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, 2000


[ ]      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     M4P 1J5
             (Address of principal executive offices)                (ZIP Code)

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

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

       SECURITIES REGISTERED UNDER TO 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.         $4,285,762

      The aggregate market value of the voting and non-voting  Common Stock held
by non-affiliates of November 30, 2000 the registrant,  computed by reference to
the  closing  sales  price  of the  Common  Stock on the OTC  Bulletin  Board on
December 18, 2000 was $3.05

      The number of shares of the  Registrant's  Common  Stock  outstanding  was
13,223,855 as of November  302000.  This includes  5,673,605 shares reserved for
issuance upon the exchange of exchangeable shares.

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

DOCUMENTS INCORPORATED BY REFERENCE:  None

<PAGE>

                                      INDEX
<TABLE>
<CAPTION>

PART I
<S>                    <C>
                  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 of Financial Condition and
                                    Results of Operations
                  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 List 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  factorsdiscussed  in "Item 7.
Management's  Discussion  and  Analysis of  Financial  Condition  and Results of
Operations", 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.           BUSINESS
                  --------

                                    OVERVIEW

     SoftQuad is a leading  developer of software  products for the creation and
management of content in XML. XML (eXtensible Markup Language) 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. Forrester Research estimates that B2B
e-commerce  will grow from $406  billion  in 2000 to $2.7  trillion  in 2004 and
constitute  90 percent of the total  dollar-value  of  e-commerce  in the United
States by 2003.  This is expected to create a substantial  demand for e-commerce
software  applications.   According  to  International  Data  Corporation,   the
worldwide  market  for  e-commerce  software  applications  will  grow from $1.7
billion in 1999 to $13.2 billion in 2003.

     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 1,000 customers in a
wide range of  industries.  Our  customers  include  leading  companies  such as
Amazon.com,  Continental Airlines,  DaimlerChrysler,  Deutsche Bank, IBM, Lucent
Technologies,  Microsoft,  USATODAY.com,  Ziff Davis, GE Power, Lotus,  Quantas,
British  Aerospace,  British Telecom,  Nortel  Networks,  Ericsson and Nokia. In
addition,  we have formed strategic  alliances with leading  software  companies
that offer complementary products, such as Vignette, Documentum and Software AG,
to develop comprehensive B2B e-commerce solution platforms 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,  Market  Agility  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 all channels.  We released  MarketAgility
on September 25, 2000.

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

                         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 HTML and 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
<PAGE>

International Inc.'s European subsidiary. To facilitate the buyout, on August 7,
1998, they established SoftQuad Software Inc., an Ontario (Canada) corporation
("SoftQuad Canada"). SoftQuad Canada completed the buyout on October 1, 1998.
The assets acquired in the buyout included, among other things, the rights to
the name "SoftQuad." In May 1999, we 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  advanced 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  securityholders  of SoftQuad  Canada to acquire all of the
outstanding  securities  of  SoftQuad  Canada  through  FinanceCo's  subsidiary,
SoftQuad  Acquisition Corp., an Ontario (Canada)  corporation  ("SAC").  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,  as amended,  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  securityholders  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 one-for-one  basis) their
common shares of SoftQuad Canada for shares of ASM's common stock,  (ii) because
of Canadian tax considerations,  the remaining Canadian holders of common shares
of SoftQuad  Canada  exchanged (on a  one-for-one  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 one-for-one 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.

      REDOMICILING TO DELAWARE

     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.
<PAGE>

      OUR CURRENT CORPORATE STRUCTURE

     We  currently  conduct  our  operations  through  SoftQuad  Canada  and its
wholly-owned  subsidiary,  SoftQuad  UK  Limited.  All of the  common  shares of
SoftQuad  Canada are owned by SAC, and all of the common shares of SAC are owned
by SoftQuad Software, Ltd. The following diagram illustrates this structure:

        _________________________________________
       |        SoftQuad Software, Ltd.          |
       |        (a Delaware corporation)         |
       |_________________________________________|
         .                  .                           Exchangeable
         .                  .                           Shareholders
        100%                .                                .
       common               .                                .
       equity               .                                .
         .                  .                                .
         .                  .                                .
 _________________________  .     100% common equity         .
|SoftQuad California, Inc.| .          ......................
|(a California corporation| .          .
|_________________________| .          .
                            .          .
                            .          .
        _________________________________________
       |      SoftQuad Acquisition Corp.         |
       |   (an Ontario (Canada) corporation)     |
       |_________________________________________|
                           .    100% common equity
                           .
                           .
                           .
        _________________________________________
       |         SoftQuad Software Inc.          |
       |   (an Ontario (Canada) corporation)     |
       |_________________________________________|
                           .    100% common equity
                           .
                           .
                           .
                           .
        ________________________________________
       |          SoftQuad UK Limited           |
       |         (a UK limited company)         |
       |________________________________________|



<PAGE>

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 expect our MarketAgility product to be a key supply-side solution
         for B2B e-commerce.

o        We have  developed  partnerships  and alliances  with industry  leading
         technology  companies  in  important  B2B  segments.  We  expect  these
         partnerships to enhance the acceptance of our XML products and allow us
         to be in the forefront of B2B 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 emerged as the fastest  growing  communication  medium in
history.  With over 97 million users at the end of 1998,  growing to 320 million
users by 2002, as estimated by International  Data Corporation,  the Internet is
dramatically  changing how  businesses  and  individuals  communicate  and share
information. The Internet has created new opportunities for conducting commerce,
such as  business-to-consumer  and person-to-person  e-commerce.  Recently,  the
widespread  adoption  of  intranets  and the  acceptance  of the  Internet  as a
business  communications  platform has created a foundation  for B2B  e-commerce
that will enable organizations to streamline complex processes,  lower costs and
improve productivity.

     With this  foundation,  Internet-based  B2B  e-commerce is poised for rapid
growth  and is  expected  to present a  significantly  larger  opportunity  than
business-to-consumer  or  person-to-person  e-commerce.  According  to Forrester
Research,  B2B  e-commerce is expected to grow from $406 billion in 2000 to $2.7
trillion in 2004 and constitute 90% of the total  dollar-value  of e-commerce in
the United States by 2003.  This is expected to create a substantial  demand for
e-commerce software  applications.  According to International Data Corporation,
the  worldwide  market for  e-commerce  software  applications  is  expected  to
experience  tremendous  growth,  increasing  from $1.7  billion in 1999 to $13.2
billion in 2003.

      THE IMPACT OF E-PROCUREMENT ON SUPPLIERS

     The growth of B2B  e-commerce is  dramatically  changing  today's  business
environment.  Increasingly,  buyers and sellers are automating and  streamlining
their  commercial  interactions  through  the  use  of  Web-based  e-procurement
systems. The reason for adopting, and adapting to this new technology is simple:
the potential gains, for both buyers and sellers, can be enormous.

     Buyers are realizing  dramatic cost savings in both  transaction  costs and
actual  product  costs  by  building  their  own   e-procurement   systems,   or
participating  in  e-marketplaces.  The  integration of business and transaction
processes  reduces  the time and  paperwork  associated  with  procurement.  The
centralization of supplier and product information into an e-procurement  system
increases  the  efficiency  with which  buyers can  source  and  compare  goods.
Companies can even improve the quality of their purchases by gaining access to a
wider range of suppliers whose products may better suit their needs. For buyers,
the return on investment on e-procurement  can be dramatic.  According to Morgan
Stanley Dean Witter, procurement costs can be reduced by as much as 90%.
<PAGE>

     Suppliers are realizing  benefits from  Web-based  procurement  as well. It
gives them access to a broader range of buyers without increasing selling costs.
It also can  help  avoid  price-driven  competition  by  allowing  suppliers  to
identify  and  target  buyers  whose  needs are  better  met by their  products'
specific strengths.

     For suppliers,  participating  in e-procurement  systems will  increasingly
become a necessity.  A survey of CFOs carried out by Duke  University  indicates
that the percentage of companies  selling over the Web will increase from 24% at
the end of 1998 to 56% by the end of 2000. In some industries,  large buyers are
already  creating  their own  e-procurement  systems  and  demanding  that their
suppliers  integrate with these systems; in others,  third party  intermediaries
are establishing electronic marketplaces to bring buyers and suppliers together.
Regardless of which becomes the winning business model,  sellers risk losing out
to  competitors  who have taken the  necessary  steps to enable  themselves  for
e-commerce.

      THE SUPPLIER'S CHALLENGE

     Most  of  the  building  blocks  necessary  for  the  growth  of  Web-based
procurement  are in place.  Electronic Data  Interchange  (EDI) software set the
stage for automating  order  transactions.  Enterprise  Resource  Planning (ERP)
software  advanced  the  integration  of  business   processes  across  multiple
divisions and  companies.  Both systems,  however,  have proven to be expensive,
inflexible and difficult to implement,  hampering wide-scale adoption.  With the
rise  of the Web  and  the  ascendancy  of XML  technologies  for  both  content
management and data interchange,  electronic  procurement through an exchange or
directly  between  buyers and  sellers  has finally  become  practical  for most
businesses.  The  major  challenge  that  remains  for  buyers,  suppliers,  and
intermediaries is content management.

     Content management is the process by which vendor information is collected,
categorized and delivered to the e-procurement system. Traditionally,  suppliers
provided this  information  through the arduous  production and  distribution of
paper  catalogs.  But,  as noted by  industry  observers  like  Aberdeen  Group,
Forrester,  and Morgan Stanley Dean Witter,  developing  electronic  versions of
these  catalogs  has  proved  to be an  onerous  task.  Product  information  is
generally  stored in a variety  of systems  throughout  an  enterprise  and in a
variety of formats.  Buyers,  suppliers,  exchanges or other  organizations that
have created  electronic  catalogs  have found it  difficult to transform  these
disparate sources of information into a consistent and updatable format.

     E-marketplaces  are  developing  their  own  approaches  to help  transform
supplier  data  into  a  consistent  and  updatable  format  as  part  of  their
procurement  solution.  However,  it is not yet  clear  that  they  can  develop
scaleable solutions.  As Morgan Stanley Dean Witter has found, "Getting supplier
catalogs  loaded quickly is a bottleneck,  given the poor condition much of such
data are in and the lack of standard  product  codes for every  industry."  And,
according  to  the  Aberdeen  Group,  "Because  of  the  complexity  of  catalog
management  and the  difficulty  of  dealing  with  multiple  supplier  exchange
standards,  we found that not a single organization had implemented more than 10
to 15 suppliers on their  e-procurement  system in 1999." These  bottlenecks are
not only delaying suppliers' entry into these new e-procurement  channels,  they
are placing control of their product  information in outside hands, and limiting
their ability to keep their product and pricing information current.

     In order to  participate  and  compete  effectively  in the  e-marketplace,
suppliers must take control over the creation,  management and delivery of their
product information, including rich content such as graphics and animation.

     A key part of the solution to the content  management problem is XML, which
is becoming the accepted format for information interchange over the Web. XML is
a standardized,  interoperable document format that uses custom tags to describe
the structure and meaning of information  within a document,  rather than how it
should be  presented.  This provides  greater  control over how  information  is
collected,   combined,  formatted  and  delivered  to  different  audiences  for
different purposes.  Because of this versatility and utility, XML is emerging as
the document format used by e-marketplaces.

     But XML is simply a data standard. For suppliers to overcome the challenges
of delivering their product information to e-procurement  channels, they need to
be able to resolve four main issues:
<PAGE>

     COLLECTION:   Product   information  is  generally  stored   throughout  an
enterprise in a number of disparate systems and formats. Product information and
specifications  may be stored in word  processing,  desktop  publishing  and Web
formats, while part numbers,  pricing and availability information may be stored
in relational  databases,  spreadsheets,  accounting and ERP systems, as well as
other  applications.  Suppliers need an effective and efficient way to integrate
new e-commerce and e-procurement  processes with existing systems and to collect
this information for delivery to electronic marketplaces.

     TRANSLATION/NORMALIZATION:  Suppliers  must  be  able  to  deliver  product
information   in  the  format   required  by   individual   e-marketplaces   and
e-procurement  systems.  Although  XML  is  becoming  the  standard  format  for
information  interchange  over the Web,  different  e-markets and  e-procurement
systems  use  different   dialects  of  XML.  In  addition,   each  system  uses
standardized   units  of   measurement,   product  coding  schemes  and  product
identifiers  that may not  correspond  to those  used by a  supplier's  internal
systems. This data has to be standardized for easy transformation to the schemes
used by each system.

     MANAGEMENT: In order to be successful in e-markets, suppliers need a secure
and  effective  way  to  manage  and  deliver  reliable,   up-to-date,   product
information  that is personalized  for different  buying groups.  To accommodate
regional  requirements,  language needs and  specialized  pricing  arrangements,
suppliers  must have the  flexibility to create and deliver  customized  product
listings for different  e-markets and e-procurement  systems.  In order to react
effectively to market conditions,  suppliers must also be able to update product
and pricing  information rapidly across all channels and target new e-markets as
they are identified.  Finally, they require assured, secure delivery of approved
product information to electronic marketplaces.

     DIFFERENTIATION:  In order  to  compete  effectively,  retain  and  enhance
margins and build  customer  loyalty within  e-marketplaces,  suppliers need new
ways to present  their  products  in a manner  that will  improve  branding  and
differentiate  themselves from the competition.  Therefore, in addition to basic
product, pricing and distribution information, suppliers must be able to include
images, marketing information and other rich content.

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:

     (begin bold tag) b John Doe (end bold)

     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:
<PAGE>

       [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 (html  tag)"earnings  per share" and (OPEN  BRACKET)revenue
(CLOSED  BRACKET),  whereas tags  relating to a product  catalog  might  include
(BEGIN HTML  TAG)product  name(CLOSED  BRACKET)  and (OPEN  BRACKET)price(CLOSED
BRACKET). A typical HTML Web Page might encode a product description as follows:

     (BEGIN BOLD TAG)Hoover Vacuum Cleaner(END BOLD TAG)

     (BEGIN  PARAGRAPH TAG) This  vacuum  has power and is light  weight (END
PARAGRAPH TAG)

     (BEGIN BOLD TAG) Special Price: $99.95 (END BOLD TAG)

(In HTML ("BEGIN BOLD TAG) b" denotes  bold font and ("BEGIN  PARAGRAPH  TAG p")
denotes a paragraph displayed in normal font.)

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

     (OPEN BRACKET) product name(CLOSED BRACKET) Hoover Vacuum Cleaner(END OPEN
BRACKET)product name(CLOSED BRACKET)

     (OPEN BRACKET) description  (CLOSED BRACKET)  This vacuum has power and is
light weight (END OPEN BRACKET) description (CLOSE BRACKET)

     (OPEN BRACKET) price (CLOSE BRACKET) $99.95 (END 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.
<PAGE>

                                    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 which can be easily learned and
applied, XML uses arbitrary tags which 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 the 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.  We  have  announced
strategic partnerships with XML solutions vendors such as Vignette,  Documentum,
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 announced the shipping of XMetaL 2.0, a major upgrade
to XMetaL.

