SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                   FORM 10-KSB

(Mark One)

[X]     ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
        ACT OF 1934.

        For the fiscal year ended September 30, 2001

                                       OR


[ ]     TRANSITION  REPORT  PURSUANT  TO SECTION  13 OR 15(d) OF THE  SECURITIES
        EXCHANGE ACT OF 1934

        For the transition period from ________ to ____________

                          Commission File No. 000-26327


                             SoftQuad Software, Ltd.
                 (Name of Small Business Issuer in Its Charter)

             Delaware                         65-0877744
(State or Other Jurisdiction of          (I.R.S. Employer Identification No.)
Incorporation or Organization)

  161 Eglinton Avenue East, Suite 400, Toronto, Ontario, Canada         M4P1J5
               (Address of principal executive offices)               (ZIP Code)

                                 (416) 544-9000
                (Issuer's Telephone Number, Including Area Code)

      SECURITIES REGISTERED UNDER SECTION 12 (b) OF THE EXCHANGE ACT: None

         SECURITIES REGISTERED UNDER SECTION 12 (g) OF THE EXCHANGE ACT:

                         Common Stock, $0.001 par value
                                (Title of Class)

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

     Check if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-B  is not  contained  herein,  and  will  not be  contained,  to the  best  of
registrant's   knowledge,   in  definitive   proxy  or  information   statements
incorporated  by reference  in Part III of this Form 10-KSB or any  amendment to
this Form 10-KSB. [ ]

     State issuer's revenue for its most recent fiscal year. $5,647,527

     The aggregate  market value of the voting and non-voting  Common Stock held
by non-affiliates as of November 30, 2001 the registrant,  computed by reference
to the closing  sales  price of the Common  Stock on the OTC  Bulletin  Board on
December 17, 2001 was $0.80.

<PAGE>

     The  number of  shares  of  common  stock,  par  value  $0.001  per  share,
outstanding as of November 30, 2001,  was  13,837,448.  In addition,  there were
3,086,710  outstanding  exchangeable  shares  of  the  registrant's  subsidiary,
SoftQuad  Acquisition Corp.,  which had voting and economic rights  functionally
equivalent  to shares of the  registrant's  common  stock.  Such  numbers do not
include shares subject to other derivative securities.

     Transitional Small Business Disclosure Format (check one): Yes [ ]   No [X]

DOCUMENTS INCORPORATED BY REFERENCE:  None


<PAGE>

                                      INDEX

<TABLE>
<S>                    <C>
PART I
                  Item 1.  Description of Business
                  Item 2.  Description of Property
                  Item 3.  Legal Proceedings
                  Item 4.  Submission of Matters to a Vote of Security Holders

PART II
                  Item 5.  Market for Common Equity and Related Stockholder Matters
                  Item 6.  Management's Discussion and Analysis
                  Item 7.  Financial Statements
                  Item 8.  Changes In and Disagreements with Accountants on
                           Accounting and Financial Disclosure

PART III
                  Item 9.  Directors, Executive Officers, Promoters and Control
                           Persons; Compliance with Section 16(a) of the
                           Exchange Act
                  Item 10. Executive Compensation
                  Item 11. Security Ownership of Certain Beneficial Owners and Management
                  Item 12. Certain Relationships and Related Transactions
                  Item 13. Exhibits and Reports on Form 8-K
</TABLE>


This  Annual  Report of  SoftQuad  Software,  Ltd.  ("SoftQuad")  on Form 10-KSB
contains  various  forward-looking  statements,  as  contemplated by the Private
Securities  Litigation  Reform Act of 1995.  Forward-looking  statements  may be
identified  by the use of  forward-looking  terminology  such as "may,"  "will,"
"should," "expect,"  "intend,"  "estimate" or "continue" or the negative thereof
or comparable terminology and may include, among other things,  expected growth,
business   strategies,   future   revenues,   future  sales,   future  operating
performance,   plans,  objectives,   goals  and  strategies  of  SoftQuad.  Such
forward-looking  statements are based upon  information  currently  available in
which SoftQuad's management shares its knowledge and judgment about factors that
it believes may materially affect SoftQuad's  performance.  The  forward-looking
statements  are made in good faith by SoftQuad  and are  believed by SoftQuad to
have a reasonable basis. However, such statements are speculative, speak only as
of  the  date  made  and  are  subject  to  certain  risks,   uncertainties  and
assumptions.  Should one or more of these risks or uncertainties materialize, or
should  underlying   assumptions  prove  incorrect,   actual  results  may  vary
materially  from those  anticipated,  estimated or expected.  Factors that might
cause actual  results to differ  materially  from those in such  forward-looking
statements  include,  but are not limited to, the factors  discussed in "Item 6.
Management's  Discussion and Analysis",  as well as other factors discussed from
time to time in the reports filed by SoftQuad with the  Securities  and Exchange
Commission.

     Readers are urged to review  carefully  and  consider  disclosures  made by
SoftQuad in this and other  reports that discuss  factors  germane to SoftQuad's
business.

<PAGE>

                                     PART I


ITEM 1.  DESCRIPTION OF BUSINESS
         -----------------------

                                    OVERVIEW

     SoftQuad is a leading  developer of software  products for the creation and
management of content in XML (eXtensible Markup Language). XML is a language for
the exchange of data on the World Wide Web that is a rapidly  emerging  standard
for B2B e-commerce.

     Our XMetaL product is an advanced,  yet  easy-to-use,  XML content creation
solution.  XMetaL allows authors  throughout an organization to create and adapt
content  for  use  in   e-commerce,   e-publishing   and  knowledge   management
applications.  Since its release in May 1999,  XMetaL has received  enthusiastic
reviews and awards from the media and has been sold to over 2,000 customers in a
wide range of industries.  Our customers  include leading  companies such as the
Canadian House of Commons, Cisco, Congressional Quarterly, Continental Airlines,
GE Medical  Systems,  the  Maryland  General  Assembly,  Microsoft,  RTIS-G Reed
Technologies   and   Information    Services-Government,    Tufts    University,
USAToday.com,  the United States House of  Representatives,  Ford Motor Company,
the  European   Space   Agency,   BMW,   L'Equipe,   KBC  Bank  and   Insurance,
Butterworth-Heinemann,  Philips,  Business  Europe,  ALSTOM and Thomas Cook.  In
addition,  we have formed strategic  alliances with leading  software  companies
that offer complementary products, such as Documentum,  Interwoven, and Software
AG, to  develop  comprehensive  XML  content  management  solutions  integrating
XMetaL.

     Our MarketAgility  product is an XML-based content management  solution for
e-commerce.  MarketAgility  gives  e-commerce  suppliers  more  control over the
collection,  processing and real-time delivery of product  information in XML to
e-marketplaces  and  e-procurement  systems.  MarketAgility  allows suppliers to
quickly  gather  product  information  from  wherever  it resides  within  their
enterprises, whether in content management systems, electronic resource planning
systems,  enterprise  databases  or  Microsoft  Word or Excel  files.  After any
non-XML  information  is  converted  into  XML,   MarketAgility   delivers  this
information  to e-markets  in a format that is fully  customized  for  different
e-markets in their specific dialect of XML.  MarketAgility also allows suppliers
to maintain their competitive  advantage by rapidly and  incrementally  updating
product and pricing information across channels. While we released MarketAgility
on September 25, 2000,  the e-commerce  market is currently  suffering a lack of
demand and sales have not yet materialized.

     Our HoTMetaL product is an HTML-based Web page creation and management tool
that gives developers the advanced capabilities and productivity tools needed to
create Web sites.  As we focused  our  efforts  on  providing  solutions  to the
e-commerce  industry,  we are  transitioning our business away from HoTMetaL and
towards our XML products.

                               RECENT DEVELOPMENTS

     On  August  7,  2001,  we  entered  into  a  merger  agreement  with  Corel
Corporation  ("Corel")  pursuant  to which  Corel is to  acquire  SoftQuad  in a
stock-for-stock  transaction to be accounted for as a purchase transaction.  The
transaction is structured as a merger under the laws of Delaware  between us and
a  wholly-owned  subsidiary  of Corel.  Subject to the  satisfaction  of certain
conditions,  the  transaction  is expected to be completed in the first calendar
quarter of 2002.

     Corel develops, manufactures,  licenses, sells and supports a wide range of
software  products  including  graphics,   business  productivity  and  consumer
products.  Corel  products  are  available  for  users  of most  PCs,  including
International  Business  Machines  Corporation  and  IBM-compatible  PCs,  Apple
Computer  Inc.'s  Macintosh(R)  and Linux-based  systems.  Corel is incorporated
under the Canada Business Corporation Act and its principal office is in Ottawa,
Canada. The common shares of Corel are traded under the stock symbol CORL on the
NASDAQ National Market and the Toronto Stock Exchange.

     Under the terms of the transaction,  each of our shares of common stock and
preferred  stock  will be  exchanged  for  0.4152 of a common  share of Corel on
closing,  being a ratio of $1.50 to  $3.6129.  The  $1.50  value for each of


                                       4
<PAGE>

our shares equals an  approximate  34 per cent premium over the closing price of
our common stock on August 6, 2001 (the last trading day before the announcement
of the transaction). The $3.6129 value for the common shares of Corel represents
the prior 10 day volume  weighted  average  share price of the common  shares of
Corel. The exchange ratio will be fixed for movement in the share price of Corel
between $2.71 and $4.52 per share.  If the share price of Corel  increases above
$4.52,  the exchange  ratio will decrease such that each of our shares of common
stock and  preferred  stock will be exchanged  for a portion of a share of Corel
having a value of $1.875 based on the volume weighted average share price of the
common  shares of Corel on the NASDAQ  National  Market for the 10 trading  days
ending on the third day prior to the meeting of our  stockholders to approve the
transaction.  If the share price of Corel  decreases  to below $2.71 but remains
above $2.17,  the exchange  ratio will  increase such that each of our shares of
common stock and  preferred  stock will be exchanged for a portion of a share of
Corel having a value of $1.125.  If the share price of Corel  decreases to $2.17
or below, the exchange ratio will increase to 0.5190.

     The exchangeable shares of SoftQuad Acquisition Corp., our subsidiary, will
be exchanged on an equivalent basis in a parallel  transaction to the merger. It
is the  intention of SoftQuad and Corel to structure the  transaction  involving
the holders of the  exchangeable  shares in a manner that  provides  the holders
with a tax-deferred  roll-over for Canadian  income tax purposes,  provided that
there are no adverse  consequences  to Corel in structuring  the  transaction in
that manner.

     The  completion  of the  transaction  is  subject  to the  approval  of our
stockholders.  We will hold a special  meeting  of our  stockholders  as soon as
possible to consider  and, if deemed  advisable,  approve the  transaction.  The
level of approval required is a majority of the votes cast by the holders of our
voting stock, voting as a single class.

     The completion of the  transaction is also subject to the  satisfaction  of
certain other  customary  conditions,  including the fulfillment of covenants in
the merger  agreement,  the  accuracy of  representations  and  warranties,  the
obtaining of certain  consents and approvals  from  government  authorities  and
certain third parties.

     Pursuant to the merger agreement,  we have agreed,  among other things, not
to solicit competing  acquisition  proposals for SoftQuad. If the transaction is
not completed under certain circumstances,  including by virtue of a third party
making a  unsolicited  acquisition  proposal to us or our  stockholders,  we are
required to pay Corel a break-up fee of $1.5 million and reimburse its expenses.

     The merger  agreement may be terminated by either party if the  transaction
has not been  completed  on or before  February  15,  2002 or in  certain  other
limited  circumstances,  including breach of a representation or covenant of the
other party. The merger agreement may also be terminated by us if the price of a
common  share of Corel is less than $2.17 based on the volume  weighted  average
share  price of the  common  shares on the  NASDAQ  National  Market  for the 10
trading days ending on the third day prior to the meeting of our stockholders to
approve the transaction.

     No assurance can be given that the merger will be consummated.

                         HISTORY AND CORPORATE STRUCTURE

     COMMENCEMENT OF OUR BUSINESS

     We commenced our business in 1986 under the name  SoftQuad Inc.  During the
1980s, we developed software products based on SGML (Standard Generalized Markup
Language),  the  predecessor  of XML. In 1992,  SoftQuad  Inc.  was  acquired by
SoftQuad  International Inc. (now renamed NewKidCo International Inc.), which is
a publicly traded company listed on the Toronto Stock Exchange. During the early
1990s, we began to focus on HTML-based software,  culminating with the launch in
1993 of HoTMetaL.  In 1996,  members of our  management  identified a need for a
more   versatile   language   than  HTML  and  began  to  work,   together  with
representatives of other technology companies, on developing XML.

     ESTABLISHMENT OF SOFTQUAD CANADA

     In August 1998,  certain  members of our management  organized a management
buyout of  substantially  all of the assets and liabilities of SoftQuad Inc. and
100% of the shares of  SoftQuad  UK Limited,  which was  SoftQuad  International
Inc.'s European  subsidiary.  To facilitate the buyout,  on August 7, 1998, they
established  SoftQuad  Software  Inc.,  an Ontario  corporation  referred  to as
"SoftQuad Canada".  SoftQuad Canada completed the buyout on


                                       5
<PAGE>

October 1, 1998. The assets acquired in the buyout included, among other things,
the rights to the name "SoftQuad." In May 1999, SoftQuad Canada launched XMetaL.

     ESTABLISHMENT OF FINANCECO

     In December 1999, we retained a Toronto-based  investment  dealer to act as
an agent in  facilitating  private  placement  financings  of  SoftQuad  Canada.
Pursuant  to this  agreement,  money was  first  funded  by  investors  to a new
Delaware corporation formed to facilitate the financings, FinanceCo, in exchange
for FinanceCo stock and warrants. As of January 17, 2000, FinanceCo entered into
agreements  with the security  holders of SoftQuad  Canada to acquire all of the
outstanding  securities  of  SoftQuad  Canada  through  FinanceCo's  subsidiary,
SoftQuad Acquisition Corp. ("SAC"), an Ontario  corporation.  Pending completion
of that  acquisition,  FinanceCo loaned the proceeds of completed  financings to
SoftQuad Canada for operating purposes.

     MERGER WITH THE AMERICAN SPORTS MACHINE, INC.

     On March 2,  2000,  FinanceCo  merged  with  and into The  American  Sports
Machine,  Inc., a Florida corporation ("ASM"). ASM was organized on June 2, 1995
but, at the time of the merger,  had not engaged in an active  trade or business
other than to seek to merge with a private operating company. At the time of the
merger,  ASM's common stock was registered under Section 12(g) of the Securities
Exchange Act of 1934,  and its common stock was quoted on the OTC Bulletin Board
under the symbol "AMRR." Upon the merger,  the separate  corporate  existence of
FinanceCo  terminated and ASM continued as the surviving entity. Under the terms
of the merger agreement,  ASM agreed to seek stockholder  approval to rename the
merged  company  SoftQuad  Software,  Ltd. and to redomicile it to Delaware.  In
connection with the merger,  the security  holders of FinanceCo  exchanged their
securities for equivalent securities of ASM.

     COMPLETION OF THE CANADIAN ACQUISITION

     On April 5, 2000, ASM,  through SAC completed its acquisition of all of the
outstanding  securities of SoftQuad Canada. In the acquisition,  (i) two holders
of common shares of SoftQuad Canada  exchanged (on a 1-for-1 basis) their common
shares of SoftQuad  Canada for shares of ASM's  common  stock,  (ii)  because of
Canadian tax considerations,  the remaining holders of common shares of SoftQuad
Canada exchanged (on a 1-for-1 basis) their common shares of SoftQuad Canada for
exchangeable  shares of SAC (which have voting and economic rights  functionally
equivalent  to, and are  exchangeable  on a 1-for-1  basis  with,  shares of our
common  stock),  and (iii) each holder of an option to acquire  common shares of
SoftQuad  Canada  exchanged  such  option  for an  option  issued  by  ASM  with
economically equivalent terms.

     To facilitate ASM's redomiciling to Delaware and the change of its name, on
March 7, 2000, ASM formed a new Delaware  corporation  named SoftQuad  Software,
Ltd. On April 10, 2000, ASM merged with and into this new subsidiary, upon which
the separate corporate existence of ASM terminated,  and SoftQuad Software, Ltd.
continued as the surviving entity.

        COMPLETION OF THE ACQUISITION OF ADVANCED DATA ENGINEERING, INC.

     On  November  20,2000,  we  completed  our  acquisition  of  Advanced  Data
Engineering,  Inc.  ("ADEi").  Under  the  acquisition  agreement,  we agreed to
purchase ADEi for a purchase  price of $4.8 million,  which was satisfied by the
issuance of 744,133 shares of our common stock.  Also pursuant to the agreement,
option holders of ADEi converted vested options in ADEi to 80,770 vested options
of SoftQuad.  The total purchase price was approximately $5.5 million.  ADEi was
subsequently  merged into SoftQuad  Software  California Inc. The purchase price
was  subject  to  working  capital  adjustments.  The  acquisition  of ADEi  was
accounted for using the purchase  method of  accounting.  The purchase price was
allocated to the assets acquired and liabilities assumed.  Operating results for
ADEi were included in our operating results from the date of the acquisition. In
June 2001, we issued an additional 37,206 shares of our common stock to the ADEi
stockholders  as a penalty for not timely  registering  the shares issued in the
acquisition of ADEi with the Securities and Exchange Commission.


                                       6
<PAGE>

     OUR CURRENT CORPORATE STRUCTURE

     We currently conduct our operations  through SoftQuad  Software  California
Inc.,  SoftQuad Canada and its wholly owned subsidiary,  SoftQuad  Limited.  The
following diagram illustrates the structure of SoftQuad and its subsidiaries:

<TABLE>

                                                      SoftQuad Software, Ltd.
                                                      (a Delaware corporation)
                                                         |    "SoftQuad"    |
                                                         |                  |
                                      100% common equity |                  | 100% common equity
                                                         |                  |
                                                         |                  |
                                                         |                  |
       <S>                                                            <C>
       --------------------------------------------------------       -------------------------------------------
                 SoftQuad Software California, Inc.                           SoftQuad Acquisition Corp.
                     (a California corporation)                           (an Ontario (Canada) corporation)
                       "SoftQuad California"                                            "SAC"
       --------------------------------------------------------       -------------------------------------------
                                                                            |
                                                                            | 100% common equity
                                                                            |
                                                                      -------------------------------------------
                                                                                SoftQuad Software Inc.
                                                                          (an Ontario (Canada) corporation)
                                                                                  "SoftQuad Canada"
                                                                      -------------------------------------------
                                                                            |
                                                                            | 100% common equity
                                                                            |
                                                                      -------------------------------------------
                                                                                   SoftQuad Limited
                                                                                (a UK limited company)
                                                                      -------------------------------------------
</TABLE>

                                BUSINESS STRATEGY

o    We are a leader in XML development and software.  Members of our management
team  have  been  and  continue  to  be  leaders  in  the   development  of  XML
specifications through the World Wide Web Consortium (W3C).

o    Our  award-winning  XMetaL  product is  recognized as a leading XML content
creation solution for the B2B market.

o    We  have  developed   partnerships  and  alliances  with  industry  leading
technology companies in important content management and B2B segments. We expect
these partnerships to enhance the acceptance of our XML products and allow us to
be in the forefront of XML content creation solutions.

o    We have an  experienced  management  team that has extensive  experience in
marketing leading edge products.

                                    INDUSTRY

MARKET ANALYSIS

     INDUSTRY BACKGROUND

     The  Internet  has  created new  opportunities  for  businesses  to enhance
service and deliver information to partners and customers electronically. Today,
websites are an important source of product and service  information across many
industries and businesses rely on them to improve  customer  service and enhance
market reach.

                                       7
<PAGE>

     The opportunity,  however, brings with it new demands:  whereas at one time
corporations   published   predominantly   in  printed  form  only  and  updated
publications  in manageable  cycles,  today  businesses  are expected to deliver
up-to-date information almost continuously,  through websites,  through wireless
devices, and in a variety of formats, as well as in printed form.

     This  has  taxed  the  existing  print  publishing  processes.  In this new
environment, for example, information is often reused from one publication media
to another and across many documents. Changing it may imply revising hundreds of
individual   documents  at  once.   Tracking  and  executing   these   revisions
continuously  to  ensure  accurate   information  delivery  on  multiple  media,
twenty-four  hours a day,  seven days as week,  often  requires  new systems and
processes.

     XML content  management has emerged as an important  technology to meet the
demands of this kind of continuous,  cross-media publishing.  Content management
systems support the publishing  process from authored  document to final output,
controlling  and tracking the flow of work and managing  revisions.  XML, on the
other hand,  facilitates the reuse of information  across documents and delivery
media.  When used  together,  these two  technologies  enable  organizations  to
streamline  and automate  information-flow  from  potentially  many thousands of
authors  and to manage and  control the  delivery  of this  information  to many
websites and printed documents.

     AUTHORING XML CONTENT

     Once in XML, web and print content is readily  managed.  However,  XML is a
difficult format for  non-technical  authors.  XML has a specialized  syntax and
rules for how parts of a  document  are to be  combined.  Moreover,  traditional
word-processors  and desktop publishing tools do not produce XML content that is
suitable for cross-media publishing applications.

     Our  products  enable  non-technical  authors  to create  and work with XML
content  more  easily,  thereby  allowing  enterprises  to  deploy  XML  content
management  solutions more broadly within their  organizations and reduce costly
and  cumbersome   format   conversions.   Just  as  importantly,   our  products
specifically support the reuse of information across many documents and delivery
media and help to automate revisions to this information.

     We  specialize  in native  XML  content  authoring  technology.  XML itself
represents  the  technology  evolution of "markup"  languages over some 20 years
from SGML,  to HTML and  finally to XML.  We have  contributed  to this  process
through  our  work  at  international  technology  standards  bodies.  We  are a
co-founder of the World Wide Web Consortium (W3C) and the W3C XML working group.
Our Chief Scientist,  Peter Sharpe,  collaborated in the development of the SGML
technical specifications and co-authored the specification for XML. Our Director
of Product  Technology  Dr.  Lauren  Wood  chairs the yearly  international  XML
conference.

     Beginning  in  1990  with  the  launch  of  our  SGML   authoring   product
Author/Editor, our technology base parallels this evolution. SGML is used almost
exclusively in large-scale corporate and military publishing  applications since
these  applications  demand  flexible,  easy  to  use  solutions.  By  contrast,
HoTMetaL,  launched  in 1994 to  address  the  mass-market  for HTML  based  web
authoring  solutions,  had  ease-of-use  as its primary  design  goal.  Finally,
XMetaL,  our flagship XML content authoring  solution launched in 1999,  evolved
from  this  shared  technology  base and,  like XML  itself,  combines  both the
flexibility of SGML and the ease-of-use of HTML.

TECHNOLOGY BACKGROUND:  HTML, SGML AND XML

     HYPER TEXT MARKUP LANGUAGE (HTML)

     HTML is currently the most  prevalent  language used on the World Wide Web.
HTML is used to encode display  information on Web pages. Web Browsers,  such as
Microsoft Internet Explorer and Netscape Navigator, use this display information
to format Web Pages on  individuals'  screens as they browse the Web.  HTML uses
"tags" to indicate how a particular  item should be  formatted.  It is concerned
with the set up or presentation,  as opposed to the content or substance, of the
information.  For example,  if a name is to be displayed in bold,  HTML dictates
that that word should be surrounded by the bold ("b") tag, as follows:

    OPEN BRACKET b CLOSE BRACKET John Doe OPEN BRACKET /b CLOSE BRACKET


                                       8
<PAGE>

     HTML  is an  international  standard  governed  by  the  W3C,  an  industry
organization  composed of member  companies  with the  objective  of  developing
international standards for the World Wide Web.

     STANDARD GENERALIZED MARKUP LANGUAGE (SGML)

     SGML is the  parent  technology  to  HTML.  SGML  is an open  international
standard  governed  by  the  International  Standards  Organization.   SGML  was
developed  in the 1980's to enable the  encoding  of  important  documents  in a
standard format, which was independent of any particular software vendor. SGML's
focus is on encoding the information  contained in documents,  as opposed to the
set up or  presentation  of that  information.  Formatting  (the laying out of a
document  on a printed  page or  display) is  accomplished  as a separate  step,
allowing the same information to be displayed on multiple destinations,  such as
print, CD-ROM and online, from the same source.  SGML, like HTML, uses "tags" to
label items in a document but unlike HTML, these tags refer to an item's meaning
rather than its format.  For example,  the name of the author of a given article
might be encoded as follows:

     OPEN BRACKET  AUTHOR CLOSE  BRACKET John Doe END OPEN BRACKET  author CLOSE
BRACKET

     SGML  is  used  in  a  number  of  high-end   publishing  and   engineering
applications   for  a  number  of  industries,   including   telecommunications,
aerospace, pharmaceuticals,  legal and commercial publishing and semiconductors.
However,  the growth of SGML usage is hampered by the fact that the language was
not designed for use on the World Wide Web.

     EXTENSIBLE MARKUP LANGUAGE (XML)

     As noted  above,  the HTML  protocol  was  designed to allow the display of
information on the Web.  However,  because it is focused on presentation and not
content,  it does not assist in encoding the meaning of  displayed  information.
The use of the Web for e-commerce imposes new requirements on Web content. These
requirements  go  beyond  simple   presentation   to  full-fledged   information
processing.  For  example,  a  purchase  order  sent to a  supplier  needs to be
processed  by that  supplier's  order  entry  system,  not merely  displayed  on
someone's screen.  Also, while HTML is useful for displaying product information
to prospective customers,  it does not allow a computer program to automatically
search and  compare  products on the Web.  As a result,  labor-intensive  manual
searches must be performed.

     Our Chief Scientist,  Peter Sharpe,  and  representatives  of several other
technology  companies  identified  the need to create a new language  that would
enable  information  processing  and  exchange  on the  Web  using  SGML  as its
foundation. In 1996, this group proposed the concept to the W3C, founded the XML
Working  Group and produced the XML  specification.  In February  1998,  the XML
specification was approved by the W3C and officially designated as a standard by
the Director of the W3C.

     XML,  like  both  HTML  and  SGML,  uses  "tags"  to  identify  items in an
electronic  document.  XML is  "extensible"  in the sense  that it is capable of
being  expanded or  customized.  As such,  it allows users to define new tags as
required  by a given  application.  For  example,  tags  relating  to  financial
information  might be OPEN  BRACKET  earnings  per share CLOSE  BRACKET and OPEN
BRACKET  revenue  CLOSE  BRACKET, whereas tags  relating to a product  catalog
might  include OPEN BRACKET  product name CLOSE  BRACKET and OPEN BRACKET  price
CLOSE  BRACKET . A typical HTML Web Page might encode a product  description  as
follows:

     OPEN BRACKET b CLOSE BRACKET  Hoover  Vacuum  Cleaner OPEN BRACKET /b CLOSE
BRACKET

     OPEN BRACKET p CLOSE BRACKET This vacuum has power and is light weight OPEN
BRACKET /p CLOSE BRACKET

     OPEN BRACKET b CLOSE BRACKET  Special  Price:  $99.95 OPEN BRACKET /b CLOSE
BRACKET

     (In HTML "open/closed bracket b" denotes bold font and "open/closed bracket
p" denotes a paragraph displayed in normal font.)

Using XML, the same information would be encoded as follows:

     OPEN BRACKET  product name CLOSE BRACKET Hoover Vacuum Cleaner OPEN BRACKET
/product name CLOSE BRACKET

     OPEN BRACKET  description  CLOSE BRACKET This vacuum has power and is light
weight OPEN BRACKET /description CLOSE BRACKET


                                       9
<PAGE>

     OPEN BRACKET price CLOSE BRACKET OPEN BRACKET /price CLOSE BRACKET

     By clearly  tagging  electronic  content and  identifying  its  constituent
components  (product name,  description and price above),  XML enables  computer
applications to create, share and process information automatically.

     There are a number of  organizations  devoted to establishing  standard tag
sets for particular applications,  including XML.org (of which we are a founding
member),  Microsoft's BizTalk and Rosetta.net. We continue to participate in the
development  and future  direction of XML and its related  standards,  alongside
other technology companies.

                                    PRODUCTS

XMETAL

     Released in May 1999, XMetaL is our flagship product.  XMetaL is a software
program that enables  organizations  to create XML content  easily and avoid the
complexities of formatting  languages.  As organizations  continue to adopt XML,
they will need to create valid XML documents that conform precisely to the rules
of a  specific  application.  For  example,  product  descriptions  for  product
catalogues, user guides for consumer products, articles,  newsletters,  purchase
orders,  bills of material and part specifications all have particular XML rules
as to their structure and syntax.  XMetaL enables  non-technical  individuals to
create valid XML documents  without  having to remember and correctly  apply all
these rules.  XMetaL reduces training costs and enables businesses to deploy XML
applications broadly, both internally and to business partners.

     Unlike HTML,  which has a fixed set of tags that can be easily  learned and
applied,  XML uses arbitrary tags that can vary with each application.  XML also
incorporates rules about how these tags are to be combined and used. These rules
are specific to each  application.  Consequently,  it is much more difficult for
people to create valid XML documents.

     XMetaL  enables  people to create XML content  from scratch or by importing
information  from word processors,  spreadsheets and databases.  XMetaL requires
minimal  customization and eliminates lengthy learning curves and training costs
associated with  alternative  options.  XMetaL won PC Magazine's  award for Best
Development Tool in the 2001 Technical Innovation Awards and Outstanding Product
of the Year in the  Authoring  Tools  category  at the Web '99 Web  Tool  Awards
presented by Web Techniques, a respected industry journal. XMetaL also was named
one of  Internet  Week's  "Best of the Best"  and one of the  "Most  Innovative"
software  packages in Internet World's Best of the Year Awards.  XMetaL was also
nominated for "Printing  Solution of the Year" in the 2001 Publishing Awards. We
have announced strategic  partnerships with XML solutions vendors such as Ariba,
Documentum,  Interwoven and Software AG to integrate  XMetaL with these vendors'
products.

     XMetaL  integrates  with  content  management  systems,  ensuring  that the
content  coming  into  those  systems  adheres  to  the  rules  specific  to the
application in question. XML content is then stored in these systems as reusable
components,   which  can  be   selectively   processed   and  displayed  by  Web
applications. Using this kind of solution, Web architects and designers are free
to manage the content, redeploy applications and connect to new partners and new
systems without disrupting the work of content contributors. XMetaL communicates
with the content management system to ensure that content is properly stored and
allows users to work in a familiar interface.

