As filed with the Securities and Exchange Commission on April 9, 2004



UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549



FORM 20-F/A



[ ]  REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED

or

[ ]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED

For the fiscal year ended December 31, 2003

or

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

EXCHANGE ACT OF 1934, AS AMENDED

For the transition period from October 31, 2003 to December 3, 2003



Commission file number:  0-23304



DIVERSINET CORP.

Province of Ontario, Canada

2225 Sheppard Avenue East, Suite 1801, Toronto, Ontario M2J 5C2



Securities registered or to be registered pursuant to Section 12(b) of the Act:      None

Securities registered or to be registered pursuant to Section 12(g) of the Act:       Common Shares, no par value

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:      None

Indicate the number of outstanding shares of each of the issuer's classes of capital or common stock as of the close of the period covered by the Annual Report:     11,043,027 Common Shares as of December 31, 2003



Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.



Yes

[X]

No

[ ]



Indicate by check mark which financial statement item the registrant has elected to follow:

Item 17

[X]

Item 18

[ ]

#







DIVERSINET CORP.

FORM 20-F ANNUAL REPORT

TABLE OF CONTENTS



PART I

Page



ITEM 1.

IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

4

ITEM 2.

OFFER STATISTICS AND EXPECTED TIMETABLE

4

ITEM 3.

KEY INFORMATION

4

ITEM 3. (A)

SELECTED FINANCIAL DATA

4

ITEM 3. (B)

CAPITALIZATION AND INDEBTEDNESS

5

ITEM 3. (C)

REASONS FOR THE OFFER AND USE OF PROCEEDS

5

ITEM 3. (D)

RISK FACTORS

5

ITEM 4.

INFORMATION ON DIVERSINET

11

ITEM 4. (A)

HISTORY AND DEVELOPMENT OF DIVERSINET

11

ITEM 4. (B)

BUSINESS OVERVIEW

11

ITEM 4. (C)

ORGANIZATIONAL STRUCTURE

23

ITEM 4. (D)

PROPERTY, PLANT AND EQUIPMENT

24

ITEM 5.

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

24

ITEM 5. (A)

OPERATING RESULTS

25

ITEM 5. (B)

LIQUIDITY AND CAPITAL RESOURCES

28

ITEM 5. (C)

RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES, ET CETERA.

28

ITEM 5. (D)

TREND INFORMATION

29

ITEM 6.

DIRECTORS, SENIOR MANAGEMENT, AND EMPLOYEES

29

ITEM 6. (A)

DIRECTORS AND SENIOR MANAGEMENT OF THE REGISTRANT

30

ITEM 6. (B)

COMPENSATION

30

ITEM 6. (C)

BOARD PRACTICES

32

ITEM 6. (D)

EMPLOYEES

32

ITEM 6. (E)

SHARE OWNERSHIP

32

ITEM 7.

MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

33

ITEM 7. (A)

MAJOR SHAREHOLDERS

33

ITEM 7. (B)

RELATED PARTY TRANSACTIONS

35

ITEM 7. (C)

INTERESTS OF EXPERTS AND COUNSEL

35

ITEM 8.

FINANCIAL INFORMATION

35

ITEM 8. (A)

FINANCIAL INFORMATION

35

ITEM 8. (B)

SIGNIFICANT CHANGES

36

ITEM 9.

THE OFFER AND LISTING

36

ITEM 9. (A)

OFFER AND LISTING DETAILS

36

ITEM 9. (B)

PLAN OF DISTRIBUTION

37

ITEM 9. (C)

MARKETS

37

ITEM 9. (D)

SELLING SHAREHOLDERS

37

ITEM 9. (E)

DILUTION

37

ITEM 9. (F)

EXPENSES OF THE ISSUE

37

ITEM 10.

ADDITIONAL INFORMATION

37

ITEM 10. (A)

SHARE CAPITAL

37

ITEM 10. (B)

MEMORANDUM AND ARTICLES OF ASSOCIATION

37

ITEM 10. (C)

MATERIAL CONTRACTS

38

ITEM 10. (D)

EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITYHOLDERS

38

ITEM 10. (E)

TAXATION

39

ITEM 10. (F)

DIVIDENDS AND PAYING AGENTS

43

ITEM 10. (G)

STATEMENT BY EXPERTS

43

ITEM 10. (H)

DOCUMENTS ON DISPLAY

43

ITEM 10. (I)

SUBSIDIARY INFORMATION

43

ITEM 11.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

43

ITEM 12.

DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

43

PART II

ITEM 13.

DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

44

ITEM 14.

MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS

44

ITEM 15.

CONTROLS AND PROCEDURES

44

ITEM 16.

AUDIT COMMITTEE AND FINANCIAL EXPERT

44

PART III

ITEM 17.

FINANCIAL STATEMENTS

44

ITEM 18.

FINANCIAL STATEMENTS

44

ITEM 19.

EXHIBITS

44

#







PART I

ITEM 1.  IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

Not Applicable.

ITEM 2.  OFFER STATISTICS AND EXPECTED TIMETABLE

Not Applicable.

ITEM 3.  KEY INFORMATION

3-A.

Selected Financial Data

The selected financial data for fiscal years ended October 31, 1999, 2000, 2001 and 2002, for the twelve months ended October 31, 2003 and for the fourteen months ended December 31, 2003 are derived from our audited financial statements.  The selected financial data for the two months ended December 31, 2003 are derived from our unaudited financial statements.  During 2003 we changed our fiscal year from October 31st to December 31st.  The following selected financial data should be read in conjunction with the consolidated financialstatements and the notes thereto and Operating Results appearing in Item 5-A. of this annual report.  As a result of a number of circumstances, including the current year financing activities, the acquisition of DSS and Caradas and the U.S. dollar becoming the primary currency in which most of the Companys business is transacted, effective October 1, 2003, the Company adopted the U.S. dollar as its measurement and reporting currency for preparation of its consolidated financial statements.  In addition, except where otherwise indicated, all financial information is presented in United States dollars.

Our financial statements have been prepared in accordance with Canadian GAAP.  These principles conform in all material respects with U.S. GAAP except as described in Note 15 to our 2003 consolidated financial statements.  The differences between line items under Canadian GAAP and those as determined under U.S. GAAP are not significant except that, under U.S. GAAP, our total loss would be greater by $nil for the fourteen month period ended December 31, 2003 and the twelve month period ended October 31, 2003, $35,000 for the year ended October 31, 2002, greater by $37,000 for the year ended October 31, 2001, greater by $983,000 for the year ended October 31, 2000 and less by$120,000 for the year ended October 31, 1999.  Under U.S. GAAP share capital would be greater and deficit would be less by $30,089,000 for each of the years due to the elimination of reduction in stated capital offset against accumulated shareholders deficit in March of 1999.

Selected Financial Data Ended December 31, 2003 and Years Ended October 31, 2003, 2002, 2001, 2000, 1999 and 1998

(in $000s, except per share data)

|                                       | Fourteen Months Ended December 31  | Two Months Ended December 31 | Twelve Months Ended October 31 | Fiscal Year Ended October 31
|-------------------------------------- | ---------------------------------- | ---------------------------- | ------------------------------ | ----------------------------
|                                       | 2003                               | 2003                         | 2003                           | 2002                        
|                                       | (In accordance with Canadian GAAP) |                             
|Revenue                                | $8,563                             | $1,455                       | $7,108                         | $710                        
|Loss from Continuing Operations        | (5,618)                            | (784)                        | (4,834)                        | (4,065)                     
|Net loss from Discontinued Operations  | 0                                  | 0                            | 0                              | 0                           
|Net Loss                               | (5,618)                            | (784)                        | (4,834)                        | (4,065)                     
|Weighted Average no. of shares (000s) | 6,478                              | 11,043                       | 5,715                          | 2,972                       
|Loss Per Share  Continuing Operations | (0.87)                             | (0.07)                       | (0.85)                         | (1.37)                      
|Net Loss Per Share                     | (0.87)                             | (0.07)                       | (0.85)                         | (1.37)                      
|Dividends Per Share                    | 0.00                               | 0.00                         | 0.00                           | 0.00                        
|Working Capital (Deficit)              | 452                                | 452                          | 1,114                          | 1,752                       
|Long-term Investment                   | 0                                  | 0                            | 0                              | 0                           
|Long-term Liabilities                  | 300                                | 300                          | 300                            | 0                           
|Shareholders Equity                   | 7,647                              | 7,647                        | 8,462                          | 2,950                       
|Total Assets                           | 11,004                             | 11,004                       | 12,099                         | 4,009                       
|Share Capital                          | 49,191                             | 49,191                       | 49,202                         | 40,678                      
|                                       |                                    |                              |                                |                             
|                                       | (In accordance with U.S. GAAP)     |                             
|Loss from Continuing Operations        | (5,618)                            | (784)                        | (4,834)                        | (4,100)                     
|Net Loss from Discontinued Operations  | 0                                  | 0                            | 0                              | 0                           
|Net Loss                               | (5,618)                            | (784)                        | (4,834)                        | (4,100)                     
|Loss Per Share  Continuing Operations | (0.87)                             | (0.07)                       | (0.85)                         | (1.38)                      
|Net Loss Per Share                     | (0.87)                             | (0.07)                       | (0.85)                         | (1.38)                      
|Long-term Liabilities                  | 300                                | 300                          | 300                            | 0                           
|Shareholders Equity                   | 6,655                              | 6,655                        | 7,471                          | 1,958                       
|Total Assets                           | 11,004                             | 11,004                       | 12,099                         | 4,009                       
|Share Capital                          | 79,281                             | 79,281                       | 79,291                         | 70,767                      



At our March 1999 Annual Meeting, our shareholders approved a resolution providing for the reduction of our stated capital by$30,089,000.  This resulted in a reduction in our accumulated shareholders deficit in the same amount.  At December 31, 2003, we had an accumulated deficit of$41,482,000.  If our shareholders had not approved the reduction in our stated capital, our accumulated deficit at December 31, 2003 would have been $71,571,000 and October 31, 2002 would have been$65,953,000.

The following table sets forth the rate of exchange for the Canadian Dollar at the end of the five fiscal years ended December 31, 2004 and the end of each of the last six months, the average rates for the period, and the range of high and low rates for the period.  For purposes of this table, the rate of exchange means the noon buying rate in New York City for cable transfers in foreign currencies as certified for customs purposes by the Federal Reserve Bank of New York.  The table sets forth the number of Canadian Dollars required under that formula to buy one U.S. Dollar. The average rate means the average of the exchange rates on the last day of each month during the period.

|                           | U.S. Dollar/Canadian Dollar
|-------------------------- | ---------------------------
|                           | Close                      
|Month Ended 02/28/05       | 1.2408                     
|Month Ended 01/31/05       | 1.2412                     
|Month Ended 12/31/04       | 1.2020                     
|Month Ended 11/30/04       | 1.1860                     
|Month Ended 10/31/04       | 1.2180                     
|Month Ended 9/30/04        | 1.2616                     
|Fiscal Year Ended 12/31/04 | 1.2020                     
|Fiscal Year Ended 12/31/03 | 1.2924                     
|Fiscal Year Ended 10/31/02 | 1.5661                     
|Fiscal Year Ended 10/31/01 | 1.5782                     
|Fiscal Year Ended 10/31/00 | 1.5315                     

The exchange rate was 1.2408 as of February 28, 2005.



3-B.  Capitalization and Indebtedness

Not Applicable.

3-C.  Reasons for the Offer and Use of Proceeds

Not Applicable.

3-D.  Risk Factors

When used in this annual report, the words may, will, expect, anticipate, continue, estimate, project, intend plan and similar expressions are intended to identify forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, regarding events, conditions and financial trends that may affect Diversinets future plans of operations, business strategy, operating results and financial position.  All statements, other than statements of historical facts, included or incorporated by reference in this document which address activities, events or developments which the Company expects or anticipates will or may occur in the future, including such things as future capital expenditures (including the amount and nature thereof), business strategy, expansion and growth of the Companys business and operations, and other such matters are forward-looking statements.  These statements are based on certain assumptions and analyses made by the Company in light of its experience and its perception of historical trends, current conditions and expected future developments as well as other factors it believes are appropriate in the circumstances.  Such statements are not guarantees of future performance and are subject to risks and significant uncertainties and that actual results may differ materially from those included within the forward-looking statements as a result of various factors.  The occurrence of any unanticipated events may cause actual results to differ from those expressed or implied by the forward-looking statements contained herein. Prospective investors are cautioned that any forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties and that actual results may differ materially from those included within the forward-looking statements as a result of various factors, some of which are described in the Risk Factors below.

We have limited financial resources.  Our ability to continue operations during the next fiscal year will be dependent on our ability to obtain additional financing.  Although we have made progress in developing our products and have completed initial consumer deployments, our revenue from operations is not sufficient to cover our operating expenses at present and may be insufficient within fiscal 2004.  We have obtained funding for operations from private equity placements in the past, raising approximately$49,835,000 through selling a total of 10,421,132 common shares, but there is no assurance we will be able to do so again in the near future despite the progress of the business.  In January 2004 we completed a private placement through the issuance of 1,000,000 common shares and 1,100,000 common share purchase warrants.  We received gross proceeds of $2,000,000 in the transaction.  The warrants were comprised of 500,000 warrants exercisable at $2.00 and 600,000 at $2.05.  Each warrant entitles the holder thereof to acquire one common share for a period of three years.  In June 2003 we completed a private placement with the issuance of 5,000,000 common shares at a price of $0.62 per common share for gross proceeds of $3,100,000 to the Company.  In April 2002, we completed a private placement with the issuance of 518,671 units at a price of $6.00 per unit for gross proceeds of $3,112,022 to the Company.  Each unit is comprised of one common share and three-quarters (3/4) of one common share purchase warrant (each whole warrant, a Warrant).  Each Warrant entitles the holder thereof to acquire one common share at a price of $7.20 per common share for a period of up to three years from April 4, 2002.  There is no assurance we will be able to obtain further placements in the near future despite the progress of the business.  As well, the terms of new capital, if any, may materially dilute existing shareholders.  Our failure to either raise capital when needed or to generate revenues would leave us with insufficient resources to continue our business.

We have lost money in the past, we have realized insufficient revenues from continuing operations and we expect to continue to sustain losses in the future.We have generated insufficient revenue to date from the sales of our solutions and licensing of our products to cover our operating costs.  For the fourteen months ended December 31, 2003, we posted a net loss of $5,618,000.  For the year ended October 31, 2003, we posted a net loss of $4,834,000, for October 31, 2002, we posted a net loss of $4,065,000 and for October 31, 2001, we posted a net loss of $12,272,000.  For the years ended October 31, 2000 and October 31, 1999, we had net losses of $10,189,000 and $9,421,000, respectively.  We generated revenue of $8,563,000 for the fourteen months ended December 31, 2003, $7,108,000 in the twelve months ended October 31, 2003, $710,000 in the year ended October 31, 2002, $793,000 in the year ended October 31, 2001, $1,787,000 in the year ended October 31, 2000 and $164,000 in the year ended October 31, 1999.  The revenue represents the sales of our secured wireless and identity management solutions and professional services including the initial licensing of our Passport Certificate Server®, Passport Authorization ProductTM and Connexus product together with related professional services and consulting revenue.  During fiscal 2001, 40% of our revenue was generated from one customer.  During fiscal 2002, 28% of revenue was generated from one customer although not the same customer as in fiscal 2002, and 54% of revenue was generated from three customers.  During fiscal 2003, 30% of revenue was generated from one customer although not the same customer as in fiscal 2001, and 50% of revenue was generated from two customers.  To date, the sales of our solutions, including related consulting services and licensing our products to various customers and providing them with related professional services has generated our revenues.  We cannot provide assurance that recurring revenues will arise from these agreements.  The auditors reports on our December 31, 2003 consolidated financial statements included additional comments for U.S. readers that states that conditions and events exist that cast substantial doubt on our ability to continue as a going concern.  The consolidated financial statements do not include any adjustments that might result from the outcome of that uncertainty.

Commercial deployment.Our ability to continue operations is also dependent on the acceptance of our security products and the adoption of transaction-based applications using Public Key Infrastructure-based security (also known in the industry as PKI) over wireless networks as an accepted method of commerce in sufficient volume for us to generate enough revenues to fund our expenses and capital requirements. The wireless mobile commerce market is in a very early stage, and it may not develop to a sufficient level to support our business.

Our solutions are marketed to large companies and government agencies. The implementation of our solutions by these entities typically involves a lengthy education process and a significant technical evaluation and commitment of capital and other resources.  This process is also subject to the risk of delays associated with customers' internal budgeting and other procedures for approving large capital expenditures, deploying new technologies within their networks and testing and accepting new technologies that affect key operations.  As a result, the associated sales and implementation cycles can be lengthy.  Our quarterly and annual operating results could be materially harmed if anticipated orders for a specific customer for a particular quarter are not realized.