      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;

     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
<PAGE>

     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. 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 schemes and product identifiers. This facilitates
transformation to the schemes 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 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
<PAGE>

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-marketplaces,   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 SoftQuad's marketing strategy is the development of partnerships
to  significantly  expand its 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 e-procurement,
e-markets and XML. We believe that such relationships  create  opportunities for
SoftQuad as well as its partners,  and will greatly  supplement its direct sales
efforts.   SoftQuad's  partnering  efforts  focus  on  three  areas:  technology
partnerships, e-market 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 and MarketAgility user base.
         Some of our partners in this category include Vignette,  Documentum and
         Software AG.

o        E-MARKET  PARTNERS - SoftQuad is targeting  e-markets and e-procurement
         hubs that are geared  towards  e-enabling  the  supplier  base of these
         large  enterprises  by  implementing  MarketAgility.  We believe that a
         large  opportunity  exists here for  SoftQuad as these  companies  have
         extensive  lists  of  suppliers  most of whom  are not  technologically
         positioned to efficiently participate in e-markets.

o        SOLUTIONS  PROVIDERS -  Solutions  provider  partners,  such as systems
         integrators  and  valued-added  resellers,  will  integrate  XMetaL and
         MarketAgility  solutions into their  e-commerce  packages.  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,
<PAGE>

         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 forty  members  in  thirteen  countries,  including
         DataChannel,   Reed   Technology,   STEP  and  Agra   Systems.   System
         Integrators, such as consulting firms, would integrate our XML software
         as part of the total solution they provide to clients.  They would work
         with  SoftQuad  on  a  project-by-project   basis  and  jointly  ensure
         successful project implementation and post implementation support.

      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 99, 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 intend to complement  these speaking  opportunities  with regional
seminars   which  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, 2000,  there were four  customers in the
United  States and one customer in Europe who each had greater than 10% of total
sales in their respective markets.  For the year ended September 30, 1999, there
were two  customers in the United States and one customer in Europe who each had
greater than 10% of total sales in their respective markets.

      HOTMETAL

     HoTMetaL has a customer base of Web developers  and consumers.  HoTMetaL is
distributed  through retail  channels in North America and Europe,  with roughly
30% of our sales in fiscal 1999 being through our Web site. Retail  distribution
partners include Ingram Micro, Techdata,  CompUSA, Best Buy, Ingram Micro UK and
Computer World.

      XMETAL

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

     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.
<PAGE>

     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    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.

     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
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.

     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."

                                   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."
<PAGE>

      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.

     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,  such as repair and  maintenance  procedures  for a  particular  model of
airplane  that  might be in  service  for a decade  or more.  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. 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.
<PAGE>

                        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,  MarketAgility and Xmetal. We have
applied to register our  trademarks  in the United  States,  Canada,  the United
Kingdom  the  European  Union.,  Australia  and New  Zealand.  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.
<PAGE>

RESEARCH AND DEVELOPMENT

      During the years ended  September 30, 2000 and 1999 and for the nine-month
period ended  September 30, 1998,  we spent $2.0 million,  $1.1 million and $798
thousand respectively,  on research and development activities, no part of which
was borne directly by any customer.

                                    EMPLOYEES

     As of September  30, 2000, we had a total of 106  full-time  employees.  Of
these  employees,  32 were in  development,  36 in sales  and  marketing,  10 in
product solution and customer support and 28 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
product solution services,  product development,  sales,  marketing and business
development  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

RISKS RELATED TO OUR BUSINESS

     WE  CANNOT   ASSURE  YOU  THAT  THE  MARKET  WILL  ACCEPT  OUR  XMETAL  AND
     MARKETAGILITY PRODUCTS

     We are focusing our business plan on our XMetaL and MarketAgility  products
and are therefore  relying on the market success of these products to propel our
growth  in  the  near  and  medium  term.  (For  a  description  of  XMetaL  and
MarketAgility,  see "Business--Products.")  Although we have been able to secure
initial  sales of the  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.  Similarly,
we cannot assure you that  MarketAgility  will be adopted by customers or secure
widespread market acceptance. The failure of XMetaL and MarketAgility to achieve
meaningful  market  acceptance  could  have a  material  adverse  effect  on our
business, operating results and financial condition.

     THE CHANGE IN OUR DIRECTION AND OPERATIONAL FOCUS FROM HTML PRODUCTS TO XML
     PRODUCTS MAY BE DIFFICULT TO MANAGE

     While we expect  our  revenue  growth to be driven  largely  by XMetaL  and
MarketAgility, most of our past revenues have been derived from HoTMetaL. (For a
description  of HoTMetaL,  see  "Business--Products.")  Target  markets,  sales,
marketing  and  distribution  models for HoTMetaL are quite  different  from the
XMetaL and  MarketAgility  products  and we will  require  different  skills and
business practices to market and support the XMetaL and MarketAgility  products.
Consequently,  the  transition  from the HTML  product  focus to the XML product
focus may be  difficult  to manage,  and our  business,  operating  results  and
financial condition could be materially adversely affected.

      RELIANCE ON DISTRIBUTION CHANNELS AND TECHNOLOGY PARTNERS MAY AFFECT SALES
      BECAUSE WE LACK CONTROL OVER THESE CHANNELS

     We rely on reseller,  distribution  and technology  partners to support our
own 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 business,
operating  results  and  financial  condition  could  be  materially   adversely
affected.
<PAGE>

      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 business,  operating results and financial  condition could be
materially adversely affected.

      WE FACE INTENSE COMPETITION

     The Internet 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.

     Our principal  competitors  offering  alternatives to XMetaL include Adobe,
Corel,  Arbortext,  Excosoft  and Stilo.  The market  for  supply-side  e-market
infrastructure software,  which MarketAgility targets,  currently is 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 and  MarketAgility),  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 which XMetaL, MarketAgility and HoTMetaL serve.

     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 business,  operating results and financial  condition could be
materially adversely affected.

      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 18 months. 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 and $6.7 million for the years ended  September  30, 1999 and 2000,
and $1.3 million for the  nine-month  period  ended  September  30, 1998.  As of
September 30, 2000, our losses have resulted in an  accumulated  deficit of $9.8
million.  We plan to  increase  our  operating  expenses to expand our sales and
marketing operations,  develop new distribution channels, fund greater levels of
research and development,  broaden professional services and support and improve
operational  and  financial  systems.  As a  result,  we will  need to  generate
significant revenues to achieve and maintain  profitability.  If our revenues do
not increase along with these expenses,  our net losses in a given quarter would
be even greater than expected.  We cannot be certain that we can sustain revenue
growth rates or 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.
<PAGE>

      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 currently are  transitioning  our operations
from supporting HoTMetaL to supporting XMetaL and MarketAgility. 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 business,  operating  results and
financial condition 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    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; and

     o    the mix of domestic and international sales.

     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 sales 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  AND   DISTRIBUTION
      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.  We have recently
expanded our direct sales force and plan to hire additional sales personnel. Our
products  and services  require a  sophisticated  sales  effort  targeted at the
senior management of our prospective clients. New employees require training and
take time to  achieve  full  productivity.  We cannot  be  certain  that our new
employees will become as productive as necessary or that we will be able to hire
enough  qualified  individuals  in the  future.  We  also  plan  to
<PAGE>

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.

      WE HAVE RELIED AND EXPECT TO CONTINUE TO RELY ON HOTMETAL REVENUES

     We have  derived and will  continue to derive  significant  portions of our
revenues from HoTMetaL.  In recent quarters,  worldwide  HoTMetaL  revenues have
declined  and  HoTMetaL  has lost market  share.  Although  we have  planned for
HoTMetaL's  absolute and  proportionate  share of total revenues to decline over
the next several  quarters,  if HoTMetaL  revenues  were to decline  faster than
anticipated,  our business,  operating results and financial  condition could be
materially adversely affected.

      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  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.

      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 services  business needs.  Clients that
license our XML software products may engage our professional  services
<PAGE>

business to assist with support, training, consulting and implementation. Growth
in our  product  sales  therefore  depends on our ability to provide our clients
with these  services  and to  educate  third-party  resellers  on how to use our
products.  As a result,  we plan to increase the number of service  personnel to
meet these needs. We expect our services revenue to increase in absolute dollars
as we continue to provide  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.

     IN ORDER TO PROPERLY  MANAGE  GROWTH,  WE NEED TO IMPLEMENT AND IMPROVE OUR
     OPERATIONAL SYSTEMS ON A TIMELY BASIS

     We have expanded our operations rapidly and we intend to continue to expand
in the foreseeable future to pursue existing and potential market opportunities.
This rapid growth places a significant  demand on our management and operational
resources.  In order to manage  growth  effectively  and to execute our business
plan, we must  implement and improve our  operational  systems,  procedures  and
controls on a timely basis.  If we fail to implement and improve these  systems,
our  business,  operating  results and financial  condition  could be materially
adversely affected.

      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 financial condition
could be materially adversely affected.  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 and technology as well as in sales and
marketing.  Many  of  our  competitors  for  qualified  personnel  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 MAY BE UNABLE TO MEET OUR FUTURE CAPITAL REQUIREMENTS

     We believe that we can fund our planned operations for at least the next 18
months  from  our  existing  working  capital.  Nevertheless,  we may  need,  or
otherwise seek, to raise additional funds in the future to maintain and grow our
business.  We  cannot  assure  you  that we will  be able to  obtain  additional
financing  on  favorable  terms,  if at  all.  If we  issue  equity  securities,
stockholders may experience  dilution of their holdings.  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 business,  operating  results
and financial condition.

      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.
<PAGE>

     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  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  PRODUCT   SHIPMENTS   COULD  BE  DELAYED  IF  THIRD  PARTY   SOFTWARE
      INCORPORATED IN OUR PRODUCTS IS NO LONGER AVAILABLE

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

      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.

      ANTI-TAKEOVER PROVISIONS COULD INHIBIT THE ACQUISITION OF OUR COMPANY

     Certain  provisions  of our  certificate  of  incorporation  and bylaws may
discourage,  delay or  prevent a merger or  acquisition  that  stockholders  may
consider favorable. These provisions include:
<PAGE>

     o    authorizing  our board of directors to fix the rights and  preferences
          of and issue preferred stock;

     o    prohibiting cumulative voting in the election of directors;

     o    limiting  the persons who may call special  meetings of  stockholders;
          and

     o    establishing  advance notice requirements for election to the board of
          directors  or  for   proposing   matters  that  can  be  acted  on  by
          stockholders at special meetings of stockholders.

     Certain  provisions of Delaware law may also  discourage,  delay or prevent
someone  from  acquiring  or  merging  with  us.

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 do not continue to grow or
          grow 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.

     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.  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.
<PAGE>

      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  dampen  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,  results of operations and financial condition 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;

     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.
<PAGE>

     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  stocks  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  approximately
8,541 square feet of office space under a lease  expiring  January 31, 2002. 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
Content  Services  Group is located in a 2,300 square foot  facility  located in
Petaluma, California under a lease expiring January 1, 2004. We also lease 3,000
square feet of office space for our European  headquarters  in London,  England,
under a 5-year lease expiring May 31, 2005.

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

         We are not a party to any material legal proceedings.

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, 2000.

                                     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."
<PAGE>

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          $10.00

           Quarter ended September 30, 2000           $13.50          $ 6.94

      (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  shares  reserved for exchange of  exchangeable  shares,  conversion of
preferred stock and the exercise of warrants and special warrants. The number of
stockholders  of record of our common  stock as of November 30, 2000 was 36, and
there is a substantially greater number of 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 deem relevant.

RECENT SALE OF UNREGISTERED SECURITIES

     SALES BY ASM

     The following sales of  unregistered  securities were made by ASM before it
merged with FinanceCo:

     On December 1, 1998, ASM sold a total of 400,000 shares of its common stock
at a price of $0.05 per share, for aggregate proceeds of approximately  $20,000,
to 25  individuals.  These sales were made  pursuant to Section 3(b) and 4(2) of
the Securities Act of 1933, as amended (the "Securities  Act") and Rules 505 and
506 of Regulation D thereunder.

     On  December  1, 1998,  ASM issued  500,000  shares of its common  stock to
Angela Michelle  Bartolotta,  the President,  Secretary and Treasurer of ASM, in
consideration  and in exchange for services  valued at $25,000 to be rendered in
connection  with the  reorganization  of ASM. On March 12, 1999, Ms.  Bartolotta
resigned her position and tendered her 500,000  shares to ASM for  cancellation.
Such shares were  canceled.  On March 12, 1999, ASM issued 500,000 shares of its
common stock to James Donald Brock,  Jr., in  consideration  and in exchange for
services valued at $25,000 to complete the  reorganization  of ASM. James Donald
Brock, Jr. was also elected  President,  Secretary,  Treasurer,  and Director of
ASM.  The  issuance  of shares to Ms.  Bartolotta  on  December  1, 1998 and the
issuance  of shares  to Mr.  Brock on March 12,  1999 were made in  reliance  on
Section 4(2) of the Securities Act and Rule 506 of Regulation D thereunder.  Ms.
Bartolotta  and Mr.  Brock  each  represented  to ASM that they were  accredited
investors  (as  defined  in Rule 501 under the  Securities  Act),  the books and
records of ASM were made available to them, and at the respective times of their
acquisition of shares, each was serving as the sole officer and director of ASM.

     SALES BY SOFTQUAD CANADA
<PAGE>

     The  following  sales of  unregistered  securities  were  made by  SoftQuad
Canada, an Ontario (Canada) corporation,  prior to its acquisition by FinanceCo,
all of which were  effected  outside of the United  States to persons other than
U.S. persons. Accordingly, they were not subject to U.S. securities laws.

     On August 7, 1998,  SoftQuad  issued five shares of its common stock,  at a
price of $0.13 per share, to Roberto Drassinower.

     On November 6, 1998,  SoftQuad Canada issued 142,855 shares of common stock
to Roberto Drassinower,  142,860 shares of common stock to each of Peter Sharpe,
Bruce Sharpe,  Lauren Wood and Jonathan  Sachs,  and 2,285,700  shares of common
stock to James  Clark at a price of  approximately  $.23,  for  aggregate  gross
proceeds of $690,000.  On that same date,  SoftQuad Canada issued 703,705 shares
of common stock to a subsidiary of NewKidCo  International  Inc. pursuant to its
obligations under a purchase agreement dated September 9, 1998.

     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 shares of common stock held by NewKidCo's
subsidiary. 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.

     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 $0.43, and paid a fee to an
investment advisor 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.

     On July 30, 1999, SoftQuad Canada issued $697,522 of debt through an agent.
In connection with this  transaction,  SoftQuad Canada issued  1,025,000  common
share purchase warrants to the agent at an exercise price of approximately $0.43
and issued warrants to purchase  102,500 shares of common stock to an investment
advisor with an exercise price of $0.43.

     On  September  30,  1999,  James Clark,  certain  institutional  investors,
NewKidCo  and the agent for the  debtholders  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, 723,520 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 the
agent.

     On December 9, 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.

     SALES BY FINANCECO

     The  following  sales of  unregistered  securities  were made by  FinanceCo
before its merger with ASM:

     On December 16, 1999,  FinanceCo  issued 736,702 shares of its common stock
at a price of $1.3574  per share,  aggregating  $1,000,000  to an  institutional
accredited  investor.  This sale was deemed to be exempt from registration under
the Securities Act in reliance upon Rule 504  promulgated  under Section 3(b) of
the Securities Act as a transaction not exceeding $1,000,000.

     On December  16, 1999,  FinanceCo  issued  1,473,405  shares of its Class A
preferred stock at $14 per share,  aggregating $2.0 million, to an institutional
accredited  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
<PAGE>

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. All of the foregoing sales were deemed to
be exempt from  registration  pursuant to Regulation S under the Securities Act.
All of the entities that purchased the  unregistered  securities were accredited
investors  (as defined in  Regulation D under the  Securities  Act) and non-U.S.
persons (as defined in  Regulation  S under the  Securities  Act),  and provided
representations as to this status at the time of their purchase.