     On June 26, 2000, we began shipping  XMetaL 2.0, a major upgrade to XMetaL,
and XMetaL 2.1 with Unicode became available on May 1, 2001.

     MARKETAGILITY

     SoftQuad's  MarketAgility is an XML-based content management  solution that
gives suppliers an efficient and cost-effective way to move product  information
from their enterprise to multiple e-procurement channels.

     Drawing on SoftQuad's expertise in XML, MarketAgility allows suppliers to:

     o  collect   product   information   from  wherever  it  resides  in  their
     enterprises,  whether in content management systems, ERPs, other databases,
     or Word and Excel files;


                                       10
<PAGE>

     o transform and deliver product  information to e-markets and e-procurement
     systems using the XML formats and schemas they require;

     o rapidly and incrementally  update product and pricing  information across
     all channels;

     o create and manage  multiple  catalogs  that  reflect  different  regional
     requirements, languages, and pricing information; and

     o differentiate  themselves in the  e-marketplace by supplementing  product
     data with rich  content,  created and revised  directly in XML using XMetaL
     technology.

     MARKETAGILITY ARCHITECTURE

     MarketAgility's   architecture  is  made  up  of  three   components:   the
MarketAgility XML Connector, the MarketAgility XML Server, and the MarketAgility
XML Transporter.

     o Marketagility XML Connector

     The  MarketAgility  XML  Connector  consists  of a  series  of  information
processors  and  XML  composition   tools  that  can  collect,   manipulate  and
standardize product information stored throughout a supplier's enterprise.

     COLLECTING DATA. The XML Connector  provides secure,  reliable retrieval of
both  structured  and  unstructured  data  sources  from local and  remote  data
repositories.

     Structured  data can be collected from relational  databases,  ERP systems,
office productivity applications like spreadsheets, standardized reports and Web
pages, as well as content management systems and enterprise applications.

     The XML Connector can retrieve  information from inconsistent  formats like
desktop publishing and word processing applications, as well HTML and XML pages.

     Because   not  all   information   sources   allow   automated   retrieval,
MarketAgility  provides an XML composition workbench where suppliers can extract
information from disparate data sources.

     ENHANCING AND VALIDATING DATA.  MarketAgility's  XML composition  workbench
also features powerful validation, viewing and editing capabilities.  Validation
ensures that  information is consistent  with corporate data sources.  Suppliers
can view collected data to identify exceptional cases and, using MarketAgility's
XML content creation tools, modify data directly. These same editing tools allow
suppliers  to easily  supplement  their  product  data with rich content to help
better differentiate themselves in e-markets.

     MAPPING AND  STANDARDIZING  DATA.  The XML Connector  maps content from its
original sources to  MarketAgility's  internal XML schema.  Data is processed to
ensure that disparate data  representations are harmonized to use standard units
of measurement, product coding schemas and product identifiers. This facilitates
transformation to the schemas used by individual marketplaces.

     o MARKETAGILITY XML SERVER

     The XML Server provides  server-based control over the storage,  management
and delivery of product  information  to multiple  e-markets.  Built on industry
standard  databases,  and  administered  through a Web interface,  it provides a
secure  and  reliable  repository  and  staging  area  for the  development  and
management of customized product listings.

     RAPID AUTOMATIC  UPDATES.  In conjunction  with the XML Connector,  the XML
Server provides a sophisticated mechanism for automatically detecting changes in
the original data sources, and providing rapid, incremental updates to collected
product  information.  When changes are  detected,  the XML Server pulls updated
data from original source  materials and integrates it into the database.  After
updates have been validated and approved,  using


                                       11
<PAGE>

the XML Server's  workflow,  they are pushed using the XML Server's  workflow to
marketplaces  or  e-procurement  systems  either on  demand or during  regularly
scheduled updates.

     STAGING  AND  WORKFLOW.  The XML  Server  provides  a  staging  area  where
suppliers can preview,  revise and approve individual product entries and entire
product  listings.  Suppliers can review  listings for accuracy  before they are
sent to e-marketplaces.  To support this capability further, the XML Server uses
a workflow system for approvals and to ensure only  authorized  users can access
and revise entries.

     o  MarketAgility   XML  Transporter   (communicator/dispatcher/broadcaster/
     publisher)

     The  XML  Transporter  controls  the  extraction,  transformation  and  the
assured, secure delivery of a supplier's product information from the XML Server
to  multiple  e-market  places,   e-procurement  systems  and  other  electronic
distribution channels.

     CUSTOMIZED PRODUCT LISTINGS.  The XML Transporter extracts required product
data  residing  on the XML  Server  based on the needs of  different  e-markets.
Customized  datasets can be defined  based on  parameters  such as  marketplace,
customer,  geographic  region or  language.  This  process can be  automated  by
incorporating business rules to determine required information, presentation and
conditional routing.

     AUTOMATIC  TRANSFORMATION.   The  XML  Transporter  automatically  converts
customized product information from MarketAgility's internal data model to those
required by specific e-markets.  Data is validated according to the schemas used
by each marketplace to ensure error free postings and updates.

     ASSURED DELIVERY.  Finally,  the XML Transporter  provides assured,  secure
delivery of product  information  to  multiple  electronic  channels,  including
e-marketplaces and e-procurement systems.

     HoTMetaL

     Our HoTMetaL  software  program was the first  commercially  available HTML
editor.  Currently  in its sixth  version,  HoTMetaL  remains  a very  versatile
HTML-based Web page creation and management tool. Its powerful, customizable and
extensible  features give developers the advanced  capabilities and productivity
tools  required to quickly create and display Web sites.  It is a  comprehensive
Web publishing  solution targeted at the Web developer and has an installed base
of over 100,000 users worldwide.

                               SALES AND MARKETING

     Central to our marketing  strategy is the  development of  partnerships  to
significantly  expand our  market  reach.  To date,  XMetaL  market  development
efforts  have  secured  a number  of key  strategic  partnerships  with  various
companies that provide XML-based  technologies and services.  We are focusing on
expanding these  relationships with various companies focused on XML. We believe
that such relationships create opportunities for us as well as our partners, and
will greatly  supplement our direct sales efforts.  Our partnering efforts focus
on two areas: technology partnerships and solutions providers.

     o  Technology   Partners  -  SoftQuad   has,  and  is  further   expanding,
     partnerships  with  companies  that  are  involved  in the  developing  and
     marketing of  complementary  technologies.  Specifically,  SoftQuad pursues
     relationships  with  companies  developing  XML  technology  and  XML-based
     products  with  which  XMetaL  software  can be  integrated.  Through  such
     partnerships,  we hope to expand the XMetaL user base. Some of our partners
     in this category include Ariba, Documentum, Interwoven and Software AG.

     o  Solutions  Providers  -  SoftQuad  is  looking  to build its  network of
     solutions provider  partners.  Many specialize in XML solutions to vertical
     markets  and,  in  addition,  provide  value-added  services in the form of
     consulting services, training, installation,  technical support, and system
     configuration.  We have  signed  reseller  agreements  with a number of XML
     capable  value-added  resellers.  These  organizations  combine  their  own
     expertise and professional services with market leading products to deliver
     fully  customized  solutions to customers.  Value-added  resellers  receive
     special  discounts from us and make a margin on product sales. To date, our
     network  of  value-added  resellers  has over  fifty  members  in  eighteen
     countries, including DataLogistics Inc., Reed Technology,  Turn-key Systems
     and Agra Systems.


                                       12
<PAGE>

     PROMOTIONAL ACTIVITIES

     Our promotional  activities  combine  awareness  campaigns  (through public
relations and trade show  attendance)  with targeted  lead  generation  (through
direct  mail,  free  evaluations  and Web  sites).  We use  professional  public
relations  agencies to manage our media relations  program in the United States,
Canada and Europe.  Media relations  activities include drafting press releases,
press  briefings and  encouraging  product  reviews and corporate  profiles.  In
addition,  XML-related  trade shows are an  important  element of the  marketing
strategy since they provide a one-to-many  communications and sales opportunity.
XML-specific trade shows include XML 2000, XML One and XML World, which are each
held twice a year, once in North America and once in Europe.  Attendees  include
individuals responsible for technology purchases in large organizations.  Due to
our involvement in various industry  standards setting  committees,  a number of
our key personnel are routinely  invited to deliver  papers at  conferences  and
seminars. We complement these speaking opportunities with regional seminars that
will showcase proven XML solutions using XMetaL and MarketAgility.

                              CUSTOMERS AND MARKETS

     Our products  serve the retail market and the corporate  market.  We target
the retail market with HoTMetaL and the corporate  market with our XML products,
XMetaL and MarketAgility.

     For the year ended  September  30, 2001,  there were two customers in North
America and one  customer in Europe who each  accounted  for greater than 10% of
our total sales in these respective  markets.  For the years ended September 30,
2000 and 1999, there were four and two customers in North America  respectively,
and one and one customer in Europe respectively,  who each accounted for greater
than 10% of our total sales in these respective markets.

     HOTMETAL

     HoTMetaL has a customer base of Web developers  and consumers.  HoTMetaL is
distributed through our direct sales force and through our website.

     XMETAL

     XMetaL is targeted  to  e-business  applications  in the  following  market
segments: e-publishing, knowledge management and e-commerce.

     o E-publishing

     Web  publishers  must keep their  content  fresh in order to  increase  and
sustain  readership.  Sites  change  daily,  or  even  several  times  per  day.
Turn-around  times  are  short  and  publishing  deadlines  tight.  In  such  an
environment,  "posting"  content  manually  on a Web  site  is  inefficient  and
difficult to manage,  particularly if content simultaneously comes from numerous
external  content  suppliers  and internal  contributing  writers.  Accordingly,
high-volume online publishers rely on Web publishing applications,  which create
Web Pages on a continuous basis from content stored in a database.

     As the Web turns  more and more  organizations  into  publishers,  for both
internal and public Web presence, the demand for these solutions is growing. The
central  issue is the same - how to allow  non-technical  writers to  contribute
content to the Web site without  requiring a manual  process that slows down the
Web group or  requires  expensive  Web  design  houses to  perform  routine  Web
updates.  Due to its inherent  structure,  XML Web content can be  automatically
read by publishing applications and processed in a streamlined fashion.

     XMetaL,  due to its  ease-of-use  and ability to generate  valid XML, is an
ideal  solution  for  non-technical  writers to create XML Web  content to power
modern Web publishing and content management systems.

     o Knowledge management

     Knowledge  management  is  the  effective  gathering  and  distribution  of
corporate  knowledge  to  better  support  employees,  partners  and  customers.
Corporate  knowledge  includes   information  about  procedures,   products  and


                                       13
<PAGE>

services,  case studies, usage scenarios and key competitive issues. Examples of
knowledge management  applications include customer help desk systems,  document
management systems,  search and retrieval tools, and knowledge bases.  Knowledge
management  applications are important to enable service offerings over the Web,
helping customers and distribution partners get accurate,  timely information to
better support business transactions.

     XML  plays  an  important  role in  these  systems  by  organizing  content
fragments, supporting intelligent searching, and allowing control of the flow of
content automatically.  XMetaL enables information workers to contribute content
directly into these  knowledge  management  applications  without being aware of
their internal structure.

     o E-commerce

     The central  challenge  for  e-commerce  vendors is to find the most direct
market for their products  online.  There are a large number of business  models
and distribution  channels, and new ones emerge all the time (including building
a portal or  destination  web site,  participating  in  affiliate  and  reseller
programs to list  products  in existing  high-traffic  sites,  participating  in
electronic markets and vertical portals,  or a combination of these techniques).
Vendors must be able to tailor product  information to specific channels quickly
while keeping all information synchronized, up-to-date and consistent.

     Management  of this  electronic  content,  therefore,  plays a key  role in
determining the success of an e-commerce  strategy.  The content being processed
includes  product  descriptions,  pricing  information,  and  a  whole  host  of
value-added  content  such as product  reviews,  product  comparisons,  links to
related products and other commentary.

     As the number of potential channels continues to multiply and the volume of
business  increases,  the  need  for  vendors  to build  flexible  and  scalable
electronic  catalogues of products and services  continues to grow. XMetaL is an
ideal  solution to create and  maintain  XML  content  within  these  e-commerce
applications,  because of its  flexibility,  ease of use and ability to generate
valid XML from inputs prepared by non-technical sources.

     MARKETAGILITY

     MarketAgility is targeted at suppliers  participating in e-marketplaces and
e-procurement  systems,  who wish to manage,  control and deliver  their product
information  using XML. This segment also is targeted by XMetaL.  See "Customers
and Markets-XMetaL-E-commerce."

                                   COMPETITION

     The market for our  products  is  intensely  competitive,  subject to rapid
technological change and significantly affected by new product introductions and
other market  activities  of industry  participants.  We expect  competition  to
persist and intensify in the future. To read more about risks resulting from our
competition, see "Risk Factors--We face intense competition."

     XMETAL COMPETITION

     Alternative  solutions to XMetaL presently  include modified SGML authoring
tools,  enhanced text editors,  which require a high degree of knowledge of XML,
and solutions based on word processors.  Although some of these alternatives are
functionally  similar to XMetaL,  we believe that none adequately offers all the
features embedded in XMetaL.

     o SGML Authoring Tools

     Traditional SGML authoring tools are very specialized and require an author
who is experienced  not only in SGML, but also in the particular  document types
being used. The high set-up,  deployment and installation costs typical of these
tools are justified only in specialized  applications.  Recent  attempts by SGML
tool providers to support XML have not, in our view,  altered these  fundamental
characteristics in their products.  Products in this category include Excosoft's
Documentor,  Adobe's FrameMaker+SGML,  Interleaf Panorama, and ArborText's Adept
Editor.  Market  penetration  of these  products is, we believe,  limited in our
target markets.


                                       14
<PAGE>

     o Text Based XML Editors

     Most of the XML authoring software  introduced to date consists of enhanced
text  editors  of  various  kinds.  These  programs  require  a high  degree  of
understanding  of XML and are not  generally  suitable  for  commercial  content
authoring  by  ordinary  business  users.  They are used  primarily  by software
developers creating XML data-oriented systems. Products in this category include
Vervet Logic's XML Pro and Stilo.

     o Microsoft Word

     Microsoft Word is not an XML authoring application; it does not support the
definition of tags, nor does it create validated XML content,  both of which are
essential  attributes of a commercial  grade XML editor.  Microsoft  Office 2000
will not create valid XML content,  but uses XML as a storage format.  Microsoft
Word's  design  and  architecture  is  optimized  for  paper  publishing,  where
presentation, not structure, is the primary concern.

     As a result,  Microsoft Word documents must undergo a conversion process to
be translated into XML. Conversion is expensive, labor-intensive, time-consuming
and error-prone.  Conversion is employed  effectively in applications  where the
documents  being converted do not change often and have a useful life of several
years.  On the  Web,  where  lead-time  is  short  and the  emphasis  is on new,
up-to-the-minute   information,   continuous   conversion   of  new  content  is
unworkable.

     MARKETAGILITY COMPETITION

     The marketplace for MarketAgility is a new and developing  environment that
has  softened  significantly  in  recent  quarters.  Many  vendors  have  or are
developing  XML-based solutions to address content  collection,  translation and
management.  E-marketplaces  and  e-procurement  systems  continue to evolve and
their  capability to accept rich content  continues to evolve.  Competition  for
MarketAgility may come from e-market and e-procurement  infrastructure  software
vendors,  e-catalog  aggregators and e-catalog  software solution  vendors,  ERP
vendors,  e-publishing  solutions  vendors  and  content  management,   document
management,  workflow and workgroup software solutions vendors.  MarketAgility's
competitive  advantage  is its  ability to collect and  translate  into XML both
structured and unstructured  content.  Current  solutions for the collection and
translation of unstructured content are labor-intensive and not very scalable.

     HOTMETAL COMPETITION

     HoTMetaL  faces  strong  competition  from  products  such  as  Microsoft's
FrontPage,  Macromedia's  Dreamweaver and Adobe's GoLive. As a result,  HoTMetaL
revenues  have declined in recent  quarters.  As we focus our efforts on our XML
products, we expect sales of HoTMetaL to continue to decline.

                        PROPRIETARY RIGHTS AND LICENSING

     Our success and ability to compete is  dependent  on our ability to develop
and maintain  the  proprietary  aspects of our  technology  and operate  without
infringing on the  proprietary  rights of others.  We rely on a  combination  of
trademark,  trade  secret,  and copyright law and  contractual  restrictions  to
protect the  proprietary  aspects of our  technology.  These  legal  protections
afford only limited protection for our technology.  We presently own no patents.
We seek to protect our source  code for our  software,  documentation  and other
written materials under trade secret and copyright laws. We license our software
pursuant  to signed  license or  "shrinkwrap"  agreements  that  impose  certain
restrictions on the licensee's ability to utilize the software. Finally, we seek
to avoid  disclosure  of our  intellectual  property by requiring  employees and
consultants   with   access   to  our   proprietary   information   to   execute
confidentiality agreements with us and by restricting access to our source code.
Due  to  rapid  technological  change,  we  believe  that  factors  such  as the
technological and creative skills of our personnel, new product developments and
enhancements  to  existing  products  are more  important  to  establishing  and
maintaining a technology leadership position than legal protections.

     We also have rights in the  trademarks  that we use to market our products.
These  trademarks  include  SoftQuad,  HoTMetaL PRO,  MarketAgility  Enterprise,
MarketAgility Express, MarketAgility and XMetaL. We have applied to register our
trademarks in the United States, Canada, the United Kingdom, the European Union,
Australia,  New


                                       15
<PAGE>

Zealand,  South Africa, South Korea, Taiwan, China, Hong Kong and Japan. We have
received registrations for SoftQuad, HoTMetaL and XMetaL, among others.

     Despite our efforts to protect our proprietary rights, unauthorized parties
may attempt to copy  aspects of our  products  or to obtain and use  information
that we regard as  proprietary.  Policing  unauthorized  use of our  products is
difficult and while we are unable to determine the extent to which piracy of our
software  exists,  we  expect  software  piracy  to  be  a  persistent  problem.
Litigation may be necessary in the future to enforce our  intellectual  property
rights, to protect our trade secrets, to determine the validity and scope of the
proprietary  rights of others or to defend  against  claims of  infringement  or
invalidity.  However,  the laws of many countries do not protect our proprietary
rights to as great an extent as do the laws of the United States and Canada. Any
such resulting  litigation  could result in  substantial  costs and diversion of
resources and could have a material  adverse  effect on our business,  operating
results  and  financial  condition.  We  cannot  assure  you that  our  means of
protecting our proprietary  rights will be adequate or that our competitors will
not independently develop similar technology. If we fail to meaningfully protect
our proprietary rights, our business,  operating results and financial condition
could be materially adversely affected.

     To  date,  we have  not  been  notified  that  our  products  infringe  the
proprietary rights of third parties, but we cannot assure you that third parties
will  not  claim  infringement  by us with  respect  to our  current  or  future
products. We expect that developers of Web-based commerce software products will
increasingly  be subject to  infringement  claims as the number of products  and
competitors in our industry  segment grows and as the  functionality of products
in different segments of the software industry increasingly  overlaps.  Any such
claims,  with or without merit,  could be  time-consuming  to defend,  result in
costly litigation,  divert management's  attention and resources,  cause product
shipment  delays or require us to enter into  royalty or  licensing  agreements.
Such royalty or licensing agreements, if required, may not be available on terms
acceptable to us or at all. A successful claim of product  infringement  against
us and our failure or inability to license the  infringed  technology or develop
or  license  technology  with  comparable  functionality  could  have a material
adverse effect our business, financial condition and operating results.

     We integrate  third-party  software  into our  products.  This  third-party
software may not continue to be available on commercially  reasonable  terms. If
we cannot  maintain  licenses  to key  third-party  software,  shipments  of our
products  could be delayed  until  equivalent  software  could be  developed  or
licensed and  integrated  into our products,  which could  materially  adversely
affect our business, operating results and financial condition.

RESEARCH AND DEVELOPMENT

     During the years ended  September  30, 2001,  2000 and 1999,  we spent $2.1
million, $2.0 million and $1.1 million respectively, on research and development
activities,  no part of which was borne directly by any customer.  These amounts
represent  37.2%,  45.7% and  32.5%,  respectively,  of revenue in each of those
periods. We believe our current investment in research and development is at the
appropriate  level to attain our strategic  objectives and we expect our overall
research and development spending to stabilize in future periods.

                                    EMPLOYEES

     As of September  30, 2001, we had a total of 105  full-time  employees.  Of
these employees, 32 were in development and product management,  27 in sales and
marketing,  22 in professional  services and customer  support and 24 in finance
and  administration.  Our  future  success  depends  in part on our  ability  to
attract,   retain  and  motivate  highly  qualified   technical  and  management
personnel,  for whom  competition  is intense.  From time to time we also employ
independent contractors to support our professional services,  development,  and
marketing  activities.  Our  employees  are not  represented  by any  collective
bargaining  unit,  and we have never  experienced  a work  stoppage.  We believe
relations with our employees are good.

                                  RISK FACTORS

     The Risk Factors related to SoftQuad and SoftQuad's stock will not apply to
the former holders of SoftQuad stock who hold Corel stock after the consummation
of the  proposed  merger with Corel.  Risk  factors  related to the Internet and
Internet industry may continue to be applicable to the Corel stockholders. There
may be additional  risk factors that are applicable to Corel  stockholders  that
are contained in the filings Corel has made or will make with the Securities and
Exchange Commission.


                                       16
<PAGE>

RISKS RELATED TO OUR BUSINESS

     WE MAY BE UNABLE TO MEET OUR FUTURE CAPITAL REQUIREMENTS

     The Company has determined  that it will not have  sufficient cash and cash
equivalents  to meet its working  capital  requirements  for the first  calendar
quarter of 2002, as the Company's revenue  projections  continue to decrease due
to recent economic conditions, and as certain expenses increase due to the costs
associated with negotiating and completing the planned merger with Corel.  These
matters raise  substantial  doubt about the  Company's  ability to continue as a
going concern. The Company believes that entering into the strategic merger with
Corel,  in light of the  increasingly  difficult  environment  in the public and
private  markets  for  raising  financing,  is the  best  alternative  available
currently to the Company.  If the merger close is delayed or the merger fails to
close,  additional  funds will be  required  to support  the  Company's  working
capital  requirements or for other purposes.  The terms of the Merger  Agreement
permit SoftQuad to effect additional financing through the issuance of equity or
debt,  provided that (i) it has not exceeded its  operating  budget by more than
10% and (ii) Corel has a right of first refusal over any financing requirements.
If Corel waives this right,  the Company may seek to raise such additional funds
through public or private equity or debt financings or from other sources. There
can be no assurance  that  additional  financing will be available at all, or if
available  will be on terms  favorable  to the Company,  or that any  additional
financing  will not be  dilutive.  New equity  securities  may also have rights,
preferences or privileges  senior to those of existing  holders of common stock.
If we cannot raise funds on acceptable  terms,  we may not be able to develop or
enhance our  products,  take  advantage  of future  opportunities  or respond to
competitive pressures or unanticipated requirements, which could have a material
adverse effect on our net loss, revenue growth and cash position.

     WE HAVE INCURRED AND EXPECT TO CONTINUE TO INCUR LOSSES

     We have not achieved profitability and we expect to incur net losses for at
least  the  next  several  quarters.  To date,  we have  funded  our  operations
primarily  from the  sale of  equity  and debt  securities  and  borrowings.  We
incurred  losses of $3.0  million,  $6.7 million and $15.2 million for the years
ended  September 30, 1999,  2000 and 2001. As of September 30, 2001,  our losses
have resulted in an accumulated  deficit of $25.0  million.  We plan to maintain
our  operating  expenses at their current  levels or, in some areas,  at reduced
levels due to headcount reductions  implemented during the year. We will need to
generate  significant  revenues to achieve and  maintain  profitability.  If our
revenues do not increase quarter over quarter, our net losses in a given quarter
may be even  greater  than  expected.  We cannot be certain that we will achieve
sufficient revenues for profitability. If we do achieve profitability, we cannot
be certain that we can sustain or increase profitability in the future.

     FAILURE TO  COMPLETE  OUR  MERGER  WITH COREL  COULD  ADVERSELY  AFFECT OUR
     BUSINESS AND CASH POSITION

     The completion of our merger with Corel is subject to numerous  conditions.
Even if a majority in interest of holders of our common stock,  preferred  stock
and exchangeable  shares in SAC vote to approve the merger,  we cannot guarantee
that the merger with Corel will be completed. If the merger is not completed for
any  reason,  we may be subject to a number of  material  risks,  including  the
following:

     o    Potential customers may defer purchases of our products or services;

     o    Potential partners may refrain from entering into agreements with us;

     o    We may, under some circumstances,  be required to pay Corel's expenses
          related to the merger and pay to Corel a substantial termination fee;

     o    Employee turnover may increase; and,

     o    We will  require  additional  capital,  which may not be  available on
          attractive terms or at all.

     The  occurrence  of these  factors  could  result  in  serious  harm to our
business and financial condition.


                                       17
<PAGE>

     IF THE MERGER WITH COREL IS TERMINATED UNDER A NUMBER OF CIRCUMSTANCES,  WE
     WOULD INCUR SUBSTANTIAL COSTS

     In the event the merger with Corel is  terminated by us or by Corel under a
number  of  specified  circumstances,  we  would  be  obligated  to pay  Corel a
termination fee of $1,500,000.  In addition, we also would be required to pay to
Corel all of  Corel's  accounting,  legal,  investment  and other  out-of-pocket
expenses  incurred by Corel with respect to the merger.  The  requirement to pay
the  foregoing  significant  amounts  could  result in our not  having  adequate
capital resources to continue with our business plan.

     THE  SUBSTANTIAL  EXPENSES  ASSOCIATED  WITH THE MERGER  WITH  COREL  COULD
     ADVERSELY AFFECT OUR FINANCIAL CONDITION

     We will incur  substantial  costs in connection with the merger with Corel.
These  costs  will  primarily  relate to the costs  associated  with the fees of
attorneys,  accountants and our financial advisors.  If the merger with Corel is
not  completed,  we will  have  incurred  significant  costs  for  which we have
received no benefit.  The requirement to pay the foregoing expenses could result
in our not having adequate capital resources to continue with our business plan.

     WE CANNOT ASSURE YOU THAT THE MARKET WILL ACCEPT OUR XMETAL PRODUCT

     We are  focusing  our  business  plan on our  XMetaL  product  and  related
services  and are  therefore  relying on the market  success of this  product to
propel  our growth in the near and medium  term.  Although  we have been able to
secure initial sales of our XMetaL  product,  we cannot assure you that existing
customers will deploy XMetaL in larger numbers (which will require a significant
commitment and  investment of resources by these  customers) or that XMetaL will
be adopted by new customers or secure widespread market acceptance.  The failure
of XMetaL to achieve  meaningful market acceptance could have a material adverse
effect on our ability to generate  sufficient  revenues to meet our expenses and
cash position.

     RELIANCE ON TECHNOLOGY  PARTNERS MAY AFFECT  REVENUE GROWTH BECAUSE WE LACK
     CONTROL OVER THESE PARTNERS

     We rely on  technology  partners to support our  selling  efforts.  Some of
these partners must have the expertise required to work with XML. Because XML is
a relatively new technology, expertise is not widespread. If these partners fail
to develop,  do not acquire  appropriate  XML  expertise  or  otherwise  fail to
adequately support our products,  our ability to generate sufficient revenues to
meet our expenses and our cash position could be materially adversely affected.

     IF WE ARE  UNABLE  TO  MEET  THE  RAPID  CHANGES  IN XML  CONTENT  CREATION
     TECHNOLOGY OR A SUPERIOR OR MORE WIDELY  ACCEPTED  TECHNOLOGY IS DEVELOPED,
     OUR EXISTING PRODUCTS COULD BECOME OBSOLETE

     The  market  for our  products  is  marked by rapid  technological  change,
frequent product  introductions and  Internet-related  technology  enhancements,
uncertain product life cycles,  dynamic changes in client demands and constantly
evolving  industry  standards.  We cannot be certain  that we will  successfully
develop  and market new  products or new product  enhancements  that  respond to
technological  change,  evolving  industry  standards  or  client  requirements.
Competing  products based on new  technologies  or new industry  standards could
render our existing products obsolete and unmarketable. To succeed, we will need
to enhance our current  products  and  develop new  products on a timely  basis.
E-commerce technology, particularly XML content creation technology, is complex,
and new  products and product  enhancements  can require  long  development  and
testing periods.  If we do not develop and release enhanced or new products on a
timely basis, our ability to generate  sufficient  revenues to meet our expenses
and our cash position could be materially adversely affected.

     WE FACE INTENSE COMPETITION

     The XML content  creation and e-market  infrastructure  software  market is
intensely competitive. Our clients' requirements and the technology available to
satisfy those requirements  continually change. We expect competition to persist
and intensify in the future.


                                       18
<PAGE>

     Our principal  competitors  offering  alternatives to XMetaL include Adobe,
Arbortext,   Excosoft   and  Stilo.   The  market   for   supply-side   e-market
infrastructure  software,  which MarketAgility targets, is currently fragmented,
but we  anticipate  strong  competition  to develop from new entrants as well as
existing  software  companies.  HoTMetaL faces strong  competition from products
such as Microsoft's FrontPage, Macromedia's Dreamweaver and Adobe's GoLive. Most
of our competitors have longer  operating  histories and  significantly  greater
financial,  technical,  marketing and other  resources than we do. Many of these
companies  can also  leverage  extensive  customer  bases and  adopt  aggressive
pricing policies to gain market share.  Potential competitors (which may develop
products  with  features  similar  to  XMetaL),  such as Adobe,  Macromedia  and
Microsoft,  may bundle or price their  products in a manner that may  discourage
users from  purchasing  our  products.  In  addition,  it is  possible  that new
competitors  or  alliances  among  competitors  may emerge and  rapidly  acquire
significant  market  share.  There are no  significant  barriers to entering the
markets that XMetaL serves.

     Competitive  pressures  may make it difficult  for us to acquire and retain
customers and may require us to reduce the price of our  software.  We cannot be
certain  that we will be able to  compete  successfully  with  current or future
competitors.  If we fail to  compete  successfully  against  current  or  future
competitors, our growth could be materially adversely affected.