Many of our early licensing agreements permitted our customers to examine and test our products with no initial up-front payments to us.  These customers are not required to make payments to us until they begin to use our product for commercial purposes.  In certain cases, we also enter into evaluation agreements, whereby potential customers may examine our software products for a specified period of time with no payment to us.  Our licensing agreements typically require the customer to pay a license fee attributable to the software components and the solution and upon shipment of these items to the customer, although we have often waived the up-front fee.

Market conditions.The general economic conditions may have a significant impact on our ability to generate sales for our solutions.  During fiscal 2002 and 2001, we experienced decreased activity from our potential customers and generally the adoption of wireless services has not proceeded as rapidly as previously expected.  During 2003, with the acquisitions of DSS and Caradas, we were able to increase revenues, however there is no guarantee that sales will not decline in the near future.

Foreign exchange. Our functional currency is the U.S. dollar.  Sales generated outside Canada are generally denominated in U.S. dollars.  During fiscal 2003, we incurred a large portion of our expenses in U.S. dollars, but we also incurred a smaller portion of our expenses in other currencies including Canadian dollars, Pound Sterling and Hong Kong dollars.  Changes in the value of these currencies relative to the U.S. dollar may result in currency losses that may have an adverse effect on our operating results.  With the completion of our financings in June 2003 and January 2004, we have a portion of our cash resources in U.S. dollar short-term investments and in Canadian dollars.  During fiscal 2003 we maintained a portion of our cash resources in both U.S. and Canadian dollar term deposits. During 2003 we with the acquisitions of DSS and Caradas, we switched our reporting currency from Canadian dollars to U.S. dollars.

We may not be successful if we fail to retain our key technical personnel. During 2003, in order to reduce our largest single expenditure, salaries and benefits, we reduced our headcount of employees in the Toronto office.  During September 2001, we substantially reduced our headcount and curtailed certain sales and marketing activities, particularly in the United States.  During 2002 and 2003, we continued to review our cost structure and have continued to reduce our headcount.  Workforce reductions may have a detrimental effect on the morale of remaining employees, impeding their performance levels.  In addition, our ability to attract potential new employees in the future may suffer if our reputation was hurt by this staff reduction.

We currently have seven senior officers and 124 employees and contractors.  We may not be able to improve our products or create new products if we lose any of our key employees or contractors.  The contract with our CEO, Mr. Nagy Moustafa, had a term of five years, commencing September 29, 1997, and has been renewed on a year-to-year basis.  None of our other employment agreements has a specified term.  We do not maintain key person life insurance policies on any of our employees.  Skilled technical personnel can be difficult to attract depending on the strength of the economy and competitive opportunities.  We may not be able to retain our current employees if they receive better job offers from other employers.   The weakened economy through 2002 and 2003 may not alleviate this risk in the future.

We are involved in litigation which could result in judgments against us which, in the aggregate, could total more than our combined current assets, working capital and net assets.There are currently two material claims pending against us.  If we lose either of these suits or enter into settlements requiring us to pay cash or issue any of our common shares, our liquidity and financial position will be adversely affected, and our shareholders ownership may be diluted.

We have been sued, along with other individuals and corporations, by Silva Run Worldwide Ltd. in connection with Silva Runs purchase of 21,250 common shares (850,000 common shares prior to reverse splits in May 1997 and January 2003) in 1995 for a purchase price of $3,700,000.  Silva Run is seeking to cancel the stock purchase and reimbursement of the $3,700,000 purchase price, plus interest, attorneys fees and costs.  Silva Run has alleged that we, directly or as the control person of other defendants, violated the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended.

In May 2000 we were sued, along with our wholly owned Barbados subsidiary, in an action in which the plaintiff is seeking damages of $1,533,950 for breach of an October 25, 1995 dealer agreement with our previous printing business regarding the distribution of printing equipment and damages of $25,000,000 for loss of reputation and loss of opportunity, pre-judgment and post-judgment interest, and costs.

In July 2003, we were sued in the Ontario Superior Court of Justice by two former employees who claim, inter alia, that each was terminated, while on short term disability, in a manner that exhibited bad faith and unfair dealings.  One is seeking against Diversinet $125,000 in special, general, punitive and exemplary damages.  The other is seeking against Diversinet $350,000 in special, general, punitive and exemplary damages.

In January 2004, we and an officer of the Company were sued in the Ontario Superior Court of Justice by a former employee who claims, inter alia, that he was wrongfully terminated in a manner that exhibited bad faith and unfair dealings.  He is seeking a total of Cdn$450,000 against us and our officer in aggravated, general, punitive and exemplary damages.

We have limited experience in the wireless Internet security software field and we are therefore subject to risks inherent in establishing a new business.We have been in the wireless Internet security software field since fiscal 1997 and the identity management solutions field since 2001, and we have only generated minimal revenues from this business.  We are not sufficiently established to fully evaluate or forecast our prospects, and we are subject to the risks inherent in establishing a new business enterprise in an early market environment.

We are dependent on the adoption of transaction-based applications over wireless networks as an accepted method of commerce.In order for us to be successful, transaction-based applications using wireless security infrastructure over wireless networks must be adopted as a means of trusted and secure communications and commerce to a sufficient extent and within a reasonable time frame, particularly considering our existing financial resources and future capital needs.  Since trusted and secure communications and commerce over these networks is new and evolving, it is difficult to predict with any assurance the size of this market and its growth rate, if any.

If the market for trusted and secure communications and commerce utilizing PKI over these networks fails to develop or develops more slowly than expected, we may have difficulty selling products or generating sufficient revenues to support our business.

Our ability to keep pace with the rapid technological changes and frequent new product introductions common in the electronic commerce industry will determine our ability to remain competitive and affect the viability of our products. To succeed in the mobile e-commerce and the identity management solutions business, we believe that we will have to continuously improve the performance, features and reliability of our products and be the first to the market with new products or enhancements to existing products.  We cannot provide assurance that we will be able to improve our products in a timely manner.  The emerging market for security solutions for mobile e-commerce and the identity management is characterized by rapid technological developments, frequent new product introductions and evolving industry standards.  We anticipate this evolution will also occur in the mobile e-commerce and the identity management solutions market in which we focus our technological developments.  The adoption of new standards, or the informal adoption of certain standards by a significant percentage of the computer security and related industries, could require us to reconfigure our products.  We may not be able to counter challenges to our current products or to introduce product offerings that keep pace with the technological changes introduced by competitors or persons seeking to breach information security.  We are not currently aware of any significant new technologies either under development or about to be introduced in the mobile e-commerce or the identity management solutions security field.

The highly competitive nature of the electronic commerce field could prevent us from achieving success.Our solutions are targeted at the new and rapidly evolving market for authentication and authorization products for wireless electronic commerce, telecommunications and identity management.  This market is not mature.  We anticipate that it will be intensely competitive, subject to rapid change and significantly affected by new solution, product and service introductions and other market activities of industry participants.  Many of our competitors and potential competitors have a longer operating history, greater name recognition, larger installed customer base and significantly greater financial, technical and marketing resources than we have.  As a result, they may be able to adapt more quickly to new or emerging technologies and changes in customer requirements, and they could therefore render our technologies and products obsolete.

Because of the broad potential application of our authentication and authorization software and identity management solutions, we compete with vendors offering a wide range of computer security products.  These competitors include Entrust Technologies, VeriSign, Certicom and RSA Security.  There also may be other potential entrants to the market of whom we are not yet aware.

Our licensing revenues are dependent on our customers acceptance and use of our software products, and we expect our sales cycle to be lengthy.  We often enter into evaluation agreements, whereby potential customers may examine our software products for a specified period of time with no payment to us.  Our current licensing agreements typically require the customer to pay a license fee attributable to the software components and the development toolkit and upon shipment of these items to the customer, until early in fiscal 2000, we generally waived the up-front fee.

Customers often cannot simply license our solutions and begin using them immediately in their businesses as our solutions are often part of an overall application environment.  This can make our solutions work with a particular customers application complex, expensive and, in certain cases, an ultimately unsuccessful process.  This process may also require the customer to make significant commitments of time and money.  Based on discussions with our customers, we believe that a customers required cycle of testing, internal approval and network modifications can reasonably take between six and nine months or longer.  Therefore, we expect our sales cycle, or the time between entering into an agreement and when we begin to receive revenue, to be six to nine months or longer.  Also, the amount of revenue can be very limited until the customers product is made generally available and adopted.  Our sales are also subject to significant risks over which we have little or no control, including customers budgetary constraints and internal acceptance procedures regarding security-related matters.

We lack experience in marketing and sales, and we depend on our relationships with more established corporations to assist in marketing and selling our product.  We have limited sales and marketing experience and limited money to fund marketing.  A significant part of our business strategy is to form strategic relationships with more established companies to expose our solutions to a larger customer base than we could reach through a direct sales and marketing force.  Our existing relationships have not resulted in any significant revenues to date and may not result in any revenues in the future.

As a result of our emphasis on these relationships, our success will partially depend on both the ultimate success of the third parties with whom we have these relationships and the ability of these third parties to market our products and services successfully.

In the past, we have concentrated our sales efforts marketing to application service providers.  This strategy has lead to no commercial deployments.  As a result and due to some success experienced by us in Hong Kong, we are focussing our efforts on working to establish the necessary infrastructure first. We have jointly developed Mobile e-Cert with Hongkong Post. Hongkong Post will support the Mobile e-Certs through its Mobile Certification Authority and mobile operators will act as the Registration Authorities for the authentication of the identity of Mobile e-Cert subscribers. Hongkong Post is the first recognized public certificate authority in Hong Kong.  Hutchinson, the largest and leading mobile operator in Hong Kong, has been appointed the first certified Registration Authority for the registration of Hongkong Post Mobile e-Cert digital certificates to mobile users.  The company believes that this appointment also marks the first time worldwide a mobile operator is acting as a Registration Authority for the issuance of wireless digital certificates. After this was successfully accomplished, we have been working with application service providers who will develop applications that will have our software embedded and will utilize Mobile e-Cert.  Furthermore, with our recent acquisitions of DSS and Caradas, we believe that we have mitigated our risk by diversifying our solution offering.

We cannot provide assurance that we will be able to enter into additional, or maintain our existing, strategic relationships on commercially reasonable terms, if at all.  Our failure to do so would require us to devote substantially more resources to the distribution, sales and marketing of our products and services.  Also, these strategic relationships do not afford us any exclusive marketing or distribution rights.  The third parties may reduce their commitments to us in the future or pursue alternative technologies.

The nature of our products subjects us to product liability risks, potential lost revenues and adverse publicity in the event of product failure.  Our customers may rely on our products to prevent unauthorized access to computer networks.  Malfunctions or design defects of our products could:

•

cause interruptions, delays or cessation of services to our customers,

•

result in product returns,

•

result in liability for damages,

•

adversely affect the markets perception of the security offered by our product, resulting in a lack of demand for our products, or

•

require us to make significant expenditures of capital or other resources to alleviate the problem.

Our license agreements may not be adequate to limit our liability.A large number of claims by our customers could subject us to significant liability as well as limit the demand for our solutions and products.  In most cases our license and support agreements attempt to limit our liability to the total amount of the licensing and support fees paid during the twelve-month period preceding an alleged error in or failure of our software.  This contractual provision may not always be enforceable.  Courts have held that contractual limitations of liability of this type, or the shrink-wrap licenses in which they are sometimes embodied, are unenforceable because the licensee does not sign them.  If these contract provisions limiting our liability are not enforceable, we could be obligated to pay significant damages resulting from customer claims.

If computer hackers find ways to circumvent our products, our products would not perform their essential function.  Any compromise of the security offered by our products, in a single incident or a series of incidents, would make our products less attractive to our customers.  Software error or failure may result from a hacker seeking unauthorized access to a computer network.  The methods used by hackers are evolving rapidly and generally are not recognized until they are launched against one or more systems.  We are unable to anticipate hackers tactics.  The publicity surrounding any security breaches could adversely affect the public perception of the security offered by our authentication and authorization products and make it more difficult for us to sell our products.

Technical advances in the information security market may make our products obsolete.Our products are based on PKI technology and identity management technology and depend in part on the application of certain mathematical principles forming the basis of the encryption technology that we license and embed in our products.  Any significant advance in techniques for decoding or cracking encrypted computer information could render our products obsolete or unmarketable.

Our PKI products use algorithms, or mathematical formulae, to encrypt and secure information.  The security afforded by our products is predicated on the assumption that these mathematical formulae are very difficult to solve.  This assumption is based on the fact that years of theoretical and empirical research by leading mathematicians have not resulted in any efficient solutions to these problems.  There can be no assurance, however, that future research will not uncover efficient solutions to these problems.

Also, even if no breakthrough in solving these problems is discovered, they may eventually be solved by computer systems having sufficient speed and power.  If improved techniques for decoding encrypted information are developed or made possible by the increased availability of powerful computing resources, our products could be rendered obsolete.

We might not always be able to enforce our intellectual property rights.Our success depends significantly upon our proprietary technology and our means of protecting our proprietary and intellectual property rights may not be adequate.  We rely on a combination of patent and trademark laws, trade secrets, confidentiality agreements and contractual provisions to protect our proprietary rights.  We have two U.S. patents, which will be in effect until at least August 22, 2017, and three patents granted in Israel in effect until 2017 and 2021, as well as 13 applications pending in Israel, the United States and Canada.  We cannot provide assurance that any of our applications will be approved, that any new patents will be issued, that we will develop proprietary products or technologies that are subject to patent, that any issued patent will provide us with any competitive advantages or will not be challenged by third parties.  Furthermore, we cannot provide assurance that the patents of others will not have a material adverse effect on our business and operating results.  There is also a risk that our competitors will independently develop similar technology, duplicate our products or design around our patents or other intellectual property rights.

If our technology or products were determined to infringe upon the rights of others, we would be required to obtain licenses to use that technology.  If we are not able to obtain a license in a timely manner on acceptable terms or at all, we may have to stop producing our product until we can develop an alternative that does not infringe the rights of others.

Patent disputes are common in technology-related industries.  We cannot provide assurance that we will have the financial resources to enforce or defend a patent infringement or proprietary rights action.  As the number of products and competitors in our target markets grows, the likelihood of infringement claims also increases.  Any claims or litigation may be time-consuming and costly, cause product shipment delays or require us to redesign our product or require us to enter into royalty or licensing agreements.  Any of these events could have a material adverse effect on our business and operating results.  Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our products or to use our proprietary information and software.  In addition, the laws of some foreign countries do not protect proprietary and intellectual property rights to as great an extent as do the laws of Canada and the United States.

We have focused our sales and marketing efforts in Asia and Hong Kong.  In 2003, several economies in Asia, including Hong Kong, have been negatively affected by the outbreak of severe acute respiratory syndrome, or SARS. Some industries in Hong Kong were been hit hard by the SARS outbreak.  The dramatic decline in the business has had a negative effect on the economy of Hong Kong for 2003.  The Government of Hong Kong and business communities have taken various measures to stimulate the economic recovery of Hong Kong.  While the ultimate impact of SARS is unclear at this time, the effects of these measures are crucial to Hong Kongs future financial condition and economic developments, which would in turn affect our financial condition and results of operations.



Changes in the export regulation of encryption-based technologies may restrict our ability to sell or license our products.Our products are subject to export controls under Canadian and U.S. laws and regulations.  These laws and regulations may be revised from time to time in ways that may materially and adversely affect our ability to sell our products abroad or to make products available for sale or license via international computer networks such as the Internet, although pursuant to an international treaty, a number of countries have relaxed, or are in the process of relaxing, their export rules as applicable to products licensed by us.  Canadian and U.S. government controls on the export of encryption technologies which we license from third parties and which are embedded in our products may, if subject to revision, be amended and subsequently restrict our ability to freely export our products.  As a result, foreign competitors subject to less stringent export controls on their products may be able to compete more effectively than we can in the global information and computer security market.

Our articles of incorporation authorize us to issue an unlimited number of common shares, which could result in dilution to our shareholders. Subject to regulatory and/or shareholder approval, shareholders may experience dilution or limitations in takeover attempts because our articles of incorporation allow us to issue an unlimited number of common shares.  Our shareholders have no right to purchase additional common shares when we issue new shares.  As of February 15, 2004, we had 12,043,027 common shares issued and outstanding.

In addition, our ability to issue an unlimited number of common shares may have the effect of delaying, deferring or preventing a takeover attempt by a third party attempting to acquire control of us.

If our common shares should become ineligible for continued quotation on the OTC BB or a public trading market does not continue for any reason, holders of our common shares may have difficulty selling their shares.Our common shares became ineligible for continued quotation on the NASDAQ SmallCap Market and are now trading on the Over the Counter Bulletin Board; therefore holders of our common shares will have difficulty selling their shares.  Our common shares were quoted on the NASDAQ SmallCap Market from June 1995 through late April 2003.