     On February  28, 2000,  FinanceCo  issued  1,722,222  shares of its Class B
preferred stock to  institutional  accredited  investors at a price of $2.90 per
share,  aggregating  $5  million.  In  connection  with  this  transaction,  the
institutional  accredited 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, also an institutional  accredited investor,  received warrants
to purchase  347,222 shares of common stock of FinanceCo on identical terms. All
of the foregoing  sales were deemed to be exempt from  registration  pursuant to
Regulation S under the  Securities  Act. All of the entities that  purchased the
unregistered  securities were  accredited  investors and non-U.S.  persons,  and
provided representations as to this status at the time of their purchase.

     On February 29, 2000, an  institutional  accredited  investor,  as agent on
behalf of Canadian-resident subscribers, purchased 1,000,000 special warrants at
a price of $2.50 per special  warrant.  Each special warrant entitled the holder
thereof to acquire  one share of common  stock of  FinanceCo  for no  additional
consideration.  For its services, the agent 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. All of the foregoing sales
were deemed to be exempt from  registration  pursuant to  Regulation S under the
Securities Act. All of the foregoing sales were made by FinanceCo outside of the
United States to non-US persons, who provided  representations as to this status
at the time of their purchase.

     ISSUANCES UPON MERGER OF ASM AND FINANCECO

     On March 2, 2000,  FinanceCo  merged with and into ASM. In connection  with
the merger, all of the  securityholders of FinanceCo  exchanged their securities
for  equivalent  securities  of  ASM.  All of the  issuances  of  securities  in
connection with this merger were deemed to be exempt from registration  pursuant
to Regulation S under the  Securities  Act. All of the persons and entities that
received the  unregistered  securities  were  accredited  investors and non-U.S.
persons, having provided  representations as to this status at the time of their
purchase.

     SALES AFTER MERGER OF ASM AND FINANCE CO

     On April 5, 2000,  we issued  3,435,670  shares of common stock to two U.S.
persons,  and SAC issued  5,773,605  exchangeable  shares to Canadian persons in
exchange  for all of the  outstanding  shares  of  SoftQuad  Canada.  All of the
issuances of securities were deemed to be exempt from  registration  pursuant to
Regulation S under the  Securities Act and Section 4(2) of the Securities Act on
the basis that the transaction did not involve a public offering.

     On April 18 and 20,  2000,  we issued an  aggregate  of  200,010  shares of
common stock to an  institutional  accredited  investor for a purchase price per
share of $7.50, special warrants to acquire 1,906,660 shares of common stock for
no additional  consideration  at a purchase price per special warrants of $7.50,
and warrants to purchase  1,053,335  shares of common stock at an exercise price
of $12.50 per share, for gross proceeds of $15,800,025. The foregoing sales were
deemed  to be  exempt  from  registration  pursuant  to  Regulation  S under the
Securities  Act and  Section 4 (2) of the  Securities  Act on the basis that the
transaction did not involve a public offering.

     On June 5, 2000,  we issued  special  warrants to acquire  44,760 shares of
common stock for no  additional  consideration  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,  for gross proceeds of $335,700.  All of the
foregoing  issuances  were  deemed to be exempt  from  registration  pursuant to
Regulation S under the  Securities Act and Section 4(2) of the Securities Act on
the basis that the transaction did not involve a public offering.
<PAGE>

     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 foregoing issuance was deemed to
be exempt from  registration  pursuant to Section 4(2) of the  Securities Act on
the basis that the transaction did not involve a public offering.

     On May 29,  2000,  we issued  88,409  shares of common stock to a financial
advisor in consideration of advisory  services  provided pursuant to an advisory
services  agreement.  The  foregoing  issuance  was  deemed  to be  exempt  from
registration  pursuant to Regulation S under the Securities Act and Section 4(2)
of the Securities Act on the basis that the transaction did not involve a public
offering.

     On May 29, 2000,  we 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.  The  foregoing  issuance was deemed to be exempt from
registration  to Regulation S under the  Securities  Act and Section 4(2) of the
Securities Act.

ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANICAL CONDITION AND REUSLTS
         OF OPERATIONS


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,  2000  and 1999 and for the  nine-month  period  ended  September  30,  1998
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 and that was previously owned and conducted
by their predecessors. 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. XML (eXtensible Markup Language) 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,    e-publishing   and   knowledge   management   applications.   Our
MarketAgility(TM)  product,  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 and will continue to derive
portions of our revenues from HoTMetaL(R),  our HTML-based Web page creation and
management tool. In recent  quarters,  total HoTMetaL  revenues  world-wide have
declined and HoTMetaL has lost market share to  competitors.  We expect revenues
from HoTMetaL to continue to decline and revenues from our XML products to grow.

      We generate  our  revenues  from  license  fees,  maintenance  and support
contracts and product  solution  services.  Product  solution  services  include
integration  of  software,   application  development,   training  and  software
installation.  We expect to increase the revenue generated from product solution
services  in the next  fiscal  year as the mix of  product  sales  continues  to
changes from HoTMetaL to XMetaL and  MarketAgility.  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
<PAGE>

recognized as revenue over the term of the agreement.  Service revenue  consists
of fees for product  solution  services and is recognized as revenue as the work
is completed.  During the year ended September 30, 2000, the Company adopted the
Statement  of Positions  ("SOP")  97-2  "Software  Revenue  Recognition",  which
provides  guidance on applying US generally  accepted  accounting  principles in
recognizing revenue from software transactions.

      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,  if any,  related to providing  product  solution  services and
customer support services.

      Since our  inception,  we have incurred  substantial  costs to develop our
technology  and products,  to recruit and train  personnel for our  development,
sales and marketing  (including business development and product management) and
product  solution  services  departments,  and to  establish  an  administrative
infrastructure.   As  a  result,  we  have  incurred  significant  losses  since
inception.  As of  September  30,  2000,  we  have  an  accumulated  deficit  of
approximately $9.8 million.

      We believe  that our future  success  depends  on XML  technology  and our
XMetaL and MarketAgility  products.  We plan to increase our operating  expenses
and  expect  to  continue  to incur  operating  losses  for at least the next 18
months.

     Because our business  has  historically  been carried on by entities  other
than SoftQuad Software, Ltd., the historical financial results described in this
section are  primarily  the  results of:  SoftQuad  Software  Inc.,  our Ontario
operating subsidiary, for the fiscal years ended September 30, 2000 and 1999 and
the  Web  division  of a  subsidiary  of  NewKidCo  International  Inc.  for the
nine-month period ended September 30, 1998.

OUR 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 (Canada)  corporation  ("SoftQuad
Canada").  SoftQuad  Canada  completed the buyout on October 1, 1998. The assets
acquired  in the buyout  included,  among other  things,  the rights to the name
"SoftQuad." In May 1999, we launched XMetaL.

      ESTABLISHMENT OF FINANCECO

      In December 1999, a Toronto-based investment dealer agreed to act as agent
in facilitating  private  placement  financings of SoftQuad Canada.  Pursuant to
this  agreement,  money was advanced 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., an Ontario (Canada) corporation  ("SAC").  Pending completion
of that  acquisition,  FinanceCo loaned the proceeds of completed  financings to
SoftQuad Canada for operating purposes.
<PAGE>

      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,  as amended,  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 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 one-for-one basis) their common shares
of SoftQuad  Canada for shares of ASM's common  stock,  (ii) because of Canadian
tax considerations,  the remaining Canadian holders of common shares of SoftQuad
Canada exchanged (on a one-for-one 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 one-for-one  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 equivalent terms.

      REDOMICILING TO DELAWARE

      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.

      OUR CURRENT CORPORATE STRUCTURE

      We  currently  conduct  our  operations  through  SoftQuad  Canada and its
wholly-owned subsidiary,  SoftQuad UK Limited. SAC owns all of the common shares
of SoftQuad Canada, and SoftQuad Software, Ltd. owns all of the common shares of
SAC.

      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,
2000 and 1999 and the nine-month  period ended September 30, 1998. 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     Nine month period
                                                  September   September 30,   ended September 30,
                                                  30, 2000         1999               1998
------------------------------------------------ ------------ --------------- ---------------------
<S>                                                 <C>            <C>                <C>
Revenue
------------------------------------------------ ------------ --------------- ---------------------
         Licenses                                    99%           100%               100%
------------------------------------------------ ------------ --------------- ---------------------
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
------------------------------------------------ ------------ --------------- ---------------------
         Services                                    1%             -                  -
                                                     ---
------------------------------------------------ ------------ --------------- ---------------------
<S>                                                 <C>            <C>                <C>
                                                    100%           100%               100%
                                                    ----
------------------------------------------------ ------------ --------------- ---------------------
Cost of Revenue
------------------------------------------------ ------------ --------------- ---------------------
         Licenses                                    12%           17%                18%
------------------------------------------------ ------------ --------------- ---------------------
         Services                                    8%             2%                 4%
------------------------------------------------ ------------ --------------- ---------------------
                                                     80%           81%                78%
------------------------------------------------ ------------ --------------- ---------------------
Expenses
------------------------------------------------ ------------ --------------- ---------------------
         Selling and marketing                      122%           62%                54%
------------------------------------------------ ------------ --------------- ---------------------
         Research and development                    46%           32%                54%
------------------------------------------------ ------------ --------------- ---------------------
         General and administrative                  78%           34%                62%
------------------------------------------------ ------------ --------------- ---------------------
                                                    246%           128%               170%
------------------------------------------------ ------------ --------------- ---------------------
Loss from operations                               (166%)         (47%)              (92%)
------------------------------------------------ ------------ --------------- ---------------------
Other (income) expenses                             (10%)           2%                 -
------------------------------------------------ ------------ --------------- ---------------------
Net loss                                           (156%)         (49%)              (92%)
------------------------------------------------ ------------ --------------- ---------------------
Value of share  capital  issued on  acquisition       -            43%                 -
of warrants
------------------------------------------------ ------------ --------------- ---------------------
Net loss                                           (156%)         (92%)              (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
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 increase our  operating  expenses to expand sales and marketing
operations,  develop new distribution channels,  fund greater levels of research
and development,  broaden support  services and support and improve  operational
and financial  systems.  If revenues do not increase along with these  expenses,
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.
<PAGE>

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  coupled with a
significant  decrease in HoTMetaL  product  license  revenues for the year ended
September 30, 2000.  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.  We expect
XMetaL's product license revenues and related  professional  services  revenues,
both in absolute  dollars  and their  proportionate  share of total  revenues to
continue to increase over the next several  quarters  while  HoTMetaL's  product
license  revenues,  both in absolute  dollars and their  proportionate  share of
total  revenues,  continue to decline.  We also expect to begin to generate both
license and related  professional  services  revenues during the second or third
quarter of fiscal 2001 from  MarketAgility  1.0, which was launched in September
2000.

      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:
the Americas and Europe  (including  the UK). For the year ended  September  30,
2000,  revenue  generated  from the Americas 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  product  solution
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. We expect cost of revenues to increase, both in absolute dollars and as
a percentage of revenue,  as we continue to invest in product solution  services
and  customer   support  services  by  hiring  and  training  new  personnel  in
anticipation  of increased  service  revenue and customer base  associated  with
XMetaL and MarketAgility.

      SALES AND MARKETING

      Sales 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 sales and  marketing  personnel  and  increased  marketing  program
expenditures  associated  with and the  launch  of  XMetaL  2.0 in June 2000 and
MarketAgility  1.0 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 sales,  business development and marketing  activities.
We expect sales and  marketing  spending  will  continue to increase in absolute
dollars as we continue to increase due to the planned growth in sales,  business
development and marketing personnel and due to expected additional  increases in
marketing programs and other promotional activities.
<PAGE>

      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
XMetaL2.0  launched June 2000 and MarketAgility 1.0 launched September 2000. For
the year ended  September 30, 2000, we increased our headcount by 18. We believe
that continued  investment in research and  development is critical to attaining
our  strategic  objectives  and,  as a  result,  we  expect  that  research  and
development  expenses will increase in absolute  dollars in future  periods.  To
date, all software development costs have been expensed in the period incurred.

      GENERAL AND ADMINISTRATIVE

      General and  administrative  expenses  increased from $1.1 million for the
year ended  September 30, 1999 to $3.4 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. We expect that general and administrative spending will increase in absolute
dollars to support our  expanding  operations  and as we continue to enhance our
administrative infrastructure.

     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 large  increase in other income 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. We expect to incur losses for at least the next 18 months.

RESULTS OF OPERATIONS  FOR THE YEAR ENDED  SEPTEMBER 30, 1999 AND THE NINE-MONTH
PERIOD ENDED SEPTEMBER 30, 1998

      The 1999 fiscal year  described  below  represents the twelve months ended
September  30,  1999.  The 1998  fiscal  year  described  below  represents  the
nine-month  period ended  September 30, 1998. This short period is a consequence
of the October 1998 management buyout of our business from NewKidCo, which had a
December  31  fiscal  year  end.  You  should  take  the  resulting  three-month
discrepancy into account when  considering each of the following  comparisons of
our operating  results,  in addition to any other  factors we identify  below as
having affected specific periods.

      REVENUE

      Total revenue  increased from $1.5 million for the nine-month period ended
September  30,  1998,  to $3.3  million for the year ended  September  30, 1999,
representing a 120% increase in revenue. This increase is primarily attributable
to the higher  license and service  revenues  associated  with the launch in May
1999 of the first version of XMetaL and the release of a new version of HoTMetaL
in October 1998. The revenue increase derived from XMetaL and the new version of
HoTMetaL was partially offset by a revenue disruption resulting from a change in
a major distribution relationship. For the nine-month period ended September 30,
1998, all our revenues were derived from HoTMetaL product license revenues.
<PAGE>

      COST OF REVENUES

      Cost of revenues  increased from $322 thousand for the  nine-month  period
ended  September  30, 1998,  to $636  thousand for the year ended  September 30,
1999, as a result of higher  royalties and production  costs associated with the
release of HoTMetaL in October 1998.

      SALES AND MARKETING

      Sales  and  marketing  expenses  increased  from  $794  thousand  for  the
nine-month  period ended  September 30, 1998, to $2.0 million for the year ended
September  30, 1999.  The increase is primarily  attributable  to an increase in
sales and marketing personnel and the increased  marketing program  expenditures
associated with the launches of new versions of HoTMetaL and XMetaL.

      RESEARCH AND DEVELOPMENT

      Research and  development  expenses  increased  from $798 thousand for the
nine-month  period ended  September 30, 1998, to $1.1 million for the year ended
September 30, 1999. The increase was primarily  attributable  to the development
of XMetaL.

      We expect that research and development expenses will increase in absolute
dollars in future  periods  based on our belief  that  continued  investment  in
research and development is critical to attaining our strategic  objectives.  To
date, all software development costs have been expensed in the period incurred.

      GENERAL AND ADMINISTRATIVE

      General and  administrative  expenses increased from $902 thousand for the
nine-month  period ended  September 30, 1998, to $1.1 million for the year ended
September 30, 1999.  The increase was  primarily due to increased  personnel and
facility expenses necessary to support our expanding operations.

      NET LOSS

      Our net loss increased  from $1.3 million for the nine-month  period ended
September 30, 1998, to $1.6 million for the year ended  September 1999 primarily
reflecting higher sales and marketing and research and development expenses that
offset higher  revenues  generated by XMetaL and the release of a new version of
HoTMetaL.

      LIQUIDITY AND CAPITAL RESOURCES

      Since  inception,  we have  funded  our  operations  and  met our  capital
expenditure requirements through the private sale of equity and debt securities.
From December 1999 through September 2000, we raised approximately $22.0 million
in net  proceeds  from  equity  financings  in order to  expand  our  sales  and
marketing  and  product  development  efforts  and  support  our  administrative
infrastructure.