     OUR OPERATING HISTORY MAKES FINANCIAL FORECASTING DIFFICULT

     We began  operations  in 1986.  However,  from 1992 to 1998, we operated as
part of NewKidCo. In addition, we have transitioned our operations from HoTMetaL
to XMetaL and related services.  As a result, it is difficult for us to forecast
operating  expenses  based  on  historical  results.  Accordingly,  we base  our
anticipated expenses in part on projected future revenues.  Most of our expenses
are fixed in the short term and we may not be able to quickly reduce spending if
our  revenues  are  lower  than our  projections.  If  revenues  do not meet our
projections,  our  operating  income,  net  income  and cash  position  could be
materially adversely affected and net losses in any period would be even greater
than expected.

     WE EXPECT OUR QUARTERLY REVENUES AND OPERATING RESULTS TO FLUCTUATE

     Our revenues and operating  results are likely to vary  significantly  from
quarter to quarter.  A number of factors  are likely to cause these  variations,
including:

     o    Varying demand for our products and services;

     o    Seasonal fluctuations, including those resulting from the introduction
          of new versions of our products or new products, our clients' calendar
          year budgeting cycles and slow summer purchasing patterns in Europe;

     o    Unexpected delays in introducing new products and services;

     o    Length of the sales cycle;

     o    Customer budget constraints;

     o    Increased  expenses,  whether related to sales and marketing,  product
          development or administration;

     o    Changes  in the  rapidly  evolving  market  for XML  content  creation
          technology and e-market infrastructure software;

     o    The mix of product license and services revenue, as well as the mix of
          products licensed;

     o    The mix of services  provided and whether these  services are provided
          by staff or third party contractors;

     o    The mix of domestic and international sales; and,

     o    Economic conditions.


                                       19
<PAGE>

     Accordingly,   we  believe  that  quarter-to-quarter   comparisons  of  our
operating  results are, and will continue for the foreseeable  future to be, not
necessarily  meaningful,  and such comparisons may not be accurate indicators of
future  performance.  The  operating  results  of  companies  in the  electronic
commerce industry have, in the past, experienced significant  quarter-to-quarter
fluctuations.  If our revenues for a quarter fall below our  expectations and we
are not able to quickly reduce our spending in response,  our operating  results
for the quarter  will be harmed.  It is likely  that in some future  quarter our
operating  results may be below the  expectations  of public market analysts and
investors  and,  as a result,  the price of our common  stock may fall.  As with
other companies in our industry,  our operating expenses,  which include selling
and marketing,  research and  development  and general and  administrative,  are
based on our  expectations of future revenues and relatively  fixed in the short
term.  You should not rely on the results of one quarter as an indication of our
future performance.

     IN  ORDER  TO  INCREASE  MARKET  AWARENESS  OF OUR  PRODUCTS  AND  GENERATE
     INCREASED REVENUE WE NEED TO EXPAND OUR SALES CAPABILITIES

     We must  expand  our  direct  and  indirect  sales  operations  in order to
increase market  awareness of our products and generate  increased  revenue.  We
cannot be certain that we will be  successful  in this effort.  Our products and
services require a sophisticated  sales effort targeted at the senior management
of our  prospective  clients.  We cannot be certain that we will be able to hire
enough  qualified  individuals  in the  future.  We  also  plan  to  expand  our
relationships  with  value-added   resellers,   systems  integrators  and  other
third-party  resellers to build an indirect sales channel. In addition,  we need
to manage  potential  conflicts  between our direct  sales force and third party
reselling  efforts.  Finally,  XML expertise is often lacking in the value-added
resellers,  systems integrators and third-party  resellers.  Because individuals
with XML expertise are in  increasingly  high demand,  we cannot be certain that
partners will be successful in acquiring XML expertise,  either through training
employees or by hiring experienced personnel.

     IF OUR INTERNATIONAL  BUSINESS CONTINUES TO GROW IN ABSOLUTE DOLLARS AND AS
     A PERCENTAGE OF REVENUE, OUR BUSINESS WOULD BECOME INCREASINGLY SUSCEPTIBLE
     TO RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS

     We expect  revenue  outside of North  America to  continue to account for a
significant percentage of our total revenue in the future and we believe that we
must  continue  to  expand  international  sales  in  order  to  be  successful.
International operations are generally subject to a number of risks, including:

     o    Expenses associated with customizing products for foreign countries;

     o    Laws and business practices that favor local competition;

     o    Dependence on local vendors;

     o    Multiple, conflicting and changing governmental laws and regulations;

     o    Potentially adverse tax consequences;

     o    Difficulties in collecting accounts receivable; and,

     o    Foreign currency exchange rate fluctuations.

     Our  international  sales  growth  will  be  limited  if we are  unable  to
establish  additional foreign  operations,  expand  international  sales channel
management  and support  organizations,  hire  additional  personnel,  customize
products for local markets,  develop  relationships with  international  service
providers and establish  relationships  with additional  distributors  and third
party integrators.  In that case, our business,  operating results and financial
condition  could  be  materially  adversely  affected.  Even  if we are  able to
successfully expand international  operations, we cannot be certain that we will
be able to maintain or increase international market demand for our products. In
addition,  while our financial results are currently reported in U.S. dollars, a
significant  portion of our sales are denominated in U.K. pounds  sterling,  the
Euro and  other  currencies.  Significant  long-term  fluctuations  in  relative
currency values may adversely affect our consolidated results of operations.  In
particular,  our consolidated results of operations may be adversely affected by
a significant strengthening of the U.S. dollar against U.K. pounds sterling, the
Euro or other


                                       20
<PAGE>

currencies  in which we generate  revenues.  To date, we have not engaged in any
foreign  exchange  hedging  transactions.  We intend to consider  entering  into
foreign exchange hedging transactions in the future, if appropriate.

     THE IMPACT OF CHANGES IN GLOBAL  ECONOMIC  CONDITIONS  ON OUR CUSTOMERS MAY
     CAUSE US TO FAIL TO MEET EXPECTATIONS

     Our  operating  results  can vary  significantly  based  upon the impact of
changes in global economic conditions on our customers.  More specifically,  the
current macro-economic  environment is more uncertain than in recent periods and
has the potential to materially and adversely  affect us. The revenue growth and
profitability  of our  business  depends  on the  overall  demand  for  computer
software and services,  particularly  in the areas in which we compete.  Because
our sales are primarily to corporate  customers whose businesses  fluctuate with
general  economic  and business  conditions,  a softening of demand for computer
software  caused by a weakening  economy may result in  decreased  revenues  and
lower  growth  rates  and may  increase  the  collection  risk  of our  accounts
receivable  portfolio.  Customers  may defer the  purchase  of  products if they
experience a downturn in their business or if there is a downturn in the general
economy.

     WE MAY BE UNABLE TO ADEQUATELY DEVELOP A PROFITABLE  PROFESSIONAL  SERVICES
     BUSINESS, WHICH COULD AFFECT BOTH OUR RESULTS AND OUR ABILITY TO ASSIST OUR
     CLIENTS WITH THE IMPLEMENTATION OF OUR PRODUCTS

     We cannot be certain that we can attract or retain a  sufficient  number of
the highly qualified  personnel that our professional  services  business needs.
Clients  that  license our XML  software  products  may engage our  professional
services  business  to assist  with  data  conversion,  software  customization,
training,  consulting  and  implementation.  Growth  in our  product  sales  may
therefore  depend on our ability to provide our clients with these  services and
to  educate  third-party  resellers  on how to use our  products.  We expect our
professional  services revenue to increase in absolute dollars as we continue to
provide data  conversion,  consulting and training  services that complement our
products and as our installed base of clients  grows.  We cannot be certain that
our professional services business will ever achieve profitability. We generally
bill our clients for our services on a "time and materials" basis. However, from
time to time we enter into  fixed-price  contracts  for  services.  We cannot be
certain  that our fees from these  contracts  will exceed the costs of providing
the  services.  In addition,  competition  for qualified  services  personnel is
intense.  We are in a new  market  and there are a limited  number of people who
have the skills to provide the services that our clients demand.

     WE MAY BE ADVERSELY  AFFECTED IF WE LOSE OUR EXECUTIVE OFFICERS AND CERTAIN
     KEY PERSONNEL,  OR ARE UNABLE TO ATTRACT NEW KEY PERSONNEL OR ARE UNABLE TO
     ATTRACT AND RETAIN HIGHLY SKILLED PERSONNEL GENERALLY

     Our success  depends  largely on the skills,  experience and performance of
some key members of our management,  including  Roberto  Drassinower,  our Chief
Executive Officer, and Peter Sharpe, our Chief Scientist. If we lose one or more
of these key employees,  our business,  operating  results and cash position may
suffer.  Also, our future success depends on our ability to continue  attracting
and retaining highly skilled personnel.  Like other software companies,  we face
intense  competition  for  qualified  personnel,  particularly  in the  areas of
engineering,  technology,  selling and marketing.  Many of our competitors  have
greater  resources than we have. We cannot be certain that we will be successful
in attracting or retaining qualified personnel in the future.

     WE DEVELOP  COMPLEX  SOFTWARE  PRODUCTS  SUSCEPTIBLE TO SOFTWARE  ERRORS OR
     DEFECTS THAT COULD RESULT IN LOST  REVENUES,  OR DELAYED OR LIMITED  MARKET
     ACCEPTANCE

     Complex  software  products such as ours often  contain  errors or defects,
particularly  when first  introduced  or when new versions or  enhancements  are
released.  Despite  internal  testing  and  testing  by  current  and  potential
customers,  our current and future products may contain serious defects. Serious
defects or errors could result in lost revenues, a delay in market acceptance or
other  costs,  which  could  have a  material  adverse  effect on our  business,
operating  results and  financial  condition.  In our  license and  "shrinkwrap"
agreements,  we seek to limit  liability  for  certain  claims  associated  with
product  defects,  but we  cannot  assure  you that  these  limitations  will be
enforceable.

     DELAYS IN  RELEASING  ENHANCED  VERSIONS OF OUR  PRODUCTS  COULD  ADVERSELY
     AFFECT OUR COMPETITIVE POSITION

     We will need to continue to  introduce  new versions of our products to add
new features,  functionality  and technology that customers desire. In the past,
we have experienced delays releasing new products. As a result, we cannot assure
you that we will be able to  successfully  complete the development of currently
planned  or  future  products  in a  timely  and  efficient  manner.  Due to the
complexity of these products,  internal quality  assurance  testing and customer
testing of  pre-commercial  releases may reveal  product  performance  issues or
desirable  feature


                                       21
<PAGE>

enhancements  that could lead us to postpone the release of these new  versions.
In addition, the reallocation of resources associated with any such postponement
would  likely  cause  delays in the  development  and  release  of other  future
products or enhancements to our currently available products.

     OUR BUSINESS IS BASED ON PROPRIETARY  RIGHTS TO OUR  TECHNOLOGY,  AND IF WE
     FAIL TO  ADEQUATELY  PROTECT  THESE  RIGHTS,  OUR BUSINESS MAY BE SERIOUSLY
     HARMED

     We  depend  upon  our  ability  to  develop  and  protect  our  proprietary
technology and intellectual property rights to distinguish our products from our
competitors'  products.  The  use by  others  of our  proprietary  rights  could
materially harm our business.  We rely on a combination of copyright,  trademark
and trade secret  laws,  as well as  confidentiality  agreements  and  licensing
arrangements, to establish and protect our proprietary rights. We have no issued
patents.  Attempts  may be  made  to copy  or  reverse-engineer  aspects  of our
products or to obtain and use information that we regard as proprietary. Despite
our efforts to protect our proprietary rights, existing laws afford only limited
protection.  Accordingly,  we cannot be certain  that we will be able to protect
our  proprietary  rights  against  unauthorized  third  party  copying  or  use.
Furthermore,  policing the  unauthorized  use of our products is difficult,  and
expensive  litigation  may be  necessary  to enforce our  intellectual  property
rights.

     WE COULD INCUR SUBSTANTIAL  COSTS DEFENDING OUR INTELLECTUAL  PROPERTY FROM
     INFRINGEMENT OR A CLAIM OF INFRINGEMENT

     In recent years, there has been significant litigation in the United States
involving  claims of  alleged  infringement  of patents  and other  intellectual
property rights. We could incur substantial costs to defend any such litigation.
Although we are not currently involved in any intellectual  property litigation,
we may be a  party  to  litigation  in the  future  as a  result  of an  alleged
infringement of another's  intellectual  property. If a claim of infringement of
intellectual property rights was decided against us, we could be required to:

     o    cease  selling,  incorporating  or using  products  or  services  that
          incorporate the challenged intellectual property;

     o    obtain from the holder of the infringed  intellectual property right a
          license to sell or use the relevant technology,  which license may not
          be available on reasonable terms; or

     o    redesign those products or services that incorporate such technology.

RISKS RELATED TO THE INTERNET INDUSTRY

     OUR PERFORMANCE  WILL DEPEND ON THE GROWTH OF THE INTERNET FOR COMMERCE AND
     XML

     Our future success depends heavily on the Internet and XML technology being
speedily   accepted  and  widely  used  for  commerce.   Any  of  the  following
circumstances could have a materially adverse effect on our business,  operating
results and financial condition:

     o    E-commerce or the use of XML for e-commerce  does not continue to grow
          or grows more slowly than expected.

     o    Consumers or  businesses  reject the  Internet as a viable  commercial
          medium.

     o    E-commerce businesses are unable to achieve adequate  profitability or
          are unable to raise additional capital.

     o    The Internet  infrastructure is not able to support the demands placed
          on it by increased Internet usage and bandwidth requirements.

     o    Delays in the  development  or adoption of new standards and protocols
          required to handle increased levels of Internet  activity or increased
          government  regulation  cause the Internet to lose its  viability as a
          commercial medium.


                                       22
<PAGE>

     o    We incur  substantial  expenses  adapting our solutions to changing or
          emerging technologies and market conditions, which could occur even if
          the required  infrastructure,  standards,  protocols or  complementary
          products, services or facilities are developed and the adoption of XML
          for Internet commerce continues as expected.

     OUR  PERFORMANCE  WILL  DEPEND ON THE NEW  MARKET  FOR  XML-BASED  SOFTWARE
     PRODUCTS AND E-MARKET INFRASTRUCTURE SOFTWARE SOLUTIONS

     The market for  XML-based  software  products and  e-market  infrastructure
software  products is new and rapidly evolving and has softened during the year.
We expect that we will continue to need intensive marketing and sales efforts to
educate  prospective  customers  about the uses and benefits of our products and
services.  Accordingly,  we  cannot  be  certain  that a viable  market  for our
products will emerge or be sustainable.  Enterprises  that have already invested
substantial  resources in other methods of conducting  business may be reluctant
or slow to adopt a new approach  that may  replace,  limit or compete with their
existing systems. Similarly, individuals have established patterns of purchasing
goods and services  and may be  reluctant to alter those  patterns or to provide
personal  data in connection  with  purchasing  goods over the Internet.  Any of
these  factors  could  inhibit the growth of online  business  generally and the
market's acceptance of our products and services in particular.  This could have
a material adverse impact on our ability to generate revenue growth.

     LAWS AND  REGULATIONS  COULD  EITHER  DIRECTLY  RESTRICT  OUR  BUSINESS  OR
     INDIRECTLY IMPACT OUR BUSINESS BY LIMITING THE GROWTH OF E-COMMERCE

     Laws  and  regulations  directly  applicable  to  Internet  communications,
commerce  and  advertising  are  becoming  more  prevalent,  and  new  laws  and
regulations  are under  consideration  by the United  States  Congress and state
legislatures. Any new legislation or restrictions arising from current or future
government  investigations  or  policy  could  hinder  the  growth in use of the
Internet   generally   and  decrease  the   acceptance  of  the  Internet  as  a
communications,  commercial and  advertising  medium.  The  governments of other
states or foreign countries might attempt to regulate  Internet  communications,
commerce  and  advertising  or levy  sales  or  other  taxes  relating  to these
activities.  The European Union has enacted its own privacy regulations that may
result in limits on the collection and use of certain user information. The laws
governing the Internet,  however, remain largely unsettled,  even in areas where
there  has  been  some  legislative  action.  Governmental  bodies  have not yet
determined  in many  instances  whether  and how  existing  laws  such as  those
governing intellectual property, privacy, libel, taxation and antitrust apply to
the Internet and e-commerce.  For example,  the U.S. Federal Trade Commission is
currently  examining whether B2B e-commerce  exchanges may create  opportunities
for collusion and  price-fixing  that violate  antitrust laws. In addition,  the
growth and  development  of the market for  e-commerce may prompt calls for more
stringent consumer  protection laws, both in the United States and abroad,  that
may  impose  additional  burdens  on  companies  conducting  business  over  the
Internet.  Our business,  revenue  growth and cash position  could be materially
adversely  affected by the  adoption,  modification  or  enforcement  of laws or
regulations relating to the Internet and e-commerce.

RISK RELATED TO THE SECURITIES MARKETS

     OUR STOCK PRICE IS HIGHLY VOLATILE

     The market price of our common stock has been highly volatile. In addition,
the stock market has  experienced  extreme  price and volume  fluctuations.  The
market  prices  of  the  securities  of  Internet-related  companies  have  been
especially  volatile.  Future  market  prices  may  fluctuate  significantly  in
response to the following factors, some of which are beyond our control:

     o    variations in quarterly operating results;

     o    changes in market valuations of Internet software companies;

     o    announcements by us of significant contracts,  strategic partnerships,
          joint ventures or capital commitments;

     o    loss of a major  client or failure  to  complete  significant  license
          transactions;


                                       23
<PAGE>

     o    additions or departures of key personnel;

     o    sales of our common  stock in the future by us and/or by our  insiders
          and significant stockholders; and

     o    fluctuations in stock market price and volume,  which are particularly
          common  among  highly  volatile  securities  of Internet  and software
          companies.

     POSSIBILITY OF WIDE PRICE SWINGS AND INACCURATE  PRICING  INFORMATION COULD
     CREATE A RISK THAT  STOCKHOLDERS  WILL NOT BE ABLE TO ACCURATELY ASSESS THE
     MARKET VALUE OF OUR COMMON STOCK

     While our stock trades  over-the-counter  and is quoted on the OTC Bulletin
Board,  a relative lack of liquidity or volume and the  participation  of only a
few market  makers  makes it more  likely that wide  fluctuations  in the quoted
price of our  common  stock  could  occur.  As a  result,  there is a risk  that
stockholders  will not be able to  obtain  accurate  price  quotes or be able to
correctly  assess the market  price of our stock.  Increases  in the  volatility
could also make it more difficult to pledge the common stock as  collateral,  if
stockholders  sought  to do so,  because  a  lender  might  also  be  unable  to
accurately value the common stock.

     SUBSTANTIAL  SALES OF OUR COMMON  STOCK  COULD  ADVERSELY  AFFECT OUR STOCK
     PRICE

     Sales of a  substantial  number of shares of common  stock by  stockholders
under a registration  statement filed pursuant to registration rights agreements
or otherwise,  or under Rule 144 or other exemptions that may be available under
the  Securities  Act of 1933,  could drive the market  price of our common stock
down by  introducing  a large number of shares into a market in which there is a
relatively  small  number of shares  publicly  traded  and the price is  already
volatile.  In  addition,  the sale of these  shares  could impair our ability to
raise capital through the sale of additional equity securities.

     WE HAVE BECOME SUBJECT TO THE SECURITIES  AND EXCHANGE  COMMISSION'S  PENNY
     STOCK RULES

     We have  become  subject  to the SEC's  penny  stock  rules.  Penny  stocks
generally are equity securities with a price of less than $5.00 per share (other
than securities registered on certain national securities exchanges or quoted on
NASDAQ,  provided  that  current  price and volume  information  with respect to
transactions  in that  security  is  provided by the  exchange  system).  Unless
exempt,  the penny stock rules require  delivery,  prior to any transaction in a
penny stock,  of a disclosure  schedule  about  commissions  payable to both the
broker-dealer and the registered  representative  and current quotations for the
securities.   Finally,  the  rules  require  that  broker-dealers  send  monthly
statements  disclosing recent price information for each penny stock held in the
account and  information on the limited  market in penny stocks.  Because of the
burden  placed  on   broker-dealers  to  comply  with  the  penny  stock  rules,
stockholders may have difficulty  selling our common stock in the open market as
our market price has dropped below $5.00 per share.

ITEM  2.          DESCRIPTION OF PROPERTY
                  -----------------------

     We maintain our principal  executive  offices at 161 Eglinton  Avenue East,
Suite 400,  Toronto,  Ontario,  M4P 1J5, Canada,  which consists of 8,541 square
feet of office space under a lease  expiring  March 31,  2003.  Our research and
development  group is primarily located in a 10,697 square foot facility located
in Vancouver,  Canada under a lease expiring  August 30, 2002. Our  professional
services  group is located in a 2,300 square foot facility  located in Petaluma,
California  under a lease expiring July 1, 2003. We also lease 3,000 square feet
of office space for our European headquarters in London,  England, under a lease
expiring  May 24,  2005 which  contains an early  termination  clause on May 24,
2003.  We also lease less than 1,000  square  feet of office  space for  several
executives in Seattle, Washington under a month-to-month lease.

ITEM  3.          LEGAL PROCEEDINGS
                  -----------------

     We are not a party to any current or pending material legal proceedings.


                                       24
<PAGE>

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

     No matters were  submitted to a vote of the  securities  holders during the
fourth quarter of the fiscal year ended September 30, 2001.

                                     PART II

ITEM  5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
         --------------------------------------------------------

     Our common stock has been quoted on the OTC Bulletin Board since January 7,
2000.  From  January 7, 2000 until  February  21,  2000 it was quoted  under the
symbol  "AMRP," from  February 22, 2000 until April 10, 2000 it was quoted under
the symbol  "AMRR" and since April 11, 2000 it has been quoted  under the symbol
"SXML."

     The following table sets forth, for the periods indicated, the high and low
closing bid prices per share of our common  stock as quoted on the OTC  Bulletin
Board. Quotes on the OTC Bulletin Board may reflect inter-dealer prices, without
retail  mark-ups,  mark-downs or commissions and may not  necessarily  represent
actual transactions.

                                                         High         Low

          Quarter ended March 31, 2000(1)               $36.63       $0.125

          Quarter ended June 30, 2000                   $25.00       $11.75

          Quarter ended September 30, 2000              $13.50       $ 6.94

          Quarter ended December 31, 2000               $ 8.19       $ 1.94

          Quarter ended March 31, 2001                  $ 3.08       $ 1.81

          Quarter ended June 30, 2001                   $ 2.35       $ 1.00

          Quarter ended September 30, 2001              $ 1.38       $ 0.78

     (1) Prior to March 2,  2000,  which was the  effective  date of the  merger
     between FinanceCo and ASM, the high and low closing bid prices per share of
     ASM's  common  stock as quoted on the OTC  Bulletin  Board  were  $7.50 and
     $0.125, respectively. From March 2 through March 31, 2000, the high and low
     closing  bid  prices per share of ASM's  common  stock as quoted on the OTC
     Bulletin Board were $36.625 and $24.50, respectively.

     The  number  of  shares of common  stock  deemed to be  beneficially  owned
includes  9,229,658  shares  reserved  for  exchange  of  exchangeable   shares,
conversion  of  preferred  stock and the  exercise  of  warrants.  The number of
stockholders  of record of our common stock as of September 28, 2001 was 64, and
we believe there are more than 1,000 beneficial owners of such stock.

     We have never paid any  dividends  on our common stock and we do not intend
to pay any dividends on our common stock in the foreseeable  future.  Any future
determination  as to the payment of dividends  will be at the  discretion of our
board of  directors,  and will  depend on our  financial  condition,  results of
operations  and  capital  requirements,  and such other  factors as our board of
directors deems relevant.

RECENT SALES OF UNREGISTERED SECURITIES

     SALES BY SOFTQUAD CANADA

     The  following  sales of  unregistered  securities  were  made by  SoftQuad
Canada, an Ontario (Canada) corporation between April 1999 and February 1999.

     On April 9, 1999,  SoftQuad  Canada issued  351,850  common share  purchase
warrants  with an  exercise  price of $0.47 per  share to  NewKidCo  as  partial
consideration  for the  cancellation  of 703,705  shares of common stock held


                                       25
<PAGE>

by NewKidCo's subsidiary. No sales commissions were paid in connection with such
transactions.  The  warrants  were issued in reliance  upon the  exemption  from
registration  afforded by Section 4(2) of the Securities Act of 1933, as amended
(the "Act").

     On that same date,  SoftQuad Canada issued 1,947,040 shares of common stock
to an institutional  investor and 623,055 shares of common stock to James Clark,
each at a per share  subscription  price of  approximately  $0.43 for  aggregate
subscription  proceeds  of  $1,105,141.  In  connection  with  these  issuances,
SoftQuad   Canada  issued  973,520   common  share  purchase   warrants  to  the
institutional  investor,  and 311,530  common share  purchase  warrants to James
Clark,  each with an exercise price of approximately  $0.43, and SoftQuad Canada
paid a fee to KBL Capital  Partners  Inc. for  investment  advisory  services of
$41,563  plus 58,410  shares of common stock and 233,645  common share  purchase
warrants  with  an  exercise  price  of  approximately   $0.43.   Each  investor
represented  that it was acquiring the stock for the  investor's own account and
that the  investor,  by  virtue  of the  investor's  net  worth  and  investment
experience, was able to evaluate the merits and risks associated with the stock.
No sales commissions were paid in connection with such  transactions.  The stock
and  warrants  were  issued in reliance  upon the  exemption  from  registration
afforded by Section 4(2) of the Securities Act of 1933, as amended (the "Act").

     On May 14, 1999,  SoftQuad  Canada issued 228,160 shares of common stock to
an  institutional  investor at a per share  subscription  price of approximately
$0.43,  for  aggregate  gross  proceeds  of  $98,110.  In  connection  with that
transaction,  SoftQuad  Canada issued 114,080 common share purchase  warrants to
the  institutional  investor with an exercise price of approximately  $0.43, and
paid a fee to KBL Capital  Partners  Inc. of $4,870 plus 6,845  shares of common
stock and 18,255  common  share  purchase  warrants  with an  exercise  price of
approximately  $0.43.  In a  subscription  agreement  signed by the investor and
provided to SoftQuad,  the investor  represented that it was acquiring the stock
for the  investor's  own  account  and  that  the  investor,  by  virtue  of the
investor's net worth and investment experience,  was able to evaluate the merits
and  risks  associated  with  the  stock.  No  sales  commissions  were  paid in
connection  with  such  transactions.  The  stock and  warrants  were  issued in
reliance upon the exemption  from  registration  afforded by Section 4(2) of the
Act.

     On July 30,  1999,  SoftQuad  Canada  issued  $697,522  of debt to eighteen
investors  with KBL Capital  Funding  Inc.  as agent.  In  connection  with this
transaction,  SoftQuad Canada issued 1,025,000 common share purchase warrants to
KBL Capital  Funding Inc. as agent at an exercise price of  approximately  $0.43
and paid KBL  Capital  Partners a  placement  fee of  $67,114  and  warrants  to
purchase  102,500 shares of common stock at an exercise price of $0.43.  Each of
the investors represented that it was an accredited investor.  The warrants were
issued in reliance upon the exemption from registration afforded by Section 4(2)
of the Act.

     On  September  30,  1999,  James Clark,  certain  institutional  investors,
NewKidCo and KBL Capital Funding Inc. as agent for the 18 investors  referred to
in the immediately  preceding paragraph,  sold their warrants to SoftQuad Canada
in exchange  for shares of common stock of SoftQuad  Canada on a 1-for-1  basis,
with 311,530 shares of common stock issued to James Clark,  1,442,000  shares of
common stock issued to the  institutional  investors,  351,850  shares of common
stock  issued to NewKidCo  and  1,025,000  shares of common  stock issued to KBL
Capital Funding Inc. as agent. No sales commissions were paid in connection with
such  transactions.The  stock was issued in  reliance  upon the  exemption  from
registration afforded by Section 3(a)(9) of the Act.

     On December 7, 1999,  SoftQuad Canada issued 215,385 shares of common stock
to a U.K.  company in  consideration  of services  rendered  that were valued at
$95,807.  No sales  commissions were paid in connection with such  transactions.
The stock was issued in reliance upon the exemption from  registration  afforded
by Section 4(2) of the Act.

     On February 25, 2000,  in  consideration  for advisory  services  rendered,
SoftQuad Canada granted to each of Sheldon  Inwentash and Michael Mendelson each
of whom was a director of KBL  Capital  Partners,  options to  purchase  120,000
shares of common  stock,  and  granted to Bo Manor (an  officer  of KBL  Capital
Partners)  options to purchase 60,000 shares of common stock.  Mr. Mendelson and
Mr. Manor subsequently  forfeited their options.  No sales commissions were paid
in connection  with such  transactions.  This offering was made in reliance upon
the exemption from registration afforded by Section 4(2) of the Act.

     SALES BY FINANCECO

     FinanceCo made the following  sales of unregistered  securities  before its
merger with ASM:


                                       26
<PAGE>

     On December 16, 1999,  FinanceCo  issued 736,702 shares of its common stock
at a price of $1.3574  per share and  1,473,405  shares of its Class A preferred
stock at $1.3574  per  share,  aggregating  $3.0  million,  to an  institutional
investor.  In connection with this  transaction,  the  institutional  accredited
investor  received  warrants,  exercisable on or before  December 16, 2002, at a
price of $1.3574 per share to purchase an aggregate of 442,022  shares of common
stock of FinanceCo.  In addition, the agent in respect of this purchase, also an
institutional accredited investor,  received warrants to purchase 220,011 shares
of common stock of FinanceCo on identical terms and received a sales  commission
of 7% of the offering (for an aggregate of $210,000). In subscription agreements
signed by each investor and provided to SoftQuad, each investor represented that
it acquired the securities for investment and not with a view towards resale and
that it was an  accredited  investor.  The stock  and  warrants  were  issued in
reliance upon the exemption  from  registration  afforded by Section 4(2) of the
Act.

     On February  28, 2000,  FinanceCo  issued  1,722,222  shares of its Class B
preferred  stock to two  institutional  investors at a price of $2.90 per share,
aggregating $5 million.  In connection with this transaction,  the institutional
investors  received  warrants,  exercisable  on or before  February 28, 2003, to
purchase an aggregate of 694,445  shares of common stock of  FinanceCo,  with an
exercise  price of $1.53 per share,  and the agent in respect of this  purchase,
Thomson Kernaghan, also an institutional accredited investor,  received warrants
to purchase  347,222 shares of common stock of FinanceCo on identical  terms and
received  a  sales  commission  of 7% of  the  offering  (for  an  aggregate  of
$350,000).  In subscription  agreements  signed by each investor and provided to
SoftQuad,  each  investor  represented  that  it  acquired  the  securities  for
investment  and not with a view  towards  resale  and that it was an  accredited
investor. The stock and warrants were issued in reliance upon the exemption from
registration afforded by Section 4(2) of the Act.