Our common shares may continue to be penny stock, which may adversely affect the liquidity of our common shares.The United States Securities and Exchange Commission has adopted regulations that define a penny stock to be any equity security that has a market price, as defined in those regulations, of less than $5.00 per share, subject to certain exceptions.  Our common shares are currently penny stock.

Generally, for any transaction involving a penny stock, a broker-dealer is required to deliver, prior to the transaction, a disclosure schedule relating to the penny stock market as well as disclosure concerning, among other things, the commissions payable, current quotations for the securities and information on the limited market in penny stocks.

The liquidity of our common shares may be materially and adversely affected if our common shares continue to be penny stock due to the administration requirements imposed by these rules.

It may be difficult for our shareholders to enforce civil liabilities under the U.S. federal securities laws because we are incorporated in Canada.  Diversinet is incorporated under Canadian law and the majority of our directors and executive officers are Canadian citizens or residents.  All, or a substantial portion, of these persons assets and substantially all of our assets are located outside the United States.  As a result, it may not be possible for investors to effect service of process within the United States upon those persons or Diversinet or to enforce against them judgments of U.S. courts predicated upon civil liabilities under U.S. federal or state securities laws.  Also, there is uncertainty as to the enforceability in Canada, in original actions or in actions for enforcement of judgments of the U.S. courts, of civil liabilities predicated upon U.S. federal or state securities laws.

ITEM 4.  INFORMATION ON DIVERSINET

4-A.

History and Development of Diversinet

Diversinet Corp. (formerly The Instant Publisher Inc.) was formed on December 8, 1993 through the amalgamation of The Instant Publisher Inc. with Lombard Consolidated Resources Inc., an Ontario corporation.  We are regulated in accordance with the Ontario Business Corporations Act.

Our registered and principal office is located at 2225 Sheppard Avenue East, Suite 1801, Toronto, Ontario, Canada, M2J 5C2 (telephone: 416-756-2324; fax: 416-756-7346).

The following table provides the amount spent on capital expenditures for the fourteen-month period ended December 31, 2003 and the last two fiscal years ended October 31, 2002 and 2001:

|YEAR | AMOUNT  
|---- | --------
|2003 | $75,000 
|2002 | $21,000 
|2001 | $719,000

There have been no major capital divestitures during the fourteen-month period ended December 31, 2003 or the two-year period ended October 31, 2002.  A large portion of the capital expenditures have been computer hardware and software required for our continued growth.  Most of these expenditures have occurred at our head office.  We currently have no significant capital expenditures or divestiture projects in process.  All capital expenditures have been financed through working capital.

4-B.

Business Overview

We are a security software product company that develops, markets and distributes wireless security and identity management solutions and professional services to the enterprise, financial services, government and gaming and wagering marketplace.  As part of providing these solutions we perform professional services to install, support and integrate our solutions with other applications.  Our solutions encompass all aspects of commercial transaction security requirements, covering the authentication and authorization of individuals involved, the integrity of the information being sent and the non-repudiation or legalization of the transaction.

We are a pioneer in providing security products and solutions for mobile commerce over wireless networks and are striving to become the leading provider of wireless security solutions.  Our strategy to achieve this objective involves: targeting emerging m-commerce markets, expanding strategic partnerships and sales channel relationships, maintaining a leadership position in terms of products and research and development and building awareness of the Diversinet brand.

Security solutions are becoming important to a wide range of parties - service providers, applications developers, certification authorities, enterprises, content providers and end-users - as organizations increasingly utilize public and private networks for confidential and high-value transactions.  The highly publicized security breaches associated with communications, the storage of confidential information and transactions over communications networks have accentuated the need for security solutions that address the critical network security needs.

We believe that the enactment of the Electronic Signatures in Global and National Commerce Act by the United States in June 2000, together with similar legislation emerging throughout the world, is increasing the demand for security in mobile commerce to parallel that of the bricks-and-mortar world.

A wide range of products and services has been introduced recently to address the security needs of mobile users.  However, the lack of flexibility, scalability and comprehensiveness inherent in many of these solutions led companies such as Diversinet to develop a combination of public-key encryption and digital certification systems in a PKI design to address all critical network security needs.

Even as standards for wireless security develop, an efficient implementation of mobile security is required to:

- make efficient use of the available bandwidth,

- effectively utilize a mobile device to provide a rich experience while offering efficient access to information and applications,

- manage the constraints of devices such as battery life, memory and processing power, and wireless network coverage,

- enable a seamless experience allowing the user to move across wireless technologies from public wide-area networks to private, local area networks, and,

- provide strong security for wired and wireless applications via a single infrastructure.



Global investment in PKI products and services will grow from $436 million in 2000 to $3.4 billion in 2006. [SOURCE: Datamonitor, May 2, 2001 eSecurity: PKI the way forward.]  An especially large growth area will be the mobile sector.  It is forecasted the total number of wireless subscribers will exceed 2 billion by 2007 (In-Stat MDR) and the number of WLAN hotspots will exceed 100,000 by early 2005 (Pyramid Research), providing a large addressable market for Diversinet products

There are a number of significant demand drivers for PKI security-related solutions:

- laws recognizing electronic signatures and signed transactions as being legally equivalent to paper-based transactions,

- a rise in electronic and mobile commerce transactions,

- recognition that accredited digital certificates are necessary to confidently identify parties to an electronic transaction,

- increased interest from business users in wireless office applications, healthcare, and business-to-business scenarios,

- the launch of 2.5G and 3G mobile networks that offer faster data speeds, and an always-on connection,

- and the emergence of security and wireless industry standards.



Industry forecasters predict that there will be many more wireless devices (e.g. smart phones, pagers and personal digital assistants or PDAs) than computers accessing the Internet in the future.  In addition, wireless devices can communicate directly with one another without going over the Internet (referred to as peer-to-peer) or wireless devices can communicate directly with enterprises.

Our solutions are designed to address the unique needs of wireless devices, networks and applications.  We have invested significant engineering resources in developing technology we acquired in fiscal 1996.  Our main wireless security products are Passport ONE and Passport Certificate Server®, which enable the implementation of a PKI solution for mobile communications and e-commerce.  We believe that Passport ONE and Passport Certificate Server® offer advantages in terms of privacy, efficiency, scalability and flexibility over conventional solutions. We also develop the Passport Authorization ProductTM, which extends the functionality of digital certificates by granting privileges, through digital permits, to the holder of either a Diversinet certificate, or other selected vendor certificates.  Our main identity management product is the ConnexusTM Platform.  This provides turnkey solutions for smart card-based application security systems using a suite of Caradas developed and third-party technology components.

In February 2004 we announced that Passport ONE supports RIM's S/MIME Support Package v1.5 for BlackBerry. The solution provides government agencies and departments and corporate enterprises the ability to leverage the S/MIME (Secure Multipurpose Internet Mail Extensions) security protocol for wireless email on their BlackBerry handhelds from Research In Motion.  JavaTM-based BlackBerry handhelds can use the Diversinet Passport ONE email plug-in, so that the security certificates can be used in the email applications, providing a secure solution for mobile applications.



In fiscal 2003 we announced the launch of Passport SMS Messenger, a zero-client solution that enables application providers and enterprises to extend mobile connectivity to key business and consumer applications.  Passport SMS Messenger provides a solution for mobilizing Internet-aware applications by using current mobile phones and widely available text messaging services.



We continue to have early market success deploying our products in the Hong Kong market.  Over the past few years, Hongkong Post, the first recognized mobile certification authority in Hong Kong, launched Mobile e-Cert mobile certificates jointly developed based on our wireless security products.



During 2003, together with Hongkong Post and MobileTech Limited, we announced the availability of a new Secure Mobile Email service.  This new email service leverages Hongkong Post's Mobile e-Cert digital certificates to ensure the secure exchange of corporate email over wireless networks.  Consumer users will also have access to this secured email service to ensure confidence that messages from personal accounts are communicated securely.  The creation of this service is an extension of our strong relationship with the Hongkong Post, and provides a new business-focused application for use with Hongkong Post Mobile e-Cert digital certificates.



In South America, we made headway in opening the market through Consist International, Inc. who has signed on to market Diversinet's security products and solutions in Brazil and Argentina.  In addition to Consist's direct sales force engaging banking, telecom and government clients in Brazil and Argentina.



In the gaming and wagering arena, during 2003 we announced that an application partner has signed an OEM and marketing agreement to take advantage of our expertise in mobile security by integrating our security solutions into its proprietary mobile-based gaming and entertainment solutions, including lottery and gaming applications.  Under the agreement, we will work closely with the application partner on the development and marketing of their applications and the integration of the security needed to deploy them.



Acquisition of DSS Software Technologies

In early January 2003, Diversinet acquired all of the capital stock in DSS Software Technologies (DSS), a system integrator headquartered in Fremont, California.  DSS provides technical consulting services to tier one customers including financial, enterprise and technology companies such as Cisco Systems, Lucent, Oracle, Sun Microsystems and Wells Fargo in the areas of systems integration, software development, and Enterprise Resource Planning (ERP) and Customer Relationship Management (CRM) implementation.  The aggregate purchase price was $1,301,038 consisting of $300,000 in cash, $26,998 in the costs associated with the acquisition, $600,000 of promissory note payable in instalments of $300,000 on January 2, 2004 and $300,000 on January 2, 2005 and 120,000 share purchase warrants with a value of $374,040.  The share purchase warrants vest equally on January 2, 2003, 2004 and 2005 and are exercisable at $3.75 per share for five years.  Additional future cash consideration in the amount of $800,000 is payable based on the achievement of certain financial targets over the next two years and will be recorded with an increase to goodwill if and when the targets have been met.  In February 2004, we amended the DSS Software Technologies share purchase agreement.  The promissory note in the amount of $600,000 payable in instalments of $300,000 on January 2, 2004 and $300,000 on January 2, 2005 has been replaced by the issuance of 200,000 Diversinet common shares and cash payments of $50,000 in February 2004, $50,000 on April 2004 and $100,000 on January 2005.  The existing 120,000 warrants exercisable at $3.75 have been replaced by issuance of 120,000 warrants exercisable at $2.05, exercisable after January 1, 2005 expiring on December 31, 2006.  The common shares cannot be re-sold in the public markets until a registration statement has been filed and declared effective by the U.S. Securities and Exchange Commission.



The Company expects that the addition of DSS services suite will enhance Diversinets ongoing strategy to provide greater depth and breadth in its product and service offering.  Combined, DSS and Diversinets technical and industry expertise can offer integrated solutions and full services offerings.  The Company believes its acquisition of DSS will strengthen its position in the U.S. through the addition of a comprehensive line of services that will help it to better address rapidly growing demands for security in telecommunication services.

The synergy between the two companies is expected to provide the infrastructure and capability to expand into new markets and convey a unique opportunity to deliver products and services that will meet the specific needs of enterprise customers.

With DSS professional services focuses, high profile customers in our target markets (enterprise, financial, et cetera), complementary skill sets (application development, wireless), and a U.S. sales force, the combined company can provide technical consulting services to companies in the areas of system integration, software development, and ERP and CRM implementation, which are all natural extensions of wireless technology, and require enhanced security.

DSS operations will be integrated with Diversinet as a wholly owned subsidiary of Diversinet, and DSS will become the principal office for Diversinets U.S. operations.  The purchase of DSS will be accounted for using the purchase method the results of operations will be consolidated into Diversinet from the date of acquisition.

Acquisition of Caradas, Inc.

In September 2003, Diversinet acquired all of the capital stock of Caradas, Inc. (Caradas), a digital ID and authentication management provider headquartered just outside Boston, Massachusetts.  Caradas provides smart card enablement to the financial, retail, enterprise, government and other markets looking for open, secure, multi-application solutions.  Caradas technology answers the need for multi-application smart card technology, essential for managing critical business processes.



Caradas focuses on smart card-based application security systems within the financial services industry, particularly as a vehicle for managing relationships between issuers and cardholders.  Caradas offers a suite of solutions and services to define and implement secure application infrastructures.



*

The Caradas ConnexusTM Platform Caradas provides turnkey solutions for smart card-based application security systems using a suite of Caradas developed and third-party technology components.



*

Visa and MasterCard Issuer Solutions: Caradas adds value to Visa and MasterCard issuer projects, by working closely on architecture and design, providing integration services, followed by test and operational transfer as the deployment occurs.  The smart Visa and MasterCard oneSmart Solutions are based upon established methodologies, third-party technologies and the Caradas ConnexusTM Platform technology.



*

Caradas Services:  Caradas provides a set of professional integration services for the strategy and support behind the technology.  The Caradas team has developed a methodology for implementing application security systems.



*

Caradas LabsTM: Caradas provides benchmarking and evaluation of core technologies through the testing center.



The Company expects that the addition of Caradas will enhance its ongoing strategy to provide greater depth and breadth in its product and service offering, namely in the financial services and government verticals.  Combined, Caradas and Diversinets technical and industry expertise can offer integrated solutions and full services offerings.  The Company believes the acquisition of Caradas will strengthen its position in the U.S. through expanded access to key customers and the addition of a comprehensive line of services that will help us to better address rapidly growing demands for security in telecommunication services.



The synergy between the two companies is expected to provide the infrastructure and capability to expand into new markets and convey a unique opportunity to deliver products and services that will meet the specific needs of financial service and government customers.



With Caradas focus on smart card technology in the Companys target markets (financial, government, et cetera) the complementary skill sets (application development and wireless), and a U.S. sales force, the combined company can provide technical consulting services to companies in the areas of smart card-based application security systems and software development, which are natural extensions of wireless and require enhanced security.



Industry Background

In recent years, the wireless data industry has been growing on many fronts.  The worldwide growth of the wireless data industry is being propelled by the explosive growth of the Internet and the consequent demand for wireless access to the Internet, high penetration rates for users of mobile telephones, intense price competition among wireless network operators and the emergence of worldwide standards for wireless communications.

Security has and will continue to be a major concern for the wireless data community.  The increasing number of consumers and businesses that expect the ability to securely access confidential information and conduct transactions wirelessly has created the interest and demand for mobile security.

The wireless market and its existing wired solutions are not readily adaptable to its networks, applications and devices.  Wireless networks are fundamentally different from wired networks.  In wired networks, the Intel chip in a PC is the common device platform, Microsoft Windows is the dominant operating system and the browser is the common graphical user interface.  In wired networks data and content reside largely in databases, and data is extracted by the user on a simplified query basis using search engines - the user must either find or know where to get the information for which he or she is looking.

Wireless networks currently have no such standards for client platforms, operating systems or user interfaces.  The wireless device may be a PDA, a two-way pager or a smart phone.  Multiple operating systems are being employed.

Wireless industry standards are emerging, and we are a member and contributor to many of the standard-setting bodies.  One of the main standards setting forums is the Open Mobile Alliance (formerly the WAP or Wireless Application Protocol Forum).  The objective of this association is to develop standards intended to bring Internet content to wireless devices by creating global wireless protocol specifications and standards that work across all wireless network technologies. In addition to the Open Mobile Alliance Forum, we are members of Hong Kong PKI Forum, The Open Group, Bluetooth, Consortium for Efficient Embedded Security, Mobile Electronic Transactions organization, Mobile Execution Environment Forum, Standards for Efficient Cryptography Group and Liberty Alliance Project.

Need For Secure Transactions

The openness and accessibility that have stimulated the adoption and growth of the Internet, and of wireless and wired public and private networks, also create threats to the privacy and integrity of information that is transmitted across or stored on the networks.  According to The Yankee Group's May 2002 Corporate Wireless Survey, security continues to be the top inhibitor of wireless enterprise deployments.  Well-publicized Internet fraud experienced by VISA International and e-Bay and attacks resulting in overloading of popular e-business web sites by hackers have highlighted the need for improved security.  Enhanced security is critical for such wireless applications as banking, brokerage, database access, and corporate and consumer purchases.

The security risks associated with communications and commerce over the Internet, and over wireless and wired public and private networks, have accentuated the need for information security solutions that address five critical network security needs:

Authorization - Only authorized users should be able to view or modify certain data.

Confidentiality - Data in transit over the network or in storage should not be disclosed to unauthorized persons.

Integrity - Data should not be altered or compromised by unauthorized manipulation.

Authentication - The identity of the data sender and receiver should be verified.

Non-Repudiation - The sender of a transmission should not be able to deny or repudiate the message.



A wide range of products and services has been introduced to address one or more of these five critical network security needs.  For example, products such as firewalls and password tokens, which limit network access only to users having recognized addresses or entering recognized passwords, provide access control.  These products are generally limited in their flexibility and do not directly address such requirements as confidentiality, integrity, authentication and non-repudiation.  Encryption devices and programs provide confidentiality, but are device-dependent and generally do not address issues of authorization, integrity, authentication and non-repudiation.

The lack of flexibility and scalability inherent in these solutions has led to the development of public-key encryption and digital certification systems combined in a PKI, designed to address all five critical network security needs.