      The  number  of days our  accounts  receivable  balances  are  outstanding
increased in fiscal 2000 to 46 days from 39 days in fiscal 1999.  This  increase
can be attributed  to the large volume of sales  realized in the last quarter of
fiscal 2000.

      For the years ended September 30, 2000 and 1999 and the nine-month  period
ended  September  30,  1998,  net cash used for  operating  activities  was $4.9
million,  $1.4  million,  and $1.2  million,  respectively.  For the years ended
September 30, 2000 and 1999 and the nine-month  period ended September 30, 1998,
respectively,  the increase in cash used for operating  activities was primarily
due to net losses of $6.7 million,  $1.6 million, and $1.3 million respectively,
offset by changes in operating working capital.

      Net cash used in investing activities was $1.0 million, $185 thousand, and
$23 thousand for the years ended  September 30, 2000 and 1999 and the nine-month
period ended September 30, 1998, respectively. Cash used in
<PAGE>

investing  activities  for the year  ended  September  30,  2000  related to the
purchase of capital assets,  mainly computer  hardware and software to build our
information  technology  infrastructure and as a result of increasing headcount.
At September  30,  2000,  we do not have any  material  commitments  for capital
expenditures.  We  anticipate  a modest  increase  in our  capital  expenditures
consistent with anticipated growth in operations, infrastructure and personnel.

      Net cash provided by financing activities was $21.6 million,  $2.5 million
and  $1.4  million  for the  years  ended  September  30,  2000 and 1999 and the
nine-month period ended September 30, 1998,  respectively.  The cash provided in
the year ended  September  30, 2000  resulted  primarily  from net proceeds from
equity  financings.  The cash provided in the prior periods  resulted  primarily
from net proceeds of private financings.

      As of September  30, 2000,  our  principal  sources of liquidity  included
approximately $16.3 million of cash and cash equivalents.

     We believe that we have sufficient  cash,  cash  equivalents and short-term
investments  to meet our  presently  anticipated  operating  losses and  working
capital  requirements  for at  least  the  next  18  months.  After  that  time,
additional funds may be required to support our working capital  requirements or
for other purposes.  Our future liquidity and capital  requirements  will depend
upon numerous  factors.  The rate of expansion of our  operations in response to
potential growth opportunities and competitive pressures will affect our capital
requirements  as will financing of continued net losses and negative cash flows.
Our forecast of the period of time through which our financial resources will be
adequate to support  operations  is a  forward-looking  statement  that involves
risks and uncertainties, and actual results could vary materially as a result of
the factors  described above. We may seek to raise such additional funds through
public or private  equity or debt  financings or from other  sources.  We cannot
assure you 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

      We  have  adopted  the  recently  issued  accounting   standard  SFAS  133
"Accounting for Derivative  Instruments and Hedging  Activities,"  effective for
our fiscal year ended  September 30, 2001. It requires that all  derivatives  be
recognized  as either  assets or  liabilities  and  measured at fair value.  The
criteria for determining whether all or a portion of a derivative instrument may
be  designated  as a hedge has changed.  Derivatives  that are fair market value
hedges,  together with the financial  instrument being hedged, will be marked to
market with  adjustments  reflected in income.  Derivatives  which are cash flow
hedges  will be marked to market with  adjustments  reflected  in  comprehensive
income.  As at  September  30,  2000,  we have not entered  into any  derivative
contracts.  Further, as at September 30, 2000, we have completed a review of all
contracts for embedded  derivatives  and none were noted.  Thus, the adoption of
SFAS  133  will not  have a  significant  impact  on  either  our  statement  of
operations or financial  position.  In June 2000,  the  Securities  and Exchange
Commission issued Staff Accounting Bulletin No. 101B "Second Amendment:  Revenue
Recognition  in  Financial  Statements"  ("SAB  101B").  SAB 101B  amends  Staff
Accounting Bulletin No. 101 "Revenue Recognition in Financial  Statements" ("SAB
101") to further defer the  implementation  date of SAB 101 for registrants with
fiscal  years that begin  between  December  16, 1999 and March 15, 2000 SAB 101
provides guidance on the recognition,  presentation and disclosure of revenue in
financial statements of all public registrants. Changes in the Company's revenue
recognition  policy  resulting  from  the  interpretation  of SAB 101  would  be
reported  as a  change  in  accounting  principle.  The  change  in the  revenue
recognition  policy could result in a cumulative  adjustment  in the quarter the
Company adopts SAB 101. The Company has fully assessed the  implications  of SAB
101 and  management  believes  the  adoption of this  statement  will not have a
significant impact on the Company's consolidated financial position,  results of
operations or cash flows.
<PAGE>

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

         Our financial  statements,  including the auditor's report and notes to
the financial statements,  appear on pages F-1 to F-23, which follow immediately
after the  signature  page on page  II-47.  Pages  F-1 to F-23 are  incorporated
herein by reference.

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

         None

<PAGE>

                                    PART III

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


EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES

     The following table sets out certain  information  regarding the directors,
executive officers and key employees of SoftQuad  Software,  Ltd. as of November
30, 2000.
<TABLE>
<CAPTION>
               NAME                     AGE                    POSITION
----------------------------------  ---------   ----------------------------------------------------------
<S>                                     <C>
Roberto Drassinower                     37      Chief Executive Officer and Director
Andrew Muroff                           32      President and Director
David R. Lewis                          55      Chief Financial Officer,  Secretary and Treasurer
Bruce Sharpe                            46      Chief Technology Officer
Peter Sharpe                            48      Chief Scientist
Margo Day                               40      Executive Vice President of Strategy & Business Development
Pamela Geoga                            49      Vice President of Sales
Joan Dea                                37      Director
Robert Bagga                            31      Director
Brock Armstrong                         54      Director
Lawrence Goldberg                       50      Director
</TABLE>

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.

ANDREW  MUROFF,  MBA,  has many  years of  experience  in  leading  mergers  and
acquisitions efforts, for high-tech public companies having led and closed about
$100 million in  acquisitions  for a publicly  traded  company as well as having
headed up business  development for an international  internet service provider.
Before joining  SoftQuad as President,  Mr. Muroff was Director of Corporate and
Legal  Development  of  CYBERPLEX,   Inc  (CX:TSE),  an  international  internet
professional  services firm, from January 1999 to October 2000. From May 1996 to
December  1998,  Mr.  Muroff was  Director  of Business  Development  at Managed
Network Systems, Inc., an international internet communications  provider, where
he  cultivated  key  strategic  partnerships.  . Mr.  Muroff  is a member of the
Michigan  Bar and holds an MBA degree from the  University  of Windsor,  a BA in
Economics  from the  University  of Western  Ontario  and a law degree  from the
Detroit College of Law at Michigan State University.

<PAGE>

DAVID R. LEWIS,  CA 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 Nasdaq-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. (V. 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 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.

MARGO  DAY has  served  as Vice  President,  Business  Development  of  SoftQuad
Software,  Ltd. from April 2000 to October 2000.  and Executive  Vice  President
Strategy & Business  Development  from October  2000.  From August 1999 to March
2000,  Ms. Day was Vice  President and Managing  Director of Go2Net,  one of the
Internet's  leading networks.  While with Go2Net, she created HyperMart Business
Unit, a leading small business e-commerce  solutions-hosting  community that now
boasts more than 800,000  members.  From November 1998 to July 1999, Ms. Day was
Executive  Vice  President  of Medweb,  a  provider  of  web-based  telemedicine
solutions. From April 1992 to September 1998, Ms. Day 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,  including  Senior  Director for North  American  small and medium
business, sales and field marketing,  Director of Enterprise Sales, and Director
of US Business Partner Sales.

PAMELA  GEOGA has  served as Vice  President,  Sales,  of  SoftQuad  Canada  and
SoftQuad  Software,  Ltd.  since March 2000.  For 25 years until July 1998,  Ms.
Geoga worked for IBM Corporation and its subsidiary Lotus  Development  Corp. As
Vice President,  North America,  for Lotus, a position she held from May 1988 to
July 1998,  Ms.  Geoga led sales and  service  teams of up to 800  professionals
generating annual revenues of approximately  $600 million.  Under her direction,
the North American division evolved from a group of independent  operating units
into a fully  integrated  operation  with  dynamic,  cross-organizational  teams
focused on specific  market  segments.  She also  introduced  the Lotus Solution
Sales  process,  a process  which  became a standard  for IBM senior  executives
worldwide.  Ms. Geoga holds a Bachelor of Science  degree from Western  Michigan
University.
<PAGE>

JOAN DEA has been a director of SoftQuad Software, Ltd. since June 13, 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. Economics and Political Science from Yale University and an MSc Economics
(International Relations) from the London School of Economics.

ROBERT BAGGA has been a director of SoftQuad Software, Ltd. since July 27, 2000.
Mr.  Bagga is  currently  the Chief  Executive  Officer of  iJoin.com,  Inc.,  a
provider of online B2B creative  solutions.  Mr. Bagga founded  Barter  Business
Exchange in 1993, and held the position of Chief  Executive  Officer until March
1999,  when he successfully  negotiated the merger of Barter  Business  Exchange
with Seattle-based International Barter Corporation.  The Company created by the
merger,  Ubarter.com,  quickly  became  one of the  world's  largest  B2B barter
companies.  After the merger,  Mr.  Bagga held the  position of Chief  Operating
Officer of  Ubarter.com  until  March 2000,  when he became the Chief  Executive
Officer of iJoin.com.  Mr. Bagga studied  economics at York  University.  He has
served  on  the  Board  of  Directors  of  the  International  Reciprocal  Trade
Association,  where he headed the  Certification  Committee  responsible for the
Certified  Trade  Broker  Program,  and is  currently  a  member  of  the  Young
Entrepreneurs Organization.

LAWRENCE GOLDBERG is the Executive Vice President and Chief Financial Officer of
Pinetree Capital Corp. Mr. Goldeberg,  a Chartered  Accountant,  brings with him
over 20 years of experience in the software  industry.  During that time, he has
worked in both a financial and operational  capacity with a number of companies,
typically   during  their  periods  of  highest  growth.   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 is President and Chief  Executive  Officer of DC  DiagnostiCare
Inc. 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.  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
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.  Mr.
Armstrong is an  experienced  senior  executive with a proven record of creating
and managing profitable growth as well as significant  experience in mergers and
acquisitions.  Mr.  Armstrong  is a  Chartered  Accountant  and holds an Honours
Bachelor  of  Business  Administration  degree  from the  University  of Western
Ontario.

BOARD OF DIRECTORS

     There currently are six 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 Robert Bagga. The compensation committee makes recommendations regarding
compensation and benefits, including stock options, given to our employees.
<PAGE>
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 soley 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 Septemer 30,
2000, except for the following:

     Margo Day, an officer of the Company,  filed a late Statement of Changes in
Beneficial  Ownership on Form 4 reflecting  the receipt of a stock  option,  and
Michael  Mendelson,  a former  director of the Company,  has not filed an Annual
Statement of Changes in Beneficial Ownership on Form 5 reflecting the receipt of
a stock option.

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

EXECUTIVE COMPENSATION

     The following table sets forth  information  concerning total  compensation
paid to our chief  executive  officer and other members of the executive team in
excess of $100,000 for services  rendered during the fiscal year ended September
30, 2000 and 1999,  for  services  in all  capacities  to the Company  since its
inception.  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>
                                                                                                     LONG-TERM COMPENSATION
                                                          ANNUAL COMPENSATION                                AWARDS
                                                       -----------------------      -----------------------------------------
                                                                                                      NUMBER OF SECURITIES
Executive                                     YEAR       SALARY        BONUS          OTHER            UNDERLYING OPTIONS
---------                                     ----     ----------    ---------      ---------        -----------------------
<S>                                           <C>       <C>           <C>            <C>                    <C>
Roberto Drassinower - CEO.................    2000      $102,092      $77,050        $120,000(1)            400,000
Roberto Drassinower - CEO                     1999       $80,000      $27,000                               550,010
Bruce Sharpe - Chief Technology Officer       2000       $80,400      $30,150                                50,000
Peter Sharpe - Chief Scientist                2000       $80,400      $30,150                                50,000
Nick Mongston - Managing Director of
                 SoftQuad Software (UK) Ltd.  2000       $98,150      $40,540                                60,000
Johnathan Sachs (2) - Vice President of
                       Marketing              2000       $98,300      $13,400                                50,000
</TABLE>
(1) Represents  housing loan
(2) Johnathan Sachs left SoftQuad effective October, 2000.

OPTION GRANTS IN LAST FISCAL YEAR

     The  following  table sets forth  each  grant of stock  options  during the
fiscal  year ended  September  30,  2000 to the named  executive  officers.  The
percentage  of total  options  set  forth  below is  based  on an  aggregate  of
2,658,700  options  granted to employees  during the fiscal year ended September
30, 2000. The market value on the date of grant has been determined by our board
of directors.  Potential realizable values are net of exercise price, but before
taxes associated with exercise.  Amounts represent hypothetical gains that could
be achieved  for the options if  exercised  at the end of the option  term.  The
assumed 5% and 10% rates of stock price  appreciation are provided in accordance
with the rules of the SEC and do not represent our estimate or projection of the
future common stock price.
<TABLE>
<CAPTION>
                                INDIVIDUAL GRANTS
                                                 PERCENT OF
                                                   TOTAL
                                    NUMBER OF     OPTIONS
                                    SECURITIES   GRANTED TO                            POTENTIAL REALIZABLE VALUE AT
                                    UNDERLYING   EMPLOYEES    EXERCISE                 ASSUMED ANNUAL RATES OF STOCK
                                     OPTIONS     IN FISCAL      PRICE     EXPIRATION    PRICE APPREASTION FOR OPTION
                                     GRANTED        2000      ($/SHARE)      DATE                   TERM
                                                                                             5%              10%
<S>                                  <C>            <C>         <C>        <C>  <C>        <C>            <C>
Roberto Drassinower -                400,000        15%         $1.44      2/25/2010       $362,200       $918,000
Bruce Sharpe -                        50,000         2%         $1.44      2/25/2010       $ 45,300       $114,700
Peter Sharpe -                        50,000         2%         $1.44      2/25/2010       $ 45,300       $114,700
Nick Mongston -                       60,000         2%         $1.44      2/25/2010       $ 54,300       $137,700
Johnathan Sachs -                     50,000         2%         $1.44      2/25/2010       $ 45,300       $114,700
</TABLE>
<PAGE>
OPTION VALUES

     The  following  table  sets  forth  the  number  and  value  of  securities
underlying  unexercised  options that are held by the name executive officers as
of September 30, 2000. No officer  exercised any options  during the fiscal year
ended September 30, 2000. The value of unexercised in-the-money options is based
on the fair market value of our common stock on September 30, 2000 of $7.00,  as
quoted on the OTC Bulletin Board, minus the actual exercise price.
<TABLE>
<CAPTION>
                                             NUMBER OF SECURITIES                VALUE OF UNEXERCISED
                                           UNDERLYING UNEXERCISED               IN-THE-MONEY OPTIONS
                                        OPTIONS AT SEPTEMBER 30, 2000          AT SEPTEMBER 30, 2000 ($)
                                        -----------------------------        --------------------------------
                                        Exercisable     Unexercisable        Exercisable        Unexercisable
                                        -----------     -------------        -----------        -------------
<S>                                       <C>              <C>                <C>                <C>
Roberto Drassinower.................      340,010          610,000            $2,378,000         $3,694,000
Bruce Sharpe                              193,330          190,000            $1,352,000           $278,000
Peter Sharpe                              193,330          190,000            $1,352,000           $278,000
Nick  Mongston                               -              60,000                                 $334,000
SoftQuad Software (UK)
Johnathan Sachs                           193,330          190,000            $1,352,000           $278,000
</TABLE>
DIRECTORS COMPENSATION

      Directors  currently  do not  receive  any  cash  compensation  for  their
services as members of the board of directors,  although  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 February 25,  2000,  in  consideration  for their
agreement  to serve as  directors,  we granted to each of  Sheldon  Inwentash  ,
Michael  Mendelson (or their  nominees) and Joan Dea options to purchase  80,000
shares of common  stock,  all at an exercise  price of $1.44 per share.  Messrs.
Inwentash  and  Mendelson  no  longer  are  directors.  On  July  27,  2000,  in
consideration  for his  agreement  to serve as a director,  we granted to Robert
Bagga options to purchase 80,000 shares of common stock, at an exercise price of
$7.50 per share. 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,  all at an exercise price of
$3.25 per share. All of these 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.

