 and2001, the Company reviewed the carrying value of each of its strategicinvestments and determined that in light of recent financial performance ofeach investment and market conditions, the decline in value of theseinvestments was other than temporary, and a revaluation was required.  

 

(b)              The Company reviewedthe carrying value of a prepaid advertising asset during the first quarter of2001 and determined the future value of this asset had been significantlyreduced as a result of market conditions and changes to the Company’sbusiness-to-business marketing strategy.

 

F-23

----

 

**16.****      ****ACQUISITION OF ADB SYSTEMERASA**

 

On October 11, 2001, theCompany acquired 98.3 per cent of the outstanding shares of ADB Systemer ofSola, Norway.  ADB Systemer was apublicly traded software vendor focused on enterprise asset management andintegrated electronic procurement.  ADBSystemer has wholly-owned subsidiaries in the United States and in the UnitedKingdom. 

 

The purchase price for12,518,493 of the outstanding ADB Systemer common shares was $13.762million.  The purchase price wascomprised of $2.293 million in cash, $9.844 million of common stock issued fromtreasury, acquisition costs of $765,000, employee stock options with a fairmarket value of $576,000 granted to ADB Systemer employees as replacementoptions and warrants with a fair market value of $284,000 issued to ADBSystemer warrant holders as replacement warrants.  Common stock issued from treasury totaled 10,866,052 shares(21,732,104 pre-consolidation) with a value of $9.844 million based on afive-day trading average beforeand after September 10, 2001, the date the acquisition was announced to thegeneral public.  The purchase price forADB Systemer did not include any contingent payments, options, orcommitments.  The purchase price of$13.762 million was allocated as follows:

 

|                                                 |   | **2001**            |   |
|------------------------------------------------------|--------|---------------------|--------|
|                                                 |   | **(in  thousands)** |   |
|                                                 |   |                |   |
| Net monetary  assets (including cash of $814)        |   | $                   | 418    |   |
| Capital assets                                       |   | 308                 |   |
| Contractual  agreements                              |   | 177                 |   |
| Acquired  software and related intellectual property |   | 3,383               |   |
| Goodwill                                             |   | 9,476               |   |
| Total purchase  price                                |   | $                   | 13,762 |   |

 

ADB Systemer’s operationswere consolidated after the effective date of the acquisition, October 11,2001.

 

The amortization periods forcontractual agreements and software and related intellectual property are 12and 36 months respectively.  At the endof fiscal 2003, accumulated amortization for acquired software amounted to$2,537,000 (2002 - $1,409,000), resulting in a net book value of $846,000 (2002- $1,974,000).  

 

Goodwill was not amortized,but was subject to an impairment test where the carrying value of goodwill wascompared to its fair value.  In theevent the carrying value of goodwill exceeded its fair value, a goodwillimpairment would be recorded. At December 31, 2001, the carrying value ofgoodwill was tested for impairment, and it was determined that a goodwillimpairment of $9.476 million was required. Goodwill is not deductible for tax purposes.

 

F-24

----

 

**17.****      ****INVESTMENTS IN JOINTLYCONTROLLED COMPANIES**

 

a) On September 25, 2003 the Company established ajoint venture with GE Commercial Equipment Financing, a unit of GE CommercialFinance, with each entity holding a 50 percent interest in the jointventure.  The joint venture will operateunder the name of GE Asset Manager LLC. The joint business venture will develop and market asset managementtechnology to customers in a broad range of industries.  Upon the establishment of this jointventure, 1 million share-purchase warrants issued by ADB to GE CapitalCorporation vested.  The fair value ofthese warrants of $188,000, calculated at the vesting date, is reflected on theConsolidated Balance Sheets as an Acquired Agreement.  This acquired agreement is being amortized over the initialperiod of the venture agreement. Accumulated amortization at December 31, 2003, is $38,000, resulting ina net book value of $150,000.  

 

As at December 31, 2003, the joint venture held noassets or liabilities, nor were there any activities within the jointventure.  As a result, there are noamounts with respect to GE Asset Manager LLC included in the consolidatedfinancial statements of the Company.