Public-key systems offer the ability to create digital signatures.  A user applies his or her private key to the date to be signed, creating a digital signature.  Subsequently, anyone can certify the correctness of the signature using the users public key.  If the signature verifies, then the signer must possess the correct private key.  In addition, it proves that the data signed has not been modified thus satisfying the security needs listed above.

Because a digital signature allows a user to prove only that he or she holds the private key that matches a particular public key, additional data is necessary to use signature validation to create an assurance of identity. This is accomplished with digital certificates, which are signed messages that bind a name or other attributes of the holder of a given private key to the corresponding public key. Each certificate is signed by a trusted third party known as the certificate authority, or CA; the CA vouches that a given user is the sole holder of the private key matching the corresponding public key. The signature from the CA allows the binding of the name to the public key to be trusted. This allows a relying party to validate the identity of a user or server by first checking the validity of the certificate and then verifying the signature against the certified public key. A CA may cooperate with a registration authority. The registration authority is responsible for validating a user's identity, on behalf of the CA, before a certificate is issued. The collection of certificate authorities, registration authorities, policies, and procedures associated with the management of public keys is known as public-key infrastructure. Enterprises have adopted PKI because it offers proven, tested information security standards leading to greater confidence in the resulting applications and lower integration costs for developers.

Market Acceptance of Digital Certification

The use of digital certificates has gained significant market acceptance in particular sectors where information security is critical, such as government, finance, health care and telecommunications. The acceptance of digital certificates in the United States escalated upon the signing of the Electronic Signatures in Global and National Commerce Act (commonly referred to as the E-Signature Act) on June 30, 2000.  Former President Clinton signed into federal law the E-Signature Actwhich legalizes contracts "signed" with electronic signatures, thus giving the same legal validity of written contracts to electronic contracts.  We believe the new law is a significant step to provide consumers and businesses with greater confidence regarding the security of transactions made over wireless and wired networks.  The E-Signature Act also provides a uniform legal framework across state lines so that electronic transactions can be conducted with the assurance that contracts signed electronically will be valid throughout the 50 states.Similar legislation is emerging throughout the world.

In August 1996, the United States passed the Health Insurance Portability and Accountability Act to reduce administrative costs and burdens in the health care industry through the use of electronic communication. Health Insurance Portability and Accountability Act requires the Department of Health and Human Services to adopt national uniform standards for the electronic transmission of certain health information.  One important aspect of Health Insurance Portability and Accountability Act is the mandate to adopt standards for secure electronic health transactions, including the protection of information exchanged between healthcare providers, such as claims, enrollment, eligibility, payment, and coordination of benefits.

Since the E-Signature Act was signed, it opened the door for other electronic applications to utilize digital certificates as a legal way of conducting transactions.  In the healthcare industry, medical professionals are starting to use wireless communications to access patient records and medical reports, as well as to input information into these files and write electronic prescriptions for patients.

Need for Wireless Security

The increasing acceptance of digital certificates is beginning to give rise to numerous products and services that issue digital certificates or that are able to work with digital certificates.  However, the mere issuance of digital certificates does not ensure that a users access is properly monitored, that privileges associated with access are accurately and currently defined, or that the certificates in question have not been withdrawn or replaced.

Indeed, the proliferation of users and certificates greatly complicates management of these issues, which is critical to maintaining an effective secure environment across and between enterprises.  To address these needs, enterprises generally require a robust PKI that supplements certificate issuance functions with full life cycle management of public and private keys, including issuance, authentication, storage, retrieval, backup, recovery, updating and revocation, in an easy-to-use, cost-effective manner.  We believe that demand for this class of product will increase during the next few years.

Market Size

PKI has been predicted to boom for the past years, but is only now is it starting to be taken up by businesses, which want to be able to conduct eCommerce in a secure and trusted environment. According to a May 2001 Datamonitor report, PKI is now at the beginning of what will be solid growth until 2006, with global investment in PKI products and services growing from $436 million in 2000 to $3.4 billion in 2006. As the uptake of eBusiness strengthens, so the business case for PKI increases. PKI will be crucial for many organizations, across the vertical markets and size bands enabling them to conduct secure communications for a range of eBusiness applications, be it via the Internet, intranets or extranets.

Datamonitor predicts that an especially large growth area for PKI will be in the mobile sector. In 2000, mobile devices accounted for just 1% of overall PKI revenues. However, after 2003, when the mass market begins to take up 3G devices, wireless PKI will become a major industry, accounting for up to 45% of total PKI revenues in 2006. This trend will continue as the uptake of the mobile Internet accelerates.

Demand Drivers

We believe that the four significant drivers of demand for m-commerce security related products and services are as follows:

1.

Rise of e-commerce over the Internet

There were 600 million people worldwide with Internet access as of Q3 2002.  International Data Corporation (IDC) is forecasting an increase in the number of Internet users and the value of annual e-business activity.  According to IDC, almost 1 billion people around the world will be using the Internet by 2005 driving e-commerce revenues to over $5 trillion by 2005, up from $354 billion in 2000.  Online spending worldwide will more than triple from almost $22 billion in 2000 to $69 billion in 2005.  Industry forecasts expect similar growth rates to apply to m-commerce based on the forecasted penetration of wireless devices.  It should be noted that these industry forecasts have been missed which is reflected in our internal forecasts being missed as well.

2.

Data over wireless networks and the emergence of the wireless Internet

According to Accenture research, by 2005 there will be 1.7 billion mobile connections, allowing the number of wireless devices capable of Internet access in the global market to increase by an astronomical 630 per cent.

Mobile voice communications has reached high penetration levels of 80% to 90% in Asia, 50% to 60% in Europe and 30% to 40% in North America.  Voice communications represent approximately 98% of traffic on the wireless networks that hosted the communications.  Competition by network operators for the voice customers is intense and has reduced revenue growth per customer.  These wireless network operators are expected to implement new value-added services, such as m-commerce, to maintain revenue growth in the face of competition from other voice network operators.

3.

Wireless standards, technology improvements and awarding wireless spectrum licenses

Worldwide initiatives are evolving for wireless standards, such as OMA/WAP, that enhance the attractiveness for wireless device and m-commerce application developers to create products and services to operate on wireless networks.  Network operators are also preparing for the opportunities that m-commerce holds by upgrading their networks to maximize available capacity and providing wireless device connection to the Internet that is always on rather than having to establish an Internet connection when needed.

4.

Lack of security as an impediment to m-commerce and e-commerce growth

Security is often regarded as the primary impediment to the mainstream adoption of the Internet as a business tool.  Given the importance attached to the Internet and wireless networks and the related potential for cost reduction and revenue generation, the issue of security becomes one of fundamental need and importance.  The majority of respondents to a recent survey conducted by Deloitte & Touche cited the following barriers to e-commerce: lack of security, other priorities, immature technology and no proven benefits.  VISA International has stated publicly that although only two percent of its credit card business relates to Internet transactions, fifty percent of its disputes and discovered fraud are in that area.  VISA also stated that the problem of authentication has become one of the most important issues facing e-commerce in the financial industry.  In another well-publicized demonstration of the security issues involved in conducting commercial transactions over the Internet, e-Bay, an Internet-based on-line auction site, recently had a third party fraudulently execute an auction purchase under the name and password of one of e-Bays customers.  This security breach demonstrates the issues relating to the authentication of customers.  Recent overloading of e-business web sites by hackers and the hacking of hundreds of thousands of credit cards has served to highlight the need for strong security.

Strategy

We strive to be a leader in providing security products for m-commerce over wireless networks and other networks, including corporate networks, telecommunications systems and the Internet.

Our revenue model consists of (i) license fees from the licensing of our Passport ONE, Passport Certificate Server®and Passport Authorization Product, which are one-time fees typically recorded upon execution of the license agreement and the shipment of the software as long as all vendor obligations have been satisfied and collection of the license fee is probable (although a licensee may ultimately require additional servers and pay additional fees), (ii) recurring royalties from the provision of certificates and permits, (iii) annual support fees (for phone assistance and product updates) and (iv) consulting fees (advice regarding the integration of our software with a clients application).  In certain cases, we have waived the first year support fees for certain of our customers (usually amounting to approximately 15% of aggregate license fees).  As our business evolves, we expect that most of our revenue will be generated through recurring royalties.  This revenue stream is dependent on the adoption of transaction-based applications over wireless networks.

The key elements of our strategy to achieve this objective include the following:

Target emerging m-commerce markets.Our sales and marketing activities are primarily targeted at emerging markets for enterprise, financial and government markets, in addition to more traditional forms of e-commerce over wireless networks.  Within these markets, our customers and partners include device manufacturers, network infrastructure manufacturers, application developers, certificate authorities and network operators.  Our business plan is dependent of the cooperation of numerous parties to a transaction.  The original equipment manufacturers, or OEMs, must integrate our software into their hardware and software products.  These personal digital assistants, or PDAs, are then sold to consumers or enterprise customers.  Application developers also integrate our technology into their solution.  Once this software is embedded into a PDA and the end user performs an action, a digital certificate or digital permit will be issued.  A certificate authority, or CA must also be PKI enabled and issue these certificates. A CA may cooperate with a registration authority. The registration authority is responsible for validating a user's identity, on behalf of the CA, before a certificate is issued.  It is through all these parties working together that our vision is realized.

Expand strategic relationships.We have formed relationships in the areas of sales, marketing and technology with industry leaders, and expect to continue to form such relationships in the future, to encourage widespread acceptance of our authentication and authorization products.  These include relationships with such companies as:

Ericsson

Microsoft

Gemplus

Research In Motion

Hewlett-Packard

SchlumbergerSema

Hongkong Post

Scotiabank

Hutchison

Maintain what we believe to be a leadership position in terms of research and development of technology.In late 1996, we acquired technology that consists of concepts and methods that relate to automatic and safe public information communication systems and methods for secure distribution of information.  This technology, as well as our root rollover and permit technology, forms the primary foundation on which we base our current product developments.  We have invested, and intend to continue to invest, significantly in the development of our technology.  We will base future development of our technology on wireless security market requirements.  In January 1999, we were issued a patent for this technology by the U.S. Patent and Trademark Office that will be in effect until August 22, 2017.  In April 2001 we received an U.S. patent for our technology relating to the handling of permissions.  In June 2001 we received an Israeli patent that will be in effect until 2021 for our technology relating to safe communications handshake and data transfer.  On July 11, 2003, we received a patent from the State of Israel Patent Office for our System and Method for Reliable Key Transfer.  This patent will be effective until 2021.  This system and method provides for an automated method to securely update root CA keys and certificates (basis for root rollover) and combine domains. On August 5, 2003, we received a trademark from the U.S. Patent and Trademark Office for our Diversinet logo.  This trademark will be effective until 2013.  On November 2, 2003, we received a patent from the State of Israel Patent Office for our System and Method for Handling Permits.  This patent will be effective until 2017.  The patented technology provides for a unique permit separation model that enhances the security and privacy of wired and wireless e-commerce systems by improving the management of personal privileges in advanced PKI security environments.

Build awareness of the Diversinet brand.Our goal is to establish our brand as a leader for security products for all transactions over wireless networks.  We plan to achieve this goal through a variety of programs that will generate brand awareness.  These include regular press and investor sessions, an ongoing pro-active speaking program by senior management and regular interaction with major market influencers.

Strengthening our Presence in the US Market.  We believe the U.S. market will be an active and growing market for our solutions and services.  To strengthen our position in this important market Diversinet acquired two U.S. based companies in 2003, Caradas and DSS.  The professional resources, U.S. customer relationships and products obtained through these acquisitions will help improve our presence in the U.S. and provide an expanded offering in international markets.

Products and Product Development

Products

We develop, market and distribute six primary products: Passport Certificate Server,® Passport ONE, Connexus Platform, Passport SMS Messenger, Passport Authorization Product, and Passport Wireless VPN, that together provide, what we believe to be, a comprehensive security solution with a focus on wireless applications including Palm, RIM, Symbian, Microsofts WinCE and Pocket PC operating systems; WAP devices; Smart Cards; and GSM/SIM (Subscriber Identity Module) based devices.  Our products are designed to address the unique needs of wireless devices, networks and applications.  When integrated with an enterprises specific application, our products enable these enterprises to effectively manage secure communications across a wide range of applications.

Passport Certificate Server® and Passport ONE software address the five critical network security needs of enterprises (authentication, non-repudiation, integrity, privacy and authorization) and allow for consistent enterprise-wide security policy management, permitting any enterprise or service provider to establish its own flexible and highly reliable PKI.  Passport ONE and Passport Certificate Server® issue digital certificates, consisting of public and private keys to authenticate users of business applications in real time.  Passport Certificate Server®digital certificates are based on Diversinets proprietary compact micro-certificate format.  Micro-certificates are designed for use in lower-bandwidth network environments, with mobile devices that have limited battery life, and lower data processing and storage capabilities.  Passport ONE issues Internet digital certificates suitable for use with mobile and Internet devices that comply with this industry standard.  Such support for standards allows Passport ONE to issue certificates for use with SSL, WTLS and WAP security. Passport Certificate Server® enables user anonymity through the use of globally unique identifiers, such that permissions or private information and credentials belonging to the digital certificate owners are stored separately. Passport Certificate Server and Passport ONE run on Microsoft Windows® 2000, Windows NT or UNIX platforms.  The Passport Certificate Server includes a developer toolkit for client software development.

Our current product offerings include encryption technology that is sourced from third-party vendors.  Diversinet currently uses its own encryption technology and also licenses encryption technology from RSA Security, one encryption technology vendor who service the wireless and the e-commerce security markets.  Under the terms of the open-ended licensing arrangement, we pay a royalty to the licensor when we derived recurring revenue from the deployment of our products.

We believe that the our Passport ONE and Passport Certificate Server® offers the following advantages over conventional authentication solutions that make it well suited for wireless devices and wired networks:

Privacy

•

Our public-key certificates do not contain personal information, thereby ensuring anonymity

Efficiency

•

The Passport Certificate Server® certificate is small in size, since only relevant, and not private, information is included

•

It uses a compact encoding scheme and RSA encryption keys

•

Root Key Rollover provides a safe way, with minimal downtime, to update all certificates issued in a PKI realm

•

On-line validation of certificates, which is more efficient than other methods (such as revocation lists)

Scalability

•

It accommodates practically any number of certificates

•

Support for wide range of wireless devices (Palm, RIM, Symbian, Microsofts WinCE and Pocket PC operating systems; WAP devices; Smart Cards; and GSM/SIM (Subscriber Identity Module) based devices)

Flexibility

•

The client globally unique identifier within a public-key certificate can be associated with one or more attribute certificates

•

Companies can set up environments to be closed or open, such as allowing clients to reserve their own globally unique identifier

•

A functional attribute can be assigned to a public-key certificate for a specific application function

•

Aliases can be assigned to clients globally unique identifier

We believe that our products are ideally suited to m-commerce security using wireless devices.  Some of the important characteristics and challenges of these wireless devices compared to personal computers are:

•

the devices have a less powerful central processing unit

•

they contain less memory

they have a more restricted power supply

We believe our technology and approach to secure m-commerce have several distinct advantages over existing security methods.  Most notably, our solutions were developed specifically for the wireless environment.  Our digital certificate technology minimizes demands placed on scarce device resources such as processor and memory, and as a result assists in conserving battery life.  Our technology achieves this goal by using a digital certificate format designed to eliminate non-essential information such as user name fields, which often is also confidential.  As a result, our digital certificate consumes approximately one-tenth the storage requirements of digital certificates designed for wired networks, while also preserving the anonymity of the user.  Our digital certificate can be easily stored on the wireless device, allowing for end-to-end security from device through to the application provided on the wireless network.

Our technology also minimizes the amount of data sent over the network and the number of steps required to achieve a secure connection, which optimizes consumer network resources.

The ConnexusTM platform integrates enterprise applications, application security, and smart devices to enable customers to manage their own multi-application smart device business environment. The ConnexusTM Platform is a solution for user authentication and management of smart device-based applications. It consists of proprietary and 3rd party connector technology. The technology basis is driven by open standards including Microsoft .NET, XML, SOAP, Open Platform, Java and JavaCard, EMV (Europay, MasterCard, Visa for Smart Card Financial Transactions), X.509 and others.



The ConnexusTM Platform consists of the Connexus Manager, Connexus Gatekeeper, and Connexus Client.  The  ConnexusTM Manager is a software product used for lifecycle management of the credentials, smart devices (i.e. smart cards, USB tokens, proximity cards and tokens, PC’s, Kiosks, and Point of Sale Terminals) and applications used within a smart device based system.  The  ConnexusTM Gatekeeper is a web services product used for smart device holder authentication in local and distributed internet environments.  The  ConnexusTM Client is a PC/Kiosk software product that provides a seamless and convenient smart device user experience, including both core infrastructure services and value-added application functions.  The Connexus product uses a few third party products.  The most significant one is the Hardware Security Modules (HSM) from nCipher.