     On February  29,  2000,  an  institutional  accredited  investor  purchased
1,000,000 special warrants at a price of $2.50 per special warrant. Each special
warrant  entitled the investor to acquire one share of common stock of FinanceCo
for  no  additional   consideration.   The  investor  also  received   warrants,
exercisable on or before February 28, 2003, to purchase 100,000 shares of common
stock of FinanceCo,  with an exercise  price of $2.50 per share and a fee in the
amount of 8% of the offering  (for an aggregate of  $200,000).  In  subscription
agreements  signed by the  investor  and  provided  to  SoftQuad,  the  investor
represented  that it acquired the  securities for investment and not with a view
towards  resale and that it was an accredited  investor.  The stock and warrants
were issued in reliance upon the exemption from registration afforded by Section
4(2) of the Act.

     ISSUANCES UPON MERGER OF ASM AND FINANCECO

     On March 1, 2000,  in  connection  with the reverse  acquisition  of ASM by
FinanceCo,  ASM issued 736,702 shares of common stock, 1,473,405 shares of Class
A Convertible Preferred Stock, 1,722,222 shares of Class B Convertible Preferred
Stock,  warrants  to  purchase  1,804,701  shares  of common  stock and  special
warrants to purchase  1,000,000 shares of common stock to the six  institutional
stockholders  of FinanceCo.  The common  stock,  Preferred  Stock,  warrants and
special  warrants were issued in exchange for the securities of FinanceCo having
the  same  title,  rights  and  privileges  as  the  ASM  securities.  No  sales
commissions  were paid in connection with such  transactions.  These  securities
were issued in reliance upon the exemption from registration afforded by 4(2) of
the Securities Act.

     SALES AFTER MERGER OF ASM AND FINANCE CO

     To facilitate ASM's redomiciling to Delaware and the change of its name, on
March 7, 2000, ASM formed a new Delaware  corporation  named SoftQuad  Software,
Ltd.  ("SoftQuad").  On April  10,  2000,  ASM  merged  with  and into  this new
subsidiary,  upon which the separate corporate existence of ASM terminated,  and
SoftQuad  continued as the  surviving  entity.  All holders of ASM common stock,
preferred  stock,  options or warrants  received  equivalent  stock,  options or
warrants in SoftQuad.  No sales  commissions  were paid in connection  with such
transactions.  These  securities were issued in reliance upon the exemption from
registration afforded by 4(2) of the Securities Act.

     On April 5, 2000, ASM, through SoftQuad Acquisition Corp. ("SAC"), acquired
all the outstanding securities of SoftQuad Canada by issuing 3,435,670 shares of
common stock to two individuals, and by issuing 5,773,605 exchangeable shares of
SAC to 9 holders of common stock. ASM also issued 1,856,000  options to purchase
ASM common stock to the  forty-three  holders of options to acquire common stock
of SoftQuad Canada. Five of such optionholders were also common stockholders and
all the  optionholders  were employees of SoftQuad  Canada.  The


                                       27
<PAGE>

shares issuable upon exercise of options were subsequently  registered under the
Act. No sales  commissions were paid in connection with such  transactions.  The
stock was issued in reliance upon the exemption  from  registration  afforded by
Section 4(2) of the Act.

     On April 18 and 20, 2000, SoftQuad issued an aggregate of 200,010 shares of
common stock for $7.50 per share,  special warrants to acquire  1,906,660 shares
of common stock for $7.50 per warrant and warrants to purchase  1,053,335 shares
of common  stock at an  exercise  price of $12.50 per share to  forty-four  (44)
institutional  investors for aggregate  gross proceeds of  $15,800,025.  Thomson
Kernaghan,  for its  services as agent in respect of these  private  placements,
received  $1,290,858  plus  compensation  options  exercisable  at no  cost  for
warrants to purchase  215,143  shares of common stock with an exercise  price of
$7.50 per share. Each investor  represented that it was an accredited  investor.
The  stock  and  warrants  were  issued  in  reliance  upon the  exemption  from
registration afforded by Section 4(2) of the Act.

     On June 5, 2000,  SoftQuad issued special warrants to acquire 44,760 shares
of common stock at a purchase price per special  warrant of $7.50,  and warrants
to purchase  22,380  shares of common  stock at an exercise  price of $12.50 per
share to an institutional  investor for gross proceeds of $335,700. The investor
represented that it was an accredited  investor.  No sales commissions were paid
in  connection  with such  transactions.  The stock and warrants  were issued in
reliance upon the exemption  from  registration  afforded by Section 4(2) of the
Act.

     In  addition,  the agent in respect  of the April 18,  April 20 and June 5,
2000 private  placements  received warrants to purchase 215,143 shares of common
stock with an exercise price of $7.50 per share,  exercisable at any time, on or
prior to the second anniversary of the date of effectiveness of the registration
statement  covering the underlying  shares. The agent represented that it was an
accredited  investor.  No sales  commissions  were paid in connection  with such
transactions.  The stock and warrants were issued in reliance upon the exemption
from registration  afforded by Section 4(2) of the Act. On March 30, 2001, these
warrants were returned to the Company for cancellation.

     On May 29,  2000,  SoftQuad  issued  88,409  shares  of  common  stock to a
financial  advisor in consideration of advisory services provided pursuant to an
advisory services  agreement.  No sales commissions were paid in connection with
such  transactions.  The stock was issued in reliance  upon the  exemption  from
registration afforded by Section 4(2) of the Act.

     On May 29,  2000,  SoftQuad  issued  39,076  shares of  common  stock to an
attorney in consideration of services  rendered valued at $97,691 pursuant to an
agreement dated February 29, 2000. No sales  commissions were paid in connection
with such transactions. The stock was issued in reliance upon the exemption from
registration afforded by Section 4(2) of the Act.

     Since  October 10,  2000,  SoftQuad has issued  2,686,895  shares of common
stock to 15 SAC  exchangeable  stockholders  upon  exchange of the  exchangeable
stock to acquire  such shares.  No  consideration  was paid by the  exchangeable
stockholders to SoftQuad with respect to such transactions. No sales commissions
were paid in connection with such transactions. The stock was issued in reliance
upon the exemption from registration afforded by Section 4(2) of the Act.

     On November 20, 2000,  SoftQuad  completed our acquisition of Advanced Data
Engineering  Inc.  (ADEi).  ADEi merged with SoftQuad  Software  California Inc.
(SoftQuad  California),  a SoftQuad  subsidiary  created for acquiring ADEi, and
SoftQuad California  continued as the surviving entity. We issued 744,133 shares
of common stock to the six  stockholders  of ADEi,  and 80,770 vested options to
purchase  common stock to the six option holders of ADEi. All the option holders
of ADEi were  employees of ADEi.  The shares  issuable  upon exercise of options
were subsequently registered under the Act. The stockholders of ADEi represented
that they were acquiring the stock solely for  investment  purposes and that the
stockholders had such knowledge and experience in financial and business matters
that they were capable of evaluating  the merits and risks of their  acquisition
of  our  stock.  No  sales   commissions  were  paid  in  connection  with  such
transactions.  The  stock  was  issued  in  reliance  upon  the  exemption  from
registration afforded by Section 4(2) of the Act.

     On  March  30,  2001,  SoftQuad  issued  200,000  shares  of  common  stock
(delivered  in six equal  monthly  installments  over a  six-month  period)  and
warrants to acquire 200,000 shares of common stock at an exercise price of $2.00
per  warrant to a  financial  advisor in  consideration  of  financial  advisory
services to be provided pursuant to an advisory  services  agreement dated as of
March  30,  2001.  No  sales  commissions  were  paid in  connection  with


                                       28
<PAGE>

such  transactions.  The stock was issued in reliance  upon the  exemption  from
registration afforded by Section 4(2) of the Act.

     On March 30, 2001,  SoftQuad issued 115,000  warrants to purchase shares of
common stock as payment for services rendered. No sales commissions were paid in
connection with such transactions. The warrants were issued in reliance upon the
exemption  from  registration  afforded by Section  4(2) of the Act. On July 30,
2001, these were cancelled as part of a legal settlement.

     On June 12, 2001,  SoftQuad issued 37,206 shares of common stock to the six
former common  stockholders of ADEi as required under the Merger  Agreement with
ADEi,  as we did not register the shares issued on  acquisition  on November 20,
2000 within the prescribed  time. No sales  commissions  were paid in connection
with such transactions.  The stock was registered in reliance upon the exemption
from registration afforded by Section 4(2) of the Act.

     Since August 31, 2001,  SoftQuad issued 2,951,420 shares of common stock to
25 holders of special warrants upon exercise of the special warrants to purchase
such shares. No consideration was paid by the special warrantholders to SoftQuad
with respect to such  transaction.  No sales commissions were paid in connection
with such transactions. The stock was issued in reliance upon the exemption from
registration afforded by Section 3(a)(9) of the Act.

ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS
         ------------------------------------

     You should read the  following  discussion  and analysis  together with our
financial  statements and related notes as at and for the years ended  September
30,  2001,  2000 and 1999  contained  elsewhere  in this  annual  report on Form
10-KSB. In this report, "we," "us" and "our" refer to the business that is owned
and  conducted  by  SoftQuad  Software,  Ltd.  and  its  subsidiaries.   Certain
information  contained in the following discussion and analysis and elsewhere in
this annual report  includes  forward-looking  statements that involve risks and
other  uncertainties.  See "Risk Factors" for a discussion of important  factors
that could cause actual results to differ  materially from the results described
in or implied by the forward looking statements contained in this annual report.

OVERVIEW

     SoftQuad is a leading  developer of software  products for the creation and
management of content in XML (eXtensible Markup Language). XML is a language for
the exchange of data on the World Wide Web that is a rapidly  emerging  standard
for business-to-business  ("B2B") e-commerce. Our XMetaL(R) product, launched in
May 1999, is an advanced,  yet easy-to-use,  XML content creation  solution that
allows authors throughout an organization to create and adapt content for use in
e-commerce,    knowledge   management   and   e-publishing   applications.   Our
MarketAgility  product(TM),  launched in September 2000, is an XML-based content
delivery  solution  that  gives  suppliers  more  control  over the  collection,
processing   and   real-time   delivery  of  product   information   in  XML  to
e-marketplaces  and e-procurement  systems.  While we currently are focusing our
efforts towards our XML products,  we have derived portions of our revenues from
HoTMetaL(R),  our HTML-based  Web page creation and  management  tool. In recent
quarters,  total HoTMetaL revenues worldwide have declined and HoTMetaL has lost
market share to  competitors.  We expect  revenues  from HoTMetaL to continue to
decline.

     We  generate  our  revenues  from  license  fees,  maintenance  and support
agreements  and  professional  services.   Professional  services  include  data
conversion   into  XML,   application   development,   training   and   software
installation.  We recognize revenues from license agreements on product delivery
if an  agreement  exists  with a  fixed  or  determinable  fee,  no  significant
performance obligations exist under the agreement, and collection of the related
receivable  is  reasonably   assured.   Revenue  from  maintenance  and  support
agreements is initially  recorded as deferred  revenue and recognized as revenue
ratably  over  the  term  of the  agreement.  Professional  service  revenue  is
recognized as the work is completed.

     Our cost of revenues includes costs to manufacture, package, and distribute
our  products  and related  documentation,  royalty  payments to third  parties,
payments to vendors and  inventory  write-downs,  as well as personnel and other
expenses  related  to  providing  professional  services  and  customer  support
services.


                                       29
<PAGE>

     Since our  inception,  we have  incurred  substantial  costs to develop our
technology and products,  to recruit and train personnel for our development and
product management,  selling and marketing (including business  development) and
professional services groups, and to establish an administrative infrastructure.
As a  result,  we  have  incurred  significant  losses  since  inception.  As of
September  30,  2001,  we had an  accumulated  deficit  of  approximately  $25.0
million.

     We believe that our future success depends on XML technology and our XMetaL
and MarketAgility  products. We have currently stabilized our operating expenses
and expect to continue to incur  operating  losses for at least the next several
quarters.

     Results of Operations

     The following  table sets forth the results of  operations  for the Company
expressed as a percentage  of total  revenues for the years ended  September 30,
2001,  2000  and  1999.  The  Company's  historical  operating  results  are not
necessarily  indicative of the results for any future period.  This  information
should be read in conjunction  with the  consolidated  financial  statements and
related notes thereto included in this report.

<TABLE>
<CAPTION>

                                             Year ended              Year ended              Year ended
                                         September 30, 2001      September 30, 2000      September 30, 1999
<S>                                               <C>                    <C>                     <C>
Revenue
         Licenses                                  66%                    99%                   100%

         Services                                  34%                     1%                     -
                                                  ---                    ---                    ---
                                                  100%                   100%                   100%
Cost of Revenue

         Licenses                                   6%                    12%                    17%

         Services                                  44%                     8%                     2%
                                                  ---                    ---                    ---
                                                   50%                    80%                    81%
Expenses

         Selling and marketing                    111%                   122%                    62%

         Research and development                  37%                    46%                    32%

         General and administrative               116%                    72%                    30%

         Amortization                              30%                     6%                     4%
                                                  ---                    ---                    ---
                                                  294%                   246%                   128%
                                                  ---                    ---                    ---
Loss from operations                             (244%)                 (166%)                  (47%)
                                                  ---                    ---                    ---
Other (income) expenses                            26%                   (10%)                    2%
                                                  ---                    ---                    ---
Net loss before value of share
capital issued on acquisition of
warrants                                         (270%)                 (156%)                  (49%)

Value of share capital issued on
acquisition of warrants                             -                      -                     43%
                                                  ---                    ---                    ---
Net loss                                         (270%)                 (156%)                  (92%)

</TABLE>

     Our operating history makes financial forecasting  difficult.  To read more
about this, please see "Risk Factors-Risks Related to Our Business-Our operating
history makes financial forecasting difficult."

     Our revenues and operating results may vary  significantly  from quarter to
quarter. To read about factors that are likely to cause these variations, please
see "Risk  Factors-Risks  Related to Our  Business-We  expect our  revenues  and


                                       30
<PAGE>

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

     We plan to maintain our  operating  expenses at their  current  levels.  If
revenues  do not  continue  to  increase,  our  business  operating  results  or
financial  condition could be materially  adversely affected and net losses in a
given quarter could be even greater than expected.

     RESULTS OF OPERATIONS  FOR THE TWELVE  MONTHS ENDED  SEPTEMBER 30, 2001 AND
     2000

     Revenue

     Total  revenue  increased  from $4.3  million  in the twelve  months  ended
September  30, 2000 to $5.6  million in the twelve  months ended  September  30,
2001, representing a 32% increase in revenue.  SoftQuad's year-over-year revenue
increase is  attributable  to: i) an increase in XMetaL license  revenue of $821
thousand;  and, ii) an increase in revenue of $1.9  million  from the  Company's
professional  services  group due primarily to its  acquisition  of ADEi (now SQ
California)  on November  20, 2000.  This  increase was offset by a $1.4 million
decrease in the Company's  HoTMetaL  license  revenue.  The decrease in HoTMetaL
license revenues was primarily attributable to SoftQuad's increased focus on the
development,  selling and  marketing of XMetaL,  and to a limited  extent due to
HTML losing market share to other HTML  competitors and as XML technology  gains
greater market  acceptance.  For the twelve months ended September 30, 2001, the
share of revenue generated from XMetaL,  HoTMetaL and professional  services was
56%, 10% and 34%  respectively,  compared with 55%, 44% and 1% respectively  for
the twelve  months  ended  September  30,  2000.  We expect  HoTMetaL's  license
revenue,  both in absolute dollars and its proportionate share of total revenue,
to continue to decline over the next several quarters.

     SoftQuad  categorizes  its  geographic  information  into two major  market
regions:  North  America and Europe.  In the twelve  months ended  September 30,
2001,  the share of revenue  generated from North America and Europe was 73% and
27% respectively,  compared with 61% and 39% respectively, for the twelve months
ended September 30, 2000. Higher proportionate  revenue for North America in the
twelve  months ended  September 30, 2001,  relative to the prior year,  resulted
from  large,  one-time  XMetaL  license  sales and high  levels of  professional
services revenue from North American customers.

     Cost of Revenue

     Cost of revenue  increased  from $867  thousand for the twelve months ended
September  30, 2000 to $2.8 million for the twelve  months ended  September  30,
2001,  representing  an  increase of 227%.  This  increase  is  attributable  to
increased  costs of $2.1  million  associated  with  professional  services  and
customer support services,  as these groups grew during the period primarily due
to SoftQuad's  acquisition  of SQ California on November 20, 2000.  For the year
ended September 30, 2001, costs associated with SoftQuad's professional services
group was  greater  than the  revenue  this group  generated  due to money spent
attracting new customers and  understanding  SoftQuad's  technology,  as well as
higher  personnel costs  associated with signing bonuses paid to all former ADEi
employees  as a  result  of the  acquisition.  We do not  expect  this  trend to
continue into fiscal 2002. This increase in cost of revenue was offset by a $174
thousand  decrease in our cost of  licenses  due to the  continued  shift in our
product mix away from HoTMetaL to XMetaL,  as multiple copies of XMetaL are more
frequently  shipped  on  one  master  disk  which  reduces  our  production  and
distribution costs as a percentage of revenue.  We expect our cost of revenue to
stabilize in our professional  services and customer support services groups, as
we have no immediate hiring plans.

     Research and Development

     Research and development expenses increased from $2.0 million in the twelve
months ended September 30, 2000 to $2.1 million for the year ended September 30,
2001,  representing  an  increase  of  7%.  The  slight  increase  is  primarily
attributable to an increase in personnel costs related to increased  development
salaries of approximately 5% and increased headcount during the period which was
necessary to undertake the ongoing development of SoftQuad's XMetaL product with
Unicode,  research and  development on XMetaL 3.0, and research and  development
activities undertaken for the release of the Company's MarketAgility  Enterprise
and MarketAgility  Express products.  This increase was offset by a weakening of
the  Canadian  dollar  during the year in  relation to the U.S.  dollar,  as all
development activity is undertaken in Canada. SoftQuad believes that its current
level of


                                       31
<PAGE>

investment in research and development is at the appropriate level to attain its
strategic  objectives  and, as a result,  the Company  expects that research and
development  expenses will  stabilize in future  periods.  To date, all software
development costs have been expensed in the period incurred.

     Selling and Marketing

     Selling and  marketing  expenses  increased  from $5.2 million for the year
ended  September 30, 2000 to $6.3 million for the twelve months ended  September
30,  2001,   representing   an  increase  of  20%.  The  increase  is  primarily
attributable  to: i) an increase in personnel costs of $184 thousand  related to
the amortization of stock-based  compensation;  ii) increased  marketing program
expenditures,  such as  attendance  at industry  trade shows,  advertising,  and
partner  events  associated  with the  launch  of  MarketAgility  Enterprise  in
September  2000, the launch of  MarketAgility  Express in February 2001, and the
launch of XMetaL 2.1 with Unicode in April 2001; and, iii) increased spending on
investor relations  activities such as hiring a Director of Investor  Relations,
obtaining  independent  equity  research  analysis,  programs  to  attract  both
institutional and retail investors, press and analyst briefings, preparation and
distribution  of investor  kits,  and senior  management  attendance  at various
investor  conferences.  SoftQuad  expects its selling and marketing  spending to
continue to decrease over the next several quarters as the benefits of headcount
reductions in sales personnel are realized, discretionary marketing expenses are
maintained  at reduced  levels as the Company  continues to focus its  marketing
expenditures in specific areas,  and as SoftQuad has  significantly  reduced the
scale of its investor relations program.

     General and Administrative

     General and  administrative  expenses  increased  from $3.1  million in the
twelve  months ended  September  30, 2000 to $6.5 million for the twelve  months
ended  September  30, 2001,  representing  an increase of 111%.  The increase is
attributable to: i) increased  personnel related costs and increased  headcount;
ii) increased costs of legal,  accounting and other professional services;  and,
iii)  increased  facility  expenses  necessary to support  SoftQuad's  expanding
operations.   SoftQuad  believes  it  has  developed  an  appropriate  level  of
infrastructure  and thus expects that general and  administrative  spending will
stabilize over the next several quarters.

     Amortization

     Amortization  increased  from $262  thousand  in the  twelve  months  ended
September 30, 2000,  to $1.7 million for the twelve  months ended  September 30,
2001.  The increase is primarily  attributable  to SoftQuad's  acquisition of SQ
California (our acquisition of ADEi) in November 2000.


                                       32
<PAGE>

     Other Expenses

     Other expenses  increased to $1.9 million for the year ended  September 30,
2001 from  $421  thousand  for the year  ended  September  30,  2000.  The large
increase  in other  expenses  is due to costs  associated  with  legal and other
activities  associated  with the merger with Corel,  including  fees paid to our
financial advisors, and the costs of a legal settlement during the third quarter
of fiscal 2001. No similar expenses were incurred during fiscal 2000.

     Net Loss

     SoftQuad's net loss increased from $6.7 million or $0.60 per share, for the
twelve months ended  September 30, 2000, to $15.2 million or $1.09 per share for
the year ended  September  30, 2001.  This  increased  net loss is a result of a
lower level of gross profit earned in the twelve months ended September 30, 2001
due to higher  costs  related to  SoftQuad's  professional  services  group as a
result of the growth of this group due to the  acquisition  of SQ  California in
November 2000.  SoftQuad's loss also increased  during this period due to higher
operating  expenses in all  departments  as a result of increased  headcount and
personnel related expenses,  increased development  activities,  increased sales
and marketing activities and increased corporate activities. Other expenses also
increased  significantly  for the same  period.  SoftQuad  expects  to incur net
losses for at least the next several quarters, however, at a reduced rate due to
its belief that expenses in all departments have stabilized and expenses in some
areas may decrease as the benefits of various cost cutting programs  implemented
during the period are realized.

     Results of Operations for the Years Ended September 30, 2000 and 1999

     Revenue

     Total revenue  increased from $3.3 million for the year ended September 30,
1999 to $4.3 million for the year ended  September 30, 2000  representing  a 30%
increase in revenue.  This increase is  attributable  to an increase in license,
support and  maintenance  fee revenues  associated with XMetaL as XML technology
started  to gain  market  acceptance  coupled  with a  significant  decrease  in
HoTMetaL  product  license  revenues  for the year ended  September  30, 2000 as
marketing activity on HoTMetaL was reduced.  XMetaL revenues increased from $356
thousand  for the year ended  September  30,  1999 to $2.4  million for the year
ended  September  30, 2000,  representing  a 574%  increase.  For the year ended
September 30, 2000,  revenue  generated from XMetaL and HoTMetaL was 57% and 43%
respectively,  compared  with  10%  and 90%  respectively  for  the  year  ended
September 30, 1999.

     SoftQuad also offers customers  maintenance and support contracts for which
technical  support  and  updates  are  provided  over the  life of the  contract
(usually one year). Given this strategy, ratable revenue recognition is required
for  maintenance  fees earned  under these  contracts.  The increase in deferred
revenue in 2000 is consistent with the increase in license sales.

     We categorize our  geographic  information  into two major market  regions:
North America and Europe  (including  the UK). For the year ended  September 30,
2000,  revenue  generated from North America and Europe was divided 61% and 39%,
respectively, compared with 63% and 37% for the year ended September 30, 1999.

     Cost of Revenues

     Cost of revenues  increased from $636 thousand for the year ended September
30, 1999 to $866 thousand for the year ended September 30, 2000, representing an
increase of 36%. The increase is primarily due to higher costs  associated  with
increasing  headcount and building  infrastructure in the professional  services
and customer support services groups. Cost of licenses decreased slightly during
the period  due to the  change in our  product  mix from  HoTMetaL  to XMetaL as
multiple copies of XMetaL are more  frequently  shipped on one master disk which
reduces both production and distribution costs as a percentage of revenue.

     Research and Development

     Research and development  expenses increased from $1.1 million for the year
ended  September 30, 1999 to $2.0 million for the year ended September 30, 2000,
representing  an increase of 82%. The increase is primarily  attributable  to an
increase in  personnel  related  costs  largely  related to the  development  of
XMetaL 2.0 launched June


                                       33
<PAGE>

2000 and MarketAgility  Enterprise 1.0 and MarketAgility 1.0 launched  September
2000. For the year ended September 30, 2000, we increased our headcount by 18.

     Selling and Marketing

     Selling and  marketing  expenses  increased  from $2.1 million for the year
ended  September 30, 1999 to $5.2 million for the year ended September 30, 2000,
representing  an increase of 148%. The increase is primarily  attributable to an
increase in selling and  marketing  personnel and  increased  marketing  program
expenditures  associated  with and the  launch  of  XMetaL  2.0 in June 2000 and
MarketAgility  Enterprise 1.0 and  MarketAgility  Express1.0 in September  2000.
During the year ended  September 30, 2000, we increased our headcount by 25 as a
result of expanding  both the sales and marketing  teams in addition to building
new  business   development  and  product  management  teams  within  the  sales
organization.  The  increase  for the year  ended  September  30,  2000 was also
attributed  to  increased  travel  related  expenses  resulting  from  increased
selling, business development and marketing activities.

     General and Administrative

     General and  administrative  expenses  increased  from $1.1 million for the
year ended  September 30, 1999 to $3. 1 million for the year ended September 30,
2000,  representing an increase of 209%. The increase is primarily  attributable
to increased  personnel  related costs,  increased costs of investor  relations,
legal and other  professional  services,  increased facility expenses in Toronto
and  London  and   increased   costs   incurred  to  build  our   administrative
infrastructure.  Such  expenditures  are  necessary  to  support  our  expanding
operations. For the year ended September 30, 2000, we increased our headcount by
12.

     Other (Income) Expense

     Other income  increased to $421  thousand for the year ended  September 30,
2000 from a net expense of $68 thousand for the year ended  September  30, 1999.
The increase is due to the high level of interest income generated on short-term
investments held as a result of the equity transactions  completed during fiscal
2000 along with a decline in interest  expense due to the  repayment of the note
payable in June 2000.

     Net Loss

     Our net loss  increased  from $1.6  million or $0.37 per share for the year
ended  September  30, 1999 to $6.7 million or $0.60 per share for the year ended
September 30, 2000,  reflecting  that our higher gross profit earned in the year
ended  September 30, 2000 was offset by higher  operating  expenses for the same
period.

     Liquidity and Capital Resources

     Since  inception,  SoftQuad has funded its  operations  and met its capital
expenditure requirements through the private sale of equity and debt securities.
To date, from December 1999, SoftQuad has raised  approximately $22.6 million in
net proceeds from equity  financings  in order to expand its selling,  marketing
and product development efforts and build its administrative infrastructure.

     For the twelve months ended  September 30, 2001 and 2000,  net cash used in
operating  activities was $13.5 million and $4.9 million  respectively.  For the
years ended September 30, 2001 and 2000, the increase in cash used for operating
activities  was  primarily  due to a net loss of $15.2  million and $6.7 million
respectively,  partially  offset by the  amortization  of  goodwill  and capital
assets and changes in operating working capital.

     Net cash used in investing  activities  was $351  thousand and $1.0 million
for the  twelve-month  periods ended September 30, 2001 and 2000,  respectively.
Cash used in investing activities for the twelve months ended September 30, 2001
related to the  purchase  of ADEi and the  purchase  of capital  assets,  mainly
computer hardware and software. At September 30, 2001, SoftQuad did not have any
material commitments for capital expenditures.

     Net cash used by  financing  activities  was $14  thousand  and provided by
financing  activities  $21.6 million for the twelve  months ended  September 30,
2001 and 2000, respectively. For the twelve months ended September 30,


                                       34
<PAGE>

2001,  net cash used by financing  activities  represented  proceeds from shares
issued upon  exercise of options  under the ESOP  offset by  decreases  in share
issuance costs.

     At  September  30,  2001,  SoftQuad  had  $2.3  million  in cash  and  cash
equivalents and working capital of $1.5 million.  This compares to $16.3 million
in cash and  cash  equivalents  and  working  capital  of  $14.9  million  as of
September 30, 2000.

     SoftQuad does not have a line of credit for general operating expenses. The
Company does have equipment lines of credit from vendors for certain  equipment,
and no  amounts  have  been  committed  under  these  vendor  lines to date.  At
September 30, 2001, SoftQuad had no notes or loans payable outstanding.

     SoftQuad   believes  that  it  does  not  have  sufficient  cash  and  cash
equivalents to meet its working capital  requirements through the first calendar
quarter of 2002, as its revenue  projections  continue to decrease due to recent
economic conditions, and the Company expects certain portions of its expenses to
increase due to costs  associated  with  negotiating and completing the proposed
merger with Corel.  These  matters  raise  considerable  doubt about  SoftQuad's
ability  to  continue  as a  going  concern  if its  merger  with  Corel  is not
consummated.  SoftQuad  believes that  entering  into the strategic  merger with
Corel, in light of the increasingly difficult environment for raising capital in
the public and private markets,  is the only alternative  currently available to
the  Company.  If the merger  close is  delayed,  or the merger  fails to close,
additional funds will be required to support our working capital requirements or
for other purposes.

     Under the merger  agreement,  SoftQuad  is  entitled  to effect  additional
financing  through the issuance of equity or debt,  provided that (i) it has not
exceeded  its  operating  budget by more than  10%of the amount set forth in the
disclosure  letter to the merger agreement at the time it is seeking  financing,
and (ii) Corel has a right of first  refusal  over any  financing  requirements.
There can be no assurance that additional financing will be available at all, or
if available on terms favorable to us, or that any additional financing will not
be dilutive.

     Recent Accounting Pronouncements

     On June 29, 2001,  the Financial  Accounting  Standards  Board approved for
issuance Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations"  ("SFAS  141") and SFAS No. 142,  "Goodwill  and Other  Intangible
Assets" ("SFAS 142").  SFAS 141 requires that the purchase  method of accounting
be used for all  business  combinations  initiated  after  June 30,  2001.  As a
result, the pooling-of-interests method will be prohibited. SFAS 142 changes the
accounting  for  goodwill  from an  amortization  method  to an  impairment-only
approach.  Thus,  amortization of goodwill,  including goodwill recorded in past
business combinations, will cease upon adoption of this Statement which, for the
Company, will be October 1, 2001; however, for any acquisitions  completed after
June 30, 2001,  goodwill and intangible  assets with an indefinite life will not
be amortized. The adoption of SFAS 141 will not have an impact on the Company as
it has applied the purchase method to all previous  business  combinations.  The
Company is still  evaluating  the impact of the adoption of SFAS 142 and has not
yet determined the effect of its adoption on the business, results of operations
or financial condition of the Company.