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

         The  following  tables  set forth  certain  information  regarding  the
beneficial  ownership of SoftQuad Common Stock as of September 30, 2000,  unless
otherwise noted, by (i) all persons who, to SoftQuad's knowledge, are beneficial
owners of five  percent or more of the  Common  Stock,  (ii) each  member of the
Board of Directors,  (iii) each of the executive  officers of SoftQuad  named in
Item 10, and (iv) all current directors and executive  officers of SoftQuad as a
group.  Unless  otherwise  noted,  each of the  stockholders has sole voting and
investment power with respect to the shares  beneficially owned by them, subject
to community property laws, where applicable
<TABLE>
<CAPTION>
                                                       Number of                   Percent of
              Name and Address                         Shares of              Outstanding Shares of
            of Beneficial Owner                       Common Stock                Common Stock
     ----------------------------------------    -------------------------    ---------------------
<S>              <C>                                     <C>                          <C>
     James Clark (1)                                     3,220,285                    24.4%
     Pinetree Capital Corporation (2)                    2,710,128                    20.5%
     VC Advantage Limited Partnership,
     Thomson Kernaghan & Co. Ltd. and CALP
     II LP (3)                                           1,599,775                     9.9%
     Hammock Group Ltd (4)                               1,545,667                     9.9%
     Roberto Drassinower  - CEO (5)                        482,870                     3.5%
     Bruce Sharpe (6)                                      336,190                     2.5%
     Peter Sharpe (6)                                      336,190                     2.5%
     Jonathan Sachs                                        336,190                     2.5%
     All current directors and executive
     officers of the Company as a group (11 persons)(7)  1,230,250                     8.5%
</TABLE>
    (1) Mr. Clark's  address is Prasanmir  Place 164/5  Sukhimrit Soi 23 Bangkok
    Thailand 10110

    (2) Includes 2,670,560 exchangeable shares of SAC. Pinetree's address is 130
    King Street West, Suite 2810, Toronto, Ontario, Canada M5X 1A9
<PAGE>

    (3) Two executive officers of Thomson Kernaghan (including the Chairman) are
    also  executive  officers of the  general  partner of VC  Advantage  Limited
    Partnership  and  general  partner  of  CALP  II  LP.  Accordingly,  Thomson
    Kernaghan,  VC  Advantage  and  CALP  II may be  considered  a  group  which
    beneficially owns all the shares beneficially owned by any of them. Under an
    agreement  with the Company,  Thomson  Kernaghan,  VC Advantage  and CALP II
    agreed not to have the right to convert any preferred  stock or exercise any
    warrants or special  warrant if, after having given effect the conversion or
    exercise, all of them considered as a group would be deemed to own more than
    9.9% of the  then  outstanding  common  stock.  If not for  this  agreement,
    Thomson  Kernaghan,  VC Advantage and CALP II, considered as a group,  would
    beneficially  own  5,285,715  shares of common  stock,  including  1,806,738
    shares of common stock issuable upon conversion of preferred  stock,  91,422
    shares of common  stock  issuable  upon  exercise  of special  warrants  and
    1,787,777  shares of common stock  issuable upon  exercise of warrants.  The
    address  for the group is 365 Bay  Street,  10th  floor,  Toronto,  Ontario,
    Canada M5H 2V2.

    (4) Under an  agreement  with the  Company,  Hammock  agreed not to have the
    right to convert any  preferred  stock or exercise  any  warrants  if, after
    having  given  effect  the  conversion  or  exercise,  it would be deemed to
    beneficially own more than 9.9% of the then outstanding common stock. If not
    for this  agreement,  Hammock would  beneficially  own  1,545,667  shares of
    common  stock,  including  1,267,889  shares of common stock  issuable  upon
    conversion of preferred  stock and 277,778  shares of common stock  issuable
    upon exercise of warrants.  Hammock's address is 365 Bay Street, 10th floor,
    Toronto, Ontario, Canada M5H 2V2.

    (5) Includes 142,860 exchangeable shares of SAC and 340,010 shares of common
    stock issuable upon exercise of options.

    (6) Includes 142,860 exchangeable shares of SAC and 193,330 shares of common
    stock issuable upon exericise of options.

    (7) Includes 428,580 exchangeable shares of SAC and 801,670 shares of common
    stock issuable upon exercise of options.

    ITEM  13.         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 October 2, 2000,
beneficially  owned more than 5% of our  common  stock:  Beacon M  International
Investments  Inc.  ("Beacon"),   Hammock  Group  Ltd.,  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,  who also was one of
our directors,  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 November 6, 1998,  we issued  2,285,700  shares of common stock to James
Clark, at a price of approximately $0.23 per share, for aggregate gross proceeds
of $525,711.

     On April 9, 1999,  we issued  1,947,040  shares of common stock to Pinetree
and 623,055 shares of common stock to James Clark,  each at approximately  $0.43
per share,  for aggregate  gross proceeds of $1,105,141.  In connection with the
issuance of these  shares,  we issued  warrants to  purchase  973,520  shares of
common stock to  Pinetree,  and  warrants to purchase  311,530  shares of common
stock  to Mr.  Clark,  each  with an  exercise  price  of  $0.43  and we paid an
investment  advisory fee to KBL Capital  Partners of $41,563,  58,410  shares of
common  stock and  warrants to purchase  233,645  shares of common stock with an
exercise price of $0.43 per share.  After the completion of this  financing,  we
entered into an advisory  services  agreement  with KBL Capital  Partners  under
which KBL Capital  Partners was to receive $3,330 per month for a term of twelve
months (automatically  renewable subject to termination by us), together with an
advisory fee of $13,300 for advisory services in connection with
<PAGE>

structuring and venture financing,  and an advisory fee of $500,000 for services
in connection  with  preparation,  structuring and executing a series of private
placements.  This advisory services  agreement was subsequently  amended on July
31,  1999  to  extend  its  initial  term to  July  31,  2000,  which  term  has
subsequently been renewed, and to increase the monthly fee to $6,650 per month.

     On May 14, 1999,  we issued  228,160  shares of common stock to Beacon,  at
approximately  $0.43 per share,  for  aggregate  gross  proceeds of $98,110.  In
connection with that transaction,  we issued warrants to purchase 114,080 shares
of common stock to Beacon with an exercise price of $0.43 per share, and paid an
investment  advisory fee to KBL Capital Partners of $4,870, plus 6,845 shares of
common  stock and  warrants to purchase  18,255  shares of common  stock with an
exercise price of $0.43 per share.

     On July 30, 1999, KBL Technology  Funding acted as agent in connection with
the issuance by us of $697,522 of debt. In  connection  with this  issuance,  we
issued  1,025,000  warrants to purchase shares of common stock to KBL Technology
Funding at an exercise price of $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.

     On September  30, 1999,  KBL  Technology  Funding (as agent),  James Clark,
Pinetree  and Beacon sold their  warrants to us in exchange for shares of common
stock on a 1-for-1 basis, with 1,025,000 shares issued to KBL Technology Funding
(as agent),  311,530  shares  issued to James Clark,  723,520  shares  issued to
Pinetree and 718,480 shares issued to Beacon.

     On December 16, 1999, VC Advantage  purchased  736,702 shares of our common
stock at a price of approximately $1.3574 per share, aggregating $1,000,000.  On
December  16, 1999,  VC Advantage  also  purchased  1,473,405  shares of Class A
preferred stock at approximately  $1.3574 per share,  aggregating $2 million. In
connection with this transaction, VC Advantage received warrants, exercisable on
or before  December 16, 2002,  with an exercise  price of $1.3574 per share,  to
purchase  an  aggregate  of  442,022  shares of common  stock of  FinanceCo.  In
addition,  Thomson  Kernaghan,  for its  services  as agent in  respect of these
transactions,  received  warrants to purchase an aggregate of 221,011  shares of
common stock on identical  terms and  received a sales  commission  of 7% of the
offering (for an aggregate of $210,000).

     On February 25, 2000, in consideration for advisory services  rendered,  we
granted to each of Sheldon  Inwenash 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.

     On February 28, 2000, VC Advantage  purchased  1,033,333  shares of Class B
preferred stock and Hammock  purchased 688,889 shares of Class B preferred stock
at a price of $2.90 per share,  for aggregate  gross proceeds of $5 million.  In
connection with this  transaction,  VC Advantage and Hammock received  warrants,
exercisable on or before  February 28, 2003, to purchase an aggregate of 694,445
shares of  common  stock,  with an  exercise  price of $1.53 per share  (Hammock
received 277,778 and VC Advantage received 416,667), and Thomson Kernaghan,  for
its services as agent in respect of this purchase, received warrants to purchase
347,223  shares  of  common  stock  on  identical  terms  and  received  a sales
commission of 7% of the offering (for an aggregate of $350,000).

     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 an
agency fee of 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 an  aggregate  of  200,010  shares of
common stock to institutional investors, including CALP II, for a purchase price
per share of $7.50, special warrants to acquire 1,906,660 shares of common stock
at a purchase  price per  special  warrant of $7.50,  and  warrants  to purchase
1,053,335  shares of common stock at an exercise price of $12.50 per share,  for
gross proceeds of  $15,800,025.  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,  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
<PAGE>

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 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,  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.

     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.

OPTION GRANTS TO DIRECTORS

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

     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  14.         EXHIBITS LIST AND REPORTS ON FORM 8-K
                  -------------------------------------

                  None

a)  Exhibits

Exhibit No.                Description
-----------                -----------

2.1(1)            Acquisition Agreement among SoftQuad Software,  Ltd., SoftQuad
                  Acquisition Corp. and SoftQuad Canada, dated December 16, 1999

2.2(2)            Plan and  Agreement  of Merger  between  The  American  Sports
                  Machine, Inc. and SoftQuad Software, Ltd., dated March 1, 2000

2.3(2)            Agreement and Plan of Reorganization among The American Sports
                  Machine,  Inc., SoftQuad Software,  Ltd. and its Stockholders,
                  dated March 1, 2000

2.4(4)            Plan and  Agreement  of Merger  between  The  American  Sports
                  Machine, Inc. and SoftQuad Software, Ltd., dated March 9, 2000

3.1(2)            Restated  Certificate of Incorporation  of SoftQuad  Software,
                  Ltd.

3.2(1)            Restated By-Laws of SoftQuad Software, Ltd.

4.1(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

4.2(1)            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
<PAGE>

4.3(1)            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

4.4(1)            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

4.5(1)            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

4.6(1)            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

4.7(1)            Agent's Warrant to Purchase Shares of Common Stock of SoftQuad
                  Software,  Ltd.  pursuant  to  the  Special  Warrant  Purchase
                  Agreement dated, May 19, 2000

4.8(1)            Special Warrant for Thomson Kernaghan & Co. Limited, as agent,
                  to Purchase Shares of Common Stock of SoftQuad Software, Ltd.,
                  dated February 29, 2000

4.9(1)            Form of Special  Warrant to Purchase Shares of Common Stock of
                  SoftQuad  Software,  Ltd.,  issued in April 18, 20 and June 5,
                  2000 private placements

4.10(1)           Warrant Indenture  Agreement between SoftQuad  Software,  Ltd.
                  and Montreal Trust Company of Canada, dated April 18, 2000

4.11(2)           Form of  Subscription  Agreement for Canadian  Subscribers  in
                  April 18, 20 and June 5, 2000 private placements

4.12(2)           Form of  Subscription  Agreement for American  Subscribers  in
                  April 18, 20 and June 5, 2000 private placements

4.13(2)           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

4.14(2)           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

4.15(2)           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

4.16(2)           Registration Rights Agreement between SoftQuad Software,  Ltd.
                  and SmallCaps Online LLC, for itself and as agent, dated April
                  18, 2000

4.17(1)           Registration Rights Agreement between SoftQuad Software,  Ltd.
                  and Thomson Kernaghan & Co. Limited,  for itself and as agent,
                  dated April 18, 2000

9.1(3)            Voting Trust and Exchange Agreement,  among SoftQuad Software,
                  Ltd., SoftQuad Acquisition Corp., SoftQuad Software,  Inc. and
                  Montreal Trust Company of Canada, dated February, 2000

10.1(3)           Support Agreement between SoftQuad Software, Ltd. and SoftQuad
                  Acquisition Corp., dated February, 2000

10.2(1)           Form of Option Holder  Lock-Up  Agreement,  dated December 10,
                  1999

10.3(1)           Form of Option Holder  Escrow  Agreement,  dated  December 16,
                  1999
<PAGE>

10.4(1)           Common Stock Purchase  Agreement  between  SoftQuad  Software,
                  Ltd.  (referredtointhis Report as FinanceCo.) and VC Advantage
                  Limited Partnership, dated December 8, 1999

10.5(1)           Class A Convertible Preferred Stock Purchase Agreement between
                  SoftQuad  Software,Ltd.  and VC Advantage Limited Partnership,
                  dated December 9, 1999

10.6(1)           VC Advantage Limited Partnership Class B Convertible Preferred
                  Stock Purchase Agreement, dated February 28, 2000

10.7(1)           Hammock  Group  Ltd.  Class  B  Convertible   Preferred  Stock
                  Purchase Agreement,dated February 28, 2000

10.8(1)           Special Warrant Purchase  Agreement between SoftQuad Software,
                  Ltd. and Thomson Kernaghan & Co. Limited,  as Agent, dated May
                  18, 2000

10.9(1)           Engagement  Letter Agreement between SoftQuad Software Inc and
                  Thomson Kernaghan & ` Co. Limited, dated February 28, 2000

10.10(3)          Form of Share Purchase  Agreement for acquisition of shares of
                  SoftQuad Software Inc.

10.11(3)          Form of Option  Exchange  Agreement for acquisition of options
                  of SoftQuad Software Inc.

10.12(1)          Form of  Indemnification  Agreement between Registrant and its
                  officers and directors

10.13(1)          2000 Stock Option Plan and Forms of Agreements thereunder

10.14(1)          Advisory Services Agreement between the SoftQuad Software Inc.
                  and  KBLCapitalPartners,  Inc.,  dated April 9, 1999,  amended
                  July 31, 1999

10.15(1)          Agency Agreement between SodftQuad Software,  Ltd. and Thomson
                  Kernaghan & Co. Limited, dated April 18, 2000

10.16(1)          Agency Agreement  between SodftQuad  Software,  Ltd. and Small
                  Caps Online LLC, dated April, 2000

21                Subsidiaries of the Registrant

27                Financial Data Schedule

------------------------------

(1)      Incorporated  by  reference to Exhibits to the  Registrant's  Quarterly
         Report on Form 10-QSB dated August 14, 2000.