Transactional applications, such as mobile banking, lottery and wagering services, and enterprise productivity tools, can be mobilized quickly and conveniently using Passport SMS Messenger. It establishes a critical link between Internet applications and wireless devices by translating between Internet and mobile message formats. It delivers a comprehensive solution allowing the exchange of Internet information and content with mobile users via Short Message Service (SMS). This includes notifications being sent to mobile users from an enterprise or e-mail system, or information requests initiated by mobile users to the enterprise application.



Applications can communicate with Passport SMS Messenger using XML-encoded messages through an HTTP POST request or TCP connection. When the SMS Messenger receives an XML message, it parses and formats the document as an SMPP message and then sends it to a Short Message Service Center (SMSC). In turn the SMSC routes the message to the mobile user as an SMS message.



Passport SMS Messenger supports message concatenation, such that it will concatenate message segments received from mobile subscribers before sending the entire message to the application. Conversely, Passport SMS Messenger will segment a long message received from applications before sending the segmented messages to the mobile user.



Our Passport Authorization ProductTM grants privileges to the holder of our digital certificate or the digital certificate of certain other vendors.  The authorization product issues digital permits that are linked to the holder’s digital certificate.  The digital permit is designed to allow digital certificates to serve additional functions such as authorizing users to perform specific tasks once they access a given network.

Our PKI-enhanced Wireless VPN product, Passport Wireless VPN, offers a complete wireless Virtual Private Network (VPN) suite to meet the needs for organizations to provide their mobile workforce with secure wireless access to corporate data. Passport Wireless VPN offers a strong security framework, optimized performance and convenient always-on connectivity. Passport Wireless VPN uses a strong security framework specially designed and optimized for communication in a wireless environment. Transport and network level security is based on a Public Key Infrastructure (PKI) framework for maximum interoperability.

Product Applications

Our Passport Certificate Server® and Passport ONE products are primarily intended to support a wide variety of emerging m-commerce applications in the financial, enterprise, government and gaming industries.  Our Passport Wireless VPN is intended to support enterprise and mobile workforce applications. Our Passport Authorization ProductTM is intended to support a wide variety of emerging wireless and wired applications, such as coupons and loyalty programs, prescriptions for doctors for online pharmacies, and rights for subscription services (e.g., a 45-day electronic subscription for the Wall Street Journal).

Product Development

Our engineering group is focused on developing core technologies and enhancements to existing product lines to maintain and extend what we believe to be our technology and product leadership position.  More specifically, the group is currently focused on the development of additional features for Passport ONE, Passport Certificate Server®and Passport Authorization ProductTM software the features of which will be assessed in terms of market demand and competition.  Our engineering group reviews all relevant proposed industry standards or conventions as they are developed and seeks to make our products compatible with each of them.  In addition, we participate in industry standard bodies, such as the Open Mobile Alliance (formerly the WAP Forum) and the Open Group and we monitor the activities of others, such as the Internet Engineering Task Force (IETF) and the American National Standards Institute (ANSI).

Professional Services and Support

We believe that a high level of service and support will be critical to our success and that a close and active customer relationship is important to facilitate rapid implementation of our solutions, assure customer satisfaction and provide us with important information regarding evolving customer requirements.  We are in the process of building a professional services group that will provide product integration services, customized engineering solutions and training to customers.

Our support offerings to date include direct telephone consulting, e-mail and fax support, Internet access to our knowledge repository, and discussion group access.  Payment of an annual maintenance fee also entitles customers to receive certain software enhancements to their licensed versions of our security solution.

Research and Development

We expect that our future success will depend in large part on our ability to continue to maintain what we believe is a leadership position in terms of research and development of technology.  Our research and development efforts are focused on developing core technologies and enhancements to existing products to maintain and extend our technology and product leadership position.

As of December 31, 2003, our research and development staff consisted of thirteen employees.  Research and development expenditures were $1.5 million in the fourteen-month period ended December 31, 2003, $1.2 million in the year ended October 31, 2003, $1.5 million year ended October 31, 2002, $4.5 million in year ended October 31, 2001, and $4.0 million in year ended October 31, 2000.  We expect to spend approximately$1.1 million in fiscal 2004.  We believe that timely development of new and enhanced security products is necessary to remain competitive in the marketplace.

Customers

To date, we have executed licensing agreements with a range of customers; Hongkong Post, Consist International, Edvance Limited, Spiral Solutions, AsiaPay, Scotiabank, Heracle Technologies, and SecureNet Ltd.  In addition, we received service revenue for support and maintenance from a number of other small service contracts for professional services and training.  We currently have several customers developing the products for integration into their product offerings (as an embedded component) and others developing pilot deployments to end-users.

We believe the following customers are in various stages of integrating our products into consumer-oriented applications or pilot projects:

AsiaPay

Spiral Solutions

Consist International

Scotiabank

Hongkong Post

Edvance Limited



In addition, we have co-marketing and/or development agreements with several innovative companies.  These companies are working with Diversinet to develop integrated security solutions.  If successful solutions are developed, Diversinet expects to earn revenue as these solutions become commercially available.  Some of these relationships include the following companies:

Ericsson

SchlumbergerSema

Gemplus



We have also entered into a number of strategic alliances during the past two years that we believe will facilitate the adoption of our security technology.  These alliances are with the following companies:

Consist International, Inc.

Consist and Diversinet entered into an agreement in fiscal 2003 to co-market and sell Diversinets products and service solutions to the Brazilian and Argentinean markets.  Under the terms of the agreement, Diversinet has granted Consist the ability to resell its solutions and to set up an ASP Certificate Authority model.  Under the agreement Consist will, subject to meeting specific sales targets, have exclusivity to sell Diversinets solutions in Brazil and Argentina.  Diversinet received an up front license fee and will share equally in all net revenues generated from sales of Diversinet solutions.

This agreement will help Diversinet expands into the South American markets and provide us with a new channel to market our solutions.

Spiral Solutions, Ltd.

Spiral and Diversinet entered into an agreement in fiscal 2003 to integrate Passport Certificate Server, Passport ONE, Passport Authorization and Passport SMS with Spirals gaming, casino and lottery-style applications.  Spiral is in the business of designing, developing and marketing Web and mobile-based gaming, casino and lottery-style applications.  Under the terms of the agreement, Diversinet received an up front licensing fee and a royalty based on commercial sales of the application.

This agreement will help Diversinet expands into the gaming and wagering markets and provide us with a new channel to market our solutions.

Hongkong Post

Hongkong Post and Diversinet jointly developed Mobile e-Cert, based on our wireless security products. Hongkong Post supports the Mobile e-Certs through its Mobile Certification Authority and mobile operators act as the Registration Authorities for the authentication of the identity of Mobile e-Cert subscribers.  Hongkong Post is the first recognized public certification authority in Hong Kong, and Hongkong Exchanges and Clearing Ltd supports this initiative.  Mobile e-Cert service will facilitate secure stock trading, banking, gaming, and digitally signed messages over wireless communications devices. This marks the first-ever availability of Mobile e-Certs globally.  Subsequent to year-end, Hutchison Telecommunications (HK) Ltd., the largest mobile operator in Hong Kong, and SUNDAY Communications became Registration Authorities.

The first phase of the new Mobile e-Cert service supports Palm and Pocket PC PDAs, and mobile phones. Future phases of the service will support WAP devices and other PDAs.

Competition

Our digital certificate technology is targeted at the new and rapidly evolving demand for secure m-commerce solutions.  Although the competitive environment has yet to develop fully, we anticipate that it will be highly competitive, subject to rapid change and significantly affected by new product and service introductions and other market activities by industry participants.  We believe we are one of a few companies that currently have PKI-based solutions on PKI standards available in the wireless security market that provides an end-to-end solution.  Sonera SmartTrust is our primary competitor in the technology platform on which most cellular phones in Europe operate.  There are a number of successful wired network security vendors who have announced their intention to compete in the wireless space.  These include Certicom, Entrust, and VeriSign.  While these competitors have better name recognition in general, we are striving to become a leading brand in wireless security today.  We also anticipate competition from a number of other larger and smaller companies that provide other certificate security solutions.  Many of our competitors and potential competitors have significantly greater resources than we have.

The principal competitive factors affecting the market for wireless security products include technical features, ease of use, reliability, level of security, scalability, customer service and support and price.  There are also significant technical challenges that are unique to the wireless environment, including constraints in device processing and storage capabilities, and network throughput limitations.  We believe our products have been optimized for this unique and technically challenging environment.  Our future success will largely depend on our ability to make our products available to serve the rapidly growing network security market, rather than taking market share away from competitors.

Regulatory Matters

Our products are subject to special export restrictions administered by the Canadian government and are also subject to import restrictions and/or use restrictions imposed by countries such as the United States, although pursuant to a recent international treaty, a number of countries have relaxed, or are in the process of relaxing, their export rules as applicable to products of the type licensed by us.  Consequently, our ability to export our products to destinations outside of Canada is subject to a variety of government approvals or licensing requirements.  These export controls may also restrict our ability to make some products available for sale via international computer networks such as the Internet.  Re-export of the products between countries other than the United States and Canada may be subject to the export control laws of those countries in addition to those provisions of Canadian export control laws that apply to re-exported goods.  In light of these restrictions, depending on the country of destination, industry sector and/or end-user, some of our products made available abroad may contain significantly weaker encryption capabilities than those available to customers in Canada, and there can be no assurance that we will continue to be able to export our products to any destinations outside of Canada.  Such restrictions could potentially have an adverse effect on our business, financial condition and results of operations.

Intellectual Property

We rely on a combination of patent, trade secret and trademark laws, non-disclosure agreements and contractual provisions to establish and protect our proprietary rights.  We also seek to protect our trade secrets and other proprietary information through license agreements with customers and suppliers, as well as non-disclosure and non-competition agreements with employees and consultants.

On January 26, 1999, we received a patent from the U.S. Patent and Trademark Office for our Method for Safe Communication which will be in effect until August 22, 2017.  This method consists of the safe distribution of encryption keys, including a known public and secret private key, and establishes a secure link between computer users who reside at separate locations and who have had no previous secure communications.

On April 10, 2001, we received a patent from the U.S. Patent and Trademark Office for our System and Method for Handling Permits.  The patented technology provides for a unique permit separation model that enhances the security and privacy of wired and wireless e-commerce systems by improving the management of personal privileges in advanced PKI security environments.

On June 20, 2001, we received a patent from the State of Israel Patent Office for our Apparatus and Method for Safe Communication Handshake and Data Transfer.  This patent will be effective until 2021.  This apparatus and method provides for the safe distribution of encryption keys, including a known public and secret private key, and establishes a secure link between computer users who reside at separate locations and who have had no previous secure communications.

On July 11, 2003, we received a patent from the State of Israel Patent Office for our System and Method for Reliable Key Transfer.  This patent will be effective until 2021.  This system and method provides for an automated method to securely update root CA keys and certificates (basis for root rollover) and combine domains.

On August 5, 2003, we received a trademark from the U.S. Patent and Trademark Office for our Diversinet logo.  This trademark will be effective until 2013.

On November 2, 2003, we received a patent from the State of Israel Patent Office for our System and Method for Handling Permits.  This patent will be effective until 2017.  The patented technology provides for a unique permit separation model that enhances the security and privacy of wired and wireless e-commerce systems by improving the management of personal privileges in advanced PKI security environments.

Applications for thirteen other patents have also been submitted in Israel and Canada based on the same concept for which the United States patent was granted, as well as other concepts.

We have registered the name Passport Certificate Server with the Canadian Trademark Office.  We have also applied to register as trademarks with the United States Patent and Trademark Office and/or the Canadian Trademark Office the names Diversinet, Passport Certificate Server and Passport Authorization Product, but there can be no assurance that these trademarks will be successfully registered.

We continue to seek patent and trademark protection where appropriate.

Marketing and Sales

Marketing

Our marketing efforts will support our two primary marketing objectives:

(i)

increasing awareness through building the Diversinet brand; and

(ii)

generating sales leads in our target markets.  Our efforts to increase awareness and build our brand will entail gaining positive coverage in targeted trade and business publications and establishing and developing relationships with analysts from market influencers, such as Yankee Group and Meta Group.  Diversinet will pursue the generation of sales leads through the implementation of programs such as web marketing, direct mail, active participation in targeted events, and cooperative marketing activities in support of channel partners.

Sales

We offer our products in Canada, the United States, Brazil, Argentina, Europe, and China (including Hong Kong) employing several sales models to target our intended markets.

We believe that our coverage of these markets by our sales team and our partners is necessary to pursue our targeted customer base, which is still in the early stage of wireless application deployment and testing.  Our customer focus is in providing secured wireless and identity management solutions to enterprise and government application developers, both directly and through OEM distribution channels.  Once established, we will continue to focus our attention to certificate authorities that we will work with to implement the infrastructure necessary to conduct secure m-commerce transactions.

We are also exploring other distribution channels to assist in reseller relationships, OEM relationships, and/or private branding of our products.

The current sales and implementation cycle for our certificate authority products is approximately twelve months and consists of four phases:

•

Initial contact and customer education/qualification

•

Pilot proof of concept

•

Early deployment testing

•

Phased production rollout

4-C.

Organization Structure

Diversinet Corp. has a representative office in Hong Kong, SAR.  In January 2003, we acquired 100% ownership of DSS, a professional services company, in Fremont California.  In September 2003, we acquired 100% ownership of Caradas, a smart card-based application security company headquartered just outside Boston, Massachusetts.

During 2001, we entered into an agreement with an Asian company to establish a joint venture to conduct certain of our Asian activities.  Each party holds a 50% interest in the joint venture, Atria Limited (formerly Diversinet Hong Kong Limited).

We have four inactive wholly-owned subsidiaries, Diversinet Corporation of America, incorporated in Delaware, Diversinet Inc., an Ontario corporation which was formed on November 20, 1996; Instant Publisher Ltd., a Barbados corporation formed on December 2, 1993; and Diversinet (Israel) Ltd., an Israeli corporation.

4-D.

Property, Plant and Equipment

Our head office is located in leased premises of approximately 6,200 square feet at 2225 Sheppard Avenue East, Suite 1801, Toronto, Canada M2J 5C2.  During the year Diversinet sublet the 17th floor (13,497 sq. ft.) and have moved to the smaller space on the 18th floor.  We also have leased premises in Hong Kong, SAR, California and Massachusetts, United States of America.

The lease for our head office expires in June 2006.  The Hong Kong office lease has a term of less than one year.  One of the California leases expires in August of 2005 while the other expires in September of 2004.  The Burlington, Massachusetts lease for 2,601 square feet expires on September 30, 2004.  We currently expect to be able to extend the terms of expiring leases or to find replacement facilities on reasonable terms.

ITEM 5.   OPERATING AND FINANCIAL REVIEW AND PROSPECTS

Our financial statements have been prepared in accordance with Canadian GAAP.  These principles conform in all material respects with U.S. GAAP except as described in Note 15 to our 2003 consolidated financial statements.  The differences between line items under Canadian GAAP and those as determined under U.S. GAAP are not significant except that, under U.S. GAAP, our total loss would be greater by $nil for the two month, fourteen month period ended December 31, 2003 and twelve months ended October 31, 2003, $35,000 for the year ended October 31, 2002, and greater by $37,000 for the year ended October 31, 2001.  Under U.S. GAAP share capital would be greater and deficit would be less by $30,089,000 for each of the years due to the elimination of reduction in stated capital offset against accumulated shareholders deficit in March of 1999.



The following discussion should be read in conjunction with the consolidated financial statements and notes thereto appearing elsewhere in this annual report.  Except for historical information, the following discussion contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended.  Such forward-looking statements involve risks and uncertainties.  Such forward-looking statements include, among others, those statements including the words, expects, anticipates, intends, believes, and similar language.  Our actual results may differ significantly from those projected in the forward-looking statements.  Factors that might cause future results to differ materially from those discussed in the forward-looking statements include, but are not limited to, those discussed in Risk Factors in Item 3-D. of this annual report.



We have incurred operating losses in each of fiscal 2003, 2002, 2001, 2000, 1999 and 1998 due to losses from our continuing operations of developing security products and our discontinued operations of developing and marketing the IPS 950 instant color digital printing system.  We have sustained our business during this period through the sale of common shares in a series of private placements.  We cannot provide assurance that we will be able to raise sufficient funds in the future to sustain our operations.



5-A.

Operating Results

Two and Fourteen-month period ended December 31, 2003 and year ended October 31, 2003 compared to year ended October 31, 2002



During fiscal 2003, the Company purchased 100% of the common shares of two companies, the DSS acquisition occurred on January 2, 2003 resulting in the inclusion of twelve months activities in the consolidated financial results for December 31, 2003 and the Caradas acquisition occurred on September 1, 2003 resulting in the inclusion of four months activity in the consolidated financial results for December 31, 2003.  The common shares of DSS were purchased through the issuance of shares, common share purchase warrants, cash and a promissory note. The common shares of Caradas were purchased through the issuance of shares and common share purchase warrants.  As a result of a number of circumstances, including the current year financing activities, the acquisition of DSS and Caradas and the U.S. dollar becoming the measurement currency in which most of the Companys business is transacted, effective October 1, 2003, the Company adopted the U.S. dollar as its measurement and reporting currency for preparation of its consolidated financial statements.