     The Financial  Accounting  Standards  Board  approved for issuance SFAS 143
"Accounting for Asset  Retirement  Obligations" and SFAS 144 "Accounting for the
Impairment or Disposal of Long-Lived  Assets".  The Company has determined  that
the adoption of these standards will not have an impact on the Company.

ITEM 7. FINANCIAL STATEMENTS
        --------------------

     Our financial  statements,  including the auditors' report and notes to the
financial  statements,  appear on pages F-1 to F-31,  which  follow  immediately
after the signature page on page 47. Pages F-1 to F-31 are  incorporated  herein
by reference.

ITEM 8. CHANGES  IN  AND  DISAGREEMENTS   WITH  ACCOUNTANTS  ON  ACCOUNTING  AND
        FINANCIAL DISCLOSURE
        ------------------------------------------------------------------------

     None


                                       35
<PAGE>

                                    PART III

ITEM 9.   DIRECTORS,   EXECUTIVE   OFFICERS,   PROMOTERS  AND  CONTROL  PERSONS;
          COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
          ----------------------------------------------------------------------

     The following table sets out certain  information  regarding the directors,
executive officers and key employees of SoftQuad  Software,  Ltd. as of November
30, 2001.

                 NAME            AGE                         POSITION
                 ----            ---                         --------
Roberto Drassinower               37       Chief Executive Officer and Director
David R. Lewis                    56       Chief Financial Officer, Secretary
                                             and Treasurer
Bruce Sharpe                      47       Chief Technology Officer
Peter Sharpe                      49       Chief Scientist
Nick Mongston                     40       Managing Director, SoftQuad Limited
Laura Wallace                     40       Vice President and General Manager
                                              North America
Joan Dea                          38       Director
Brock Armstrong                   54       Director
Lawrence Goldberg                 46       Director

     ROBERTO DRASSINOWER has served as the President and Chief Executive Officer
of SoftQuad  Canada since its inception in October 1998. He was appointed to the
same  positions  with  SoftQuad  Software,  Ltd.  and  elected as a director  of
SoftQuad  Software,  Ltd.,  on its  inception in April 2000. He began his career
with SoftQuad in January 1996, when it was part of SoftQuad  International  Inc.
Over the last three years, Mr.  Drassinower has been  instrumental in refocusing
our  business on our XML  products.  From  January  1995 to December  1995,  Mr.
Drassinower  served as President of Carolian Systems,  a UNIX network management
company.  While with Carolian  Systems,  Mr.  Drassinower  was  responsible  for
research  and  development,   technical  support  and  developing  a  successful
corporate  sales  team  serving  customers  such as  Compaq,  Pepsi and 3M.  Mr.
Drassinower  has worked in the software  industry  since 1985 and has over seven
years experience managing technology  businesses.  In addition,  Mr. Drassinower
has over five years experience as a software engineer and systems designer.

     DAVID R. LEWIS has nearly 30 years of business  experience  including  more
than 15 years in the  high-tech  industry  with  specific  software and Internet
experience in the B2C and B2B global  marketplaces.  Since 1992, he has been CFO
to a number of publicly listed companies,  accumulating strong global experience
in the software and B2C/B2B marketplaces.  Prior to joining SoftQuad,  from July
1999  to  October  2000 he was  CFO,  Corporate  Secretary,  and  Treasurer  for
SUMmedia.com  Inc.,  a publicly  traded  (OTC  Bulletin  Board:  ISUM),  global,
internet media and marketing company in the content management  applications and
solution  sectors.  From March 1999 to July 1999, Mr. Lewis was Chief  Financial
Officer of Alya  International,  Inc. (OTCBB:  ALYA), a publicly listed software
company engaged in the electronic security industry. From March 1998 to December
1999, Mr. Lewis was Chief Financial Officer,  Corporate Secretary,  and Director
of Net Nanny Software  International Inc. (CDNX. NNS;  OTCBB:NNSWF),  a publicly
listed software company involved in the personal computer  e-commerce  business.
From September 1996 to February  1998,  Mr. Lewis was Chief  Financial  Officer,
Director  and  Corporate  Secretary  for Big Server  Software  Inc.,  a software
company which developed  enterprise-wide  business databases.  From July 1994 to
February 1996, Mr. Lewis was Chief  Financial  Officer of Weir Jones  Automotive
Inc.,  a developer  of patented  automotive  security  devices.  Mr.  Lewis is a
Chartered  Accountant  and  holds  a  Bachelor  of  Engineering  from  Dalhousie
University.

     BRUCE SHARPE has served as the Chief Technology  Officer of SoftQuad Canada
since its  inception in October 1998. He was appointed to the same position with
SoftQuad Software, Ltd. and elected as a director of SoftQuad Software, Ltd., on
its  inception in April 2000.  He held the same  position  when our business was
conducted by SoftQuad  International Inc. from January 1996 to October 1998. His
responsibilities include product development activities, product design, feature
selection,  project  management  and quality  assurance.  From  October  1993 to
December  1995,  Mr.  Sharpe  was  the  Director  of  R&D  at  Gravis   Computer
Technologies Ltd., a


                                       36
<PAGE>

manufacturer of PC peripherals. Mr. Sharpe holds a Ph.D. in mathematics from the
University of British Columbia. He is the brother of Peter Sharpe.

     PETER SHARPE has served as the Chief Scientist of SoftQuad Canada since its
inception in October  1998.  He was appointed to the same position with SoftQuad
Software,  Ltd. on its  inception in April 2000.  He held the same position when
our business was  conducted by SoftQuad  International  Inc. from August 1996 to
October  1998.  Mr.  Sharpe  is the head  designer  and lead  programmer  of our
products,  including  HoTMetaL and XMetaL. Mr. Sharpe was one of the founders of
SoftQuad  International  Inc.,  and  held  the  position  of  Director  of  SGML
Development  from February 1986 to May 1996.  Mr. Sharpe was one of the original
creators of XML and worked with other  industry  participants  to define the XML
standard  as a  founding  member of the World  Wide Web  Consortium  and its XML
Technical Working Group. Mr. Sharpe holds a Masters of Science-Mathematics  from
the University of Toronto. He is the brother of Bruce Sharpe.

     NICK  MONGSTON  has  served  as  Managing   Director  of  SoftQuad  Limited
(SoftQuad's UK subsidiary)  since December 1999. From 1996 to 1999, Mr. Mongston
served as UK sales and marketing  manager and from 1991 to 1996 served as Dealer
Account Manager for Bayer Corporation (AGEA Division) in London, England. During
this time, Mr. Mongston was responsible for functional and strategic  management
of the sales and marketing function.

     LAURA  WALLACE  joined  SoftQuad  in June  2000  as  Director  of  Business
Development  and  was   subsequently   promoted  to  Vice  President,   Business
Development.  Since August 2001,  she has served as Vice  President  and General
Manager,  North  America.  From February 1996 through May 2001,  Ms. Wallace was
with Lotus Development  Corp., a provider of knowledge  management,  e-business,
desktop, and collaborative  software, and professional services,  where she held
increasingly senior roles, most recently as Regional Director for Lotus' Western
Region.  Ms. Wallace has over eighteen years of industry  experience,  including
ten years at IBM in product development, sales and sales management.. Ms Wallace
is a graduate of Vassar  College  with a Bachelor of Arts degree in  Mathematics
and Computer Science.

     JOAN DEA has been a  director  of  SoftQuad  since  June  2000.  Ms. Dea is
currently  a Vice  President  and an  officer  of The  Boston  Consulting  Group
("BCG").  Ms. Dea  became an  officer  of BCG in 1994 after its merger  with The
Canada  Consulting Group. She had been with Canada Consulting since 1989 and was
a manager at the time of the merger.  At BCG, Ms. Dea has co-led the development
of BCG's global  e-ventures  business,  which  incubates  and builds  e-commerce
businesses.  Some of the e-commerce  ventures Ms. Dea has been  instrumental  in
building  include a  comprehensive  consumer  electronics  navigation and retail
site, a licensing  marketplace for pharmaceutical  companies and a B2B exchange.
Ms.  Dea  also  has  extensive  international  consulting  experience  assisting
corporations improve their  competitiveness and performance.  From 1995 to 1999,
Ms. Dea built and led BCG's Canadian financial services practice.  Ms. Dea holds
a B.A. in  Economics  and  Political  Science  from Yale  University  and an MSc
Economics (International Relations) from the London School of Economics.

     LAWRENCE  GOLDBERG has been a director of SoftQuad since November 2000. Mr.
Goldberg has been the Executive  Vice President and Chief  Financial  Officer of
Pinetree  Capital Corp since February 2000. From September 1996 to January 2000,
Mr.  Goldberg was Chief  Financial  Officer of KL Group Inc., a company  selling
Java related development tools and components.  From February 1995 to June 1996,
he was Senior Vice President of Newstar  Technologies  Inc., which developed and
sold  application  software  directed  at  the  commercial/residential  property
management industry. Mr. Goldberg, a Chartered Accountant,  brings with him over
20  years  of  experience  in  the  software   industry.   In  addition  to  his
responsibilities  at  Pinetree,  Mr.  Goldberg  sits  on the  Boards  of many of
Pinetree's  investee  companies,  acting as an  advisor to  management  of those
companies.

     BROCK  ARMSTRONG has been a director of SoftQuad  since  November 2000. Mr.
Armstrong has been President and Chief Executive Officer of DC DiagnostiCare Inc
since  January  2000.  From October 1998 to December  1999,  Mr.  Armstrong  was
President of ING Equitable Life and Chief  Executive  Officer - Annuities of ING
US Retail  Financial  Services,  both US  subsidiaries  of ING  Group,  a global
financial  services  company.  From April 1997 to October 1998 Mr. Armstrong was
Senior Vice President of The Prudential Insurance Company of America, one of the
largest life insurance companies in the United States. From August 1994 to April
1997 Mr.  Armstrong was Executive  Vice President of London  Insurance  Group, a
Canadian financial services company with operations in Canada, the United States
and Asia. Mr. Armstrong is a Chartered  Accountant and holds an Honours Bachelor
of Business Administration degree from the University of Western Ontario.


                                       37
<PAGE>

BOARD OF DIRECTORS

     There  currently are four directors of SoftQuad  Software,  Ltd.  Directors
hold  office  until the next  annual  meeting  of  stockholders  or until  their
successors  are elected or  appointed.  Executive  officers are appointed by and
serve at the discretion of the board of directors.

     BOARD COMMITTEES

     The board of directors currently has an audit committee  consisting of Joan
Dea and Brock  Armstrong,  neither of whom is an employee.  The audit  committee
makes  recommendations  to the board of  directors  regarding  the  selection of
independent  accountants,  reviews  the  results  and  scope of audit  and other
services  provided by our independent  accountants and reviews and evaluates our
audit and control functions.

     The board of directors also has a compensation committee consisting of Joan
Dea and Roberto Drassinower.  The compensation  committee makes  recommendations
regarding  compensation  and benefits,  including  stock  options,  given to our
employees.

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING REQUIREMENTS

     Section  16(a) of the Exchange Act of 1934, as amended  ("Section  16(a)"),
requires the Company's  directors and officers and persons who own more than 10%
of  SoftQuad's  Common  Stock  (collectively,  "Insiders"),  to file  reports of
ownership and changes in ownership with the  Securities and Exchange  Commission
(the "Commission").  Insiders are required by Commission  regulations to furnish
the Company with copies of all Section 16(a) forms they file.

     Based solely upon a review of copies of such forms received by the Company,
the Company  believes that its Reporting  Persons have compiled with all Section
16 filing  requirements  applicable to them with respect to the Company's fiscal
year ended  September 30, 2001,  except that Laura  Wallace,  Vice President and
General Manager North America of the Company, filed a late Form 3.

ITEM 10. EXECUTIVE COMPENSATION
         ----------------------

EXECUTIVE COMPENSATION

     The  following  table  sets  forth  for  2001,  2000 and  1999  information
concerning  total  compensation  paid to our chief  executive  officer and the 5
other most highly paid executive officers who received in excess of $100,000 for
services  rendered  during  the  fiscal  year ended  September  30,2001,  in all
capacities to SoftQuad (the "Named Executive Officers").  In accordance with the
rules of the SEC,  the  compensation  described  in this table does not  include
perquisites  and other  personal  benefits  totaling  less than 10% of the total
salary and bonus reported.  The columns for "Other Annual Compensation" and "All
Other  Compensation"  have been omitted  because  there is no such  compensation
required to be reported.

<TABLE>
<CAPTION>

                                                Annual Compensation                                    Long-Term
                                                                                                     Compensation
Name and Position                                Year         Salary     Bonus        Other             Awards
                                                                                                  Number of Securities
                                                                                                   Underlying Options
<S>                                             <C>          <C>        <C>        <C>                 <C>
Roberto Drassinower - Chief Executive Officer   2001         $200,000   $60,000           -                  -
                                                2000         $102,092   $77,050    $120,000(1)         400,000
                                                1999          $80,000   $27,000           -            550,010
Andrew Muroff - President (2)                   2001         $150,000         -           -                  -
David Lewis - Chief Financial Officer           2001         $132,500   $45,000           -            100,000
Bruce Sharpe - Chief Technology Officer         2001         $130,000   $39,000           -                  -
                                                2000          $80,400   $30,150           -             50,000
                                                1999          $66,000         -           -            333,000
Peter Sharpe - Chief Scientist                  2001         $130,000   $39,000           -                  -
                                                2000          $80,400   $30,150           -             50,000
                                                1999          $66,000         -           -            333,000
Laura Wallace - Vice President and General
   ManagerNorth America                         2001         $130,000   $70,000           -                  -
                                                2000          $43,333   $23,333           -             40,000
</TABLE>

     (1) Represents housing loan
     (2)  Mr. Muroff's employment with SoftQuad terminated on August 31, 2001


                                       38
<PAGE>

OPTION GRANTS IN LAST FISCAL YEAR

     The  following  table sets forth  each  grant of stock  options  during the
fiscal  year ended  September  30,  2001 to the Named  Executive  Officers.  The
percentage  of total options set forth below is based on an aggregate of 743,070
options  granted to employees  during the fiscal year ended  September 30, 2001.
The  exercise  price  was  equal  to the  market  value  on the date of grant as
determined by our Board of Directors.

                                Individual Grants

                                           Percent of
                                              Total
                             Number of       Options
                             Securities    Granted to
                             Underlying     Employees  Exercise
                              Options       in Fiscal    Price       Expiration
                              Granted         2001     ($/Share)       Date

David Lewis                 100,000              13%     $5.75       11/01/2011

OPTION VALUES

     The  following  table  sets  forth  the  number  and  value  of  securities
underlying  unexercised options that are held by the Named Executive Officers as
of September 30, 2001. No officer  exercised any options  during the fiscal year
ended September 30, 2001. The value of unexercised in-the-money options is based
on the fair market value of our common stock on September 28, 2001 of $0.95,  as
quoted on the OTC Bulletin Board, minus the actual exercise price.

<TABLE>
<CAPTION>

                                                       Number of Securities               Value of Unexercised
                                                      Underlying Unexercised            In-the-Money Options at
                                                  Options at September 30, 2001          September 30, 2001 ($)
                                                  -----------------------------          ----------------------
                                                   Exercisable     Unexercisable       Exercisable      Unexercisable
<S>                                                    <C>             <C>              <C>                 <C>
Roberto Drassinower                                    578,343         371,667          $421,400            $99,700
David Lewis                                                  -         100,000                $-                 $0
Bruce Sharpe                                           279,997         103,333          $249,500            $66,500
Peter Sharpe                                           279,997         103,333          $249,500            $66,500
Laura Wallace                                           13,333          26,667                $-                 $0

</TABLE>

     Directors Compensation

     On June 4, 2001, the  Compensation  Committee  recommended and the board of
directors approved  (retroactive to October 1, 2000) providing cash compensation
to the non-executive  directors in the amount of $750 per meeting attended.  The
non-executive members of the Audit and Compensation  Committees also receive per
meeting compensation in the amounts of $525 and $600 respectively.  In addition,
members  are  reimbursed  for actual and  reasonable  out of pocket  expenses in
connection  with  attendance  at  board of  directors  and  committee  meetings.
Directors  are  eligible to  participate  in our 2000 Stock  Option Plan and may
receive  options at the discretion of the board of directors.  For a description
of this plan,  please see "Employee  Benefit  Plans.".  On December 13, 2000, in
consideration  for their agreement to serve as directors,  we granted to each of
Lawrence  Goldberg  and Brock  Armstrong  options to purchase  80,000  shares of
common  stock,  at an exercise  price of $3.25 per share.  All of these


                                       39
<PAGE>

options become  exercisable as to one-third of the underlying  shares on each of
the yearly  anniversaries  of the date of grant.  They expire ten years from the
date of grant.

     Employment Agreements

     We have an  employment  agreement  with our  Chairman  and Chief  Executive
Officer,  Roberto  Drassinower,  that  commenced  on  October  1,  2000 and will
continue indefinitely until the first to occur of the death or disability of Mr.
Drassinower,  the  termination of the agreement by us or the  termination of the
agreement  by Mr.  Drassinower.  Mr.  Drassinower's  base  annual  salary  is US
$200,000, subject to increase by the board of directors. In addition, if certain
performance  goals  established  by the  Compensation  Committee  are  met,  Mr.
Drassinower  may receive an amount  equaling up to 30% of his annual base salary
as  an  annual  bonus.  The  agreement  contains  customary  non-disclosure  and
non-compete provisions.  Pursuant to the agreement, SoftQuad provided relocation
assistance to Mr.  Drassinower  that included,  among other things,  an interest
free $120,000 loan for the purchase of a home.  The  employment  agreement  also
provides for certain benefits including an automobile  allowance and termination
benefits of up to two year's salary and bonus and the  immediate  vesting of all
unvested options upon termination of the agreement under certain circumstances.

     We have an employment agreement with our Chief Financial Officer,  David R.
Lewis, that commenced on February 1, 2001 and will continue  indefinitely  until
the death or disability of Mr. Lewis,  the termination of the agreement by us or
the termination of the agreement by Mr. Lewis.  Mr. Lewis' base annual salary is
$150,000,  subject to increase by Mr. Lewis'  superior and  ratification  of the
increase by the board of directors.  In addition,  if certain  performance goals
established  by the  Compensation  Committee  are met,  Mr. Lewis may receive an
amount  equaling  up to 30% of his annual  base  salary as an annual  bonus.  In
addition,  pursuant to the agreement,  Mr. Lewis was granted options to purchase
100,000  shares  of common  stock at $5.75 per  share.  The  agreement  contains
customary  non-disclosure and non-compete  provisions.  The employment agreement
also  provides for  termination  benefits of up to one year's  salary,  prorated
earned  annual  bonus and the  immediate  vesting of all  unvested  options upon
termination  of the  agreement  under  certain  circumstances.  Upon a change of
control of SoftQuad,  all Mr. Lewis' unvested options shall immediately vest and
become exercisable.

     We have an employment  agreement with our Chief Technology  Officer,  Bruce
Sharpe, that commenced on November 1, 2000 and will continue  indefinitely until
the death or disability of Mr. Sharpe, the termination of the agreement by us or
the termination of the agreement by Mr. Sharpe.  Mr. Sharpe's base annual salary
is US $130,000, subject to increase by Mr. Sharpe's superior and ratification of
the  increase by the board of  directors.  In addition,  if certain  performance
goals established by the Compensation  Committee are met, Mr. Sharpe may receive
an amount  equaling up to 30% of his annual base salary as an annual bonus.  The
agreement contains  customary  non-disclosure  and non-compete  provisions.  The
employment  agreement also provides for termination benefits of up to one year's
salary,  prorated earned annual bonus and the immediate  vesting of all unvested
options upon  termination of the agreement under certain  circumstances.  Upon a
change  of  control  of  SoftQuad,  all  Mr.  Sharpe's  unvested  options  shall
immediately vest and become exercisable.

     We have an employment  agreement  with our Chief  Scientist,  Peter Sharpe,
that  commenced  on November 1, 2000 and will  continue  indefinitely  until the
death or disability of Mr. Sharpe, the termination of the agreement by us or the
termination of the agreement by Mr. Sharpe.  Mr.  Sharpe's base annual salary is
US $130,000,  subject to increase by Mr. Sharpe's  superior and  ratification of
the  increase by the board of  directors.  In addition,  if certain  performance
goals established by the Compensation  Committee are met, Mr. Sharpe may receive
an amount  equaling up to 30% of his annual base salary as an annual bonus.  The
agreement contains  customary  non-disclosure  and non-compete  provisions.  The
employment  agreement also provides for termination benefits of up to one year's
salary,  prorated earned annual bonus and the immediate  vesting of all unvested
options upon  termination of the agreement under certain  circumstances.  Upon a
change  of  control  of  SoftQuad,  all  Mr.  Sharpe's  unvested  options  shall
immediately vest and become exercisable.

     We have an  employment  agreement  with  our  Vice  President  and  General
Manager,  North America,  Laura Wallace, that commenced on June 5, 2000 and will
continue  indefinitely  until  the  death  or  disability  of Ms.  Wallace,  the
termination  of the agreement by us or the  termination  of the agreement by Ms.
Wallace.  Ms.  Wallace's base annual salary is $130,000 , subject to increase by
Ms.  Wallace's  superior  and  ratification  of the  increase  by the  board  of
directors.  In  addition,  if  certain  performance  goals  established  by  the
Compensation Committee are met, Ms.


                                       40
<PAGE>

Wallace  may  receive  an amount  equaling  up to  $70,000  as an annual  bonus.
Pursuant to the agreement,  Ms. Wallace was granted  options to purchase  40,000
shares of common  stock at $7.50 per share.  The  agreement  contains  customary
non-disclosure  and  non-compete  provisions.   The  employment  agreement  also
provides for  termination  benefits of up to one year's salary,  prorated earned
annual bonus and the immediate  vesting of all unvested options upon termination
of the  agreement  under  certain  circumstances.  Upon a change of  control  of
SoftQuad,  all Ms. Wallace's  unvested options shall immediately vest and become
exercisable.

     Compensatory Arrangements

     SoftQuad was a party to an employment  agreement with its former President,
Andrew  Muroff,  which  expired on August  31,  2001,  and has not been  further
renewed.  Under  the  terms  of that  agreement  within  45 days of the  date of
termination of the employment  contract he will receive,  at SoftQuad's  option,
either $50,000 or 20,000 shares of the common stock of SoftQuad.  If a change of
control is consummated  within six months after termination or expiration of the
agreement and Mr. Muroff contributed to the consummation of such transaction, he
will receive  130,000  shares of the common stock of SoftQuad,  less any amounts
previously paid.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
         --------------------------------------------------------------

     The  following  table  sets  out  information  known  to us  regarding  the
beneficial ownership of our common stock as of November 30, 2001 by:

     o    each person known to us to be the beneficial  owner of more than 5% of
          our common stock;

     o    each of our directors and Named Executive Officers; and

     o    all of our directors and executive officers as a group.

     The number of shares of common stock deemed to be beneficially owned by the
respective  person or entity in the table  below and in  "Selling  Stockholders"
includes  shares  issuable  upon the  exchange  of  exchangeable  shares of SAC,
conversion of preferred  stock, and the exercise of options and warrants held by
the  respective  person or entity that may be exchanged,  converted or exercised
within 60 days after  November  30,  2001.  For  purposes  of  calculating  each
person's or entity's  percentage  ownership,  the number of  outstanding  shares
includes the 13,837,448 shares of common stock and 3,086,710 exchangeable shares
of SAC (which have voting and economic  rights  functionally  equivalent to, and
are  exchangeable  on  a  one-for-one   basis  with,  shares  of  common  stock)
outstanding  on November 30, 2001,  plus shares  issuable upon the conversion or
exercise of that person's or entity's preferred stock, options and warrants that
are convertible or exercisable within 60 days after November 30, 2001. Except as
indicated in the footnotes  below,  to our knowledge,  the persons named in this
table  have  sole  voting  and  investment  power  with  respect  to the  shares
beneficially  owned by them.  Footnotes to the table describe whether any of the
shares  beneficially owned are issuable upon the exchange of exchangeable shares
of SAC or the conversion of preferred stock or the exercise of warrants.

     The address of each person known by us to be the  beneficial  owner of more
than 5% of our common stock is included in the footnotes.

<TABLE>
<CAPTION>

                                                                 Amount and Nature of
Name and Address                                                 Beneficial Ownership    Percent of Class
---------------------------------------------------------------------------------------------------------

<S>                                                                           <C>                 <C>
Mark Valentine (1)                                                            3,248,779           19.2%

James Clark (2)                                                               3,220,285           19.0%

Pinetree Capital Corporation (3)                                              2,571,218           15.2%

VC Advantage Limited  Partnership,  Thomson Kernaghan & Co.                   1,675,096            9.9%
Ltd. and CALP II LP (4)

Roberto Drassinower (5)                                                         826,203            4.9%

Bruce Sharpe (6)                                                                492,857            2.9%


                                       41
<PAGE>

Peter Sharpe (6)                                                                492,857            2.9%

Joan Dea (7)                                                                     36,667            0.2%

David Lewis (8)                                                                  33,333            0.2%

Brock Armstrong (9)                                                              26,667            0.2%

Lawrence Goldberg (9)                                                            31,667            0.2%

Laura Wallace (10)                                                               13,333            0.1%

All current directors and executive  officers of SoftQuad as a                1,993,584           11.8%
group (9 persons) (11)

</TABLE>

(1)  Consists of 1,675,096  shares owned by VC  Advantage  Limited  Partnership,
     Thomson  Kernaghan  & Co.  Ltd.  and CALP II LP (as  described  in Note (4)
     below),  1,000,000 shares owned by Thomson Kernaghan, and 434,794 shares of
     common stock issuable upon conversion of preferred stock and 138,889 shares
     of common stock issuable upon warrants held by Hammock Group,  Ltd. Each of
     the  stockholders  has advised us that Mr.  Valentine is their  controlling
     stockholder.  Mr. Valentine disclaims  beneficial ownership of such shares.
     Mr.  Valentine's  address  is c/o  Thomson  Kernaghan  & Co.  Limited,  120
     Adelaide Street West, Suite 1600, Toronto, Ontario Canada, M5H 1T1.

(2)  Mr.  Clark's  address is Prasanmir  Place 164/5  Sukhimrit  Soi 23 Bangkok,
     Thailand 10110.  Information  from a Schedule 13D filed with the Securities
     and Exchange  Commission by Mr. Clark on September 6, 2000 has been used to
     complete this table.

(3)  Includes 1,570,560 shares of exchangeable stock of SAC.  Pinetree's address
     is 130 King Street West, Suite 2810,  Toronto,  Ontario M5X 1A9, Canada. We
     have been advised by Pinetree that its  controlling  stockholder is Sheldon
     Inwentash.   Information  from  a  Schedule  13D  jointly  filed  with  the
     Securities  and Exchange  Commission  by Pinetree and Sheldon  Inwentash on
     December 29, 2000, has been used to complete this table.

(4)  Two executive  officers of Thomson Kernaghan  (including its Chairman) also
     are  executive  officers of the  general  partner of VC  Advantage  Limited
     Partnership  and the general  partner of CALP II LP.  Accordingly,  Thomson
     Kernaghan,  VC  Advantage  and  CALP II may be  considered  a  group  which
     beneficially  owns  all of the  shares  beneficially  owned by any of them.
     Under an agreement  with  SoftQuad  (the "TK  Conversion  Cap  Agreement"),
     Thomson Kernaghan, VC Advantage and CALP II agreed not to have the right to
     convert any preferred  stock or exercise any warrant or special warrant if,
     after  having  given  effect to the  conversion  or  exercise,  all of them
     considered as a group would be deemed to beneficially own more than 9.9% of
     the  then  outstanding  common  stock.  If not  for the TK  Conversion  Cap
     Agreement,  Thomson  Kernaghan,  VC Advantage and CALP II,  considered as a
     group, would  beneficially own 6,509,874 shares of common stock,  including
     2,506,738  shares of common stock  issuable  upon  conversion  of preferred
     stock and  1,772,634  shares of common  stock  issuable  upon  exercise  of
     warrants. The address for each of Thomson Kernaghan,  VC Advantage and CALP
     II is c/o Thomson Kernaghan & Co. Limited,  120 Adelaide Street West, Suite
     1600,  Toronto,  Ontario Canada,  M5H 1T1.  Information from a Schedule 13G
     jointly filed with the Securities  and Exchange  Commission by VC Advantage
     Limited  Partnership,  Thomson  Kernaghan  & Co.  Limited and CALP II LP on
     September 6, 2000, has been used to complete this table.

(5)  Consists of 142,860 exchangeable shares of SAC and 683,343 shares of common
     stock issuable upon exercise of options.

(6)  Consists of 142,860 exchangeable shares of SAC and 349,997 shares of common
     stock issuable upon exercise of options.

(7)  Consists  of 36,667  shares of  common  stock  issuable  upon  exercise  of
     options.

(8)  Consists  of 33,333  shares of  common  stock  issuable  upon  exercise  of
     options.

(9)  Includes 26,667 shares of common stock issuable upon exercise of options.

(10) Consists  of 13,333  shares of  common  stock  issuable  upon  exercise  of
     options.

(11) Includes 428,580  exchangeable shares of SAC and 1,560,004 shares of common
     stock issuable upon exercise of options.  The 1,993,584 shares beneficially
     owned by the executive  officers and directors  does not include  1,570,560
     exchangeable shares of SAC owned by Pinetree. Lawrence Goldberg, a director
     of the Company, is an Executive Vice President of Pinetree.


                                       42
<PAGE>

ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
          ----------------------------------------------

FINANCINGS

     We have  engaged in  financing  transactions  in which the amount  involved
exceeded  $60,000 with the  following  persons who, on or prior to September 30,
2001,   beneficially  owned  more  than  5%  of  our  common  stock:   Beacon  M
International Investments Inc. ("Beacon"),  Pinetree Capital Corp. ("Pinetree"),
Thomson Kernaghan & Co. Limited,  VC Advantage Limited  Partnership,  CALP II LP
and James Clark. One of our former directors,  Sheldon Inwentash,  is a director
and officer of, and owner of a greater than 10% equity interest in, Pinetree. In
addition,  we have engaged in transactions in which the amount involved exceeded
$60,000 with KBL Capital  Partners Inc. and KBL

Technology  Funding Inc.  Each of Mr.  Inwentash and Michael  Mendelson,  also a
former director, is a director and officer of KBL Capital Partners. In addition,
each of Michael  Mendelson and Pinetree is an owner of a greater than 10% equity
interest in KBL Capital  Partners.  Mr. Mendelson is also a director and officer
of, and owner of a greater  than 10% interest in, KBL  Technology  Funding.  Mr.
Clark was chairman and a director of SoftQuad Canada from July 1998 until August
1, 2000. The following is a description of these transactions.