 

b) In 1999 the Companyacquired a 51% interest in Point2 Internet Systems Inc. (“Point2”) by issuing$2,500,000 of common shares and common share-purchase warrants to acquire$2,000,000 of common shares for no additional consideration.  The warrants were exercised in 2000.  The Company acquired 51 percent of theshares of Point2 but only elected 50 percent of the board of directors.  The investment was accounted for on aproportionate consolidation basis and the Company recorded its proportionateshare of revenue and expenses, assets and liabilities from the date ofacquisition.  Of the total purchaseprice, $134,000 was allocated to current assets, $521,000 to non-current assetsand $28,000 to current liabilities resulting in goodwill of $2,044,000. 

 

In May 2001, the Company soldits equity interest in Point2 for $2.6 million in cash.  The Company realized a gain of $2.2 million,and recovered a receivable from Point2 provided for in 2000.

 

Condensed income statementand cash flow information for Point2 for the five-month period ended May 31,2001 is as follows:

 

|                      |   | **2001**            |   |
|---------------------------|--------|---------------------|--------|
|                      |   | **(in  thousands)** |   |
| Revenue                   |   | $                   | 192    |   |
| Net loss                  |   | 293                 |   |
| Change in cash  resources |   | —              |   |
|                           |        |                     |        |  |

 

**18.****      ****GOODWILL IMPAIRMENT**

 

The Company reviewed the carryingvalue of goodwill acquired in connection with the acquisition of ADBSystemer.  The carrying value ofgoodwill was tested against its fair value and it was determined that agoodwill impairment of $9.476 million was required at December 31, 2001 (Note16).  For the year ended December 31,2002 a goodwill impairment of $14,000 was recorded on goodwill acquired inconnection with the purchase of shares of the non-controlling interestshareholders of ADB Systemer.  Thepermanent decline in the fair value arose on a downturn in economic conditionsresulting in lower than previously anticipated cash flows.

 

F-25

----

 

**19.****      ****RELATED PARTY TRANSACTIONS**

 

(a)                                  On August 30, 2002, the Company entered intoa series of agreements with a lender, an unrelated party, whereby the lendergranted to the Company a secured loan in the aggregate principal amount of $2million (Note 6).  The Company and thesame unrelated party also entered into an agreement whereby on-line retail operationswere to be conducted by Bid.Com Ltd. These operations utilized the on-line retail technology, experience andexpertise of the Company developed and operated under the name “Bid.ComInternational Inc.” in the on-line selling of consumer products supplied by thelender.

 

OnJune 30, 2003, the Company exercised its option to transfer 100 percent of theissued shares of Bid.Com Ltd. in full settlement of the outstanding principaland accrued interest owed to the lender.

 

TheCompany owned 100 percent of the issued and outstanding shares of Bid.Com Ltd.,but determined that, for accounting purposes, consolidation of Bid.Com Ltd. wasnot appropriate.  This determination wasbased upon the Company’s evaluation of its continuing ability to determine thestrategic operating policies of Bid.Com without the cooperation of others, itsability to obtain the future economic benefits from the resources of Bid.ComLtd., and its exposure to the related risk of ownership.  Therefore, the Company accounted for itsinvestment in Bid.Com Ltd. on the equity basis.  The Company was not exposed to losses incurred by Bid.Com Ltd.,and accordingly this investment was carried at a nominal amount.  U.S. GAAP required consolidation of theinvestment in Bid.Com Ltd. in the Company’s financial statements.  The impact of this U.S. GAAP difference fromCanadian GAAP is disclosed in note 20. 

 

Condensedbalance sheet information for Bid.Com Ltd as at December 31, 2002 is asfollows:

 
|                           |   | **2002**            |   |
|--------------------------------|--------|---------------------|--------|
|                           |   | **(in  thousands)** |   |
| Current assets                 |   | $                   | 435    |   |
| Capital assets                 |   | 71                  |   |
| Current  liabilities           |   | 701                 |   |
| Shareholders’  deficiency |   | (195                | )      |
|                                |        |                     |        |  |

 

Condensedincome statement and cash flow information for Bid.Com Ltd. for the six-monthperiod ended June 30, 2003 and the two-month period ended December 31, 2002 isas follows:

 
|                      |   | **2003**           |   | **2002** |   |
|---------------------------|--------|--------------------|--------|----------|--------|
|                      |   | **(in thousands)** |   |
| Revenue                   |   | $                  | 3,614  |     | $      | 258 |   |
| Net income  (loss)        |   | 208                |   | (195     | )      |
| Change in cash  resources |   | (358               | )      | 358      |   |
|                           |        |                    |        |          |        |  |  |

 

Revenueof $35,000 and $243,000 related to web-site development, support andmaintenance services provided to Bid.com Ltd. has been included in theconsolidated results of the Company for the six months ended June 30, 2003 andthe two months ended December 31, 2002, respectively.  In addition, the Company charged overhead-related costs of$76,000 and $22,000 for rent, connectivity and management fees to Bid.com Ltd.for the six-month period ended June 30, 2003, and the two months ended December31, 2002, respectively.  These overheadcharges have been recorded as a reduction of expenses in the consolidatedfinancial statements for the years ended December 31, 2003 and December 31,2002.