With the acquisitions of DSS and Caradas, the Company has additional resources in the U.S.  The Company also continued to maintain its Canadian operations.  During 2002, the average U.S. - Canadian dollar rate was 1.57.  During 2003, the average U.S. - Canadian dollar rate had dropped to 1.40, causing our Canadian dollar expenditures to increase relative to the U.S. dollar.  During 2002, the Company had Cdn$5,180,000 (based on the average rate of 1.57, U.S. $3,299,000) in Canadian dollar cash expenditures.  During 2003, the Company had Cdn$4,313,000 (based on the average rate of 1.40, U.S. $3,081,000) in cash Canadian dollar expenditures.  With the change in the average exchange rate between 2002 and 2003, the net effect of the changes in the foreign exchange rates was an increase in operating results of U.S. $334,000.



For the periods ending December 31, 2003 and October 31, 2003, we reported revenue of $8,563,000 and $7,108,000 respectively compared to revenue of $710,000 for the year ended October 31, 2002.  For the two month period ending December 31, 2003 we reported revenue of 1,455,000.  We generated 96% (2% in 2002) of our revenues from the United States, 3% (63% for 2002) from the Asia Pacific region, 0% (29% in 2002) from Canada and 1% (6% in 2002) from other areas during the period ended December 31, 2003 and the period ended October 31, 2003.  The increase in revenue is the result of the acquisition of DSS and Caradas during the year; both companies are located in the United States, leading to the high percentage of U.S. based revenue.  Furthermore, we changed our year-end to December 31st, leading to a two-month and fourteen-month reporting period.  We are operating in an evolving and unpredictable market and accordingly have and may continue to experience wide fluctuations in our revenues.



During the two periods ending in 2003, 30% (28% in 2002) of our revenue came from one customer.  These customers are not related to each other.  While we are endeavoring to increase our customer base, as the market that we operate in is still in an evolving stage and our revenue is still quite small, it is reasonable to expect that our revenue may continue to be concentrated among relatively few customers for the near future.



We reported a net loss of $5,618,000 for the fourteen month period ended December 31, 2003 and $4,834,000 for the year ended October 31, 2003 compared to a net loss of $4,065,000 in the prior year.  For the two month period ended December 31, 2003, we reported a net loss of $784, 000.  This net loss includes stock-based compensation expense relating to the issuance of options and warrants of $825,000 and $772,000 respectively and nil for 2002 (and $53,000 for the two month period ended December 31, 2003).  During the year the Company started to report a fair value for stock-based compensation and including this as an expense.



Research and development expenses were $1,513,000 in the period ended December 31, 2003 and $1,244,000 at October 31, 2003 compared to $1,479,000 in 2002 (and $270,000 for the two month period ended December 31, 2003).  The annualized decrease is due to further cost reduction measures carried out in the second quarter of 2003.  During the year we received a net amount of $289,000 relating to investment tax credits for R&D work done in 2002 and 2001 and a rebate of retail sales taxes paid in excess in 2001.



Sales and marketing expenses were $2,656,000 in the period ended December 31, 2003 and $2,271,000 at October 31, 2003 compared to 1,104,000 in 2002 (and $385,000 for the two month period ended December 31, 2003).  The increase in sales and marketing is largely due to the two acquisitions that were done during the year and the increase is consistent with the increase in sales activity to generate the revenues during the period.  While the Asia Pacific market place continues to be a focal point for the Company, with the addition of DSS and Caradas, we have increased our U.S. presence and increased sales and marketing in the U.S. accordingly.  Included in the fourteen month period ending December 31, 2003 sales and marketing expenses is $300,000 relating to stock-based compensation expenses.



General and administrative expenses were $2,654,000 at December 31, 2003 and $2,369,000 at October 31, 2003 compared to $1,899,000 in 2002 (and $285,000 for the two month period ended December 31, 2003).  These figures include foreign exchange losses of $309,000 for the fourteen month period ended December 31, 2003 and $230,000 in October 31, 2003 and a loss of $145,000 for 2002 (and $79,000 for the two month period ended December 31, 2003).  Until October 1, 2003 the Company has historically prepared its consolidated financial statements in Canadian dollars and used the Canadian dollar as its measurement currency.  Included in the December 31, 2003 G&A expenses is $525,000 relating to stock-based compensation expenses.



Depreciation and amortization expense was $740,000 in the fourteen month period ended December 31, 2003 and $574,000 for the year ended October 31, 2003 (and $166,000 for the two month period ended December 31, 2003).  These figures include amortization of intangible assets acquired on September 1, 2003 in the amount of $173,000 and $87,000, respectively.  Depreciation and amortization expense in fiscal 2002 was $404,000.



We earned interest and other income of $26,000 during the period ended December 31, 2003 and the year ended October 31, 2003 and $111,000 in fiscal 2002 through investing our excess cash.



Interest expenses were $21,000 during the period ended December 31, 2003 and $20,000 for the year ended October 31, 2003 compared to $nil in 2002.  This interest relates to notes payable on capital assets acquired during the year.



Year ended October 31, 2002 compared to year ended October 31, 2001



For the year ended October 31, 2002, we reported revenue of $710,000 compared to revenue of $793,000 for the year ended October 31, 2001.  We are operating in an evolving and unpredictable market and accordingly have and may continue to experience wide fluctuations in our revenues. We generated 63% (55% for 2001) of our revenues from the Asian region, 2% (24% in 2001) from the United States, 29% (17% in 2001) from Canada and 6% (4% in 2001) from other areas during fiscal year 2002.



During fiscal 2002, 28% (40% in 2001) of our revenue came from one customer.  These customers are not related to each other.  As the market that we operate in is still in an early stage of development and our revenue is still quite small, it is reasonable to expect that our revenue may continue to be concentrated among relatively few customers for the near future.



We reported an improved net loss of $4,065,000 for the year ended October 31, 2002 compared to a net loss of $12,272,000 in the prior year.  We completed operating cost reductions in the fourth quarter of 2001 that resulted in a decline in expenses from operations during fiscal 2002 compared to fiscal 2001.  These reductions included workforce reductions in the United States and Canada, closure of offices in the United States and the discontinuance of non-core programs particularly in the marketing area.  The restructuring was aimed at refocusing our efforts on the most significant market opportunities in Asia and Europe.



Research and development expenses decreased to $1,479,000 in 2002 from $4,485,000 in 2001 resulting primarily as a result of continued efforts to reduce costs as started in the last quarter of fiscal 2001.  During the year we received a net amount of $182,000 relating to investment tax credits for R&D work done in 2000 and 1999.



Sales and marketing expenses were $1,104,000 in 2002 compared to $4,712,000 in 2001.  The Company continues to focus a significant portion of its efforts in the Austral Asian markets where we derived 63% of our 2002 revenues.  During 2002 we implemented a pilot project for Hong Kong's six local mobile operators, the Hong Kong m-Cert Implementation Forum to develop and implement a single mobile digital certificate (m-Cert) standard to promote mobile commerce in Hong Kong.  We continue to make progress in this region and expect to increase our presence in 2003.



General and administrative expenses were $1,899,000 in 2002 compared to $2,616,000 in 2001.  These figures include foreign exchange losses of $145,000 for 2002 and a gain of $403,000 for 2001.



Depreciation and amortization expense in fiscal 2002 decreased to $404,000 from $1,226,000 in fiscal 2001.  The Company's deferred development and purchased technology costs were fully amortized in 2001 and the reduction in additions to capital assets has resulted in reduced amortization for the 2002 fiscal year.



During fiscal 2001, we entered into a joint venture to conduct certain of our Asian activities, as detailed in note 8 to our audited financial statements.  We own 50% of this joint venture and our financial statements reflect our proportionate interest in its assets, liabilities, revenue and expenses.



We earned interest and other income of $111,000 and $448,000 in fiscal 2002 and 2001, respectively.  The decrease is primarily due to our lower average cash and cash equivalents in 2002 and due to lower interest rates than we received during 2001.



Critical Accounting Policies

The nature of our business is not highly complex, as we operate in one primary business.  We develop, market and sell wireless security and identity management solutions and professional services to the enterprise, financial services, government and gaming and wagering marketplace. As part of providing these solutions we perform professional services to install, support and integrate our solutions with other applications.  We operate globally in a functional organization.  We do not have any off-balance sheet financing, other than operating leases entered into in the normal course of business and we do not actively engage in derivative or hedging transactions.  During 2003 with the acquisitions of DSS and Caradas, the majority of our revenues and expenses are now in U.S. dollars.  Therefore during the year we switched our functional currency from Canadian to U.S. dollars.  A significant portion of our cash balance is denoted in U.S. dollars.



In 2003, our most complex accounting judgments were made in the areas of revenue recognition.  Revenue recognition is expected to continue to be an on-going element of our accounting processes and judgments.  In 2002, our most complex accounting judgments were made in the areas of software revenue recognition.  Software revenue recognition is expected to continue to be an on-going element of our accounting processes and judgments.



Revenue Recognition

We derive our revenue primarily from two sources: sales of products, including hardware and software licenses, and services, including maintenance, support and professional services.  Significant management judgments and estimates must be made and used in connection with the revenue recognized in any reporting period.  Material differences may affect the amount and timing of our revenue for any period if our management made different judgments.  We have relied upon Statement of Position 97-2, Software Revenue Recognition, EITF 00-21, Accounting of Revenue Arrangements with Multiple Deliverables in developing our revenue recognition policies, SOP 81-1 Accounting for Performance Construction type and Certain Production Type Contracts and CICA 3400 Revenue.



We provide technical consulting services to tier one customers including financial, enterprise and technology companies such as Cisco Systems, Oracle, Sun Microsystems and Wells Fargo in the areas of systems integration, software development, and Enterprise Resource Planning ERP and Customer Relationship Management CRM implementation.  Consulting revenues are recognized on a time and materials basis, or on a percentage of completion basis, depending on the contract, as employees and subcontractors provide services.  Revenue from time and materials service contracts is recognized as the services are provided.  Revenue from fixed price long-term contracts is recognized over the contract term based on the percentage of services provided during the period compared to the total estimated services to be provided over the entire contract.  Losses on contracts are recognized during the period in which the loss first becomes probable and reasonably estimable.  Contract losses are determined to be the amount by which the estimated direct and indirect costs of the contract exceed the estimated total revenues that will be generated by the contract.  Revenue recognized in excess of billings is recorded as unbilled services.  Billings in excess of revenue recognized are recorded as deferred revenue until the above revenue recognition criteria are met.  Reimbursements, including those relating to travel and other out-of-pocket expenses, and other similar third-party costs, are included in revenues.



Revenue from software license agreements is recognized upon execution of a license agreement and the shipment of the software, as long as all vendor obligations have been satisfied, the license fee is fixed and determinable and collection of the license fees is probable.  Revenue from the sale of additional software products is recognized as software is delivered.



For all sales, we use a binding contract, purchase order or another form of documented agreement as evidence of an arrangement with the customer.  Revenues from software license agreements are recognized upon receipt of an executed license agreement and shipment of the software, if there are no significant remaining vendor obligations, collection of the receivable is probable and payment is due in accordance with our normal payment terms.



We consider delivery to occur when we ship the product, so long as title and risk of loss have passed to the customer.



At the time of a transaction, we assess whether the sale amount is fixed or determinable and whether collection is probable.  If we determine the fee is not fixed or determinable, we recognize revenue when payment becomes due.  We assess collectibility based on a number of factors, including the creditworthiness of the customer.  If we determine that collectibility is not probable, we do not record revenue until such time when collectibility becomes probable, which is generally upon the receipt of cash.



Revenue earned on software arrangements involving multiple elements (i.e., software products, upgrades/enhancements, post contract customer support, installation, training, et cetera) is allocated to each element based on vendor specific objective evidence of relative fair value of the elements. When arrangements contain multiple elements and vendor specific objective evidence (VSOE) of fair value exists for all undelivered elements, we recognize revenue for the delivered elements using the residual method.  Our determination of fair value of each of the undelivered elements in multi-element arrangements is based on VSOE of fair value. VSOE of fair value for each element is either the price charged when the same element is sold separately or the price established by management, having the relevant authority to do so, for an element not yet sold separately.  For arrangements containing multiple elements wherein VSOE of fair value does not exist for all undelivered elements, revenue for the delivered and undelivered elements is deferred until VSOE of fair value exists or all elements have been delivered.  The revenue allocated to post contract customer 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.



Maintenance service revenue, whether sold separately or as part of a multiple element arrangement, is deferred and recognized ratably over the term of the maintenance contract, generally twelve months.  Revenue allocated to professional service elements is recognized as the services are performed.



Due to the complexity of some software license agreements, we routinely apply judgment to the application of software revenue recognition accounting principles to specific agreements and transactions.  Different judgments and/or different contract structures could have led to different accounting conclusions, which could have had a material effect on our reported quarterly earnings.



Capital Assets

The Company records its capital assets at their cost less accumulated depreciation.  On a periodic basis, management reviews the carrying values of these assets and compares it to their estimated net recoverable amount.  The determination of net recoverable amount necessitates various assumptions, many of which are forward looking and which are based on managements best estimate of future revenues, expenses and cash flows.  To the extent that actual financial performance adversely differs from the results projected by these assumptions, an impairment charge in the value of these assets would be necessary.



Goodwill and Other Intangible Assets

We record our goodwill in accordance with CICA Handbook section 3062 Goodwill and Other Intangible Assets, that requires that goodwill no longer be amortized but instead be tested for impairment at least annually by comparing the carrying value of a reporting unit with its fair value.  If any potential impairment is indicated, then it is quantified by comparing the carrying value of goodwill to its fair value.  During the fourth quarter of 2003 the Company completed its goodwill impairment test.  The Company determined that the fair values of its reporting units are in excess of their respective carrying amounts.



Recent Accounting Developments

In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities which requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan.  SFAS No. 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002.  The adoption of SFAS No. 146 has not had a material effect on the Companys results of operations and financial position.



In December 2002, the FASB issued FASB Interpretation No 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." Guarantors will have to meet new disclosure and liability-recognition requirements for guarantees of debt that fall within the scope of newly issued FIN 45.  A liability must be recognized at the inception of a guarantee covered by the new requirements whether or not payment is probable, because the Interpretation creates the new concept of a stand-ready obligation.  This Interpretation applies to guarantees issued or modified after December 31, 2002, irrespective of the guarantor's fiscal year end. The disclosure requirements in this Interpretation are effective for financial statements of interim or annual periods ending after December 15, 2002.



In January 2003, the FASB issued interpretation No. 46, Consolidation of Variable Interest Entities (FIN 46).  Its consolidation provisions are applicable for all newly created entities created after January 31, 2003, and are applicable to existing variable interest entities as of the beginning of the Companys fiscal year being January 1, 2004.  With respect to entities that do not quality to be assess for consolidation based on voting interests, FIN 46 generally requires a company that has variable interests that will absorb a majority of the variable interests expected losses if they occur, or both, to consolidate that variable interest entity.  For periods prior to FIN 46s effective date, certain disclosures will be required if it is reasonably possible that the Company will have a significant variable interest in or be the primary beneficiary of a variable interest entity when FIN 46 guidance if effective.  The adoption of this standard will have no material impact on its financial results or operations or cash flows.



5-B.

Liquidity and Capital Resources

Fourteen month period ended December 31, 2003 and year ended October 31, 2003 compared to year ended October 31, 2002 and October 31, 2001

Cash and cash equivalents at December 31, 2003 were $723,000 compared with $864,000 at October 31, 2003 ($609,000 at October 31, 2002 and $1,940,000 at October 31, 2001).  Short term investments, being marketable bonds with a term of less than 90 days that could be converted into cash, at December 31, 2003 were $1,244,000 compared to $1,853,000 at October 31, 2003 ($1,844,000 at October 31, 2002 and $1,956,000 at October 31, 2001).  The net change in cash and cash equivalents and short term investments for the fourteen month period of 2004 was $(486,000) compared to $265,000 for the year ended October 31, 2003 ($(1,444,000) for fiscal 2002 and $(11,247,000) for fiscal 2001).  The decrease for the fourteen month period is mainly due to operating activities, which used cash in an amount of $1,677,000, the investment to acquire DSS and Caradas for net $541,000, the repayment of DSS bank indebtedness of $240,000 and the repayment of notes payable related to the acquisition of DSS of $873,000.  These cash usages were offset by financings of net $2,921,000 (being the June 2003 financing for gross proceeds of $3,100,000 net of fees).  With the acquisition of DSS in January 2003, we acquired an opening accounts receivable balance of $2,257,000, and with the acquisition of Caradas in September 2003 we acquired an opening accounts receivable balance of $985,000.  These opening balances and collections thereafter helped contribute to the $2,425,000 change in accounts receivable during the fourteen month period ended December 31, 2003.