     On September  30, 1999,  James Clark,  Pinetree,  Beacon,  NewKidCo and KBL
Capital  Funding Inc. as agent,  exchanged  their SoftQuad  Canada  warrants for
shares of common  stock of  SoftQuad  Canada on a 1-for-1  basis,  with  311,530
shares of common  stock issued to James  Clark,  723,520  shares of common stock
issued to Pinetree,  718,480  shares of common  stock issued to Beacon,  351,850
shares of common stock issued to NewKidCo and  1,025,000  shares of common stock
issued to KBL Capital Funding Inc. as agent.

     On February 25, 2000, in consideration for advisory services  rendered,  we
granted to each of Sheldon  Inwentash and Michael  Mendelson options to purchase
80,000 shares of common stock,  and Bo Manor ( who holds a 7.9% interest in KBL)
options to acquire  60,000 shares of common stock,  all at an exercise  price of
$1.44 per share. During 2001, the options granted to Mr. Mendelson and Mr. Manor
were forfeited.

     On February 28, 2000, VC Advantage  purchased  1,033,333  shares of Class B
preferred stockat a price of $2.90 per share, for aggregate gross proceeds of $3
million.  In connection with this transaction,  VC Advantage  received warrants,
exercisable on or before  February 28, 2003, to purchase an aggregate of 416,667
shares of common stock, with an exercise price of $1.53 per share.

     On February  29, 2000,  in  connection  with our sale of 1,000,000  special
warrants at a price of $2.50 per special  warrant,  Thomson  Kernaghan  received
warrants to purchase  100,000 shares of common stock,  with an exercise price of
$2.50 per share,  exercisable  on or before  February 28, 2003, and a fee in the
amount of 8% of the offering (for an aggregate of $200,000).

     On April 18 and 20, 2000, we issued to CALP II special  warrants to acquire
91,422 shares of common stock at a purchase price per special  warrant of $7.50,
and warrants to purchase  45,711 shares of common stock at an exercise  price of
$12.50 per share,  for gross  proceeds of $686,000.  On June 5, 2000,  we issued
special  warrants to acquire  44,760 shares of common stock at a purchase  price
per special  warrant of $7.50,  and warrants to purchase 22,380 shares of common
stock at an exercise price of $12.50 per share to Thomson  Kernaghan,  for gross
proceeds of $335,750.  Under the terms of the  warrants  issued in the April and
June  transactions,  from  September  30,  2000  until  the  effectiveness  of a
registration   statement  covering  the  shares  underlying  the  warrants  (and
satisfaction of a related condition concerning the qualification of a prospectus
in certain Canadian  provinces),  the average warrant exercise price declines by
$0.0082 each day until October 31, 2000 and by $0.50 per month thereafter,  to a
minimum exercise price of $3.75. Thomson Kernaghan, for its services as agent in
respect  of  these  private   placements,   received   $1,290,858  plus  options
exercisable  at no cost for warrants to purchase  215,143 shares of common stock
with an exercise  price of $7.50 per share,  exercisable at any time on or prior
to the  second  anniversary  of the date of  effectiveness  of the  registration
statement filed for the shares underlying these warrants. The warrants issued to
Thomson  Kernaghan have since been  surrendered for  cancellation  and have been
canceled by SoftQuad.

     On May 29, 2000, we issued 88,409 shares of common stock valued at $119,500
to Thomson  Kernaghan in consideration of financial  advisory  services provided
pursuant to a financial  advisory  services  agreement  dated as of December 10,
1999.

     On March 31, 2001, we issued to Thomson  Kernaghan 200,000 shares of common
stock (delivered in six equal monthly  installments over a six-month period) and
warrants to acquire 200,000 shares of common stock at an exercise price of $2.00
per  warrant in  consideration  of  financial  advisory  services to be provided
pursuant to an advisory services agreement dated as of March 30, 2001.

     OPTION GRANTS TO DIRECTORS

     Please  see  "Executive   Compensation--Directors'   Compensation"   for  a
description of stock options granted to directors for service as directors.


                                       43
<PAGE>

     We believe that all of the  transactions set forth above were made on terms
no less  favorable to us than could have been obtained from  unaffiliated  third
parties. All future  transactions,  including loans between us and our officers,
directors,  principal  stockholders and their affiliates,  will be approved by a
majority of the board of  directors,  including  a majority  of the  independent
outside directors on the board of directors, and will continue to be on terms no
less favorable to us than could be obtained from unaffiliated third parties.

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
         --------------------------------

     None

a)      Exhibits

<TABLE>
<CAPTION>

Exhibit No.         Description
-----------         -----------
<S>                 <C>
2.1                 Acquisition Agreement among SoftQuad Software, Ltd., SoftQuad Acquisition Corp. and SoftQuad Canada, dated
                    December 16, 1999(1)
2.2                 Plan and Agreement of Merger between The American Sports Machine, Inc. and SoftQuad Software, Ltd., dated
                    March 1, 2000(2)
2.3                 Agreement and Plan of Reorganization among The American Sports Machine, Inc., SoftQuad Software, Ltd. and
                    its Stockholders, dated March 1, 2000(2)
2.4                 Plan and Agreement of Merger between The American Sports Machine, Inc. and SoftQuad Software, Ltd., dated
                    March 9, 2000(4)
2.6                 Merger Agreement by and among Corel Corporation, Calgary II Acquisition Corp. and SoftQuad Software, Ltd.,
                    as amended and restated, dated August 7, 2001(5)
3.1                 Restated Certificate of Incorporation of SoftQuad Software, Ltd. (7)
3.2                 Restated By-Laws of SoftQuad Software, Ltd. (1)
4.1                 Agent's Warrant to Purchase Shares of Common Stock of SoftQuad Software, Ltd. pursuant to the Class A
                    Convertible Stock Purchase Agreement, dated December 9, 1999(1)
4.2                 Purchaser's Warrant to Purchase Shares of Common Stock of SoftQuad Software, Ltd. pursuant to the Class A
                    Convertible Stock Purchase Agreement, dated December 9, 1999(1)
4.3                 VC Advantage Limited Partnership's Warrant to Purchase Shares of Common Stock of SoftQuad Software, Ltd.
                    pursuant to the Class B Convertible Stock Purchase Agreement, dated February 28, 2000(1)
4.4                 Hammock Group Ltd.'s Warrant to Purchase Shares of Common Stock of SoftQuad Software, Ltd. pursuant to the
                    Class B Convertible Stock Purchase Agreement, dated February 28, 2000(1)
4.5                 Agent's Warrant to Purchase Shares of Common Stock of SoftQuad Software, Ltd. pursuant to the Class B
                    Convertible Stock Purchase Agreement with VC Advantage Limited Partnership, dated February 29, 2000(1)
4.6                 Agent's Warrant to Purchase Shares of Common Stock of SoftQuad Software, Ltd. pursuant to the Class B
                    Convertible Stock Purchase Agreement with Hammock Group Ltd., dated February 29, 2000(1)
4.7                 Warrant Indenture Agreement between SoftQuad Software, Ltd. and Montreal Trust Company of Canada, dated
                    April 18, 2000(1)
4.8                 Form of Subscription Agreement for Canadian Subscribers in April 18, 20 and June 5, 2000 private
                    placements(1)
4.9                 Form of Subscription Agreement for American Subscribers in April 18, 20 and June 5, 2000 private
                    placements(1)
4.10                Registration Rights Agreement between SoftQuad Software Ltd., VC Advantage Limited Partnership and Thomson
                    Kernaghan & Co. Limited, as agent, in connection with the Common Stock Purchase Agreement, dated December
                    8, 1999 and the Class A Convertible Stock Purchase Agreement, dated December 9, 1999(1)
4.11                Registration Rights Agreement between SoftQuad Software Ltd., VC Advantage Limited Partnership and Thomson
                    Kernaghan & Co. Limited, as agent, in connection with the Class B Convertible Stock Purchase Agreement,
                    dated February 28, 2000(1)


                                       44
<PAGE>

4.12                Registration Rights Agreement between SoftQuad Software Ltd. Hammock Group Ltd. and Thomson Kernaghan & Co.
                    Limited, as agent, in connection with the Class B Convertible Stock Purchase Agreement, dated February 28,
                    2000(1)
4.13                Registration Rights Agreement between SoftQuad Software, Ltd. and SmallCaps Online LLC, for itself and as
                    agent, dated April 18, 2000(1)
4.14                Registration Rights Agreement between SoftQuad Software, Ltd. and Thomson Kernaghan & Co. Limited, for
                    itself and as agent, dated April 18, 2000(3)
4.15                Waiver Agreement among SoftQuad Software, Ltd, SoftQuad Software, Inc., Thomson Kernaghan & Co. Limited and
                    VC Advantage Limited Partnership, dated February 28, 2001(7)
9.1                 Voting Trust and Exchange Agreement, among SoftQuad Software, Ltd., SoftQuad Acquisition Corp., SoftQuad
                    Software, Inc. and Computershare Trust Company of Canada, dated February 2000(3)
10.1                Form of Option Holder Lock-Up Agreement, dated December 10, 1999(1)
10.2                Form of Option Holder Escrow Agreement, dated December 16, 1999(1)
10.3                Common Stock Purchase Agreement between SoftQuad Software, Ltd. (referred to in this Report as FinanceCo.)
                    and VC Advantage Limited Partnership, dated December 8, 1999(1)
10.4                Class A Convertible Preferred Stock Purchase Agreement between SoftQuad Software, Ltd. and VC Advantage
                    Limited Partnership, dated December 9, 1999(1)
10.5                VC Advantage Limited Partnership Class B Convertible Preferred Stock Purchase Agreement, dated February 28,
                    2000(1)
10.6                Hammock Group Ltd. Class B Convertible Preferred Stock Purchase Agreement, dated February 28, 2000(1)
10.7                Special Warrant Purchase Agreement between SoftQuad Software, Ltd. and Thomson Kernaghan & Co. Limited, as
                    Agent, dated May 18, 2000(1)
10.8                Engagement Letter Agreement between SoftQuad Software Inc and Thomson Kernaghan & ` Co. Limited, dated
                    February 28, 2000(1)
10.9                Form of Share Purchase Agreement for acquisition of shares of SoftQuad Software Inc. (3)
10.10               Form of Option Exchange Agreement for acquisition of options of SoftQuad Software Inc. (3)
10.11               Form of Indemnification Agreement between Registrant and its officers and directors(1)
10.12               2000 Stock Option Plan and Forms of Agreements thereunder(1)
10.13               Advisory Services Agreement between the SoftQuad Software Inc. and KBL Capital Partners Inc., dated April
                    9, 1999, amended July 31, 1999(1)
10.14               Agency Agreement between SoftQuad Software, Ltd. and Thomson Kernaghan & Co. Limited, dated April 18,
                    2000(1)
10.15               Employment Agreement between SoftQuad Software, Ltd. and Roberto Drassinower,
                    dated October 14, 2000(6)
10.16               Employment Agreement between SoftQuad Software, Ltd. and Nick Mongston, dated
                    November 21, 1999(6)
10.17               Employment Agreement between SoftQuad Software, Ltd. and Peter Sharpe, dated
                    November 1, 2000(6)
10.18               Employment Agreement between SoftQuad Software, Ltd. and Bruce Sharpe, dated
                    November 1, 2000(6)
10.19               Employment Agreement between SoftQuad Software, Ltd. and David R. Lewis, dated
                    February 2, 2001(6)
10.20               Employment Agreement between SoftQuad Software, Ltd. and Laura Wallace, dated
                    January 1, 2001
21                  Subsidiaries of the Registrant
23                  Consent of Deloitte and Touche LLP

</TABLE>

_________________

(1)  Incorporated by reference to Exhibits to the Registrant's  Quarterly Report
     on Form 10-QSB dated June 30, 2000.
(2)  Incorporated by reference to Exhibits to the Registrant's Current Report on
     Form 8-K dated March 9, 2000.


                                       45
<PAGE>

(3)  Incorporated by reference to Exhibits to the Registrant's Current Report on
     Form 8-K dated April 21, 2000.
(4)  Incorporated  by  reference  to  Exhibits  to the  Registrant's  Definitive
     Information Statement on Schedule 14C dated March 21, 2000.
(5)  Incorporated by reference to Exhibits to the  Registrant's  Proxy Statement
     included on Amendment  No. 1 to the  Registration  Statement on Form S-4 of
     Corel Corporation dated November 16, 2001.
(6)  Incorporated  by  reference  to Exhibits to the  Registrant's  Registration
     Statement on Form SB-2, dated September 18, 2001.
(7)  Incorporated  by  reference  to  Exhibits  to the  Registrant's  Definitive
     Information Statement on Schedule 14C dated April 4, 2000.

     _________________

(b)     Reports on Form 8-K

     No Current Reports on Form 8-K were filed in the last quarter of the fiscal
year ended September 30, 2001


                                       46

<PAGE>

                                   SIGNATURES

     In accordance  with Section 13 or 15 (d) of the Securities  Exchange Act of
1934,  the  Registrant has duly caused this report to be signed on its behalf by
the undersigned, there unto duly authorized.


Date: December 19, 2001
                                        SOFTQUAD SOFTWARE, LTD.


                                        By: /s/ Roberto Drassinower
                                           -------------------------------------
                                           Roberto Drassinower
                                           Chief Executive Officer

     In accordance  with the Securities Act of 1934, this report has been signed
below by the following persons on behalf of the Registrant and in the capacities
and on the dates indicated.

Date: December 19, 2001

                                           /s/ Roberto Drassinower
                                           -------------------------------------
                                           Roberto Drassinower
                                           Chief Executive Officer and Director
                                           (principal executive officer)

Date: December 19, 2001
                                           /s/ David R. Lewis
                                           -------------------------------------
                                           David R. Lewis
                                           Chief Financial Officer
                                           (principal financial and accounting
                                           officer)

Date: December 19, 20001
                                           /s/ Joan Dea
                                           -------------------------------------
                                           Joan Dea
                                           Director

Date: December 19, 2001
                                           /s/ Lawrence Goldberg
                                           -------------------------------------
                                           Lawrence Goldberg
                                           Director

Date: December 19, 20001

                                           /s/ Brock Armstrong
                                           -------------------------------------
                                           Brock Armstrong
                                           Director


                                       47
<PAGE>

                               MANAGEMENT'S REPORT

     Management is responsible for all information and representations contained
in the  consolidated  financial  statements  and other  sections  of this Annual
Report. Management believes that that the consolidated financial statements have
been prepared in conformity with U.S generally  accepted  accounting  principles
appropriate  in the  circumstances  to reflect,  in all material  respects,  the
substance of events and transactions that should be included, and that the other
information  in this  Annual  Report is  consistent  with those  statements.  In
preparing the  consolidated  financial  statements,  management  makes  informed
judgments and estimates of the expected effects of events and transactions  that
are currently being accounted for.

     In meeting their  responsibility  for the  reliability of the  consolidated
financial  statements,  management  depends on the Company's  system of internal
accounting controls.  These systems are designed to provide reasonable assurance
that assets are  safeguarded  and  transactions  are executed in accordance with
management's authorization,  and are recorded properly to permit the preparation
of consolidated  financial  statements in accordance with U.S generally accepted
accounting  principles.  In designing control procedures,  management recognizes
that errors or  irregularities  may  nevertheless  occur.  Also,  estimates  and
judgments  are  required to assess and balance the  relative  cost and  expected
benefits of the controls.  Management  believes  that the  Company's  accounting
controls provide reasonable  assurance that errors or irregularities  that could
be material to the consolidated  financial  statements are prevented or would be
detected  within a timely period by employees in the normal course of performing
their assigned functions.

     The Board of Directors  pursues its oversight  role for these  consolidated
financial  statements through the Audit Committee,  which is comprised solely of
directors who are not officers or employees of the Company.  The Audit Committee
meets with  management  periodically  to review  their  work and to monitor  the
discharge  of each of their  responsibilities.  The Audit  Committee  also meets
periodically with Deloitte & Touche LLP, the independent auditors, who have free
access to the Audit  Committee  or the Board of  Directors,  without  management
present,  to  discuss  internal  accounting  control,  auditing,  and  financial
reporting matters.

     Deloitte & Touche LLP is engaged to express an opinion on our  consolidated
financial  statements.  Their opinion is based on procedures believed by them to
be sufficient to provide  reasonable  assurance that the consolidated  financial
statements are not materially misleading and do not contain material errors.

David R. Lewis
Chief Financial Officer

November 21, 2001


                                       F-1

<PAGE>


                          INDEPENDENT AUDITORS' REPORT

To the Board of Directors and
Shareholders of SoftQuad Software, Ltd.

          We have  audited  the  accompanying  consolidated  balance  sheets  of
SoftQuad Software,  Ltd., and subsidiaries as at September 30, 2001 and 2000 and
the related consolidated statements of operations, shareholders' equity and cash
flows for the years ended  September 30, 2001,  2000 and 1999.  These  financial
statements   are  the   responsibility   of  the   Company's   management.   Out
responsibility  is to express an opinion on these financial  statements based on
our audits.

          We  conducted  our  audits  in  accordance  with  auditing   standards
generally accepted in the United States of America. Those standards require that
we plan and perform the audit to obtain  reasonable  assurance about whether the
financial  statements  are free of  material  misstatement.  An  audit  includes
examining,  on a test basis,  evidence supporting the amounts and disclosures in
the  financial  statements.  An audit also  includes  assessing  the  accounting
principles  used  and  significant  estimates  made  by  management,  as well as
evaluating the overall  financial  statement  presentation.  We believe that our
audits provide a reasonable basis for our opinion

          In our opinion, such consolidated financial statements present fairly,
in all material respects, the financial position of SoftQuad Software,  Ltd. and
subsidiaries  as at  September  30,  2001  and  2000  and the  results  of their
operations and their cash flows for the years ended September 30, 2001, 2000 and
1999 in conformity with accounting  principles  generally accepted in the United
States of America.

          The accompanying  consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
2 to the consolidated financial statements, the Company's projected inability to
generate  sufficient cash flows to meet its working capital  requirements raises
substantial doubt about its ability to continue as a going concern. Management's
plans  concerning  this  matter are also  described  in Note 2. These  financial
statements do not include any adjustments  that might result from the outcome of
this uncertainty.


/s/Deloitte & Touche LLP
Chartered Accountants
Toronto, Ontario

November 21, 2001


                                      F-2
<PAGE>
<TABLE>

                             SOFTQUAD SOFTWARE, LTD.
                           Consolidated Balance Sheets
                         (in thousands of U.S. dollars)
====================================================================================================================================


<CAPTION>

                                                                                             September 30,
                                                                                       2001                 2000
<S>                                                                                 <C>                 <C>
ASSETS
CURRENT
Cash and cash equivalents                                                            $2,261              $16,306
Accounts receivable (Note 4)                                                            815                1,147
Work in process and other inventory                                                     469                   72
Prepaid expenses and deposits                                                           499                  482
---------------------------------------------------------------------------------------------------------------------
                                                                                      4,044               18,007

CAPITAL ASSETS (Note 5)                                                                 905                1,017

GOODWILL (net of cumulative amortization of $1,428 September 30,                      3,940                   24
2001; $37 - September 30, 2000)
---------------------------------------------------------------------------------------------------------------------
                                                                                     $8,889              $19,048
=====================================================================================================================

LIABILITIES
CURRENT
Accounts payable                                                                      $924                 $834
Accrued legal fees                                                                      --                  469
Other accruals                                                                       1,284                1,637
Deferred revenue                                                                       308                  130
---------------------------------------------------------------------------------------------------------------------
                                                                                     2,516                3,070
COMMITMENTS (Note 9)

SHAREHOLDERS' EQUITY (Note6)

SHARE CAPITAL
  Preferred stock, par value $0.001 per share

    Authorized:  25,000,000 shares
    Issued and outstanding:
       Class A shares:  1,473,405 at September 30, 2001 and 2000                         1                    1
       Class B shares: 1,589,127 at September 30, 2001 and 1,722,222
        at September 30, 2000                                                            2                    2
  Special voting stock, par value $0.001 per share
    Authorized:  1 special voting share
    Issued and outstanding:  1 at September 30, 2001 and 2000                            1                    1
  Common stock, par value $0.001 per share
    Authorized:  50,000,000 shares
    Issued and outstanding:
       16,924,158 at September 30, 2001 and 12,473,472 at
       September 30, 2000  (1)                                                       2,100                3,646
                                                                                     -----                -----

                                                                                     2,104                3,650
WARRANTS                                                                             2,813                3,918
SPECIAL WARRANTS                                                                        --               13,241
---------------------------------------------------------------------------------------------------------------------
                                                                                     4,917               20,809
DEFERRED STOCK COMPENSATION EXPENSE                                                   (399)                (656)
ADDITIONAL PAID-IN CAPITAL                                                          27,169                5,700
ACCUMULATED OTHER COMPREHENSIVE LOSS                                                  (281)                 (74)
DEFICIT                                                                            (25,033)              (9,801)
---------------------------------------------------------------------------------------------------------------------
                                                                                     6,373               15,978
---------------------------------------------------------------------------------------------------------------------
                                                                                    $8,889              $19,048
=====================================================================================================================
</TABLE>
(1)  Includes  3,136,710  exchangeable  shares  of SAC  (5,773,605  exchangeable
     shares at September 30, 2000).

        See accompanying notes to the consolidated financial statements.


                                      F-3
<PAGE>
<TABLE>

                             SOFTQUAD SOFTWARE, LTD.
                      Consolidated Statements of Operations
          (in thousands of U.S. dollars, except per share information)
====================================================================================================================================

<CAPTION>

                                                                                  Years ended September 30,
                                                                      -----------------------------------------------
                                                                        2001               2000                1999
                                                                      --------           --------            --------
<S>                                                                     <C>               <C>                <C>
REVENUE
   Licenses                                                             $3,698            $4,242             $3,291
   Services                                                              1,949                44                 --
----------------------------------------------------------------------------------------------------------------------
                                                                         5,647             4,286              3,291
----------------------------------------------------------------------------------------------------------------------

COST OF REVENUE
   Licenses                                                                354               528                572
   Services                                                              2,485               339                 63
----------------------------------------------------------------------------------------------------------------------
                                                                         2,839               867                635
----------------------------------------------------------------------------------------------------------------------
                                                                         2,808             3,419              2,656
----------------------------------------------------------------------------------------------------------------------
EXPENSES
   Selling and marketing                                                 6,282             5,239              2,053
   Research and development                                              2,099             1,958              1,069
   General and administrative                                            6,529             3,098                985
   Amortization                                                          1,695               262                109
----------------------------------------------------------------------------------------------------------------------
                                                                        16,605            10,557              4,216
----------------------------------------------------------------------------------------------------------------------

LOSS FROM OPERATIONS                                                   (13,797)           (7,138)            (1,560)
----------------------------------------------------------------------------------------------------------------------

OTHER (INCOME) EXPENSES
   Interest                                                               (439)             (585)                14
   Other expenses                                                        1,874               164                 54
----------------------------------------------------------------------------------------------------------------------
                                                                         1,435              (421)                68
----------------------------------------------------------------------------------------------------------------------

NET LOSS BEFORE VALUE OF SHARE CAPITAL ISSUED ON ACQUISITION
   OF WARRANTS                                                         (15,232)           (6,717)            (1,628)

VALUE OF SHARE CAPITAL ISSUED ON ACQUISITION OF WARRANTS                    --                --              1,388
----------------------------------------------------------------------------------------------------------------------
LOSS ATTRIBUTABLE TO SHAREHOLDERS                                     $(15,232)          $(6,717)           $(3,016)
======================================================================================================================

LOSS PER SHARE (BASIC AND DILUTED)                                      $(1.09)           $(0.60)           $(0.37)
======================================================================================================================

WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING (BASIC
   AND DILUTED)                                                     13,924,299        11,158,648          4,377,000
======================================================================================================================

</TABLE>

        See accompanying notes to the consolidated financial statements.


                                      F-4
<PAGE>

                             SOFTQUAD SOFTWARE, LTD.
                 Consolidated Statement of Shareholders' Equity
                         (in thousands of U.S. dollars)

<TABLE>
<CAPTION>
====================================================================================================================================

                                                                    Deferrd                   Accumulated
                                          Shares/                     Stock       Additional     Other
                                         Warrants                  Compensation    Paid-In    Comprehensive
                                         (Note 6)         Amount    Expense        Capital    Income (Loss)   Deficit      Total
                                         --------         ------    -------        -------    -------------   -------      -----
<S>                                      <C>           <C>           <C>         <C>         <C>             <C>          <C>
BALANCE, OCTOBER 1, 1998                          1    $      --     $    --     $    --     $   --          $    --      $     --
COMPREHENSIVE INCOME (LOSS)
  Foreign currency translation                   --           --          --          --         31               --            31
  Net loss                                       --           --          --          --         --           (3,016)       (3,016)
                                                                                                                          ---------
TOTAL COMPREHENSIVE LOSS                                                                                                    (2,985)
PREMIUM ON REDEMPTION OF COMMON STOCK            --           --          --          --         --              (68)          (68)
ISSUANCE OF COMMON STOCK
  For cash                                5,863,510        1,727          --          --         --               --         1,727
  On acquisition of assets                  703,705          161          --          --         --               --           161
  Repurchase of stock                      (703,705)        (163)         --          --         --               --          (163)
  On acquisition of warrants              3,130,380        1,388          --          --         --               --         1,388
  As deferred stock compensation                 --          446        (446)         --         --               --            --
  Amortization of stock based
   compensation                                  --           --          89          --         --               --            89
-----------------------------------------------------------------------------------------------------------------------------------
BALANCE, SEPTEMBER 30, 1999               8,993,890        3,559        (357)         --         31           (3,084)          149
COMPREHENSIVE LOSS
  Foreign currency translation                   --           --          --          --       (105)              --          (105)
  Net loss                                       --           --          --          --         --           (6,717)       (6,717)
                                                                                                                          ---------
TOTAL COMPREHENSIVE LOSS                                                                                                    (6,822)

ISSUANCE OF COMMON STOCK
  For cash                                  936,711            1          --         793         --               --           794
  As deferred stock compensation                 --           --        (624)        624         --               --            --
  Amortization of stock based
   compensation                                  --           --         325          --         --               --           325
  In satisfaction of debt                   342,870           86          --         138         --               --           224
  Resulting from reverse takeover         2,200,000           --          --          --         --               --            --

ISSUANCE OF SPECIAL VOTING STOCK                  1            1          --          --         --               --             1

ISSUANCE OF PREFERRED STOCK
  Class A                                 1,473,405            1          --       1,153         --               --         1,154
  Class B                                 1,722,222            2          --       2,992         --               --         2,994

ISSUANCE OF WARRANTS                      3,095,558        3,918          --          --         --               --         3,918

ISSUANCE OF SPECIAL WARRANTS              2,951,420       13,241          --          --         --               --        13,241
-----------------------------------------------------------------------------------------------------------------------------------

BALANCE, SEPTEMBER 30, 2000              21,716,077    $  20,809     $  (656)    $ 5,700     $    (74)       $ (9,801)    $  15,978
===================================================================================================================================
</TABLE>


                                      F-5
<PAGE>

<TABLE>
                             SOFTQUAD SOFTWARE, LTD.
                 Consolidated Statement of Shareholders' Equity
                         (in thousands of U.S. dollars)
====================================================================================================================================

<CAPTION>
                                                                    Deferrd                   Accumulated
                                          Shares/                     Stock       Additional     Other
                                         Warrants                  Compensation    Paid-In    Comprehensive
                                         (Note 6)         Amount    Expense        Capital    Income (Loss)   Deficit      Total
                                         --------         ------    -------        -------    -------------   -------      -----
<S>                                      <C>           <C>           <C>         <C>         <C>             <C>          <C>
BALANCE SEPTEMBER 30, 2000               21,716,077    $  20,809     $   (656)   $   5,700   $   (74)        $ (9,801)    $ 15,978

COMPREHENSIVE LOSS
     Foreign currency translation                --           --           --           --      (207)              --         (207)
     Net loss                                    --           --           --           --        --           15,232)     (15,232)
                                                                                                                            ------
TOTAL COMPREHENSIVE LOSS                         --           --           --           --        --               --      (15,439)

ISSUANCE OF COMMON STOCK
     In satisfaction of services            200,000           --           --          400        --               --          400
     As deferred stock compensation              --           --         (184)         184        --               --           --
     On acquisition, net of share
      issue costs                           781,339            1           --        5,095        --               --        5,096
     On exercise of employee options        384,833           --           --           16        --               --           16
     On exchange of exchangeable shares          --       (1,461)          --        1,461        --               --           --
     On conversion of special warrants           --      (13,238)          --       13,238        --               --           --
     Additional share issue costs                --          (89)          --         (130)       --               --         (219)
     Amortization of stock based
      compensation                               --           --          441           --        --               --          441

WARRANTS
     Issuance of warrants                   200,000          100           --           --        --               --          100
     Cancellation of warrants              (215,143)      (1,205)          --        1,205        --               --           --
====================================================================================================================================
BALANCE, SEPTEMBER 30, 2001              23,067,106    $   4,917     $   (399)   $  27,169   $  (281)        $(25,033)    $  6,373
====================================================================================================================================
</TABLE>

        See accompanying notes to the consolidated financial statements.