 

AtDecember 31, 2002, accounts receivable includes $59,000 related to unpaidservice and overhead fees charged during the year to Bid.Com Ltd. 

 

F-26

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b)                                     During 2001 the Company recorded $1 millionin revenue relating to an agreement with a company in which it had an interestand in which certain Directors of the Company, in aggregate, had a controllinginterest.  Under this agreement, theCompany would provide its on-line auction technology and related services tothe investee.  In April 2001, thisinvestee went into receivership, and the Company’s investment in the investeewas written down to zero.  

 

**20.****            ****RECONCILIATION OF UNITED STATESGAAP**

** **

The financial statements ofthe Company have been prepared in accordance with generally accepted accountingprinciples as applied in Canada, which conform in all material respects withgenerally accepted accounting principles in the United States, except as notedbelow.

 

(a) STOCK-BASED COMPENSATIONTO EMPLOYEES

 

In fiscal 2003, the Company adopted the accountingrecommendations contained in the CICA Handbook Section 3870 – “Stock-basedCompensation and Other Stock-based Payments” effective January 1, 2003regarding expensing of employee stock-based compensation.  Accordingly, commencing in fiscal 2003, theCompany records a compensation expense for stock options granted to employeeson or after January 1, 2003, based on the fair value method of accounting.  For fiscal 2002, the Company did notrecognize compensation expense for employee stock options, however pro-formadisclosure giving recognition to the fair market value of options granted fromJanuary 1, 2002 has been provided in Note 9(j).  

 

Under U.S. GAAP stock-based compensation granted toemployees is accounted for in accordance with the provisions of AccountingPrinciples Board (APB) Opinion No. 25, “Accounting for Stock Issued toEmployees,” or in accordance with SFAS 123 “Accounting for Stock-BasedCompensation.”  Prior to 2003, underUnited States GAAP the Company elected to follow APB 25 and no accountingrecognition was given to stock options granted at fair market value until theywere exercised.  Upon exercise, theproceeds were credited to shareholders’ equity.  In December2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation —Transition and Disclosure,” an amendment of FASB Statement No. 123.  This Statement amends FASB Statement No.123, “Accounting for Stock- Based Compensation,” to provide alternative methodsof transition for a voluntary change to fair value method of accounting forstock-based employee compensation.  Infiscal 2003, the Company elected to prospectively adopt the fair value methodfor stock-based compensation as prescribed in SFAS No. 148.  Under CICA 3870 and SFAS No. 148, thefair value of stock-based awards to employees is calculated through the use ofoption pricing models, even though such models were developed to estimate thefair value of freely tradable, fully transferable options without vestingrestrictions, which significantly differ from the Company’s stock optionawards.  The Company’s calculations foremployee grants were made using the Cox-Rubinstein binomial model with weightedaverage assumptions as described in the following table.  As aresult, the 2003 annual financial statements under U.S. GAAP reflect astock-based compensation expense to employees of $193,000 for options grantedon or after January 1, 2003. 

 

Prior to fiscal 2003, SFAS No. 123, “Accounting forStock-Based Compensation,” requires the disclosure of pro forma net income(loss) and earnings (loss) per share had the Company adopted the fair valuemethod from the date the standard was applicable.  The calculations for the pro forma disclosures of stock optionsgranted prior to 2003 are reported below and were made using the Cox-Rubinstein binomialvaluation model with the following weighted average assumptions:

 
|                     |   | **2003** |   | **2002** |   | **2001** |   |
|--------------------------|--------|----------|--------|----------|--------|----------|--------|
| Dividend yield           |   | —   |   | —   |   | —   |   |
| Risk free  interest rate |   | 3.53     | %      | 3.69     | %      | 4.02     | %      |
| Volatility               |   | 137.51   | %      | 131.51   | %      | 110.54   | %      |
| Expected term,  in years |   | 2.94     |   | 2.00     |   | 2.77     |   |