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

(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.

(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, 2000


<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: Dec. 19, 2000
                            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, 2000       /s/  Roberto Drassinower
                              ---------------------------------------
                                    Roberto Drassinower
                                    Chief Executive Officer and Director
                                    (principal executive officer)

Date:  December 19, 2000       /s/  Andrew Muroff
                              ---------------------------------------
                                    Andrew Muroff
                                    President and Director

Date:  December 19, 2000       /s/  David R. Lewis
                              ---------------------------------------
                                    David R. Lewis
                                    Chief Financial Officer
                                    (principal financial and accounting officer)

Date:  December 19, 2000       /s/  Joan Dea
                              ---------------------------------------
                                    Joan Dea
                                    Director

Date:  December 19, 2000       /s/  Robert Bagga
                              ---------------------------------------
                                    Robert Bagga
                                    Director

Date:  December 19, 2000       /s/  Lawrence Goldberg
                              ---------------------------------------
                                    Lawrence Goldberg
                                    Director

Date:  December 19, 2000       /s/  Brock Armstrong
                              ---------------------------------------
                                    Brock Armsrong
                                    Director
<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 2, 2000

<PAGE>

DELOITTE & TOUCHE LLP
5140 YONGE STREET, SUITE 1700
TORONTO, ON M2N 6L7
CANADA

TEL: (416) 601 6150
FAX: (416) 229 2524                                              DELOITTE
WWW.DELOITE.CA                                                   & TOUCHE

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. as at September 30, 2000 and 1999 and the consolidated statements
of operations, shareholders' equity and cash flows for the years ended September
30, 2000 and 1999, and for the nine-month period ended September 30, 1998. These
consolidated  financial  statements  are  the  responsibility  of the  Company's
management.  Our  responsibility  is to express  an  opinion on these  financial
statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the  United  States of  America.  Those  standards  require  that we plan and
perform an audit to obtain reasonable assurance whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.  An
audit also includes  assessing the accounting  principles  used and  significant
estimates  made by  management,  as well as  evaluating  the  overall  financial
statement  presentation.  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 the Company as at September 30,
2000 and 1999 and the results of its operations and its cash flows for the years
ended September 30, 2000 and 1999 and for the nine-month  period ended September
30, 1998 in conformity  with  accounting  principles  generally  accepted in the
United States of America.

/S/ DELOITTE & TOUCHE LLP

Chartered Accountants

Toronto, Ontario
November 2, 2000, except as to Note 11
which is as of November 20, 2000

<PAGE>

SOFTQUAD SOFTWARE, LTD.
CONSOLIDATED BALANCE SHEETS
(IN U.S. DOLLARS)
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------
                                                               ------------------------------------
                                                                           September 30,
                                                               ------------------------------------
                                                                     2000                1999
                                                               ----------------    ----------
ASSETS

CURRENT
<S>                                                            <C>                 <C>
   Cash and cash equivalents                                   $     16,305,820    $      726,784
   Accounts receivable (Note 4)                                       1,146,954           590,432
   Inventory                                                             71,954            21,776
   Prepaid expenses and deposits                                        482,226           137,032
----------------------------------------------------------------------------------------------------
                                                                     18,006,954         1,476,024

CAPITAL ASSETS (Note 5)                                               1,017,061           233,415

GOODWILL (net of cumulative amortization of
   $37,495 - 2000; $20,217 - 1999)                                       23,553            40,831

DEFERRED FINANCING COSTS                                                     -             54,441
----------------------------------------------------------------------------------------------------
                                                               $     19,047,568    $    1,804,711
====================================================================================================
</TABLE>
See accompanying notes to the consolidated financial statements.

<PAGE>
SOFTQUAD SOFTWARE, LTD.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(IN U.S. DOLLARS)
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------
                                                                                         ------------------------------------
                                                                                                     September 30,
                                                                                         ------------------------------------
                                                                                               2000                1999
                                                                                         ----------------    ----------------
LIABILITIES

CURRENT
<S>                                                                                      <C>                 <C>
   Accounts payable                                                                      $        834,453    $      347,786
   Accrued legal fees                                                                             468,555             -
   Accrued commission                                                                                  -            145,941
   Accrued royalties                                                                                   -            133,779
   Other accruals                                                                               1,637,492           200,669
   Deferred revenue                                                                               129,844            30,404
   Current portion of notes payable (Note 6)                                                           -            697,522
------------------------------------------------------------------------------------------------------------------------------
                                                                                                3,070,344         1,556,101
NOTES PAYABLE (Note 6)                                                                                 -            100,035
------------------------------------------------------------------------------------------------------------------------------
                                                                                                3,070,344         1,656,136
------------------------------------------------------------------------------------------------------------------------------

COMMITMENTS (Note 10)

SHAREHOLDERS' EQUITY (Note 7)

SHARE CAPITAL
   Preferred stock, par value $0.001 per share
     Authorized
         25,000,000 preferred shares
     Issued and outstanding
          1,473,405 (NIL at September 30,1999) Class A shares                                       1,473                -
          1,722,222 (NIL at September 30,1999) Class B shares                                       1,722                -
   Special voting stock, par value $0.001 per share
     Authorized
                  1 special voting share
     Issued and outstanding
                  1(NIL at September 30,1999) special voting share                                     1                 -
   Common stock, par value $0.001 per share
     Authorized
         50,000,000 shares
     Issued and outstanding

         12,473,472 shares (8,993,890 at September 30, 1999) (1)                                3,645,906         3,559,074
------------------------------------------------------------------------------------------------------------------------------
                                                                                                3,649,102         3,559,074
WARRANTS                                                                                        3,918,204                -
SPECIAL WARRANTS                                                                               13,240,802                -
------------------------------------------------------------------------------------------------------------------------------
                                                                                               20,808,108         3,559,074
DEFERRED STOCK COMPENSATION EXPENSE                                                              (655,992)         (357,675)
ADDITIONAL PAID-IN CAPITAL                                                                      5,699,597                -
ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME                                                     (73,971)           30,805
DEFICIT                                                                                        (9,800,518)       (3,083,629)
------------------------------------------------------------------------------------------------------------------------------
                                                                                               15,977,224           148,575
------------------------------------------------------------------------------------------------------------------------------
                                                                                         $     19,047,568    $    1,804,711
------------------------------------------------------------------------------------------------------------------------------
</TABLE>

(1)  Includes  5,773,605  shares  reserved  for  issuance  upon the  exchange of
exchangeable shares.

See accompanying notes to the consolidated financial statements.

<PAGE>
<TABLE>
<CAPTION>
SOFTQUAD SOFTWARE, LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN U.S. DOLLARS)
------------------------------------------------------------------------------------------------------------------------------
                                                                                                                Nine-Month
                                                                                                              Period Ended
                                                                                                              ------------
                                                                              Year ended September 30,
                                                                          --------------------------------   September 30,
                                                                                2000             1999              1998
                                                                          ---------------  ---------------   --------------
                                                                                                                (Note 3)
REVENUE
<S>                                                                         <C>                <C>            <C>
   Licenses                                                                 $  4,241,685       $3,291,335     $   1,466,138
   Services                                                                       44,077               -                 -
------------------------------------------------------------------------- ---------------- ----------------- ----------------
                                                                               4,285,762        3,291,335         1,466,138
------------------------------------------------------------------------- ---------------- ----------------- ----------------

COST OF REVENUE
   Licenses                                                                      527,550          572,167           261,632
   Services                                                                      338,612           63,494            60,234
------------------------------------------------------------------------- ---------------- ----------------- ----------------
                                                                                 866,162          635,661           321,866
------------------------------------------------------------------------- ---------------- ----------------- ----------------
                                                                               3,419,600        2,655,674         1,144,272
------------------------------------------------------------------------- ---------------- ----------------- ----------------

EXPENSES

   Selling and marketing                                                       5,239,286        2,052,983           794,065
   Research and development                                                    1,957,856        1,069,449           797,604
   General and administrative                                                  3,359,868        1,093,730           901,958
------------------------------------------------------------------------- ---------------- ----------------- ----------------
                                                                              10,557,010        4,216,162         2,493,627
------------------------------------------------------------------------- ---------------- ----------------- ----------------

LOSS FROM OPERATIONS                                                          (7,137,410)      (1,560,488)       (1,349,355)
------------------------------------------------------------------------- ---------------- ----------------- ----------------

OTHER (INCOME) EXPENSES
   Interest                                                                     (584,864)          14,063                -
   Other expenses                                                                164,343           54,226                -
------------------------------------------------------------------------- ---------------- ----------------- ----------------
                                                                                (420,521)          68,289                -
------------------------------------------------------------------------- ---------------- ----------------- ----------------

NET LOSS BEFORE VALUE OF SHARE CAPITAL
   ISSUED ON ACQUISITION OF WARRANTS                                          (6,716,889)      (1,628,777)       (1,349,355)

VALUE OF SHARE CAPITAL ISSUED ON
   ACQUISITION OF WARRANTS                                                            -         1,387,647                -
------------------------------------------------------------------------- ---------------- ----------------- ----------------
NET LOSS                                                                  $   (6,716,889)  $   (3,016,424)   $   (1,349,355)
------------------------------------------------------------------------- ---------------- ----------------- ----------------

LOSS PER SHARE                                                            $        (0.60)  $        (0.37)
------------------------------------------------------------------------- ---------------- ----------------- ----------------
WEIGHTED AVERAGE NUMBER OF COMMON
   SHARES OUTSTANDING                                                         11,158,648        4,377,000
------------------------------------------------------------------------- ---------------- ----------------- ----------------
</TABLE>
See accompanying notes to the consolidated financial statements.

<PAGE>
SOFTQUAD SOFTWARE, LTD.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN U.S. DOLLARS)
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------------
                                                                                                Net
                                                          Deferred               Accumulated  Investment
                                                           Stock    Additional     Other      by NewKidCo
                                  Shares/              Compensation   Paid-In   Comprehensive International,
                                 Warrants     Amount      Expense     Capital   Income (Loss)     Inc.    Deficit       Total
                                 --------     ------   ------------ ---------   ------------- ----------- -------       -----
                                 (Note 7)
<S>              <C>                       <C>         <C>         <C>           <C>         <C>        <C>         <C>
BALANCE, JANUARY 1, 1998            -      $    -      $   -       $    -        $ -         $   -      $    -      $      -

COMPREHENSIVE LOSS
  Foreign currency translation      -           -          -            -         53,323         -           -          53,323
  Net loss                                                                                                           (1,349,355)
                                    -           -          -            -          -         (1,349,355)     -      ------------
TOTAL COMPREHENSIVE LOSS                                                                                             (1,296,032)
NET CONTRIBUTIONS BY
  NEWKIDCO INTERNATIONAL,
  INC.                              -           -          -            -          -          1,435,078      -       1,435,078
-------------------------------------------------------------------------------------------------------------------------------
BALANCE, SEPTEMBER 30, 1998         -      $    -      $   -       $    -        $53,323    $   85,723  $    -      $  139,046
-------------------------------------------------------------------------------------------------------------------------------
BALANCE, OCTOBER 1, 1998                1  $        1  $   -       $    -        $ -         $   -      $    -      $        1
                                                                                                                    -----------

COMPREHENSIVE INCOME LOSS
  Foreign currency translation      -           -          -            -         30,805         -           -          30,805
  Net loss                          -           -          -            -          -             -       (3,016,424) (3,016,424)
                                                                                                                    -----------

TOTAL COMPREHENSIVE LOSS                                                                                             (2,985,619)
                                                                                                                    -----------

PREMIUM ON REDEMPTION
  OF COMMON STOCK                   -           -          -            -          -             -         (67,205)    (67,205)

ISSUANCE OF COMMON STOCK
  For cash                       5,863,509  1,726,861      -            -          -             -           -       1,726,861
  On acquisition of assets
(Note 2)                          703,705     161,374      -            -          -             -           -         161,374
  Repurchase of stock            (703,705)   (162,809)     -            -          -             -           -        (162,809)
  On acquisition of warrants     3,130,380  1,387,647      -            -          -             -           -       1,387,647
  As deferred stock

compensation                        -         446,000   (446,000)       -          -             -           -           -
    Amortization of stock based
      compensation                  -           -         88,325        -          -             -           -          88,325
-------------------------------------------------------------------------------------------------------------------------------
BALANCE, SEPTEMBER 30, 1999      8,993,890  3,559,074   (357,675)       -         30,805         -       (3,083,629)   148,575

COMPREHENSIVE LOSS
  Foreign currency translation      -           -          -            -        (104,776)       -           -        (104,776)
  Net loss                          -           -          -            -          -             -       (6,716,889) (6,716,889)
                                                                                                                    -----------
TOTAL COMPREHENSIVE LOSS                                                                                             (6,821,665)
                                                                                                                    -----------
ISSUANCE OF COMMON STOCK
  For cash                        936,711         936      -          793,048      -             -               -     793,984
  As deferred stock
compensation                                            (622,985)     622,985      -             -           -           -
  Amortization of stock based
    compensation                    -           -        324,668        -          -             -           -         324,668
  In satisfaction of debt         342,870      85,756      -          138,007      -             -           -         223,763
  Resulting from reverse

takeover                         2,200,000        140      -            -          -             -           -             140

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

ISSUANCE OF PREFERRED
  STOCK

    Class A                      1,473,405      1,473      -        1,153,347      -             -           -       1,154,820
    Class B                      1,722,222      1,722      -        2,992,210      -             -           -       2,993,932

ISSUANCE OF WARRANTS             3,095,558  3,918,204      -            -          -             -           -       3,918,204

ISSUANCE OF SPECIAL
  WARRANTS                       2,951,420 13,240,802      -            -          -             -           -       13,240,802
-------------------------------------------------------------------------------------------------------------------------------
BALANCE, SEPTEMBER 30, 2000      21,716,077$20,808,108 $(655,992)  $5,699,597    $(73,971)  $    -      $(9,800,518)$15,977,224
-------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to the consolidated financial statements.