                                       F-6
<PAGE>
<TABLE>

                             SOFTQUAD SOFTWARE, LTD.
                      Consolidated Statements of Cash Flows
                         (in thousands of U.S. dollars)
====================================================================================================================================

<CAPTION>

                                                                                       Years ended September 30,
                                                                             -------------------------------------------
                                                                               2001              2000            1999
                                                                             --------          --------        ---------
<S>                                                                            <C>             <C>             <C>
NET INFLOW (OUTFLOW) OF CASH RELATED
  TO THE FOLLOWING ACTIVITIES
OPERATING
  Net loss                                                                     $(15,232)       $ (6,717)       $ (1,628)
  Items not affecting cash:
     Loss on disposal of capital assets                                              --              60              10
     Compensation under stock option plan                                           441             325              88
     Services paid through issuance of share capital and warrants                   545              --              --
     Amortization of capital assets                                                 304             191              77
     Amortization of goodwill                                                     1,391              17              20
     Amortization of deferred financing costs                                        --              54              12
  Changes in non-cash operating working capital
  items
     Accounts receivable                                                            344            (557)           (254)
     Work in process and other inventory                                           (359)            (50)             73
     Prepaid expenses and deposits                                                  (15)           (345)              3
     Accounts payable and accrued liabilities                                    (1,015)          2,026             139
     Deferred revenue                                                               123              99              30
------------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities                                           (13,473)         (4,897)         (1,430)
------------------------------------------------------------------------------------------------------------------------
INVESTING
  Acquisition of net assets excluding cash                                         (151)             --            (122)
  Purchase of capital assets                                                       (200)         (1,034)            (68)
  Proceeds from disposal of capital assets                                           --              --               5
------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities                                              (351)         (1,034)           (185)
------------------------------------------------------------------------------------------------------------------------
FINANCING
  Issuance of share capital, net of share issue costs                               (14)         22,412           1,888
  Redemption of common shares                                                        --              --            (163)
  Repayment of notes payable                                                         --            (797)             --
  Increase in notes payable                                                          --              --             797
  Deferred financing costs                                                           --              --             (66)
------------------------------------------------------------------------------------------------------------------------
Net cash (used) provided by financing activities                                    (14)         21,615           2,456
------------------------------------------------------------------------------------------------------------------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH                                            (207)           (105)           (114)
------------------------------------------------------------------------------------------------------------------------
NET CASH (OUTFLOW) INFLOW                                                       (14,045)         15,579             727
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                                     16,306             727              --
------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR                                         $  2,261        $ 16,306        $    727
========================================================================================================================
CASH AND CASH EQUIVALENTS INCLUDES:
  Cash                                                                         $    735        $    224        $    727
  Short-term deposits                                                             1,526          16,082              --
------------------------------------------------------------------------------------------------------------------------
                                                                               $  2,261        $ 16,306        $    727
========================================================================================================================

</TABLE>


                                      F-7
<PAGE>

                             SOFTQUAD SOFTWARE, LTD.
                      Consolidated Statements of Cash Flows
                         (in thousands of U.S. dollars)
================================================================================

<TABLE>
<CAPTION>

                                                                              Years ended September 30,

                                                                         2001           2000           1999
                                                                         ----           ----           ----
<S>                                                                    <C>            <C>            <C>

SUPPLEMENTARY CASH FLOW
INFORMATION
  Cash payments during the period for:
    Interest paid                                                      $   --         $   28         $   --
    Interest received                                                     431            613             14
  Non-cash investing and financing activities:
    Value of share capital issued on
      acquisition of warrants                                              --             --          1,388
    Value of common stock recorded on
      stock compensation expenses                                         441            623            446
    Issuance of share capital and warrants as                             545            314             --
      payment for services
    Issuance of common shares and options                               5,096             --             --
       on acquisition of Advanced Data
       Engineering Inc.

</TABLE>

        See accompanying notes to the consolidated financial statements.


                                      F-8
<PAGE>

                             SOFTQUAD SOFTWARE, LTD.
                   Notes to Consolidated Financial Statements
          (in thousands of U.S. dollars, except per share information)
================================================================================

1.   DESCRIPTION OF BUSINESS

     SoftQuad  Software,  Ltd. (the "Company"),  through its direct and indirect
     subsidiaries,  develops, markets and supports digital content authoring and
     publishing  software  tools  and  provides  related  services  that  enable
     non-technical  and  expert  users to  create  and  publish  multi-platform,
     standards-based,  formatted, interactive, digital content via the Internet,
     Web, intranets, CD-Rom and paper.

     On August 7, 2001,  the Company signed a definitive  merger  agreement with
     Corel  Corporation  ("Corel").  The transaction is expected to close during
     Corel's first quarter ending February 28, 2002.

2    SIGNIFICANT ACCOUNTING POLICIES

     The consolidated financial statements have been prepared in accordance with
     Generally Accepted  Accounting  Principles ("GAAP") in the United States of
     America.

     Basis of presentation

     The Company has determined  that it will not have  sufficient cash and cash
     equivalents  to meet  its  working  capital  requirements  for the  next 12
     months,  as the Company's revenue  projections  continue to decrease due to
     recent economic  conditions,  and as certain  expenses  increase due to the
     costs  associated  with  negotiating and completing the planned merger with
     Corel. These matters raise substantial doubt about the Company's ability to
     continue as a going  concern.  The Company  believes that entering into the
     strategic  merger  with  Corel,  in  light  of the  increasingly  difficult
     environment in the public and private markets for raising financing, is the
     best alternative available currently to the Company. If the merger close is
     delayed or the merger fails to close,  additional funds will be required to
     support the Company's  working capital  requirements or for other purposes.
     The terms of the merger agreement  permit the Company to effect  additional
     financing through the issuance of equity or debt,  provided that (i) it has
     not  exceeded  its  operating  budget by more than 10% and (ii) Corel has a
     right of first  refusal over any  financing  requirements.  If Corel waives
     this right,  the Company may seek to raise such  additional  funds  through
     public or private equity or debt  financings or from other  sources.  There
     can be no assurance that additional  financing will be available at all, or
     if  available  will be on  terms  favorable  to the  Company,  or that  any
     additional financing will not be dilutive.

     The financial statements include the accounts of the Company and its wholly
     owned   subsidiaries,   SoftQuad  Software  California  Inc.  and  SoftQuad
     Acquisition  Corp.  as well as  SoftQuad  Acquisition  Corp.'s  subsidiary,
     SoftQuad  Software  Inc.   ("SoftQuad   Canada"),   and  SoftQuad  Canada's
     subsidiary  SoftQuad  Limited.  All significant  intercompany  accounts and
     transactions have been eliminated.


                                      F-9
<PAGE>

                             SOFTQUAD SOFTWARE, LTD.
             Notes to Consolidated Financial Statements - continued
          (in thousands of U.S. dollars, except per share information)
================================================================================

     Reverse takeover accounting

     The current corporate  structure of the Company and its direct and indirect
     subsidiaries  is the result of a series of  transactions  through which the
     former  shareholders  of SoftQuad  Canada and the former  shareholders of a
     company that had been formed to facilitate  certain  financings of SoftQuad
     Canada ("FinanceCo") acquired control of the Company.

     On January 17, 2000, the shareholders of SoftQuad Canada irrevocably agreed
     to tender their shares for securities exchangeable for shares of FinanceCo.
     On March 2, 2000,  FinanceCo merged with The American Sports Machine,  Inc.
     Upon consummation of the merger, the former shareholders of SoftQuad Canada
     and the former  shareholders  of FinanceCo owned  approximately  91% of the
     common stock of the Company and, accordingly,  the merger was accounted for
     as a reverse takeover transaction.

     As a result of the application of reverse takeover accounting:

     (i) the consolidated financial statements of the combined entity are issued
     under the name of the Company,  but are  considered a  continuation  of the
     financial  statements  of  FinanceCo  and  its  consolidated  subsidiaries,
     SoftQuad Acquisition Corp.,  SoftQuad Canada and SoftQuad (UK) Limited; and
     (ii) the assets and liabilities in the  consolidated  financial  statements
     are included at their historical carrying value.

     Cash equivalents

     For purposes of the  statements of cash flows,  highly  liquid  investments
     with maturities of three months or less are considered cash equivalents.

     Work in Process and Inventory

     Inventory  is  valued  at the  lower  of  cost,  determined  on a  first-in
     first-out  basis,  and net  realizable  value.  Work in process  represents
     unbilled costs on services contracts.


                                      F-10
<PAGE>

                             SOFTQUAD SOFTWARE, LTD.
             Notes to Consolidated Financial Statements - continued
          (in thousands of U.S. dollars, except per share information)
================================================================================

     Capital assets

     Capital  assets  are  stated  at  cost.   Amortization  is  provided  on  a
     declining-balance   basis,  except  for  leasehold  improvements  that  are
     amortized on the straight-line basis, at the following rates per annum:

          Computer hardware             -     30%
          Furniture and fixtures        -     20%
          Computer software             -     30%
          Leasehold improvements        -     Lease term

     Goodwill

     In accordance with the provisions of the Statement of Financial  Accounting
     Standards  ("SFAS") No. 121 "Accounting for Impairment of Long-Lived Assets
     and for  Long-Lived  Assets to be Disposed  Of" ("SFAS  121"),  the Company
     evaluates  the  carrying  value  of  its  long-lived   assets  and  certain
     identifiable  intangibles  for  impairment  whenever  events or  changes in
     circumstances  indicate  that the  carrying  amount  of an asset may not be
     recoverable.  Impairment  of assets to be held and used is  calculated by a
     comparison of the carrying  amount of an asset to future  undiscounted  net
     cash  flows  expected  to be  generated  by the asset.  If such  assets are
     considered to be impaired,  the  impairment to be recognized is measured by
     the amount which the carrying  amount of the assets  exceeds the fair value
     of the assets.  Assets to be  disposed of are  reported at the lower of the
     carrying amount or fair value less the cost to sell the asset.

     Goodwill is being  amortized on a  straight-line  basis over its  estimated
     economic life of three years. Subsequent to the acquisition, which resulted
     in this goodwill,  the Company  continually  evaluates whether later events
     and circumstances  have occurred that indicate the remaining useful life of
     the goodwill may warrant revision or that the remaining  balance may not be
     recoverable.  When factors  indicate that goodwill  should be evaluated for
     possible impairment,  the Company uses an estimate of the undiscounted cash
     flows over the  remaining  life of the  goodwill in  measuring  whether the
     carrying amount of goodwill is recoverable.


                                      F-11
<PAGE>

                             SOFTQUAD SOFTWARE, LTD.
             Notes to Consolidated Financial Statements - continued
          (in thousands of U.S. dollars, except per share information)
================================================================================

     Revenue recognition and deferred revenues

     The Company  recognizes  revenues in accordance with applicable  accounting
     regulations,  including  American Institute of Certified Public Accountants
     Statement of Position 97-2,  "Software  Revenue  Recognition,"  and related
     interpretations and amendments,  and the Securities and Exchange Commission
     Staff  Accounting  Bulletin  No.  101  "Revenue  Recognition  in  Financial
     Statements".  Revenue from sale of products is  recognized  when a contract
     has been executed, the product has been delivered, the sales price is fixed
     or  determinable  and  collection of the resulting  receivable is probable.
     Support  revenue is  recognized  ratably over the support  period.  Amounts
     billed in advance of revenue  recognition are recorded as deferred revenue.
     Professional services revenue is recognized as the services are performed.

     Revenue earned on software arrangements  involving multiple elements (i.e.,
     software products,  upgrades/enhancements,  post contract customer support,
     installation,  training)  is  allocated  to each  element  based on  vendor
     specific  objective  evidence of relative fair value of the  elements.  The
     revenue  allocated to post contract support is recognized  ratably over the
     term of the support  and revenue  allocated  to service  elements  (such as
     training and  installation)  is recognized  as the services are  performed.
     When arrangements  contain multiple elements and vendor specific  objective
     evidence  exists  for all  undelivered  elements,  the  Company  recognizes
     revenue  for  the  delivered   elements  using  the  residual  method.  For
     arrangements   containing  multiple  elements  for  which  vendor  specific
     objective evidence does not exist for all undelivered elements, revenue for
     the delivered and  undelivered  elements is deferred until vendor  specific
     objective evidence exists or all elements have been delivered.

     Research and development

     Research costs are expensed as incurred.

     Development  costs  that meet the  criteria  for  deferral  under  GAAP are
     deferred  and  amortized  based  on  the  estimated  sales  revenue  of the
     products,  to a maximum period of three years. Other development costs that
     do not meet these criteria are expensed as incurred.  During the period, in
     management's opinion, no costs met the criteria for deferral.

     Income taxes

     The  Company  accounts  for  income  taxes  under  Statement  of  Financial
     Accounting  Standards ("SFAS") No. 109, "Accounting for Income Taxes". SFAS
     No. 109  requires  the  Company to use an asset and  liability  approach to
     recognize   deferred  tax  assets  and   liabilities  for  the  future  tax
     consequences  of events that have been recognized at different times in the
     financial  statements  than in the tax returns.  These  differences  relate
     primarily to different  amortization  methods used for financial  reporting
     and income tax purposes.


                                      F-12
<PAGE>

                             SOFTQUAD SOFTWARE, LTD.
             Notes to Consolidated Financial Statements - continued
          (in thousands of U.S. dollars, except per share information)
================================================================================

     Foreign currency translation

     Effective  October 1, 1999, the Company  changed its reporting  currency to
     the U.S. dollar.  Accordingly,  historical balance sheet figures previously
     reported in Canadian  dollars were translated into U.S. dollars at the rate
     of  exchange  prevailing  at  year-end,  while  revenue and  expenses  were
     translated at average rates for the periods.  The adjustment resulting from
     translating  the  financial  statements  is  reflected  as a  component  of
     comprehensive income in the shareholders' equity on the balance sheet.

     Effective  October 1, 2000, the Company changed its functional  currency to
     the U.S. dollar as it represents the primary economic  environment in which
     the Company  operates.  The effects of this change have been  recorded as a
     separate   component  of   shareholders'   equity  in   accumulated   other
     comprehensive loss.

     Comprehensive income

     The  Company  has  adopted  the   requirements  of  SFAS  130,   "Reporting
     Comprehensive   Income".   SFAS  No.  130  requires  that  a  statement  of
     comprehensive  income  be  displayed  with  the  same  prominence  as other
     financial statements.  Comprehensive income, which incorporates net income,
     includes all changes in equity during a period except those  resulting from
     investments by and distributions to owners.

     Stock based compensation

     The Company  grants  stock  options for a fixed number of shares to its key
     officers, directors,  employees, advisors and consultants at a fixed price.
     The Company has elected to follow  Accounting  Principles Board Opinion No.
     25, "Accounting for Stock Issued to Employees" ("APB 25") for those options
     issued  to  employees  and  directors,   and  related   interpretations  in
     accounting  for its employee  stock options  because the  alternative  fair
     value  accounting  provided  for  under  SFAS  No.  123,   "Accounting  for
     Stock-Based   Compensation"  ("SFAS  123"),  requires  the  use  of  option
     valuation models. However,  options granted to advisors and consultants are
     accounted for under SFAS No. 123. Under APB 25, no compensation  expense is
     recognized when the exercise price of the Company's  employee stock options
     granted equals the estimated  market price of the  underlying  stock on the
     date of the grant.

     Loss per share

     Loss per share has been  calculated  using the weighted  average  number of
     common shares outstanding. The effect on the loss per share of the exercise
     of all dilutive securities  including preferred shares,  warrants,  special
     warrants and stock options referred to in Note 6 is anti-dilutive.


                                      F-13
<PAGE>

                            SOFTQUAD SOFTWARE, LTD.
             Notes to Consolidated Financial Statements - continued
          (in thousands of U.S. dollars, except per share information)
================================================================================

     Use of estimates

     The  preparation  of financial  statements  in  conformity  with  generally
     accepted  accounting  principles  requires management to make estimates and
     assumptions  that affect the amounts  reported in the financial  statements
     and accompanying notes. Actual results could differ from those estimates.

     Long-lived assets

     The Company accounts for its investments in long-lived assets in accordance
     with Statement of Financial  Accounting  Standards No. 121, "Accounting for
     the  Impairment  of  Long-Lived  Assets  and for  Long-Lived  Assets  to be
     Disposed  of" (SFAS  121).  Under  SFAS  121,  an  impairment  loss must be
     recognized for long-lived assets and certain identifiable intangibles to be
     held and used by an entity  whenever  events or  changes  in  circumstances
     indicate  that the  carrying  amount  of an asset  may not be  recoverable.
     Management believes there has been no material impairment of the long-lived
     assets as of September 30, 2001.

     Recently issued accounting standards not yet implemented

     On June 29, 2001,  the Financial  Accounting  Standards  Board approved for
     issuance  Statement of  Financial  Accounting  Standards  ("SFAS") No. 141,
     "Business  Combinations" ("SFAS 141") and SFAS No. 142, "Goodwill and Other
     Intangible Assets" ("SFAS 142"). SFAS 141 requires that the purchase method
     of accounting be used for all business  combinations  initiated  after June
     30, 2001. As a result, the pooling-of-interests  method will be prohibited.
     SFAS 142 changes the accounting for goodwill from an amortization method to
     an  impairment-only  approach,  Thus,  amortization of goodwill,  including
     goodwill recorded in past business  combinations,  will cease upon adoption
     of this Statement which, for the Company, will be October 1, 2001; however,
     for any acquisitions completed after June 30, 2001, goodwill and intangible
     assets with an indefinite life will not be amortized.

     The  adoption  of SFAS 141 will not have an impact on the Company as it has
     applied the purchase  method to all  previous  business  combinations.  The
     Company is still  evaluating the impact of the adoption of SFAS 142 and has
     not yet determined  the effect of its adoption on the business,  results of
     operations or financial condition of the Company.

     The Financial  Accounting  Standards  Board  approved for issuance SFAS 143
     "Accounting for Asset Retirement  Obligations" and SFAS 144 "Accounting for
     the  Impairment  or  Disposal  of  Long-Lived  Assets".   The  Company  has
     determined  that the adoption of these standards will not have an impact on
     the Company.


                                      F-14
<PAGE>

                             SOFTQUAD SOFTWARE, LTD.
             Notes to Consolidated Financial Statements - continued
          (in thousands of U.S. dollars, except per share information)
================================================================================
3.   ACQUISITION OF ADVANCED DATA ENGINEERING INC. ("ADEi")

     On November 20, 2000,  the Company  completed  its  acquisition  of ADEi, a
     provider of content transformation  solutions. The transaction was affected
     through the  issuance of 744,133  common  shares with a value of $4,762 and
     the exchange of 80,770 vested options,  based on the publicly traded price,
     for all the  outstanding  shares  and  vested  options  of ADEi.  The total
     purchase price is approximately  $5,553. The acquisition has been accounted
     for using the purchase  method of  accounting  with  substantially  all the
     purchase  price  allocated  to  goodwill  and the results of ADEi have been
     included in the statement of operations from the date of acquisition.

     The assets and liabilities were acquired for total  consideration of $5,553
     and are comprised of the following:

                                                     (in thousands of U.S.
                                                            dollars)
         Cash                                                    $105
         Accounts receivable                                        7
         Costs in excess of billings                               37
         Capital assets                                            30
         Accounts payable and accrued charges                    (47)
         Deferred revenue                                        (67)
         Goodwill                                               5,488
         ------------------------------------------------------------
         Net assets acquired and purchase price                $5,553

     The following  pro forma summary  represents  the  consolidated  results of
     operations for the year ended  September 30, 2000 as if the acquisition had
     occurred as of October 1, 1999.  These pro forma results have been included
     for  comparative  purposes only and do not purport to be indicative of what
     would have occurred had the acquisition been made as of that date or of the
     results which may occur in the future.

                                                                 Pro Forma
                                                                Year ended
                                                            September 30, 2000
                                                           (in thousands, except
                                                              Per share data)
                                                                (unaudited)


     Total revenue..........................................      $ 5,793
     Net Loss applicable to common shareholders.............      $(8,792)
     Basic net loss per common share........................      $ (0.74)

     No pro forma results have been  presented for the year ended  September 30,
     2001 as the acquisition  took place shortly after the  commencement of such
     fiscal year.


                                      F-15
<PAGE>

                             SOFTQUAD SOFTWARE, LTD.
             Notes to Consolidated Financial Statements - continued
          (in thousands of U.S. dollars, except per share information)
================================================================================

4.   ACCOUNTS RECEIVABLE

                                                         September 30
                                                     2001           2000
                                                     ----           ----

         Trade                                      $ 828          $ 1,148
         Less allowance for doubtful accounts         (13)              (1)
                                                    -------        -------
                                                    $ 815          $ 1,147

5.   CAPITAL ASSETS

<TABLE>
<CAPTION>

                                                  September 30, 2001                                    September 30, 2000
                                                   Accumulated                                           Accumulated        Net Book
                                      Cost        Amortization       Net Book Value       Cost          Amortization         Value
                                      ----        ------------       --------------       ----          ------------         -----
<S>                                  <C>               <C>               <C>            <C>                 <C>             <C>
Computer hardware                      $726            $281              $445            $ 625              $109              $516
Furniture and fixtures                  311             119               192              271                47               224
Computer software                       246              88               158              236                57               179
Leasehold improvements                  150              40               110              112                14                98
                                        ---              --               ---              ---                --                --
                                     $1,433            $528              $905           $1,244              $227            $1,017
                                     ======            ====              ====           ======              ====            ======

</TABLE>

6.   SHARE CAPITAL

     Authorized

     The Company's  authorized  capital stock  consists of 50,000,000  shares of
     common stock,  $0.001 par value per share,  25,000,000  shares of preferred
     stock,  $0.001 par value per share,  and one share of special voting stock,
     $0.001 par value.


                                      F-16
<PAGE>

                             SOFTQUAD SOFTWARE, LTD.
             Notes to Consolidated Financial Statements - continued
          (in thousands of U.S. dollars, except per share information)
================================================================================

i)   Common stock
     ------------

     The  holders  of  common  stock are  entitled  to one vote per share on all
     matters to be voted on by the shareholders. Subject to preferences that may
     be applicable to any  outstanding  preferred  stock,  the holders of common
     stock are  entitled to receive  ratably such  dividends,  if any, as may be
     declared  from time to time by the Board of Directors  out of funds legally
     available  therefor.  In the  event  of the  liquidation,  dissolution,  or
     winding up of the  Company,  the  holders of common  stock are  entitled to
     share ratably in all assets remaining after payment of liabilities, subject
     to prior rights of preferred stock, if any, then outstanding.

ii)  Preferred stock
     ---------------

     The shares of Class A convertible  preferred  stock and Class B convertible
     preferred stock are convertible at any time at the option of the holder, on
     a one-for-one  basis,  for shares of common stock.  The number of shares of
     common  stock into which Class A  convertible  preferred  stock and Class B
     convertible  preferred  stock is  convertible  is subject to  adjustment or
     modification in the event of a stock split or other change to the Company's
     capital  structure  so as to maintain the initial  one-to-one  relationship
     between  the  shares of such  preferred  stock and the  common  stock.  The
     holders  of Class A  convertible  preferred  stock and Class B  convertible
     preferred  stock are entitled to the number of votes per share equal to the
     number of shares  of  common  stock  into  which  such  preferred  stock is
     convertible on all matters to be voted on by the shareholders. With respect
     to dividends,  Class A convertible  preferred stock and Class B convertible
     preferred  stock rank on parity  with each other and the  Company's  common
     stock. With respect to distributions upon liquidation, the holders of Class
     A convertible  preferred stock and Class B convertible  preferred stock are
     entitled to receive an initial preferred distribution before any payment is
     made in respect  of shares of common  stock of $1.3574  and  $2.903226  per
     share, respectively.

iii) Special voting stock
     --------------------

     The one  authorized  share of  special  voting  stock  has been  issued  to
     Computershare  Trust  Company of Canada in its  capacity as trustee for the
     benefit of holders of exchangeable shares of SoftQuad Acquisition Corp. The
     special voting share is the vehicle  through which holders of  exchangeable
     shares are able to exercise their voting  rights.  The special voting stock
     has  attached to it a number of votes  equal to the number of  exchangeable
     shares  outstanding  from  time to  time,  which  votes  may be cast at any
     meeting at which the Company's common shareholders are entitled to vote.


                                      F-17
<PAGE>

                             SOFTQUAD SOFTWARE, LTD.
             Notes to Consolidated Financial Statements - continued
          (in thousands of U.S. dollars, except per share information)
================================================================================

iv)  Exchangeable shares

     The  exchangeable  shares are exchangeable at any time at the option of the
     holder,  on a one-for-one  basis,  for shares of common stock. The Company,
     SoftQuad  Acquisition  Corp.  ("SAC") and  Computershare  Trust  Company of
     Canada, as trustee for the exchangeable shareholders, have entered into the
     voting and  exchange  trust  agreement  with  respect  to the  exchangeable
     shares.  By  furnishing  instructions  to the trustee  under the voting and
     exchangeable trust agreement,  holders of the exchangeable  shares are able
     to exercise  essentially the same voting rights with respect to the Company
     as they  would have if they had  exchanged  their  exchangeable  shares for
     shares of the Company's  common stock.  Holders of exchangeable  shares are
     also entitled to receive from SoftQuad  Acquisition Corp. dividends payable
     that are economically  equivalent to any cash dividends paid by the Company
     on the common stock. The  exchangeable  shares are subject to adjustment or
     modification in the event of a stock split or other change to the Company's
     capital  structure  so as to maintain the initial  one-to-one  relationship
     between the exchangeable shares and the common stock. The book value of the
     exchangeable  shares  is  $1,741  (September  30,  2000  -  $3,201)  and is
     presently  included as a component  of common  stock on the balance  sheet.
     When the exchangeable shares are exchanged for common stock of the Company,
     $1,736  (September  30,  2000 - $3,195)  of the  value of the  exchangeable
     shares will be allocated to additional paid in capital.

     The following table summarizes the details of share capital and warrants:

<TABLE>
<CAPTION>

                                                                                 September 30,         September 30,
                                                                                     2001                      2000
<S>                                                                                   <C>               <C>
Preferred stock, par value $0.001 per share
    Authorized:  25,000,000 shares

    Issued and outstanding:

       Class A shares:  1,473,405 at September 30, 2001 and 2000                          $1            $     1
       Class B shares: 1,589,127 at September 30, 2001 and 1,722,222
       at September 30, 2000                                                               2                  2

Special voting stock, par value $0.001 per share

   Authorized:  1 special voting share

   Issued and outstanding:  1 at September 30, 2001 and 2000                               1                  1

Common stock, par value $0.001 per share
   Authorized:  50,000,000 shares
   Issued and outstanding:
   16,924,158  at September 30, 2001 and 12,473,472 at
   September 30, 2000(1)                                                               2,100              3,646

Special warrants to acquire common stock

   Nil at September 30, 2001 and 2,951,420 at September 30, 2000                          --             13,241

Warrants to purchase common stock
   3,080,416 at September 30, 2001 and 3,095,559 at September 30, 2000                 2,813              3,918
                                                                                      ------            -------
                                                                                      $4,917            $20,809
                                                                                      ======            =======

</TABLE>

(1)  Includes 3,136,710 exchangeable shares of SAC (5,773,605  exchangeable
     shares at September 30, 2000).


                                      F-18
<PAGE>

                             SOFTQUAD SOFTWARE, LTD.
             Notes to Consolidated Financial Statements - continued
          (in thousands of U.S. dollars, except per share information)
================================================================================

          Share transactions

          The Company entered into the following share transactions:

          (a)  On September 30, 1999,  the Company  issued  3,130,380  shares of
               common  stock as  consideration  for the  purchase  of  3,130,380
               previously issued warrants. The common stock issued was valued at
               $1,388 an amount equivalent to the exercise price of the warrants
               previously issued.

          (b)  On December 16, 1999  FinanceCo  was  incorporated  in the United
               States of America to  facilitate  the  raising of  financing  for
               SoftQuad Canada. On incorporation  736,702 shares of common stock
               and 1,473,405 Class A preferred shares were issued. The estimated
               costs of $210  associated  with the issuance  were  recorded as a
               reduction  of paid-in  and  additional  paid-in  capital  for net
               proceeds  of  approximately   $2,790.  In  connection  with  this
               transaction,  the  purchaser and the agent  received  442,022 and
               221,011  warrants  respectively,  exercisable  at any time,  at a
               price of $1.3574 per share, expiring December 10, 2002.

          (c)  On  January  17,  2000 the  securityholders  of  SoftQuad  Canada
               entered  into  agreements  with  FinanceCo  to  acquire  all  the
               outstanding  securities of SoftQuad  Canada  through  FinanceCo's
               subsidiary  SoftQuad  Acquisition Corp. Although this acquisition
               was  not  formalized  until  April  5,  2000 it has  been  deemed
               effective  for  financial  accounting  purposes as of January 17,
               2000,  the date on which it became  irrevocable  by the  SoftQuad
               Canada  securityholders.  As a result there were 5,773,605 shares
               of common  stock  reserved  for  issuance  upon the  exchange  of
               exchangeable  shares  of  the  Company's   subsidiary,   SoftQuad
               Acquisition  Corp.,  and  3,435,670  exchangeable  shares  of the
               Company's subsidiary were exchanged for shares of common stock in
               the Company.

          (d)  On February 28, 2000,  FinanceCo  completed the private placement
               of  1,722,222  Class B  preferred  shares  having a par  value of
               $0.001 at a price of $2.90 per share. The estimated costs of $400
               associated  with the  placement  were  included as a reduction of
               paid-in  and  additional  paid-in  capital  for net  proceeds  of
               approximately  $4,600. In connection with this  transaction,  the
               purchaser  and  agent  received   694,445  and  347,222  warrants
               respectively,  exercisable  at any time,  at a price of $1.53 per
               share, expiring February 28, 2003.

          (e)  On February 29, 2000 FinanceCo completed the private placement of
               1,000,000  special  warrants  at a price  of  $2.50  per  special
               warrant.  Each special warrant entitled the holder to acquire one
               share  of   common   stock  of   FinanceCo   for  no   additional
               consideration.  The estimated  costs of $200 associated with this
               placement  were included as a reduction of paid-in and additional
               paid-in  capital for net  proceeds of  approximately  $2,300.  In
               connection  with this  transaction,  the agent  received  100,000
               warrants,  exercisable  any time,  at a price of $2.50 per share,
               expiring February 28, 2003.


                                      F-19
<PAGE>

                             SOFTQUAD SOFTWARE, LTD.
             Notes to Consolidated Financial Statements - continued
          (in thousands of U.S. dollars, except per share information)
================================================================================

          (f)  On March 2,  2000  FinanceCo  merged  with  The  American  Sports
               Machine,  Inc.  to form the  Company.  Upon  consummation  of the
               merger,   for   financial   accounting   purposes,   the   former
               securityholders   of   SoftQuad   Canada  and   FinanceCo   owned
               approximately  91% of the  common  stock  of  the  Company,  and,
               accordingly,  the merger was accounted for as a reverse  takeover
               transaction.