The net change in cash and cash equivalents and short term investments for the twelve month period ending October 31, 2003 of $255,000 is mainly due to operating activities which used cash in an amount of $953,000, the investment to acquire DSS and Caradas for net $541,000, the repayment of DSS bank indebtedness of $240,000 and the repayment of notes payable related to the acquisition of DSS of $868,000.  These cash usages were offset by financings of net $2,931,000 (being the June 2003 financing for gross proceeds of $3,100,000 net of fees).  With the acquisition of DSS in January 2003, we acquired an opening accounts receivable balance of $2,257,000, and with the acquisition of Caradas in September 2003, we acquired an opening accounts receivable balance of $985,000.  These opening balances and collections thereafter, helped contribute to the $2,084,000 change in accounts receivable during the year ended October 31, 2003.



On June 23, 2003, we completed a private placement of 5,000,000 common shares at a price of $0.62 per common share for gross proceeds of $3,100,000.  The placement agent exercised its option to receive 500,000 common shares in lieu of its $310,000 fee from the private placement.  The placement agent also received 40,000 common shares in lieu of its $24,000 retainer fee to act as placement agent.  Further compensation was issued as a three-year broker cashless exercisable warrant terminating on June 20, 2006 to purchase up to 500,000 common shares of Diversinet at $0.62 per share.  The placement agent has exercised 440,000 in a cashless exercise to receive 304,037 common shares.



With the addition of DSS in January 2003 and Caradas in September 2003, we incorporated the fair value of their balance sheets into the Companys on the acquisition dates.  The inclusion of these balance sheets has affected the calculation of non-cash operating working capital for the fourteen month period ended December 31, 2003 and the year ended October 31, 2003.



The net change in cash and cash equivalents and short term investments for the twelve month period ending October 31, 2002 of $(1,444,000) is mainly due to operating activities which used cash in an amount of $4,532,000 which was offset by the April 2002 financing for gross proceeds of $3,100,000.  In April 2002, we completed a private placement for net proceeds of $3,108,000.  The Company completed the issue and sale of 518,671 units in the capital of the Company at $6.00 per unit for gross proceeds of $3,112,022.



The net change in cash and cash equivalents and short term investments for the twelve month period ending October 31, 2001 of $(11,247,000) is mainly due to operating activities which used cash in an amount of $10,596,000 and the purchase of capital assets for $719,000.



As of December 31, 2003 we had commitments under non-cancelable operating leases for our facilities and equipment through 2006 in amounts ranging from $620,000 in fiscal 2004 declining to $308,000 in fiscal 2006.



We are not subject to material market risk exposures, except for risks related to interest rate fluctuations and foreign currency exchange rates.  Our exposure to market rate risk for changes in interest rates relates primarily to our short term investments, created by our past financings.  We have not used derivative financial instruments in our short term investments.  We invest in high quality money market instruments and bonds with terms of less than 90 days.  We are averse to principal loss and ensure the safety and preservation of our invested funds by limiting default, market and reinvestment risk.  We do not make use of a bank line of credit and do not have any long-term debt.  The impact of inflation has not been material to our business over the past five years.



We believe that our cash and cash equivalents and short-term investments as at December 31, 2003 of $1,967,000 together with the additional funds raised subsequent to our year-end will be sufficient to meet our short-term working capital requirements for the next fiscal year.  We may need to raise additional amounts to meet our working capital requirements through private or public financings, strategic relationships or other arrangements.  However, additional funding may not be available on terms attractive to us, or at all.  If we enter into strategic relationships to raise additional funds, we may be required to relinquish rights to certain of our technologies.  Our failure to either raise capital when needed or to generate revenues would leave us with insufficient resources to continue our business.



The following table presents unaudited selected financial data for each of the last eight quarters ending October 31, 2003 and the two months ended December 31, 2003:

|                  | Revenue for the period | Loss for the period | Basic and diluted loss per share
|----------------- | ---------------------- | ------------------- | --------------------------------
|December 31, 2003 | $  1,455,000           | $   784,000         | $       0.07                    
|October 31, 2003  | 2,687,000              | 1,882,000           | 0.33                            
|July 31, 2003     | 1,742,000              | 738,000             | 0.13                            
|April 31, 2003    | 1,835,000              | 1,443,000           | 0.45                            
|January 31, 2003  | 843,000                | 772,000             | 2.39                            
|October 31, 2002  | 261,000                | 657,000             | 0.22                            
|July 31, 2002     | 140,000                | 1,001,000           | 0.31                            
|April 31, 2002    | 198,000                | 1,311,000           | 0.47                            
|January 31, 2002  | 111,000                | 1,096,000           | 0.41                            



5-C.

Research and Development, Patents and Licenses, et cetera

We plan to continue to invest in research and development for our security products based on the technology we purchased in 1996, and we anticipate spending approximately $1,060,000 in the year ending December 31, 2004 in connection with these efforts.  We expect to allocate funds almost entirely to salary payments to staff for the continued research and development of our security product suite.  We cannot reasonably estimate when the benefits, if any, of the continued development costs will be realized.  We also cannot reasonably estimate whether any of the continuing development costs will result in revenue for us, or whether additional sources of funding will be available if continued development of the technology is unsuccessful.



5-D.

Trend Information

At this time, it is difficult to provide any trends due to a number of factors.  We currently have several customers that are using our products for pilot projects.  The sales cycle can take a significant amount of time.  In addition to customer constraints, such as budgetary restrictions, the integration process required to make our products function properly within a customers specific application may be complex.  Mobile data commerce applications are also in their infancy, and the need for security applications is dependent on the adoption of these applications by consumers.



Our revenue model consists of (i) license fees from the licensing of our Passport Certificate Server® and Passport Authorization ProductÔ, which are one-time fees typically recorded upon execution of the license agreement (although a licensee may ultimately require additional servers and pay additional fees), (ii) consulting revenues, as employees and subcontractors provide services to our customers, which are recognized on a time and materials basis, or on a percentage of completion basis, depending on the contract, as employees and subcontractors provide services (iii) recurring royalties from the provision of certificates and permits, and (iv) annual support fees (for phone assistance and product updates).  As our business evolves, we expect that most of our revenue will be generated through recurring royalties.  This revenue stream is dependent on the adoption of transaction-based applications over wireless networks and therefore cannot be accurately projected at this time.



We are not aware of any other trends, uncertainties, demands, commitments or events which are reasonably likely to have a material effect upon our net sales or revenues, income from continuing operations, profitability, liquidity or capital resources.



5-E.

Off-balance Sheet Arrangements

We do not have any off-balance sheet arrangements that have had, or are reasonably likely to have, a current or future effect on the Companys financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.



5-F.

Tabular Disclosure of Contractual Obligations

We are committed under operating leases for a total amount of approximately $1,386,000. The minimum payments due in each of the following years are as follows:



|Contractual obligations     | Total      | Less than 1 year | 1-3 years | 3-5 years | More than 5 years
|--------------------------- | ---------- | ---------------- | --------- | --------- | -----------------
|Operating lease obligations | 1,386,378  | 620,188          | 766,190   | -         | -                
|Total                       | $1,386,378 | $620,188         | $766,190  | $-        | $-               





ITEM 6.   DIRECTORS, SENIOR MANAGEMENT, AND EMPLOYEES

6-A.

Directors and Senior Management

The following sets forth certain information about each of our directors and executive officers:

Stanley M. D. Beck, 69, has served as a Director since July 2002.  Mr. Beck was formerly Chairman of the Ontario Securities Commission and Dean of Osgoode Hall Law School.  Mr. Beck is currently Chairman of 407 International Inc. and President of Granville Arbitrations Limited, and holds seats on a number of boards.

Derek Buntain, 63, has served as a Director since July 2003.  Mr. Buntain has over 25 years experience in corporate finance, mergers and acquisitions and international business.  Mr. Buntain is currently the President of The Dundee Bank, and the former President of Goodman & Company (Bermuda) Limited and holds seats on a number of boards.

Nagy Moustafa, 40, has served as Diversinet's President and Chief Executive Officer since November 1997. Mr. Moustafa has more than 16 years of professional experience working in technology and engineering.

Keith Powell, 58, has served as a Director since July 2002. Mr. Powell is currently the principal of Keith Powell Consulting Inc., an information technology consulting firm and a Partner in XPV Capital Corp., a venture capital company investing in early stage communications companies. Mr. Powell also sits on several other boards. From 1980 to 2000, Mr. Powell held a number of positions with Nortel Networks, including Senior Vice-President, Information Services & Chief Information Officer from 1996 to 2000. In 1999 Mr. Powell was inducted into the Canadian Information Productivity Awards Hall of Fame.

Mark C. Steinman, 55, has served as a Director since June 1998 and Chairman since July 2002.  Mr. Steinman has thirty years of corporate finance experience, recently as Executive Vice President and Chief Financial Officer of Stelco Inc. and prior to 1999 as Chief Financial Officer of Spar Aerospace and Chief Financial Officer of Rogers Cablesystems.

Charles M.H. Shiu, 70, has served as a Director since September 2002. Mr. Shiu is a former senior executive with Nortel Networks and has more than 25 years experience with strategic alliances, joint ventures and investments in the European, North American and Asia Pacific markets. Mr. Shiu is currently Chairman of Allied Asia Investments Limited and holds seats on a number of boards.

David Hackett,39, was appointed as Chief Financial Officer effective March 26, 2002.  Previously, Mr. Hackett was CFO of a technology and service provider to electronic marketplaces, where he oversaw start-up operations, public financing and acquisitions.  Mr. Hackett has also held senior financial management positions at EveryWare Development, Alliance Atlantis Communications and Entertainment Information Services Ltd.

Atul Parikh, 39, joined Diversinet in January 2003 upon the acquisition of DSS Software Technologies.  Mr. Atul Parikh is responsible for sales initiatives and fulfillment services in the United States.  Mr. Parikh holds a Master Degree in Computer Applications from India.  He worked with major companies like Oracle, Hitachi, Autodesk, British Telecom before he founded a DSS in 1996.  DSS was the fastest growing company in the bay area with 200 employees in 2001.  He developed the DSS business from revenue of 100,000 to 25,000,000 within five years of business.

Scott Lowry, 59, has over twenty-five years experience in the financial services industry. His career started at Chase Manhattan Bank in international banking with assignments in New York, London, Frankfurt and Beirut. He was then Chairman and CEO of Great Western Bank in Phoenix, an $800 million bank with more than 800 employees that was later sold to Citibank. Scott was Executive Director of the Canary Wharf Development Company in London, which at the time was the largest real estate project in the world. In the mid-1990's, he became president of Internet security company Digital Signature Trust, which was backed by Zions Bank and the American Bankers Association, and in mid-2002 sold to Identrus LLC.

Hussam Mahgoub, 53, has served as our Vice President of Products since April 1999. Prior to joining Diversinet, he held senior positions at Canada Post Corporation, Bell Canada and Bank of Montreal.  At Canada Post Corporation, he was responsible for introducing many electronic services.

Nick Darwish, 43, has been with Diversinet since December 1999 and is currently EVP, OEM Channels.  Mr. Darwish joined Diversinet from Nortel Networks, a global supplier of data and telephone network solutions and services.  Most recently, he was responsible for Nortels new E-Commerce applications business.

Charles Walton, 44, has served as a Director since September 2003.  Mr. Walton is the founder of Caradas and is currently EVP, Business Development for the Company.  Mr. Walton has more than 20 years of business and technical experience in the security industry.

6-B.

Compensation

The following table and notes show the executive compensation paid or accrued by us during the fourteen month period ended December 31, 2003 to our officers earning in excess of$100,000 per year:



|                                                        | Annual Compensation | Long Term
Compensation
|------------------------------------------------------- | ------------------- | ----------------------
|Name and Principal Position                             | Salary
($)          | Bonus(6)
($)          
|Nagy Moustafa
President and Chief Executive Officer     | 256,667(1)          | 15,000                
|David Hackett
Chief Financial Officer                   | 192,500(2)          | 8,000                 
|Atul Parikh (5)
EVP, Professional Services              | US$140,000(3)       | -                     
|Charles Walton
EVP, Financial and International Markets | US$50,000(7)        | -                     
|Scott Lowry
EVP, Government and Enterprise Markets      | US$60,000(8)        | -                     
|Nick Darwish
EVP, OEM Channels                          | 179,667(5)          | -                     
|Hussam Mahgoub
EVP, Products                            | 154,000(4)          | 5,000                 



(1)

Mr. Moustafa is currently being compensated at the rate of Cdn $220,000 per annum.  See Employment Agreements.

(2)

Mr. Hackett is currently being compensated at the rate of Cdn $165,000 per annum.  See Employment Agreements.

(1)

Mr. Parikh is currently being compensated at the rate of U.S. $140,000 per annum.  See Employment Agreements.

(2)

Mr. Mahgoub is currently being compensated at the rate of Cdn $132,000 per annum.  See Employment Agreements.

(3)

Mr. Darwish is currently being compensated at the rate of Cdn $154,000 per annum.  See Employment Agreements.

(4)

Bonus allocations, if any, are determined annually at the discretion of the board of directors on the recommendation of the Compensation Committee, bonuses are paid and recorded as compensation in the fiscal year following the year in which they are earned as the determination is made by the Board in the following year.

(5)

Mr. Walton is currently being compensated at the rate of US $150,000 per annum.  See Employment Agreements.

(6)

Mr. Lowry is currently being compensated at the rate of US $180,000 per annum.  See Employment Agreements.

There were no long-term incentive awards other than stock options made to the executive officers listed above during the fiscal year ended December 31, 2003.  There are no pension plan benefits in place for our executive officers and none of our senior officers or directors is indebted to us.

Employment Agreements

We entered into an employment agreement with Nagy Moustafa, effective September 29, 1997, as amended, which provides for an annual salary of Cdn $220,000 for fiscal 2003, a maximum performance bonus of Cdn $250,000, payable upon the achievement of corporate objectives, and for severance compensation upon the occurrence of certain events.  The employment agreement also contains certain non-competition and non-disclosure provisions and is renewable annually, subject to certain termination provisions.



We entered into an employment agreement and consulting agreement with David Hackett, effective March 26, 2002, as amended, which provides for an annual compensation of Cdn $165,000 for fiscal 2003 and a performance bonus of Cdn $75,000, payable upon the achievement of corporate objectives, and for severance compensation upon the occurrence of certain events.  The employment agreement also contains certain non-disclosure provisions and is renewable annually, subject to certain termination provisions.



We entered into an employment agreement with Charles Walton, effective September 1, 2003, which provides for an annual compensation of $150,000 and a performance bonus of $100,000, payable upon the achievement of corporate objectives, and for severance compensation upon the occurrence of certain events.  The employment agreement also contains certain non-disclosure provisions and is renewable annually, subject to certain termination provisions.



We entered into an employment agreement with Scott Lowry, effective September 1, 2003, which provides for an annual compensation of $180,000 and a performance bonus of $100,000, payable upon the achievement of corporate objectives, and for severance compensation upon the occurrence of certain events.  The employment agreement also contains certain non-disclosure provisions and is renewable annually, subject to certain termination provisions.



We entered into an employment agreement with Atul Parikh, effective January 3, 2003, which provides for an annual compensation of $140,000 and a performance bonus of $100,000, payable upon the achievement of corporate objectives, and for severance compensation upon the occurrence of certain events.  The employment agreement also contains certain non-disclosure provisions and is renewable annually, subject to certain termination provisions.



We entered into an employment agreement with Hussam Mahgoub, effective April 1, 1999, as amended, which provides for an annual salary of Cdn $132,000 for fiscal 2002 and a Cdn $100,000 performance bonus, payable upon the achievement of corporate objectives, and for severance compensation upon the occurrence of certain events.  The employment agreement also contains certain non-disclosure provisions and is renewable annually, subject to certain termination provisions.



We entered into an employment agreement with Nick Darwish, effective December 20, 1999, as amended, which provides for an annual salary of Cdn $154,000 for fiscal 2002 and a performance bonus of Cdn $100,000, payable upon the achievement of corporate objectives, and for severance compensation upon the occurrence of certain events.  The employment agreement also contains certain non-disclosure provisions and is renewable annually, subject to certain termination provisions.



Compensation of Directors

Our directors received no compensation during fiscal 2003 for attending meetings of the board of directors or a committee of the board of directors.



The Corporation compensated none of the directors of the Corporation in his capacity as a director during the fiscal year ended December 31, 2003 pursuant to any other arrangement or in lieu of any standard arrangement.  It has been the Corporations practice to grant to a director 50,000 options to acquire common shares of the Corporation upon his or her election as a director.  In addition the Corporation may grant directors additional options from time to time.  During fiscal 2003 Stanley Beck received 15,000 options at Cdn $0.84 and 25,000 options at Cdn $3.38; Derek Buntain received 25,000 options at $0.62 and 25,000 options at $2.45; Keith Powell received 15,000 options at Cdn $0.84 and 25,000 options at Cdn $3.38; Charles Shiu received 15,000 options at $0.62 and 25,000 options at $2.45; and Mark Steinman received 15,000 options at Cdn$0.84 and 40,000 options at Cdn $3.38.  Such options are exercisable to acquire common shares at the market price on the day preceding the grant pursuant to the terms of the Plan.