<PAGE>
SOFTQUAD SOFTWARE, LTD.
                                           CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN U.S. DOLLARS)
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------------
                                                                                                                 Nine-Month
                                                                                  Year ended September 30,      Period Ended
                                                                              ------------------------------   September 30,
                                                                                   2000             1999            1998
                                                                              --------------   --------------  --------------
                                                                                                                  (Note 3)
NET INFLOW (OUTFLOW) OF CASH RELATED
   TO THE FOLLOWING ACTIVITIES
OPERATING
<S>                                                                           <C>              <C>             <C>
   Net loss                                                                   $   (6,716,889)  $   (1,628,777) $  (1,349,355)
   Items not affecting cash:
      Loss on disposal of capital assets                                              59,253           10,140          -
      Compensation under stock option plan                                           324,668           88,325          -
      Amortization of capital assets                                                 191,138           77,337        122,196
      Amortization of goodwill                                                        17,278           20,217          -
      Amortization of deferred financing costs                                        54,441           11,562          -
      Changes in non-cash operating working capital items
      Accounts receivable                                                           (556,523)        (254,355)      (372,447)
      Inventory                                                                      (50,178)          72,850        (18,904)
      Prepaid expenses and deposits                                                 (345,194)           2,783        (63,008)
      Accounts payable and accrued liabilities                                     2,025,829          138,831        463,603
      Deferred revenue                                                                99,440           30,404         (3,890)
------------------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities                                             (4,896,737)      (1,430,683)    (1,221,805)
------------------------------------------------------------------------------------------------------------------------------
INVESTING
   Acquisition of net assets excluding cash (Note 2)                                   -             (122,013)         -
   Purchase of capital assets                                                     (1,034,037)         (67,948)       (23,361)
   Proceeds from disposal of capital assets                                            -                4,886          -
------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities                                             (1,034,037)        (185,075)       (23,361)
------------------------------------------------------------------------------------------------------------------------------
FINANCING
   Issuance of share capital                                                      22,412,142        1,888,236          -
   Redemption of common shares                                                         -             (162,809)         -
   Repayment of notes payable                                                       (797,557)           -              -
   Increase in notes payable                                                           -              797,557          -
   Deferred financing costs                                                            -              (66,003)         -
   Contributions by NewKidCo International, Inc. (Note 3)                              -                -          1,435,078
------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities                                         21,614,585        2,456,981      1,435,078
------------------------------------------------------------------------------------------------------------------------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH                                             (104,775)        (114,439)      (189,912)
------------------------------------------------------------------------------------------------------------------------------
NET CASH INFLOW                                                                   15,579,036          726,784          -

CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                                         726,784            -              -
------------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR                                        $   16,305,820   $      726,784  $       -
------------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS INCLUDES:
   Cash                                                                       $      223,960   $      726,784  $       -
   Short-term deposits                                                            16,081,860            -              -
------------------------------------------------------------------------------------------------------------------------------
                                                                              $   16,305,820   $      726,784  $       -
------------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTARY CASH FLOW INFORMATION
   Interest paid                                                              $       27,862   $        -      $       -
   Interest received                                                          $      612,726   $       14,083  $       3,811
   Value of share capital issued on acquisition of warrants                   $        -       $    1,387,647  $       -
   Value of common stock  recorded on stock compensation expenses             $      622,985   $      446,000  $       -
   Issuance of share capital as payment for debt                              $      313,504   $        -      $       -
</TABLE>
See accompanying notes to the consolidated financial statements.

<PAGE>
       NOTES TO FINANCIAL STATEMENTS

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.

2.     COMMENCEMENT OF OPERATIONS

       On October 1, 1998 the Company's indirect  subsidiary,  SoftQuad Software
       Inc. ("SoftQuad Canada") acquired  substantially all the operating assets
       and liabilities of 1225322 Ontario Inc.  (formerly  "SoftQuad  Inc."),  a
       subsidiary  of  NewKidCo  International,  Inc.  ("NewKidCo"),  a Canadian
       public company, and immediately commenced operations.

       The assets and  liabilities  were  acquired  for share  consideration  of
       $161,374 and are comprised of the following:

      Cash                                                     $      44,551
      Accounts receivable                                            583,598
      Inventory                                                       56,244
      Prepaid expenses and deposits                                   98,981
      Capital assets                                                 259,379
      -------------------------------------------------------- --------------
                                                                   1,042,753

      Accounts payable and accrued charges                          (942,427)
      Goodwill                                                        61,048
      -------------------------------------------------------- --------------
      Net assets acquired and purchase price                   $     161,374
      -------------------------------------------------------- --------------

3.     SIGNIFICANT ACCOUNTING POLICIES

       The financial statements have been prepared in accordance with Accounting
       Principles  Generally  Accepted  ("GAAP") in the United States of America
       and reflect the following significant accounting policies:

       Basis of presentation

       The  statements of operations  and cash flows for the  nine-month  period
       ended  September  30,  1998 are  presented  as the  business  operated by
       NewKidCo prior to the sale to SoftQuad  Canada and include  revenues from
       the sale of digital content authoring and publishing  software tools, the
       related costs of product sold,  shipping,  royalties,  software agreement
       costs, direct advertising and marketing expenditures,  salary and benefit
       costs for staff  involved  directly with the  operations of the business,
       administrative  and overhead costs,  consulting fees and direct occupancy
       costs.  The allocation of the various  expenses is based on  management's
       best estimates and may not be representative of the overhead expenses had
       the business been operated as a separate entity.

<PAGE>
       NOTES TO FINANCIAL STATEMENTS (CONTINUED)

3.     SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

       The statement of  shareholders'  equity for the  nine-month  period ended
       September  30, 1998  presents the  cumulative  losses of the business and
       contributions of NewKidCo prior to the formation of the Company.

       The  financial  statements  include  the  accounts of the Company and its
       wholly owned subsidiary,  SoftQuad Acquisition Corp. SoftQuad Acquisition
       Corp.'s  subsidiary,  SoftQuad  Canada and SoftQuad  Canada's  subsidiary
       SoftQuad  (UK)  Limited.  All  significant   intercompany   accounts  and
       transactions have been eliminated.

       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.

       Inventory

       Inventory  is  valued  at the  lower of cost,  determined  on a  first-in
first-out basis, and net realizable value.

<PAGE>
       NOTES TO FINANCIAL STATEMENTS (CONTINUED)

3.     SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

       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

       The  excess  of  purchase  consideration  over fair  market  value of net
       identifiable  assets acquired is recorded as goodwill.  Goodwill is being
       amortized on a straight-line basis over three years.

       Revenue recognition and deferred revenues

       The Company recognizes  revenue in accordance with applicable  accounting
       regulations, including American Institute of Certified Public Accountants
       Statement of Position 97-2,  "Software Revenue  Recognition," as amended.
       Revenue  from sale of products  is  recognized  when a contract  has been
       executed,  the product has been  delivered,  the sales price is fixed and
       determinable and collection of the resulting receivable is probable.

       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.

<PAGE>
       NOTES TO FINANCIAL STATEMENTS (CONTINUED)

3.     SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

       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.

       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.

       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 option granted equals the estimated market price
       of the underlying stock on the date of the grant.

<PAGE>
       NOTES TO FINANCIAL STATEMENTS (CONTINUED)

3.     SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

       Loss per share

       All share and per share amounts  presented herein give effect to the five
       for one stock split approved by the board of directors on July 28, 1999.

       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  7  is
       anti-dilutive.

       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, 2000.

       Recently issued accounting standards not yet implemented

       The  Company  will be  required to adopt the  following  recently  issued
       accounting  standards  for United  States  reporting  purposes  in future
       years.

       SFAS  No.  133  "Accounting   for  Derivative   Instruments  and  Hedging
       Activities"  will be  effective  for fiscal  2001.  It requires  that all
       derivatives be recognized as either assets or liabilities and measured at
       fair value.  The criteria for  determining  whether all or a portion of a
       derivative   instrument  may  be  designated  as  a  hedge  has  changed.
       Derivatives  that  are  fair  market  value  hedges,  together  with  the
       financial  instrument  being  hedged,  will  be  marked  to  market  with
       adjustments  reflected in income.  Derivatives  that are cash flow hedges
       will be marked to market  with  adjustments  reflected  in  comprehensive
       income.  As at September  30, 2000,  the Company has not entered into any
       derivative contracts.  Further, as at September 30, 2000, the Company has
       completed a review of all  contracts  for embedded  derivatives  and none
       were noted.  Thus,  the  adoption of FAS133 will have no impact on either
       the Company's statement of operations or financial position.

<PAGE>
       NOTES TO FINANCIAL STATEMENTS (CONTINUED)

3.     SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

       Recently issued accounting standards not yet implemented (continued)

       In June  2000,  the  Securities  and  Exchange  Commission  issued  Staff
       Bulletin No. 101B "Second  Amendment:  Revenue  Recognition  in Financial
       Statements" ("SAB 101B").  SAB 101B amends Staff Accounting  Bulletin No.
       101 "Revenue Recognition in Financial  Statements" ("SAB 101") to further
       defer the  implementation  date of SAB 101 for  registrants  with  fiscal
       years that begin  between  December 16, 1999 and March 15, 2000.  SAB 101
       provides guidance on recognition,  presentation and disclosure of revenue
       in  financial  statements  of  all  public  registrants.  Changes  in the
       Company's revenue recognition policy resulting from the interpretation of
       SAB 101 would be reported as a change in accounting principle. The change
       in revenue recognition policy could result in a cumulative  adjustment in
       the quarter  the Company  adopts SAB 101.  The Company has  assessed  the
       implications  of SAB 101,  and  management  believes the adoption of this
       statement  will have no impact on the  Company's  consolidated  financial
       position, results of operations or cash flows.

4.     ACCOUNTS RECEIVABLE
<TABLE>
<CAPTION>
                                                                                              September 30,
                                                                                    ---------------------------------
                                                                                          2000            1999
                                                                                    -------------    ----------------
      Trade                                                                         $   1,147,884    $    591,216
<S>                                                                                <C>             <C>
      Less allowance for doubtful accounts                                                   (930)           (784)
      ----------------------------------------------------------------------------- ---------------- ----------------
                                                                                    $   1,146,954    $    590,432
      ----------------------------------------------------------------------------- ---------------- ----------------
</TABLE>
5.     CAPITAL ASSETS
<TABLE>
<CAPTION>
                                           September 30, 2000                         September 30, 1999
                             -------------------------------------------- -------------------------------------------
                                              Accumulated       Net Book                 Accumulated     Net Book
                                 Cost        Amortization        Value        Cost       Amortization     Value
                             ------------  ---------------  ------------  -----------  ---------------  -------------
<S>                          <C>             <C>            <C>           <C>             <C>           <C>
      Computer hardware      $    624,513    $   108,545    $    515,968  $   130,888     $   35,086    $     95,802
      Furniture and
         fixtures                 270,749         47,159         223,590       75,565         11,659          63,906
      Computer software           236,355         56,938         179,417      105,421         31,714          73,707
      Leasehold
         improvements             112,235         14,149          98,086        -              -               -
      ---------------------------------------------------------------------------------------------------------------
                             $  1,243,852    $   226,791    $  1,017,061  $   311,874     $   78,459    $    233,415
      ---------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
6.     NOTES PAYABLE
                                                                                                   September 30,
                                                                                               2000           1999
                                                                                          --------------------------
<S>                                    <C>
      Note payable bearing interest at 12% per annum,
         interest payable quarterly commencing October 15,
         1999, secured by a general security agreement,
         maturing July 15, 2000, repaid February 12, 2000                                 $     -        $   697,522

      Note payable, non-interest bearing, unsecured,
         maturing November 6, 2001                                                              -            100,035
      ----------------------------------------------------------------------------------- -------------- ------------
                                                                                                -            797,557
      Less current portion                                                                      -            697,522
      ----------------------------------------------------------------------------------- -------------- ------------
      Long-term portion                                                                   $     -        $   100,035
      ----------------------------------------------------------------------------------- -------------- ------------
       On June 5, 2000, the non-interest bearing note payable was paid in full.
</TABLE>
<PAGE>
       NOTES TO FINANCIAL STATEMENTS (CONTINUED)

7.     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.

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


             The holders of common  stock are  entitled to one vote per share on
             all  matters  to  be  voted  on by  the  stockholders.  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
             stockholders.  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
             Montreal 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 stockholders are entitled to vote.

<PAGE>
       NOTES TO FINANCIAL STATEMENTS (CONTINUED)

7.     SHARE CAPITAL (CONTINUED)

       Authorized (continued)

       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. and Montreal 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 in Canadian dollars 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  $3,201,399  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,  $3,195,625 of the value of the exchangeable shares
             will be allocated to additional paid in capital.

       Share transactions

       During  the  year  the  Company   entered   into  the   following   share
transactions:

       (a)    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 $210,000  associated with the issuance were recorded as a
              reduction  of  paid-in  and  additional  paid-in  capital  for net
              proceeds of  approximately  $2,790,000.  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 $1.44 per share,  expiring  December 10, 2002. The Company also
              issued 166,500  options to purchase common stock of the Company at
              $1.44 per share, expiring December 16, 2009.

       (b)    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.

<PAGE>
       NOTES TO FINANCIAL STATEMENTS (CONTINUED)

7.     SHARE CAPITAL (CONTINUED)

       Share transactions (continued)

       (c)    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  $400,000
              associated  with the  placement  were  included as a reduction  of
              paid-in  and  additional  paid-in  capital  for  net  proceeds  of
              approximately $4,600,000. 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.

       (d)    On February 25, 2000 the Company  issued an aggregate of 2,009,000
              options  to  purchase  common  stock of the  Company  at $1.44 per
              share, expiring at various dates from December 2090 to April 2010.

       (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 $200,000  associated  with
              this  placement  were  included  as a  reduction  of  paid-in  and
              additional  paid-in  capital  for net  proceeds  of  approximately
              $2,300,000.  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)    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 and $12.50
              per warrant  (subject to  adjustment  on a periodic  basis until a
              registration  statement  has been filed)  respectively,  for gross
              proceeds of $16,135,725.

       (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)    During the period from March to September  30,  2000,  the Company
              issued an aggregate of 599,700 options to purchase common stock of
              the  Company at $7.50,  expiring  at  various  dates from March to
              September 2010.
<PAGE>
       NOTES TO FINANCIAL STATEMENTS (CONTINUED)

7.     SHARE CAPITAL (CONTINUED)

       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, 2000 is 4,899,500  (September  30, 1999 - 1,856,000)  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  upon  the  optionee  ceasing  to be an
       officer, director, employee or consultant of the Company.

       The stock  options  outstanding  at  September  30,  2000 and 1999 are as
follows:
<TABLE>
<CAPTION>
                                                                               September 30,
                                                                     -------------------------------
                                                                          2000            1999
                                                                     -------------     -------------
<S>      <C>                                  <C>                        <C>             <C>
      Outstanding options to purchase common shares at
         $0.00013 per share expiring November 6, 2008                    1,050,000       1,050,000

      Outstanding options to purchase common shares at
         $0.231 per share expiring May 26, 2009                            267,000         306,000

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

      Outstanding options to purchase common shares at
         $1.44 per share expiring at various dates from
         December 2009 to April 2010                                     2,009,000           -

      Outstanding options to purchase common shares at
         $7.50 per share expiring at various dates from
         March 2010 to September 2010                                      599,700           -
      -------------------------------------------------------------- --------------- ----------------
                                                                         4,425,700       1,856,000
      -------------------------------------------------------------- --------------- ----------------
</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,  2000,  options  were  issued  to
       contractors  and  advisors.  The Company has  accounted for these options
       grants under SFAS No. 123 "Accounting for Stock-Based Compensation". As a
       result,  share capital and deferred stock compensation  expense were each
       increased by $622,985 during the year ended September 30, 2000.

       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 $446,000 during the year ended September 30, 1999.

<PAGE>
       NOTES TO FINANCIAL STATEMENTS (CONTINUED)

7.     SHARE CAPITAL (CONTINUED)

       Stock option plan (continued)

       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, 2000,
       payroll  costs  increased by $51,215 in selling and  marketing  expenses,
       $102,430 in research and development expenses and $171,023 in general and
       administrative  expenses and  deferred  stock  compensation  decreased by
       $324,668. For the year ended September 30, 1999, payroll costs in general
       and  administrative  expenses  increased and deferred stock  compensation
       decreased by $88,325.

       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  $3,719,200  and
       $2,244,000  and increased the basic loss per share by $0.33 and $0.50 for
       the years ended September 30, 2000 and 1999, respectively.

       The fair value of the  options was  estimated  at the date of grant using
       the  minimum-value  option  pricing  model  with the  following  weighted
       average assumptions for the period: risk-free interest rate of 6.0% (1999
       - 6.5%);  expected life of the options of 3 years; expected volatility of
       35 percent (1999 - zero percent) and a dividend yield of zero.