          (g)  On  April 18 and 20 and  June 5,  2000,  the  Company  issued  an
               aggregate of 200,010  shares of common stock for a purchase price
               per share of $7.50,  special warrants to acquire 1,951,420 shares
               of common  stock for no  additional  consideration  at a purchase
               price per share  subject to such  special  warrants  of $7.50 per
               special  warrant and warrants to purchase  215,143 and  1,075,715
               shares of common stock at an exercise  price of $7.50 per warrant
               respectively, for gross proceeds of $16,136. The 215,143 warrants
               were subsequently  returned for cancellation and cancelled by the
               Company.

          (h)  On May 29,  2000,  the Company  issued  127,485  shares of common
               stock in consideration of financial advisory services provided in
               connection with financing transactions completed during the year.

          (i)  In October,  2000 the  Company  issued  300,000  shares of common
               stock in consideration of investor  relations  services provided.
               These  shares were  subsequently  returned for  cancellation  and
               cancelled by the Company.

          (j)  On November 20, 2000 the Company  issued 744,133 shares of common
               stock  and  80,770  vested   options  in   connection   with  the
               acquisition of ADEi.

          (k)  On March 30, 2001,  the Company  issued  200,000 shares of common
               stock  in  consideration  of  financial  advisory  services.  The
               Company also issued warrants to purchase 200,000 common shares at
               an exercise price of $2.00 per warrant.

          (l)  On March 30, 2001, the Company issued warrants to purchase 75,000
               common  shares at an  exercise  price of $7.50 per  warrant,  and
               warrants to purchase 40,000 common shares at an exercise price of
               $12.50 per warrant.  These warrants were subsequently returned to
               the Company for cancellation as part of a legal settlement.

          (m)  On June 12,  2001,  the Company  issued  37,206  shares of common
               stock valued at $1.20 per common share to the former shareholders
               of Advance Data Engineering  Inc.  ("ADEi") as required under the
               Merger  Agreement  with ADEi, as the Company did not register the
               shares issued on the  acquisition on November 20, 2000 within the
               prescribed time.


                                      F-20
<PAGE>

                             SOFTQUAD SOFTWARE, LTD.
             Notes to Consolidated Financial Statements - continued
          (in thousands of U.S. dollars, except per share information)
================================================================================

          (n)  On August 31, 2001, the Company issued 2,951,420 shares of common
               stock on conversion of the 2,951,420 special warrants  previously
               outstanding.  The special warrants entitled the holder to acquire
               one share of common stock.  The special  warrants  expired on the
               fifth  business day  following the date of  effectiveness  in the
               holder's  province of residence of a qualifying  prospectus.  The
               prospectus was effective August 24, 2001.

          (o)  During fiscal 2001,  the Company  issued 384,833 shares of common
               stock to employees on the exercise of previously  issued  options
               under the Employee Stock Option Plan.

          (p)  For the period from  October 1, 2000 to September  30, 2001,  the
               Company issued  2,636,895  shares of common stock in exchange for
               2,636,895 exchangeable shares of SoftQuad Acquisition Corp.

          Stock option plan

          The  Company  has  established  a stock  option  plan (the  "Plan") to
          encourage ownership of the Company's common stock by its key officers,
          directors,  employees, advisors and consultants. The maximum number of
          shares of common  stock that may be reserved  for issue under the Plan
          at September  30, 2001 is 5,500,000  (September  30, 2000 - 4,899,500)
          with  provision  that the Board of  Directors  of the  Company has the
          right  from  time to time  to  increase  such  number  subject  to the
          approval of the  shareholders  of the Company.  Options under the Plan
          vest  equally  over  various  periods to a maximum of ten years on the
          anniversary  date of the granting of the option.  All options  granted
          under  the Plan that have not been  exercised  on or before  the tenth
          anniversary  of the grant will expire on that date  subject to earlier
          termination  if  the  optionee  ceases  to  be an  officer,  director,
          employee or consultant of the Company.


                                      F-21
<PAGE>

                             SOFTQUAD SOFTWARE, LTD.
             Notes to Consolidated Financial Statements - continued
          (in thousands of U.S. dollars, except per share information)
================================================================================

     The  stock  options  outstanding  at  September  30,  2001  and 2000 are as
follows:

<TABLE>
<CAPTION>

                                                                         September 30,
                                                                         -------------
                                                                 2001                     2000
                                                                 ----                     ----
<S>                                                           <C>                      <C>
          Outstanding options to purchase common shares
          at $0.00013 per share expiring November 6,
          2008                                                  816,670                1,050,000

          Outstanding options to purchase common shares
          at $0.231 per share expiring May 26, 2009             193,999                  267,000

          Outstanding options to purchase common shares
          at $0.0066 per share expiring September 29,
          2009                                                  400,000                  500,000

          Outstanding options to purchase common shares
          at exercise prices between $0.96 and $7.50
          per share expiring at various dates from
          December 2009 to March 2011                         2,480,236                2,608,700
          --------------------------------------------------------------------------------------
                                                              3,890,905                4,425,700
          --------------------------------------------------------------------------------------

</TABLE>

          The Company  applies APB Opinion 25 in accounting for its stock option
          plan for  options  issued to  employees  and  members  of the Board of
          Directors.

          During the year ended  September  30, 2001,  no options were issued to
          contractors and advisors,  however, options were issued to contractors
          and  advisors  for the year ended  September  30,  2000.  The  Company
          accounted for these option grants under SFAS No. 123  "Accounting  for
          Stock-Based Compensation".

          During the year ended  September 30, 1999,  certain stock options were
          granted  to  employees  at  exercise  prices  which were less than the
          estimated  market price of the common stock on the day  preceding  the
          grant.  Accordingly,  compensation expense was calculated on the stock
          options granted on the difference between the option price at the date
          of the grant and the estimated market price of the stock on that date.
          As a result,  share capital and deferred  stock  compensation  expense
          were each increased by $446, during the year ended September 30, 1999.


                                      F-22
<PAGE>

                            SOFTQUAD SOFTWARE, LTD.
             Notes to Consolidated Financial Statements - continued
          (in thousands of U.S. dollars, except per share information)
================================================================================

          As a result of these  transactions,  payroll  costs will  increase and
          deferred  stock  compensation  expense will  decrease over the vesting
          period of the stock options granted.  For the year ended September 30,
          2001 and 2000,  payroll costs increased by $nil and $52 in selling and
          marketing expenses, $102 and $102 in research and development expenses
          and $155 and $171 in general and administrative  expenses and deferred
          stock compensation  decreased by $257 and $325  respectively.  For the
          year  ended   September  30,  1999,   payroll  costs  in  general  and
          administrative  expenses  increased  and deferred  stock  compensation
          decreased by $88.

          Accounting for stock-based compensation

          If the fair values of the options  granted to employees and members of
          the  Board  of  Directors  in  the  period  had  been   recognized  as
          compensation expense, on a straight-line basis over the vesting period
          of the grant  (consistent  with the  method  prescribed  by SFAS 123),
          stock-based  compensation  costs would have  reduced  net  earnings by
          $4,067,  $3,719 and $2,244 and  increased  the basic loss per share by
          $0.29,  $0.33 and $0.50 for the years ended  September 30, 2001,  2000
          and 1999, respectively.

          The fair value of the options was estimated at the date of grant using
          the  Black-Scholes  option  pricing model with the following  weighted
          average  assumptions for the period:  risk-free  interest rate of 4.5%
          (2000 - 6%,  1999 - 6.5%);  expected  life of the  options of 3 years;
          expected  volatility  of 40 percent  (2000 - 35 per cent,  1999 - zero
          percent) and a dividend yield of zero.


                                      F-23
<PAGE>

                             SOFTQUAD SOFTWARE, LTD.
             Notes to Consolidated Financial Statements - continued
          (in thousands of U.S. dollars, except per share information)
================================================================================
          Outstanding Options

          A summary of the status of stock options  outstanding  as at September
          30, 2001,  2000 and 1999 and changes  during the periods are presented
          below:

                                                    Weighted
                                                    Average
                                                    Exercise            Number
                                                     Price           Outstanding

            Granted                                 $0.0408           1,856,000
            Forfeited                               $    --                  --
            Exercised                               $    --                  --
            --------------------------------------------------------------------
            Balance, September 30, 1999             $0.0408           1,856,000
            Granted                                 $2.8103           2,658,700
            Forfeited                               $1.0119             (89,000)
            Exercised                               $    --                  --
            --------------------------------------------------------------------
            Balance, September 30, 2000             $1.6850           4,425,700
            Granted                                 $4.5172             743,070
            Forfeited                               $1.4130            (891,202)
            Exercised                               $0.0341            (386,663)
            --------------------------------------------------------------------
            Balance, September 30, 2001             $2.0024           3,890,905

          The  following  table  summarizes  information  about the  outstanding
          options as of September 30, 2001:

<TABLE>
<CAPTION>

                                                                                                Number of
                                          Remaining                   Number of             Shares Subject to
                                         Contractual              Shares Subject to             Exercisable
             Exercise Price             Life in Years                 Options                     Options
             --------------             -------------                 -------                     -------
             <S>       <C>                   <C>                     <C>                          <C>
             $0.0013                         7.0                       816,670                    571,670
             $0.0066                         8.0                       400,000                    400,000
             $0.2310                         8.0                       193,999                     38,167
             $0.9600                         9.0                        80,770                     80,770
             $1.0100 - $1.32                 9.0                        55,500                          -
             $1.4400                         8.5                     1,430,166                    564,499
             $1.9400 - $7.25                 9.0                       599,800                      3,333
             $7.5000                         8.5                       314,000                    104,667
             --------------------------------------------------------------------------------------------
                                             8.4                     3,890,905                  1,763,106
             --------------------------------------------------------------------------------------------
</TABLE>


                                      F-24
<PAGE>

                             SOFTQUAD SOFTWARE, LTD.
             Notes to Consolidated Financial Statements - continued
          (in thousands of U.S. dollars, except per share information)
================================================================================

          Warrants

          The following  tables summarize  warrants  outstanding as of September
          30, 2001. At the time the warrants were issued,  the fair value of the
          warrants was  determined  using a  Black-Scholes  option pricing model
          with  the  following  weighted  average  assumptions  for the  period:
          risk-free  interest  rate  of 6%,  expected  life of the  warrants  as
          indicated,  expected  volatility of 35% and a dividend  yield of zero.
          Based on this valuation,  the below noted values were allocated to the
          warrants:

<TABLE>
<CAPTION>

                                                                                Number               Value
                                                                                ------               -----
<S>                                                                           <C>                       <C>
          Outstanding warrants to purchase shares of common stock
            at $1.3574 per share, expiring December 10, 2002                    663,033            $    271

          Outstanding warrants to purchase shares of common stock
            at $1.53 per share, expiring February 28, 2003                    1,041,668                 281

          Outstanding warrants to purchase shares of common stock
            at $2.50 per share, expiring February 28, 2003                      100,000                  27

          Outstanding warrants to purchase shares of common stock
            at $2.00 per share, expiring March 30, 2004                         200,000                 100

          Outstanding warrants to purchase shares of common stock
            at $6.50 per share, expiring on the third anniversary
            of an effective registration statement (1)                        1,075,715               2,394
                                                                              ---------               -----
                                                                              3,080,416               3,073
         Allocated cost of issuance                                                                    (260)
                                                                                                      -----
         Total                                                                                      $ 2,813
                                                                                                    -------

</TABLE>

          (1) Of the warrants, 1,075,715 have an exercise price that declines by
          $0.50 each month (or prorated portion thereof), to a minimum of $3.75,
          until the date  (the  "Effectiveness  Date")  on which a  registration
          statement  covering the shares  underlying  such warrants was declared
          effective by the  Securities  and Exchange  Commission.  To date,  our
          registration statement has not yet been declared effective.

          (2) Of the warrants,  2,050,412 will expire upon closing of the merger
          with Corel.


                                      F-25
<PAGE>

                             SOFTQUAD SOFTWARE, LTD.
             Notes to Consolidated Financial Statements - continued
          (in thousands of U.S. dollars, except per share information)
================================================================================
7.   INCOME TAXES

     The following is a geographic  breakdown of consolidated loss before income
     taxes by income tax jurisdiction:

                                                     September 30,
                                          2001           2000          1999
                                          ----           ----          ----
          United States                $  (7,713)     $    (87)      $     --
          Foreign                         (7,519)       (6,630)        (1,628)
          --------------------------------------------------------------------
                                       $ (15,232)     $ (6,717)      $ (1,628)
          --------------------------------------------------------------------

     There has been no provision for U.S.  federal or state income taxes for any
     period as the Company has incurred operating losses in all periods.

     Deferred income taxes reflect the net tax effects of temporary  differences
     between  the  carrying  amounts of assets  and  liabilities  for  financial
     reporting   purposes  and  the  amounts  used  for  income  tax   purposes.
     Significant components of the Company's deferred tax assets are as follows:

<TABLE>
<CAPTION>

                                                                                 September 30,
                                                                                 -------------
                                                                           2001               2000
                                                                           ----               ----
<S>                                                                      <C>                  <C>
         Net deferred tax assets:
          Operating loss carry-forwards                                  $   7,196            $   2,399
          Unclaimed foreign scientific research, experimental
           development expenditures and investment tax credits               1,936                  535
          Other                                                                 16                  105
         ----------------------------------------------------------------------------------------------
         Deferred tax assets                                                 9,148                3,039
         Less valuation allowance                                           (9,148)              (3,039)
         ----------------------------------------------------------------------------------------------
         Net deferred tax assets                                         $      --            $      --
         ----------------------------------------------------------------------------------------------

</TABLE>

     Realization  of deferred tax assets is dependent upon future  earnings,  if
     any.  The  timing  and  amount  of  such  future  earnings  are  uncertain.
     Accordingly,  the net  deferred  tax  assets  have been  fully  offset by a
     valuation  allowance.  During  the  year  ended  September  30,  2001,  the
     valuation allowance increased by approximately $6.1 million.


                                      F-26
<PAGE>

                             SOFTQUAD SOFTWARE, LTD.
             Notes to Consolidated Financial Statements - continued
          (in thousands of U.S. dollars, except per share information)
================================================================================

     The Company and its subsidiaries  have the following losses available as at
     September  30,  2001 for carry  forward,  which if unused,  will  expire as
     follows:

                                  United States     Canadian     United Kingdom

       2006                         $     --        $    374       $     --
       2007                               --           4,453             --
       2008                               --           4,693             --
       2015                            5,550              --             --
       Indefinite carry-forward           --              --          3,548
       --------------------------------------------------------------------
                                    $  5,550        $  9,520       $  3,548
       --------------------------------------------------------------------

     The  Company's  Canadian  subsidiary  has  investment  tax credits that are
     available for  carry-forward to reduce future years' taxes payable expiring
     from 2009 to 2011.  In  addition  the  Company's  Canadian  subsidiary  has
     unclaimed  scientific  research and experimental  development  expenditures
     that may be carried  forward  indefinitely  to reduce future years' federal
     taxable income.

8.   SEGMENTED INFORMATION

     The  Company's  operations  fall into one dominant  industry  segment,  the
     development,  marketing  and  support  of  digital  content  authoring  and
     publishing  software tools and related  services.  The Company  manages its
     operations  and  accordingly   determines  its  operating   segments  on  a
     geographic basis. The performance of geographic segments is monitored based
     on net loss. Inter-segment  transactions are reflected at market value. The
     accounting  policies  of the  geographic  segments  are the  same as  those
     described in Note 2.


                                      F-27
<PAGE>

                             SOFTQUAD SOFTWARE, LTD.
             Notes to Consolidated Financial Statements - continued
          (in thousands of U.S. dollars, except per share information)
================================================================================


                                                 Year ended September 30, 2001
                                                 -----------------------------
                                                North
                                               America      Europe       Total

     Revenue
        Licenses                               $  2,294    $  1,404    $  3,698
        Services                                  1,806         143       1,949
        Inter-segment royalties                     103          --         103
     --------------------------------------------------------------------------
                                                  4,203       1,547       5,750
     --------------------------------------------------------------------------
     Cost of revenue
        Licenses                                    218         136         354
        Services                                  2,227         258       2,485
        Inter-segment royalties                      --         103         103
     --------------------------------------------------------------------------
                                                  2,445         497       2,942
     --------------------------------------------------------------------------
                                                  1,758       1,050       2,808
     --------------------------------------------------------------------------
     Expenses
        Selling and marketing                     5,020       1,262       6,282
        Research and development                  2,099          --       2,099
        General and administrative                5,821         708       6,529
        Amortization                              1,653          42       1,695
     --------------------------------------------------------------------------
                                                 14,593       2,012      16,605
     --------------------------------------------------------------------------
                                                (12,835)       (962)    (13,797)
     --------------------------------------------------------------------------
     Other (income) expenses
        Interest                                   (434)         (5)       (439)
        Intercompany charges                       (408)        408          --
        Other expenses                            1,874          --       1,874
     --------------------------------------------------------------------------
                                                  1,032         403       1,435
     --------------------------------------------------------------------------
     Net loss                                  $(13,867)   $ (1,365)   $(15,232)
     --------------------------------------------------------------------------
     Total assets                              $  8,275    $    614    $  8,889
     --------------------------------------------------------------------------
     Expenditures for segment capital assets   $    178    $     22    $    200
     --------------------------------------------------------------------------

There were two  customers  in North  America and one customer in Europe who each
had greater than 10% of the total sales in their respective market.


                                      F-28
<PAGE>

                             SOFTQUAD SOFTWARE, LTD.
             Notes to Consolidated Financial Statements - continued
          (in thousands of U.S. dollars, except per share information)
================================================================================

                                                 Year ended September 30, 2000
                                                 -----------------------------
                                                North
                                               America      Europe       Total

     Revenue
       Licenses                                $  2,460    $  1,782    $  4,242
       Services                                      44          --          44
       Inter-segment royalties                      257          --         257
     --------------------------------------------------------------------------
                                                  2,761       1,782       4,543
     --------------------------------------------------------------------------
     Cost of revenue
       Licenses                                     243         285         528
       Services                                     339          --         339
       Inter-segment royalties                       --         257         257
     --------------------------------------------------------------------------
                                                    582         542       1,124
     --------------------------------------------------------------------------
                                                  2,179       1,240       3,419
     --------------------------------------------------------------------------
     Expenses
       Selling and marketing                      3,534       1,705       5,239
       Research and development                   1,958          --       1,958
       General and administrative                 3,052         308       3,360
     --------------------------------------------------------------------------
                                                  8,544       2,013      10,557
     --------------------------------------------------------------------------
                                                 (6,365)       (773)     (7,138)
     --------------------------------------------------------------------------
     Other (income) expenses
       Interest                                    (584)         (1)       (585)
       Other expenses                               164          --         164
     --------------------------------------------------------------------------
                                                   (420)         (1)       (421)
     --------------------------------------------------------------------------
     Net loss                                  $ (5,945)   $   (772)   $ (6,717)
     --------------------------------------------------------------------------
     Total assets                              $ 18,323    $    725    $ 19,048
     --------------------------------------------------------------------------
     Expenditures for segment capital assets   $    847    $    187    $  1,034
     --------------------------------------------------------------------------

There were four  customers in North  America and one customer in Europe who each
had greater than 10% of the total sales in their respective market.


                                      F-29
<PAGE>

                             SOFTQUAD SOFTWARE, LTD.
             Notes to Consolidated Financial Statements - continued
          (in thousands of U.S. dollars, except per share information)
================================================================================

                                                 Year ended September 30, 1999
                                                 -----------------------------
                                                North
                                               America      Europe       Total

     Revenue
      Licenses                                  $ 2,069     $ 1,222     $ 3,291
      Services                                       --          --          --
     --------------------------------------------------------------------------
                                                  2,069       1,222       3,291
     --------------------------------------------------------------------------

     Cost of revenue
      Licenses                                      383         188         571
      Services                                       64          --          64
     --------------------------------------------------------------------------
                                                    447         188         635
     --------------------------------------------------------------------------
                                                  1,622       1,034       2,656
     --------------------------------------------------------------------------

     Expenses
      Selling and marketing                       1,094         959       2,053
      Research and development                    1,069          --       1,069
      General and administrative                    874         220       1,094
                                                  3,037       1,179       4,216
                                                 (1,415)       (145)     (1,560)
     Other expenses
      Interest                                       14          --          14
      Other expenses                                 54          --          54
     --------------------------------------------------------------------------
                                                     68          --          68
     --------------------------------------------------------------------------

     Net loss before value of share capital
      accrued or acquisition of warrants         (1,483)       (145)     (1,628)
     Value of share capital issued on
      acquisition of warrants                     1,388          --       1,388
     --------------------------------------------------------------------------
     Net loss attributable to shareholders      $(2,871)    $  (145)    $(3,016)
     --------------------------------------------------------------------------
     Total assets                               $ 1,492     $   313     $ 1,805
     --------------------------------------------------------------------------
     Expenditures for segment capital assets    $    54     $    14     $    68
     --------------------------------------------------------------------------

     There were two  customers  in North  America and one customer in Europe who
     each had greater than 10% of the total sales in their respective market.


                                      F-30
<PAGE>

                             SOFTQUAD SOFTWARE, LTD.
             Notes to Consolidated Financial Statements - continued
          (in thousands of U.S. dollars, except per share information)
================================================================================

9.   COMMITMENTS

     The  Company is  committed  to paying a success  fee of $600 to a financial
     advisor upon closing of the proposed merger with Corel.

     The Company is committed to the  following  minimum  lease  payments  under
     operating  leases for its  office  premises  and  certain  equipment  as of
     September 30, 2001:

                      2002                $   239
                      2003                    181
                      2004                     92
                      2005                     54
                      2006                     --
                      ---------------------------
                                          $   566
                      ---------------------------

10.  FINANCIAL INSTRUMENTS

     Fair value

     All  financial  assets  and  liabilities  are stated at book  value,  which
     approximate fair value.

     Credit risk

     The Company is subject to risk of non-payment of accounts  receivable.  The
     Company  mitigates  this risk by  monitoring  the credit  worthiness of its
     customers and limiting its  concentration of receivables to any customer or
     specific group of customers.  At September 30, 2001 40% (September 30, 2000
     - 34% and 1999 - 32%) of the trade  accounts  receivable  balance was owing
     from two customers (two customers - September 30, 2000 and 1999).

     Foreign exchange risk

     The  Company  may  undertake  sales and  purchase  transactions  in foreign
     currencies, and therefore is subject to gains or losses due to fluctuations
     in foreign currencies.


                                      F-31

<PAGE>


<TABLE>
<CAPTION>

                                  EXHIBIT INDEX

Exhibit No.         Description
-----------         -----------
<S>                 <C>
2.1                 Acquisition Agreement among SoftQuad Software, Ltd., SoftQuad Acquisition Corp. and SoftQuad Canada, dated
                    December 16, 1999(1)
2.2                 Plan and Agreement of Merger between The American Sports Machine, Inc. and SoftQuad Software, Ltd., dated
                    March 1, 2000(2)
2.3                 Agreement and Plan of Reorganization among The American Sports Machine, Inc., SoftQuad Software, Ltd. and
                    its Stockholders, dated March 1, 2000(2)
2.4                 Plan and Agreement of Merger between The American Sports Machine, Inc. and SoftQuad Software, Ltd., dated
                    March 9, 2000(4)
2.6                 Merger Agreement by and among Corel Corporation, Calgary II Acquisition Corp. and SoftQuad Software, Ltd.,
                    as amended and restated, dated August 7, 2001(5)
3.1                 Restated Certificate of Incorporation of SoftQuad Software, Ltd. (7)
3.2                 Restated By-Laws of SoftQuad Software, Ltd. (1)
4.1                 Agent's Warrant to Purchase Shares of Common Stock of SoftQuad Software, Ltd. pursuant to the Class A
                    Convertible Stock Purchase Agreement, dated December 9, 1999(1)
4.2                 Purchaser's Warrant to Purchase Shares of Common Stock of SoftQuad Software, Ltd. pursuant to the Class A
                    Convertible Stock Purchase Agreement, dated December 9, 1999(1)
4.3                 VC Advantage Limited Partnership's Warrant to Purchase Shares of Common Stock of SoftQuad Software, Ltd.
                    pursuant to the Class B Convertible Stock Purchase Agreement, dated February 28, 2000(1)
4.4                 Hammock Group Ltd.'s Warrant to Purchase Shares of Common Stock of SoftQuad Software, Ltd. pursuant to the
                    Class B Convertible Stock Purchase Agreement, dated February 28, 2000(1)
4.5                 Agent's Warrant to Purchase Shares of Common Stock of SoftQuad Software, Ltd. pursuant to the Class B
                    Convertible Stock Purchase Agreement with VC Advantage Limited Partnership, dated February 29, 2000(1)
4.6                 Agent's Warrant to Purchase Shares of Common Stock of SoftQuad Software, Ltd. pursuant to the Class B
                    Convertible Stock Purchase Agreement with Hammock Group Ltd., dated February 29, 2000(1)
4.7                 Warrant Indenture Agreement between SoftQuad Software, Ltd. and Montreal Trust Company of Canada, dated
                    April 18, 2000(1)
4.8                 Form of Subscription Agreement for Canadian Subscribers in April 18, 20 and June 5, 2000 private
                    placements(1)
4.9                 Form of Subscription Agreement for American Subscribers in April 18, 20 and June 5, 2000 private
                    placements(1)
4.10                Registration Rights Agreement between SoftQuad Software Ltd., VC Advantage Limited Partnership and Thomson
                    Kernaghan & Co. Limited, as agent, in connection with the Common Stock Purchase Agreement, dated December
                    8, 1999 and the Class A Convertible Stock Purchase Agreement, dated December 9, 1999(1)
4.11                Registration Rights Agreement between SoftQuad Software Ltd., VC Advantage Limited Partnership and Thomson
                    Kernaghan & Co. Limited, as agent, in connection with the Class B Convertible Stock Purchase Agreement,
                    dated February 28, 2000(1)


                                       E-1
<PAGE>

4.12                Registration Rights Agreement between SoftQuad Software Ltd. Hammock Group Ltd. and Thomson Kernaghan & Co.
                    Limited, as agent, in connection with the Class B Convertible Stock Purchase Agreement, dated February 28,
                    2000(1)
4.13                Registration Rights Agreement between SoftQuad Software, Ltd. and SmallCaps Online LLC, for itself and as
                    agent, dated April 18, 2000(1)
4.14                Registration Rights Agreement between SoftQuad Software, Ltd. and Thomson Kernaghan & Co. Limited, for
                    itself and as agent, dated April 18, 2000(3)
4.15                Waiver Agreement among SoftQuad Software, Ltd, SoftQuad Software, Inc., Thomson Kernaghan & Co. Limited and
                    VC Advantage Limited Partnership, dated February 28, 2001(7)
9.1                 Voting Trust and Exchange Agreement, among SoftQuad Software, Ltd., SoftQuad Acquisition Corp., SoftQuad
                    Software, Inc. and Computershare Trust Company of Canada, dated February 2000(3)
10.1                Form of Option Holder Lock-Up Agreement, dated December 10, 1999(1)
10.2                Form of Option Holder Escrow Agreement, dated December 16, 1999(1)
10.3                Common Stock Purchase Agreement between SoftQuad Software, Ltd. (referred to in this Report as FinanceCo.)
                    and VC Advantage Limited Partnership, dated December 8, 1999(1)
10.4                Class A Convertible Preferred Stock Purchase Agreement between SoftQuad Software, Ltd. and VC Advantage
                    Limited Partnership, dated December 9, 1999(1)
10.5                VC Advantage Limited Partnership Class B Convertible Preferred Stock Purchase Agreement, dated February 28,
                    2000(1)
10.6                Hammock Group Ltd. Class B Convertible Preferred Stock Purchase Agreement, dated February 28, 2000(1)
10.7                Special Warrant Purchase Agreement between SoftQuad Software, Ltd. and Thomson Kernaghan & Co. Limited, as
                    Agent, dated May 18, 2000(1)
10.8                Engagement Letter Agreement between SoftQuad Software Inc and Thomson Kernaghan & ` Co. Limited, dated
                    February 28, 2000(1)
10.9                Form of Share Purchase Agreement for acquisition of shares of SoftQuad Software Inc. (3)
10.10               Form of Option Exchange Agreement for acquisition of options of SoftQuad Software Inc. (3)
10.11               Form of Indemnification Agreement between Registrant and its officers and directors(1)
10.12               2000 Stock Option Plan and Forms of Agreements thereunder(1)
10.13               Advisory Services Agreement between the SoftQuad Software Inc. and KBL Capital Partners Inc., dated April
                    9, 1999, amended July 31, 1999(1)
10.14               Agency Agreement between SoftQuad Software, Ltd. and Thomson Kernaghan & Co. Limited, dated April 18,
                    2000(1)
10.15               Employment Agreement between SoftQuad Software, Ltd. and Roberto Drassinower,
                    dated October 14, 2000(6)
10.16               Employment Agreement between SoftQuad Software, Ltd. and Nick Mongston, dated
                    November 21, 1999(6)
10.17               Employment Agreement between SoftQuad Software, Ltd. and Peter Sharpe, dated
                    November 1, 2000(6)
10.18               Employment Agreement between SoftQuad Software, Ltd. and Bruce Sharpe, dated
                    November 1, 2000(6)
10.19               Employment Agreement between SoftQuad Software, Ltd. and David R. Lewis, dated
                    February 2, 2001(6)
10.20               Employment Agreement between SoftQuad Software, Ltd. and Laura Wallace, dated
                    January 1, 2001
21                  Subsidiaries of the Registrant
23                  Consent of Deloitte and Touche LLP

</TABLE>

_________________

(1)  Incorporated by reference to Exhibits to the Registrant's  Quarterly Report
     on Form 10-QSB dated June 30, 2000.
(2)  Incorporated by reference to Exhibits to the Registrant's Current Report on
     Form 8-K dated March 9, 2000.


                                       E-2
<PAGE>

(3)  Incorporated by reference to Exhibits to the Registrant's Current Report on
     Form 8-K dated April 21, 2000.
(4)  Incorporated  by  reference  to  Exhibits  to the  Registrant's  Definitive
     Information Statement on Schedule 14C dated March 21, 2000.
(5)  Incorporated by reference to Exhibits to the  Registrant's  Proxy Statement
     included on Amendment  No. 1 to the  Registration  Statement on Form S-4 of
     Corel Corporation dated November 16, 2001.
(6)  Incorporated  by  reference  to Exhibits to the  Registrant's  Registration
     Statement on Form SB-2, dated September 18, 2001.
(7)  Incorporated  by  reference  to  Exhibits  to the  Registrant's  Definitive
     Information Statement on Schedule 14C dated April 4, 2000.


                                      E-3