 

F-27

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If the estimated fair valuesof the Company’s stock options granted to employees had been amortized toexpense over the vesting period of the awards as specified under SFAS No. 123,the loss attributable to common shareholders and the basic and diluted loss pershare on a pro forma basis (as compared to such items as reported) would havebeen:

 
|                                                          |   | **2003**            |   | **2002** |   | **2001** |   |
|---------------------------------------------------------------|--------|---------------------|--------|----------|--------|----------|--------|
|                                                          |   | **(in  thousands)** |   |
|                                                          |   |                |   |     |   |     |   |
| Loss  attributable to common shareholders under U.S. GAAP     |   |                |   |     |   |     |   |
| As calculated  (Note 20(g))                                   |   | $                   | (2,572 | )        | $      | (9,947   | )      | $ | (18,728 | ) |
| Stock-based  compensation included in net loss                |   | 193                 |   | —   |   | —   |   |
|                                                          |   | (2,379              | )      | (9,947   | )      | (18,728  | )      |
| Stock-based  compensation if fair value applied to all awards |   | (337                | )      | (797     | )      | (1,601   | )      |
| Pro forma net  loss as if fair value applied to all awards    |   | $                   | (2,716 | )        | $      | (10,744  | )      | $ | (20,329 | ) |
| Basic and  diluted net loss per share:                        |   |                |   |     |   |     |   |
| As calculated                                                 |   | $                   | (0.05  | )        | $      | (0.24    | )      | $ | (0.64 | ) |
| Pro forma                                                     |   | $                   | (0.05  | )        | $      | (0.26    | )      | $ | (0.70 | ) |

# *** ***

# **(b) COMPREHENSIVE INCOME**

 

Financial AccountingStandards Board Statement of Financial Accounting Standards No. 130, “ReportingComprehensive Income,” requires disclosure of comprehensive income, whichincludes reported net earnings adjusted for other comprehensive income.  Comprehensive income is defined as thechange in net assets of a business enterprise during a period from transactionsand other events and circumstances from non-owner sources.

 

**(c)MARKETABLE SECURITIES**

** **

U.S. GAAP requires that the Company disclosemarketable securities into one of three categories: held to maturity; availablefor sale; or trading. As at December 31, 2003 and 2002, the marketablesecurities held were classified as follows:

 
|    |   | **2003**            |   | **2002** |   |
|---------|--------|---------------------|--------|----------|--------|
|    |   | **(in  thousands)** |   |
| Trading |   | $                   | 13     |     | $      | 20 |   |
|         |        |                     |        |          |        |  |  |

 

(d) ACCUMULATED OTHERCOMPREHENSIVE INCOME

 

Under Canadian GAAP, gains and losses from foreignexchange translations of subsidiaries classified as self-sustaining areincluded in the foreign cumulative translation account component ofshareholders’ equity. Under U.S. GAAP, these gains and losses are included as acomponent of comprehensive income (loss).

 

F-28

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(e) FINANCIAL INSTRUMENTS WITH LIABILITY AND EQUITYELEMENTS

 

Under Canadian GAAP, thesecured subordinated notes (see Note 7) are recorded based upon the relativefair values of the liability and equity components of the instruments.  The liability component is accreted to theface value of the subordinated notes over the term to maturity until theunderlying notes are converted into common shares.  Under U.S. GAAP, upon issuance, the secured subordinated noteswould have been recorded as a liability and reclassified to equity only uponconversion.  Accordingly, the interestaccretion of $112,000 (2002 - $68,000) that is recorded under Canadian GAAP isreversed under U.S. GAAP. 

 

Further, under U.S. GAAP,the beneficial conversion feature represented by the excess of the fair valueof the shares issuable on conversion of the subordinated notes, measured on thecommitment date, over the amount of the loan proceeds to be allocated to thecommon shares upon conversion would be allocated to contributed surplus.  This results in a discount on thesubordinated notes that is recognized as additional interest expense over theterm of the subordinated notes and any unamortized balance is expensed immediatelyupon conversion of the subordinated notes. Accordingly, for U.S. GAAP purpose, the Company has recognized abeneficial conversion feature in 2003, with respect to the Series Esubordinated notes, of $96,000 and in 2002, with respect to the Series A throughD notes, of $389,000.  An interest expenseof $64,000 (2002 - $316,000) results from the amortization of the discount overthe term to maturity of those subordinated notes as well as the unamortizeddiscount for those subordinated notes converted during the year.  Canadian GAAP does not require therecognition of any beneficial conversion feature.