       A summary of the status of stock options  outstanding as at September 30,
       2000 and 1999 and changes during the periods are presented below:
<TABLE>
<CAPTION>
                                                                                    Weighted
                                                                                     Average             Number
                                                                                    Exercise            Outstanding
                                                                                    Price
<S>                                                                                 <C>                  <C>
      Granted                                                                       $ 0.0408             1,856,000
      Forfeited                                                                         -                    -
      Exercised                                                                         -                    -
      ------------------------------------------------------------------------ ------------------- ------------------
      Balance, September 30, 1999                                                                        1,856,000
      Granted                                                                         2.8103             2,658,700
      Forfeited                                                                       1.0119               (89,000)
      Exercised                                                                         -                    -
      ------------------------------------------------------------------------ ------------------- ------------------
      Balance, September 30, 2000                                                                        4,425,700
      ------------------------------------------------------------------------ ------------------- ------------------
      Weighted average fair value of options granted                                                 $    1.6850
      ------------------------------------------------------------------------ ------------------- ------------------
</TABLE>

<PAGE>
       NOTES TO FINANCIAL STATEMENTS (CONTINUED)

7.     SHARE CAPITAL (CONTINUED)

       Accounting for stock-based compensation (continued)

       The following table summarizes  information about the outstanding options
as of September 30, 2000:
<TABLE>
<CAPTION>
                                           Remaining
          Exercise                        Contractual                  Outstanding                    Exercisable
            Price                        Life (years)                    Number                         Number
      ---------------                 ----------------              ---------------                -----------
<S>      <C>                                  <C>                        <C>                             <C>
         $  0.0013                            8.0                        1,050,000                       420,000
         $  0.2310                            9.0                          267,000                            -
         $  0.0066                            9.0                          500,000                       500,000
         $  1.4400                           10.0                        2,009,000                            -
         $  7.5000                           10.0                          559,700                            -
      ---------------------------------------------------------------------------------------------------------------
                                                                         4,425,700                       920,000
      ---------------------------------------------------------------------------------------------------------------
</TABLE>

       Warrants and special warrants

       The following tables summarize warrants and special warrants  outstanding
as of September 30, 2000:

       Warrants
<TABLE>
<CAPTION>
                                                                                          Number            Value
     <S>                                                                               <C>          <C>
      Outstanding warrants to purchase shares of common stock
         at $1.44 per share, expiring December 10, 2002                                   663,033   $      271,000

      Outstanding warrants to purchase shares of common stock
         at $1.53 per share, expiring February 28, 2003                                 1,041,667          281,000

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

      Outstanding warrants to purchase shares of common stock
         at $7.50 per share, expiring on the second anniversary of
         an effective registration statement                                              215,143        1,205,000

      Outstanding warrants to purchase shares of common stock
         at $12.50 per share, expiring on the second anniversary
         of an effective registration statement                                         1,075,715        2,394,000
      --------------------------------------------------------------------------- ----------------- -----------------
                                                                                        3,095,558        4,178,000
      --------------------------------------------------------------------------- -----------------
      Allocated cost of issuance                                                                          (259,796)
                                                                                                    -----------------
      Total                                                                                         $    3,918,204
                                                                                                    -----------------
</TABLE>

<PAGE>
       NOTES TO FINANCIAL STATEMENTS (CONTINUED)

7.     SHARE CAPITAL (CONTINUED)

       Warrants (continued)

       The 1,075,715  warrants to purchase  shares of common stock at $12.50 per
       warrant  requires  a  registration  statement  to be filed no later  than
       September 1, 2000. If a registration  statement is not filed by September
       1,  2000  the  exercise  price  of a  warrant  is  reduced  monthly  on a
       systematic basis ($0.25 September and October,  2000 then $0.50 per month
       to February 2002) until either the registration statement is filed or the
       exercise  price  is  reduced  to  $3.75.   As  of  November  2,  2000,  a
       registration  statement had not been filed and the warrant price has been
       reduced by $0.50.

       Special warrants
<TABLE>
<CAPTION>

                                                                                        Number            Value
<S>                                                                                     <C>         <C>
      Outstanding special warrants to acquire shares of common stock                    2,951,420   $   14,714,650
      --------------------------------------------------------------------------- -----------------
      Allocated cost of issuance                                                                        (1,473,848)
                                                                                                    -----------------
      Total                                                                                         $   13,240,802
                                                                                                    -----------------
</TABLE>

       Canadian  residents hold all the special  warrants.  Each special warrant
       entitles  the  holder  to  acquire  one  share  of  common  stock  for no
       additional  consideration.  The  special  warrants  expire  on the  fifth
       business day following the date of effectiveness in the holder's province
       of residence of a prospectus qualifying the tradability of the underlying
       shares of common stock. The special warrants are exercisable at any time,
       and are  automatically  exercised  immediately prior to their expiration.
       The special warrants were sold to certain Canadian  purchasers in lieu of
       shares of the Company's  common stock because of Canadian  securities law
       considerations.

8.     INCOME TAXES

       The  following is a  geographic  breakdown  of  consolidated  loss before
income taxes by income tax jurisdiction:
<TABLE>
<CAPTION>
                                                                                                      Nine-Month
                                                                  Year ended September 30,           Period Ended
                                                             ---------------------------------       September 30,
                                                                   2000              1999                1998
                                                             ---------------   ---------------    -----------------
<S>                                                          <C>               <C>                  <C>
      United States                                          $       (87,388)  $         -          $        -
      Foreign                                                     (6,629,501)       (1,628,777)         (1,349,355)
      ------------------------------------------------------ ----------------- ------------------ -------------------
                                                             $    (6,716,889)  $    (1,628,777)     $   (1,349,355)
      ------------------------------------------------------ ----------------- ------------------ -------------------
</TABLE>

       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.

<PAGE>
       NOTES TO FINANCIAL STATEMENTS (CONTINUED)

8.     INCOME TAXES (CONTINUED)

       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,
                                                                               ---------------------------------------
                                                                                      2000               1999
                                                                               -----------------   -------------------
      Net deferred tax assets:
<S>                                                                                  <C>                   <C>
         Foreign operating loss carry-forwards                                       2,399,000             606,000
         Unclaimed foreign scientific research,
            experimental development expenditures and
            investment tax credits                                                     535,000             387,000
         Other                                                                         105,000               -
      ------------------------------------------------------------------------ ------------------- ------------------
      Deferred tax assets                                                            3,039,000             993,000
      Less valuation allowance                                                      (3,039,000)           (993,000)
      ------------------------------------------------------------------------ ------------------- ------------------
      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,  2000,  the
       valuation allowance increased by approximately $ 2.0 million.

       The Company and its  subsidiaries  have the following losses available as
       at September 30, 2000 for carry forward,  which if unused, will expire as
       follows:
<TABLE>
<CAPTION>
                                                                                                          United
                                                                                     Canadian             Kingdom
                                                                                     --------             -------
<S>   <C>                                                                      <C>                 <C>
      2006                                                                     $       374,000     $         -
      2007                                                                           4,872,000               -
      Indefinite carry-forward                                                           -               2,324,000
      ------------------------------------------------------------------------ ------------------- ------------------
                                                                               $     5,246,000     $     2,324,000
      ------------------------------------------------------------------------ ------------------- ------------------
</TABLE>
       The Company's  Canadian  subsidiary  has  investment tax credits that are
       available  for  carry-forward  to  reduce  future  years'  taxes  payable
       expiring in 2009 and 2010. 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.

<PAGE>
       NOTES TO FINANCIAL STATEMENTS (CONTINUED)

9.     SEGMENTED INFORMATION

       The Company's  operations fall into one dominant  industry  segment,  the
       software  industry.  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 3.
<TABLE>
<CAPTION>
                                                                          Year ended September 30, 2000
                                                              ----------------------------------------------------
                                                                    United
                                                                    States            Europe            Total
      Revenue
<S>                                                           <C>              <C>                <C>
         Licenses                                             $    2,459,845   $     1,781,840    $     4,241,685
         Services                                                     44,077             -                 44,077
         Inter-segment royalties                                     257,000             -                257,000
      ------------------------------------------------------- ---------------- ------------------ -----------------
                                                                   2,760,922         1,781,840          4,542,762
      ------------------------------------------------------- ---------------- ------------------ -----------------
      Cost of revenue
         Licenses                                                    243,378           284,172            527,550
         Services                                                    338,612             -                338,612
         Inter-segment royalties                                       -               257,000            257,000
      ------------------------------------------------------- ---------------- ------------------ -----------------
                                                                     581,990           541,172          1,123,162
      ------------------------------------------------------- ---------------- ------------------ -----------------
                                                                   2,178,932         1,240,668          3,419,600
      ------------------------------------------------------- ---------------- ------------------ -----------------
      Expenses
         Selling and marketing                                     3,533,511         1,705,775          5,239,286
         Research and development                                  1,957,856             -              1,957,856
         General and administrative                                3,052,081           307,787          3,359,868
      ------------------------------------------------------- ---------------- ------------------ -----------------
                                                                   8,543,448         2,013,562         10,557,010
      ------------------------------------------------------- ---------------- ------------------ -----------------
                                                                  (6,364,516)         (772,894)        (7,137,410)
      ------------------------------------------------------- ---------------- ------------------ -----------------
      Other expenses
         Interest                                                   (584,338)             (526)          (584,864)
         Other expenses                                              164,343             -                164,343
      ------------------------------------------------------- ---------------- ------------------ -----------------
                                                                    (419,995)             (526)          (420,521)
      ------------------------------------------------------- ---------------- ------------------ -----------------
      Net loss                                                $   (5,944,521)  $      (772,368)   $    (6,716,889)
      ------------------------------------------------------- ---------------- ------------------ -----------------

      Total assets                                            $   18,323,028   $       724,540    $    19,047,568
      ------------------------------------------------------- ---------------- ------------------ -----------------

      Expenditures for segment capital assets                 $      847,212   $       186,825    $     1,034,037
      ------------------------------------------------------- ---------------- ------------------ -----------------
</TABLE>

       There  were four  (1999 - two)  customers  in the  United  States and one
       customer  (1999 - one) in  Europe  who each had  greater  than 10% of the
       total sales in their respective market.

<PAGE>
       NOTES TO FINANCIAL STATEMENTS (CONTINUED)

9.     SEGMENTED INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
                                                                           Year ended September 30, 1999
                                                              --------------------------------------------------------
                                                                    United
                                                                    States            Europe             Total
      Revenue
<S>                                                           <C>               <C>                <C>
         Licenses                                             $     2,068,812   $     1,222,523    $     3,291,335
         Services                                                       -                 -                  -
      ------------------------------------------------------- ----------------- ------------------ ------------------
                                                                    2,068,812         1,222,523          3,291,335
      ------------------------------------------------------- ----------------- ------------------ ------------------
      Cost of revenue
         Licenses                                                     383,311           188,856            572,167
         Services                                                      63,494             -                 63,494
      ------------------------------------------------------- ----------------- ------------------ ------------------
                                                                      446,805           188,856            635,661
      ------------------------------------------------------- ----------------- ------------------ ------------------
                                                                    1,622,007         1,033,667          2,655,674
      ------------------------------------------------------- ----------------- ------------------ ------------------
      Expenses
         Selling and marketing                                      1,094,002           958,981          2,052,983
         Research and development                                   1,069,449             -              1,069,449
         General and administrative                                   874,151           219,579          1,093,730
      ------------------------------------------------------- ----------------- ------------------ ------------------
                                                                    3,037,602         1,178,560          4,216,162
      ------------------------------------------------------- ----------------- ------------------ ------------------
                                                                   (1,415,595)         (144,893)        (1,560,488)
      ------------------------------------------------------- ----------------- ------------------ ------------------
      Other expenses
         Interest                                                      14,063             -                 14,063
         Other expenses                                                54,226             -                 54,226
      ------------------------------------------------------- ----------------- ------------------ ------------------
                                                                       68,289                -              68,289
      ------------------------------------------------------- ----------------- ------------------ ------------------
      Net loss before value of share capital accrued
         or acquisition of warrants                                (1,483,884)         (144,893)        (1,628,777)

      Value of share capital issued on
         acquisition of warrants                                    1,387,647             -              1,387,647
      ------------------------------------------------------- ----------------- ------------------ ------------------
      Net loss                                                $    (2,871,531)  $      (144,893)   $    (3,016,424)
      ------------------------------------------------------- ----------------- ------------------ ------------------
      Total assets                                            $     1,492,149   $       312,562    $     1,804,711
      ------------------------------------------------------- ----------------- ------------------ ------------------
      Expenditures for segment capital assets                 $        54,150   $        13,798    $        67,948
      ------------------------------------------------------- ----------------- ------------------ ------------------
</TABLE>

       There  were  two  customers  (1999 - two) in the  United  States  and one
       customer  (1999 - one) in  Europe  who each had  greater  than 10% of the
       total sales in their respective market.

<PAGE>
       NOTES TO FINANCIAL STATEMENTS (CONTINUED)

9.     SEGMENTED INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
                                                                       Nine-Month Period September 30, 1998
                                                              -------------------------------------------------------
                                                                     United
                                                                     States            Europe             Total
      Revenue
<S>                                                           <C>               <C>                <C>
         Licenses                                             $       787,110   $       679,028    $     1,466,138
         Services                                                       -                 -                  -
      ------------------------------------------------------- ----------------- ------------------ ------------------
                                                                      787,110           679,028          1,466,138
      ------------------------------------------------------- ----------------- ------------------ ------------------
      Cost of revenue
         Licenses                                                     154,773           106,859            261,632
         Services                                                      60,234             -                 60,234
      ------------------------------------------------------- ----------------- ------------------ ------------------
                                                                      215,007           106,859            321,866
      ------------------------------------------------------- ----------------- ------------------ ------------------
                                                                      572,103           572,169          1,144,272
      ------------------------------------------------------- ----------------- ------------------ ------------------
      Expenses
         Selling and marketing                                        582,022           212,043            794,065
         Research and development                                     797,604             -                797,604
         General and administrative                                   481,412           420,546            901,958
      ------------------------------------------------------- ----------------- ------------------ ------------------
                                                                    1,861,038           632,589          2,493,627
      ------------------------------------------------------- ----------------- ------------------ ------------------
      Net loss                                                $    (1,288,935)  $       (60,420)   $    (1,349,355)
      ------------------------------------------------------- ----------------- ------------------ ------------------
      Total assets                                            $       528,305   $       339,446    $       867,751
      ------------------------------------------------------- ----------------- ------------------ ------------------
      Expenditures for segment capital assets                 $        23,361   $         -        $        23,361
      ------------------------------------------------------- ----------------- ------------------ ------------------
</TABLE>

       There were two customers in the United States and two customers in Europe
       who each had  greater  than 10% of the  total  sales in their  respective
       market.

10.    COMMITMENTS

       The Company is committed to the following  minimum lease  payments  under
       operating leases for its office premises and certain equipment:

                 2001                  $    140,100
                 2002                       139,600
                 2003                       119,000
                 2004                        92,070
                 2005                        53,500
              ----------------------------------------
                                       $    544,270
              ----------------------------------------

<PAGE>
       NOTES TO FINANCIAL STATEMENTS (CONTINUED)

11.    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, 2000 - 34% (1999 - 32%)
       of the trade  accounts  receivable  balance was owing from two  customers
       (two customers -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.

12.    SUBSEQUENT EVENTS

       On November 20, 2000, the Company  completed its  acquisition of Advanced
       Data  Engineering  Inc.,  (ADEi),  a provider  of content  transformation
       solutions.  The transaction was affected  through the issuance of 750,383
       common shares,  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  $5.7 million.  The
       acquisition will be accounted for using the purchase method of accounting
       with substantially all the purchase price allocated to goodwill.