 

(f) ADDITIONALDISCLOSURES AS REQUIRED IN ACCORDANCE WITH UNITED STATES GAAP 

** **

U.S. GAAP requires thedisclosure of accrued liabilities that exceed five percent of currentliabilities.  Included in accruedliabilities at December 31, 2003 are accrued audit fees of $145,000 and accruedcompensation expenses (severance and unpaid vacation) of $228,000 (2002 –$482,000).

 

U.S. GAAP requires thedisclosure of non-cash interest components incurred during the year.  In 2003, the Company incurred $126,000 (2002- $68,000) in non-cash interest expense associated with the demand loan thatwas settled through the transfer of the investment in an associated company(Note 6).

 

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(g) The effect of the above differences (Note 20(d)(e) and (j)) on the Company’s financial statements is set out below:

 

Consolidated Balance Sheets

 
|                                                     |   | **2003**            |   | **2002** |   |
|----------------------------------------------------------|--------|---------------------|--------|----------|--------|
|                                                     |   | **(in  thousands)** |   |
| Cash and  marketable securities                          |   | $                   | 445    |     | $      | 1,357 |   |
| Accounts  receivable                                     |   | 1,384               |   | 1,769    |   |
| Deposits and  prepaid expense                            |   | 118                 |   | 178      |   |
| Capital assets                                           |   | 266                 |   | 443      |   |
| Intangible  assets                                       |   | 998                 |   | 2,549    |   |
| Assets –  discontinued operations (Note 20(j))      |   | —              |   | 506      |   |
| Accounts payable  and accrued liabilities                |   | 1,370               |   | 2,288    |   |
| Demand loan                                              |   | —              |   | 2,000    |   |
| Deferred revenue                                         |   | 91                  |   | 832      |   |
| Secured  subordinated notes (Note 20(e))                 |   | 1,009               |   | 131      |   |
| Non-controlling  interest                                |   | 3                   |   | 3        |   |
| Liabilities –  discontinued operations (Note 20(j)) |   | —              |   | 642      |   |
| Shareholders’  equity                               |   | $                   | 738    |     | $      | 906 |   |

 

Consolidated Statementsof Operations

 
|                                                                          |   | **2003**            |   | **2002** |   | **2001** |   |
|-------------------------------------------------------------------------------|--------|---------------------|--------|----------|--------|----------|--------|
|                                                                          |   | **(in  thousands)** |   |
| Net loss for the  year as reported under Canadian GAAP                        |   | $                   | (2,815 | )        | $      | (9,364   | )      | $ | (18,714 | ) |
| Adjustments                                                                   |   |                |   |     |   |     |   |
| Accretion of  interest on secured subordinated notes (Note 20(e))             |   | 112                 |   | 68       |   | —   |   |
| Gain on  settlement of demand loan (Note 20(j))                               |   | (2,195              | )      | —   |   | —   |   |
| Amortization of  beneficial conversion feature (Note 20(e))                   |   | (64                 | )      | (316     | )      | —   |   |
| Translation of  foreign currency                                              |   | —              |   | —   |   | (14      | )      |
| Net loss from  continuing operations for the year as reported under U.S. GAAP |   | (4,962              | )      | (9,612   | )      | (18,728  | )      |
| Income (loss)  from discontinued operations (Note 20(j))                      |   | 2,390               |   | (195     | )      | —   |   |
| Net loss for the  year as reported under U.S. GAAP                            |   | (2,572              | )      | (9,807   | )      | (18,728  | )      |
| Preferential  distribution to shareholder (Note 20(k))                        |   | —              |   | (140     | )      | —   |   |
| Net loss  attributable to common shareholders under U.S. GAAP                 |   | $                   | (2,572 | )        | $      | (9,947   | )      | $ | (18,728 | ) |
|                                                                          |   |                |   |     |   |     |   |
| Net loss for the  year as reported under U.S. GAAP                            |   | $                   | (2,572 | )        | $      | (9,807   | )      | $ | (18,728 | ) |
| Accumulated  other comprehensive income (loss) (Note 20(d))                   |   | 74                  |   | 32       |   | 14       |   |
| Comprehensive  income (loss) as reported under U.S. GAAP                      |   | $                   | (2,498 | )        | $      | (9,775   | )      | $ | (18,714 | ) |
| Basic and  diluted loss per share from continuing operations                  |   | $                   | (0.09  | )        | $      | (0.23    | )      | $ | (0.64 | ) |
| Basic and  diluted net loss per share                                         |   | $                   | (0.05  | )        | $      | (0.24    | )      | $ | (0.64 | ) |

 

F-30

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(h) IMPACT OF NEWACCOUNTING PRONOUNCEMENTS

 

The FASB issued SFAS No.132 (revised 2003), “Employers’ Disclosures about Pensions and OtherPostretirement Benefits”.  Thisstatement revises employers’ disclosures about pension plans and otherpostretirement benefit plans.  Itrequires additional disclosures to those in the original Statement 132 aboutthe assets, obligations, cash flows, and net periodic benefit cost of definedbenefit pension plans and other defined benefit postretirement plans.  This Statement is effective for financialstatements with fiscal years ending after December 15, 2003.  The adoption of SFAS No. 132 had no effecton the Company’s results of operations and financial position for 2003. 

 

The FASB made amendmentsto SFAS No. 133, “Derivative Instruments and Hedging Activities”.  The amendments set forth in Statement 133improve financial reporting by requiring that contracts with comparablecharacteristics be accounted for similarly. This Statement is effective for contracts entered into or modified afterJune 30, 2003, and for hedging relationships designated after June 30, 2003.  The guidance should be appliedprospectively.  The Company did notengage in the use of derivative instruments or establish hedgingrelationships.  The adoption of SFAS No.133 had no effect on the Company’s results of operations and financial positionfor 2003. 

 

In April 2003, the FASBissued a staff position No. SFAS 140-1, “Accounting for Accrued InterestReceivable Related to Securitized and Sold Receivables under Statement140.”  This staff position addresses theissue of how accrued interest receivable related to securitized and soldreceivables should be accounted for and reported under Statement 140.  This guidance was effective for fiscalquarters beginning after March 31, 2003. The adoption of SFAS No. 140-1 had no effect on the Company’s results ofoperations and financial position for 2003. 

 

In June 2001, FASB issuedSFAS No. 143 “ Accounting for Asset Retirement Obligations.”  SFAS No. 143 requires the Company to recordthe fair value of an asset retirement obligation as a liability in the periodin which it incurs a legal obligation associated with the retirement oftangible long-lived assets that result from acquisition, construction,development and/or normal assets.  TheCompany is required to also record a corresponding asset that is depreciatedover the life of the asset.  Subsequentto the initial measurement of the asset retirement obligation, the obligationwill be adjusted at the end of each period to reflect the passage of time andchanges in the estimated future cash flows underlying the obligation.  The Company was required to adopt SFAS No.143 on January 1, 2003.  The adoption ofSFAS No. 143 had no effect on the Company’s results of operations and financialposition for 2003.

 

The FASB issued SFAS No. 145,“Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No.13, and Technical Corrections”, requires that, for fiscal years beginning afterMay 15, 2002, gains and losses from the early extinguishments of debt no longerbe classified as an extraordinary item, net of income taxes, but be included inthe determination of pretax earnings.  Therewas no effect on the adoption of SFAS No. 145 on the Company’s results ofoperations and financial position for 2003.

 

In July 2002, the FASBissued SFAS No. 146, “ Accounting for Costs Associated with Exit or DisposalActivities,” which requires companies to recognize costs associated with exitor disposal activities as incurred rather than at the date of commitment to anexit or disposal plan. SFAS No. 146 is to be applied prospectively to exit ordisposal activities initiated after December 31, 2002.  The adoption of SFAS No.146 had no effect onthe Company’s results of operations and financial position for 2003.

 

In December 2002, theFASB issued SFAS No 148, “Accounting for Stock-Based Compensation — Transitionand Disclosure,” an amendment of FASB Statement No. 123.  This Statement amends FASB Statement No.123, “Accounting for Stock- Based Compensation,” to provide alternative methodsof transition for a voluntary change to fair value method of accounting forstock-based employee compensation.  Inaddition, this Statement amends the disclosure requirements of Statement No.123 to require prominent disclosures in both annual and interim financialstatements.  Certain of the disclosuremodifications are required for fiscal years ending after December 15, 2002 andare included in the notes to these consolidated financial statements.  In fiscal 2003, the Company elected toprospectively adopt the fair value method for

 

F-31

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stock-basedcompensation.  As a result, the annualfinancial statements reflect the stock-based compensation expense to employeesof $193,000 for such compensation granted on or after January 1, 2003. 

 

In November 2002, theFASB issued interpretation No. 45 “ Guarantor’s Accounting and DisclosureRequirements for Guarantees, Including Indirect Guarantees of Indebtedness ofOthers” (“FIN 45”), which requires certain disclosures of obligations underguarantees.  The disclosure requirementsof FIN 45 are effective for the Company’s year ended December 31, 2003.  FIN 45**requiresthe recognition of a liability by a guarantor at the inception of certainguarantees entered into or modified after December 31, 2002, based on the fairvalue of the guarantee.  There was noeffect on the adoption of FIN No. 45 on the Company’s results of operations andfinancial position for 2003.

 

In January 2003 andDecember 2003, the FASB issued interpretation No. 46, “Consolidation ofVariable Interest Entities” (“FIN 46”), and its revision, FIN 46-R,respectively.  FIN 46 and FIN 46-Raddress the consolidation of entities whose equity holders have either notprovided sufficient equity at risk to allow the entity to finance its ownactivities or do not possess certain characteristics of a controlling financialinterest.  FIN 46 and FIN 46-R requirethe consolidation of these entities, known as variable interest entities(“VIE,s”), by the primary beneficiary of the entity.  The primary beneficiary is the entity, if any, that is subject toa majority of the risk of loss from the VIE’s activities, entitled to receive amajority of the VIE’s residual returns, or both.  FIN 46 and FIN 46-R will be effective for the Company’s annualfinancial statements commencing January 1, 2004.  The Company is continuing to evaluate its investments todetermine which, if any, will be impacted by the adoption of FIN 46 and FIN46-R.  Adoption of both of thesestandards is not expected to have a material impact on the Company’s financialposition, results of operations or cash flows.

 

The Emerging Issues TaskForce reached a consensus on Issue 00-21, addressing how to account forarrangements that involve the delivery or performance of multiple products,services, and/or rights to use assets. Revenue arrangements with multiple deliverables are divided intoseparate units of accounting if the deliverables in the arrangement meets thefollowing criteria: (a) the delivered item has value to the customer on astandalone basis; (b) there is objective and reliable evidence of the fairvalue of undelivered items; and (c) delivery of any undelivered item isprobable.  Arrangement considerationshould be allotted among the separate units of the accounting based on theirrelative fair value, with the amount allocated to the delivered item beinglimited to the amount contingent on the delivery of additional items or meetingother specified performance conditions. The final consensus will be applicable to the Company for agreements enteredinto in fiscal periods beginning on or after January 1, 2004 with earlyadoption permitted.  The Company isevaluating the impact of adoption on the consolidated financial statements.

 

(i) OPERATING LOSS

 

U.S. GAAP requires that theCompany disclose operating loss. Operating loss of the Company for the year was $4.982 million, comprisedof net loss from continuing operations of $4.962 million less realized andunrealized gains and losses on marketable securities and strategic investmentsof $20,000  (2002 - $9.480 million,comprised of net loss from continuing operations of $9.612 million plus$132,000; 2001 - $20.880 million, comprised of net loss of $18.728 million less$2.152 million).

 

F-32

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(j) INVESTMENT IN ASSOCIATEDCOMPANY/DISCONTINUED OPERATIONS

 

U.S. GAAP requiresconsolidation of the Company’s investment in the associated company describedin Note 19(a).  Furthermore, under FAS144, the Bid.Com Ltd. component would be classified as an asset held for sale andbe subject to the reporting requirements for discontinued operations.  The effect of consolidation of this entityupon the Canadian GAAP balance sheet is reported in Note 20(g).

 

Net revenue by GeographicRegion:

 
|             |   | **2003**            |   | **2002** |   | **2001** |   |
|------------------|--------|---------------------|--------|----------|--------|----------|--------|
|             |   | **(in  thousands)** |   |
|             |   |                |   |     |   |     |   |
| North America    |   | $                   | 1,211  |     | $      | 2,182    |   | $ | 2,761 |   |
| Ireland and U.K. |   | 1,239               |   | 472      |   | 893      |   |
| Norway           |   | 3,403               |   | 3,126    |   | 741      |   |
|             |   | $                   | 5,853  |     | $      | 5,780    |   | $ | 4,395 |   |

 

Consolidation of thisassociated company results in a decrease in the net loss attributable to commonshareholders due to income from discontinued operations in the amount of$195,000 for fiscal 2003.  For fiscal2002, the net loss attributable to common shareholders is increased due to aloss from discontinued operations of $195,000. Revenue in the amount of $1.074 million is included in the 2003 incomefrom discontinued operations.  Revenueof $15,000 is included in the 2002 loss from discontinued operations.

 

For fiscal 2003, the impactof consolidation of the associated company upon cash flows was to decrease cashflows as a result of cash outflows from discontinued operations in the amountof $358,000.  For fiscal 2002, theimpact upon cash flows was to increase cash flows as the result of cash inflowsfrom discontinued operations in the amount of $358,000.

 

(k) PREFERENTIAL DISTRIBUTIONTO SHAREHOLDERS

 

In accordance with U.S. GAAP,the $120,000 Series C secured subordinated debentures (see Note 7) issued inexchange for the waiver of certain US registration rights granted toStonestreet pursuant to a subscription agreement dated April 25, 2002 (Note9(e)) is recorded as preferential distribution to Stonestreet and deducted fromthe net loss to determine net loss attributable to common shareholders.  The Series C secured subordinated debenturesinclude a beneficial conversion feature; accordingly, a preferentialdistribution of $140,000 has been recorded.

 

**21.****                 SEGMENTEDINFORMATION**

** **

The Company operates inthe following reportable geographic segments: North America, Ireland and theUnited Kingdom, and Norway.

 

Assets by GeographicRegion

 
|             |   | **2003**            |   | **2002**                          |   |
|------------------|--------|---------------------|--------|-----------------------------------|--------|
|             |   | **(in  thousands)** |   |
|             |   | **Capital  Assets** |   | **Intangible  and Other  Assets** |   | **Capital  Assets** |   | **Intangible  and Other  Assets** |   |
| North America    |   | $                   | 106    |                              | $      | 152 |   | $ | 174 |   | $ | 518 |   |
| Ireland and U.K. |   | 16                  |   | —                            |   | 69 |   | — |   |
| Norway           |   | 144                 |   | 846                               |   | 200 |   | 2,031 |   |
|             |   | $                   | 266    |                              | $      | 998 |   | $ | 443 |   | $ | 2,549 |   |

 

For the year ended December31, 2003, individual customers accounted for 26 percent and 15 percent of netrevenue, respectively.  For the yearended December 31, 2002, individual customers accounted for 28

 

F-33

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percent and 13 percent of netrevenue, respectively.  For the yearended December 31, 2001 one customer accounted for 22 percent of net revenue. 

 

**22.****                ****RECLASSIFICATION OF PRIORYEARS**

 

Certain prior years amountshave been reclassified to conform to the current year basis ofpresentation.  

 

**23.****                 SUBSEQUENT EVENT**

 

Duringthe period of January 1, 2004 to March 18, 2004, Series E secured subordinatednotes with a face value of $400,000 were converted into equity units (See Note7(a)).  As a result of this conversion,1,142,856 common shares and 571,428 share-purchase warrants were issued.

 

OnMay 11, 2004, the Company entered into an agreement with First AssociatesInvestments Inc. to act as Agent in raising up to $5 million, on a best effortsbasis, in secured convertible debt (“Notes”). The Notes have a three-year term and will pay interest of 7 percent perannum, paid quarterly in arrears.  Thedebt can be converted at anytime by the lender, following a four-month holdperiod, into units consisting of one common share at $0.31 and one-half of acommon share-purchase warrant exercisable into a common share at $0.50.  Each warrant will expire three years fromthe date of closing.  The Notes willconvert automatically if the Company’s weighted average share price reaches$0.70 or more over a ten-day trading period. If the Notes remain unconverted at the end of the term the Company willbe required to repay the principal in cash.

 

**24.****                 CONVENIENCETRANSLATION**

 

The financial statementsas at December 31, 2003 and for the year then ended have been translated intoU.S. dollars using the exchange rate of the U.S. dollar at December 31, 2003 aspublished by the Federal Reserve Bank of New York (U.S. $1.000 = Cdn. $1.29).  The translation was made solely for theconvenience of readers in the United States. The translated U.S. dollar figures should not be construed as arepresentation that the Canadian currency amounts actually represent or couldbe converted into U.S. dollars.

 

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