Option to Purchase Our Securities

Our share option plan was established on October 15, 1993 and was amended on February 4, 1997, April 16, 1999, May 15, 2000, January 22, 2003 and August 15, 2003.  Under our share option plan, options for up to a specified maximum limit of 1,800,000 common shares may be granted from time to time by the board of directors to our directors, officers, employees and consultants of Diversinet and any of our subsidiaries.  Options granted under our share option plan have an exercise price equal to the closing price of the common shares on the day immediately proceeding the day of the grant and generally will be exercisable over a three-year period and will expire after five years.

The share option plan provides that:

(i)

The maximum number of common shares which may be reserved for issuance to any participant pursuant to share options may not exceed 5% of the common shares outstanding at the time of grant (on a non-diluted basis) less the aggregate number of common shares reserved for issuance to such person under any other option to purchase common shares from treasury granted as a compensation or incentive mechanism;

(ii)

The maximum number of common shares that may be issued to any one insider and his associates within a one year period may not exceed 5% of the outstanding issue;

(iii)

The maximum number of common shares that may be reserved for issuance to Diversinet insiders is limited to 10% of the common shares of the outstanding issue at the time of the grant (on a non-diluted basis) less the aggregate number of common shares reserved for issuance to insiders under any other share compensation arrangement; and

(iv)

The maximum number of common shares that may be issued to Diversinet insiders within a one-year period may not exceed 10% of the outstanding issue.

As at March 3, 2004, there were a total of 1,116,096 options to purchase common shares outstanding under our share option plan at exercise prices ranging from $0.62 to $149.40 with expiration dates ranging from March 15, 2004 to December 5, 2008.  The directors and officers as a group hold options to purchase 789,375 of our common shares.  The following table provides details on the share options granted to our directors, officers, employees and consultants under the terms of our share option plan as at March 3, 2004.

|Share Options Outstanding
|-------------------------
|Optionee                 
|Directors and Officers   
|Employees and Consultants

6-C.

Board Practices

Our board of directors presently consists of seven (7) directors who are elected annually.  Each director elected will hold office until the close of business of our first annual meeting of shareholders following his election unless his office is earlier vacated in accordance with our by-laws.  During fiscal 2003 there were no director resignations.

Audit Committee

The Audit Committee is comprised of three directors. The Audit Committee recommends engagement of the Companys independent auditors and is primarily responsible for approving the services performed by the Companys independent auditors.  The Audit Committees responsibilities included reviewing the Corporations financial report procedures, the adequacy of its internal controls and information systems, the external audit plan and the independence and terms of engagement and fees of the external auditors and the performance of the Corporations external auditors.  The committee also has the responsibility to review, and to recommend for approval, the Corporations interim unaudited consolidated financial statements and annual consolidated financial statements, managements discussion and analysis of financial condition and results of operations and related press releases, prior to their approval by the full Board.  The members of the Audit Committee are Mark Steinman (Chair), Keith Powell and Derek Buntain.



To carry out its responsibilities, the Audit Committee held four meetings during the fourteen-month period of November 1, 2002 to December 31, 2003.



Compensation Committee

The Compensation Committee is comprised of two directors.  It is the responsibility of the Compensation Committee to determine the level of compensation and for developing recommendations for stock option grants for approval by the Board of Directors in respect of the Corporations senior executives (including Named Executive Officers) with a view to providing such executives with a competitive compensation package having regard to performance.  Performance is defined to include achievement of the Corporations strategic objective of growth, development of the business, enhancement of shareholder value and attainment of annual goals as set by the Board of Directors.  The members of the Compensation Committee are Keith Powell (Chair) and Derek Buntain.



Governance Committee

The Governance Committee is comprised of two directors.  The Governance Committee assists the Board of Directors in fulfilling its oversight responsibilities related to seeking candidates for membership on the Board of Directors, assessing the corporate governance policies and processes of the Board of Directors and reviewing from time to time the policies of the Board of Directors related to director qualifications, compensation, tenure and retirement.  The members of the Governance Committee are Stanley Beck (Chair) and Charles Shiu.



6-D.

Employees

As of March 15, 2004, we had 92 full-time employees and 32 contractors.  Of our employees and contractors, 84 were providing consulting services to clients, 13 were involved in research and development, 18 in sales, marketing and business development and 9 in administration and finance.  None of our employees is covered by a collective bargaining agreement, and we believe that our relationship with our employees is good.  Our future success, however, will depend upon our ability to attract and retain qualified personnel.  Competition for such personnel is often intense, and we cannot provide assurance that we will be able to attract and retain adequate numbers of qualified personnel in the future.

6-E.

Share Ownership

See item 7-A.

ITEM 7

MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

7-A.

Major Shareholders

Diversinet is a publicly owned Canadian corporation.  Another corporation or any government does not control us directly or indirectly.

As of March 3, 2004, we had 12,043,027 common shares outstanding.

The following table shows the ownership of our common shares as of March 3, 2004 of:

•

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

•

each of our directors and officers; and

•

all of our directors and officers as a group.

The second column indicates the number of common shares actually owned, and the third column indicates the number of common shares that each person has the right to acquire within sixty days from the date hereof upon the exercise of outstanding options, warrants or convertible securities.  The fourth column reflects a description of the shares underlying those options, warrants and convertible securities and the vesting and exercise prices thereof.  The fifth column reflects the sum of the second and third columns, expressed as a percentage of the issued and outstanding common shares of Diversinet.

Unless otherwise indicated, the business address for each of these individuals is c/o Diversinet Corp., 2225 Sheppard Avenue East, Suite 1801, Toronto, ON Canada  M2J 5C2.

|Name                                                  | Number of Shares Owned | Number of Options or Warrants Owned | Options Represent                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                | Percentage of Outstanding Shares
|----------------------------------------------------- | ---------------------- | ----------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | --------------------------------
|Nagy Moustafa                                         | 111,846                | 123,333                             | The vested and immediately exercisable portion of options to purchase 340,000 common shares at purchase prices ranging from Cdn$0.84 to $162.50 per share.  The balance of these options vest at the rate of 8.3% per quarter, beginning December 20, 2002 as to 29,167 options, beginning June 5, 2003 as to 75,000 options and beginning August 15, 2003 as to 112,500 options.                                                                                                                                                                | 1.93%                           
|Hussam Mahgoub                                        | 1,000                  | 28,500                              | The vested and the immediately exercisable portion of options to purchase 58,750 common shares at purchase prices ranging between Cdn $0.84 and $64.70 per share.  The balance of these options vest at the rate of 8.3% per quarter, beginning April 3, 2002 as to 1,584 options, beginning May 9, 2002 as to 1,333 options, beginning February 28, 2003 as to 3,333 options, beginning June 5, 2003 as to 1,500 options and beginning August 15, 2003 as to the remaining 22,500 options.                                                      | *                               
|Nick Darwish                                          | 4,178                  | 26,458                              | The vested and immediately exercisable portion of options to purchase an aggregate of 42,125 common shares at purchase prices ranging between Cdn$0.84 and $119.40 per share.  The balance of these options vest at the rate of 8.3% per quarter beginning July 24, 2001 as to 417 options, beginning April 3, 2002 as to 1,584 options, beginning May 9, 2002 as to 1,333 options, beginning February 28, 2003 as to 3,333 options, beginning June 5, 2003 as to 1,500 options and beginning August 15, 2003 as to the remaining 7,500 options. | *                               
|David Hackett                                         | 35,591                 | 25,417                              | The vested and immediately exercisable portion of options to purchase an aggregate of 75,000 common shares at purchase prices ranging between Cdn$0.84 and $5.50 per share.  The balance of these options vest at the rate of 8.3% per quarter beginning March 26, 2002 as to 5,000 options, beginning February 28, 2003 as to 3,333 options, beginning June 5, 2003 as to 3,750 options and beginning August 15, 2003 as to the remaining 37,500 options.                                                                                       | *                               
|Atul Parikh                                           | -                      | 55,583                              | The vested and immediately exercisable portion of options and warrants to purchase an aggregate of 141,000 common shares at purchase prices ranging between $0.62 and $3.75 per share.  The balance of these options vest at the rate of 8.3% per quarter beginning January 2, 2003 as to 71,167 options, beginning June 5, 2003 as to 3,000 options and beginning August 15, 2003 as to the remaining 11,250 options.                                                                                                                           | *                               
|Charles Walton                                        | 551,261                | 16,667                              | The vested and immediately exercisable portion of warrants to purchase an aggregate of 100,000 common shares at purchase prices of $2.45 per share.  The balance of these warrants vest at the rate of 8.3% per quarter beginning September 1, 2003.                                                                                                                                                                                                                                                                                             | 4.71%                           
|Scott Lowry                                           | 224,612                | 16,667                              | The vested and immediately exercisable portion of warrants to purchase an aggregate of 100,000 common shares at purchase prices of $2.45 per share.  The balance of these warrants vest at the rate of 8.3% per quarter beginning September 1, 2003.                                                                                                                                                                                                                                                                                             | 2.00%                           
|Stanley Beck                                          | -0-                    | 15,833                              | The vested and immediately exercisable portion of options to purchase 50,000 common shares at purchase prices ranging from Cdn$0.84 to Cdn$3.38 per share.  The remaining options vest at the rate of 8.3% per quarter beginning July 8, 2002 as to 4,167, beginning June 5, 2003 as to 11,250 options and beginning August 15, 2003 as to the remaining 18,750 options.                                                                                                                                                                         | *                               
|Mark Steinman                                         | -0-                    | 24,500                              | The vested and immediately exercisable portion of an option to purchase 74,000 common shares at a purchase prices ranging between of Cdn$0.84 and $15.30 per share. The balance of these options vest at the rate of 8.3% per quarter, beginning July 24, 2001 as to 333 options, beginning July 8, 2002 as to the remaining 4,167 options, beginning June 5, 2003 as to 15,000 options and beginning August 15, 2003 as to the remaining 30,000 options.                                                                                        | *                               
|Keith Powell                                          | -0-                    | 20,833                              | The vested and immediately exercisable portion of an option to purchase 55,000 common shares at a purchase prices ranging between of Cdn$0.84 and $13.10 per share. The balance of these options vest at the rate of 8.3% per quarter, beginning July 8, 2002 as to the remaining 4,167 options, beginning June 5, 2003 as to 11,250 options and beginning August 15, 2003 as to the remaining 18,750 options.                                                                                                                                   | *                               
|Charles Shiu                                          | -0-                    | 15,000                              | The vested and immediately exercisable portion of an option to purchase 50,000 common shares at a purchase prices ranging between of Cdn$0.84 and Cdn$3.38 per share. The balance of these options vest at the rate of 8.3% per quarter, beginning September 4, 2002 as to 5,000 options, beginning June 5, 2003 as to 11,250 options and beginning August 15, 2003 as to the remaining 18,750 options.                                                                                                                                          | *                               
|Derek Buntain                                         | 200,000                | 12,500                              | The vested and immediately exercisable portion of an option to purchase 50,000 common shares at a purchase prices ranging between of $0.62 and $2.45 per share. The balance of these options vest at the rate of 8.3% per quarter, beginning June 5, 2003 as to 18,750 options and beginning August 15, 2003 as to the remaining 18,750 options.                                                                                                                                                                                                 | 1.76%                           
|Lakefront Partners, LLC and James B. Wigdale, Jr. (1) | 1,080,000              | 500,000
warrants                    | The vested and immediately exercisable portion of warrants to purchase an aggregate of 1,000,000 common shares at a purchase price ranging between $2.00 and $2.05.  The balance of these warrants vest on July 15, 2004 at to 250,000 warrants and January 15, 2005 as to the remaining 350,000 warrants.  These warrants will vest immediately if any one of a number of significant changes occur within the Company.                                                                                                                         | 12.6%                           
|All Officers and Directors as a group (10 persons)    | 1,124,310              | 381,282                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | 12.1%                           
|*  Less than 1%                                       |                        |                                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                                 

(1)

Mr. Wigdale is the control person of Lakefront Capital Management, LLC, the manager of Lakefront Partners, LLC.  Both Lakefront Partners, LLC and Mr. Wigdale have offices located at 205 E. Wisconsin Avenue, Suite 220, Milwaukee, WI 53202.  Lakefront Partners, LLC and Mr. Wigdale may be deemed to be acting jointly or in concert in respect to their security holdings of Diversinet.



7-B.

Related Party Transactions

As at December 31, 2003 and October 31, 2003, the Company had a promissory note payable in the amount  $600,000 due to an officer of the Company.  This note is payable in installments of $300,000 on January 2, 2004 and $300,000 on January 2, 2005 and bears no interest.

In February 2004, the Company amended the DSS Software Technologies share purchase agreement.  The promissory note in the amount of $600,000 payable in installments of $300,000 on January 2, 2004 and $300,000 on January 2, 2005 has been replaced by the issuance of 200,000 Diversinet common shares and cash payments of $50,000 in February 2004, $50,000 on April 2004 and $100,000 on January 2005.  The existing 120,000 warrants exercisable at $3.75 have been replaced by issuance of 120,000 warrants exercisable at $2.05, exercisable after January 1, 2005 expiring on December 31, 2006.  The common shares cannot be re-sold in the public markets until a registration statement has been filed and declared effective by the U.S. Securities and Exchange Commission.

7-C.

Interests of Experts and Counsel

Not Applicable.

ITEM 8

FINANCIAL INFORMATION

8-A.

Consolidated Statements and Other Financial Information

The financial statements are included in this Registration Statement, Form 20-F under Item 17.

Legal proceedings

There are currently four material claims pending against us.  If we lose any of these suits or enter into settlements requiring us to pay cash or to issue any of our common shares, our liquidity and financial position will be adversely affected and our shareholders ownership may be diluted.

(a)

Silva Run Litigation Matter

In May 1996, Silva Run Worldwide Ltd. sued a number of individuals and corporations, including us, in the United States District Court for the Southern District of New York in connection with, among other things, Silva Runs purchase of 21,250 common shares (850,000 common shares prior common share consolidations) in August 1995.  At the time of such purchase, we were operating a different business under our prior name, The Instant Publisher Inc., and a prior management group was running us.  In this lawsuit, the plaintiff is seeking to cancel this stock purchase, alleging, inter alia:

•

that the plaintiff was fraudulently induced into the transaction by certain defendants other than us;

•

that the sale of our common shares was not in compliance with the Securities and Exchange Commission regulation governing the sale of those shares outside the United States; and

•

that we were the control person of other defendants who violated the Securities Act of 1933, as amended, in connection with the sale of our common shares, and thereby are required to cancel the transaction or are liable for damages under the control person provisions of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended.

The plaintiff also sought punitive damages of U.S. $25,000,000 plus interest, attorneys fees and costs.

In April 1998, the court dismissed all claims against us except for the claims against us directly and as an alleged control person seeking either a reversal of the transaction, which would require us to buy back the 21,250 common shares (850,000 common shares prior all share consolidations) purchased by Silva Run, or damages.  The plaintiffs then filed a second amended complaint in July 1998 which seeks approximately U.S. $3,700,000, as a refund or damages, plus interest, attorneys fees, and costs, but no longer seeks punitive damages against us.

On March 28, 2000, the court granted our motion to dismiss (and the other defendants motions to dismiss) the second amended complaint, without prejudice to Silva Runs filing of a third amended complaint within 30 days.  A third amended complaint was filed.  While we intend to continue to vigorously defend this case, we may have to refund the U.S. $3,700,000 purchase price of the shares, or be assessed damages, either of which would have a material adverse effect on our liquidity and our ability to fund our business.  It is possible that the dismissed claims may be reinstated and that either a judge or jury could impose punitive damages on us.

(a)

Instant Publisher (Israel) Litigation Matter

In May 2000, we were sued in the Ontario Superior Court of Justice, along with our wholly-owned Barbados subsidiary, The Instant Publisher Ltd., by Instant Publisher (Israel) Limited, a company not related to Diversinet. Instant Publisher (Israel) Limited is seeking damages of $1,533,950 for breach of an October 25, 1995 dealer agreement with our previous printing business regarding the distribution of printing equipment, and damages of $25,000,000 for loss of reputation and loss of opportunity, pre-judgment and post-judgment interest, and costs.  Based on our preliminary evaluation of the merits of this claim, we filed a notice of intention to defend against the claim.  If we are required to pay damages, this could have a material adverse effect on our liquidity and our ability to fund our business.

(b)

Subsidiary Litigation Matter

One of the Companys wholly owned subsidiaries is being sued in Bankruptcy Court by a company alleging the subsidiary received preferential payments.  The plaintiff is seeking to receive $200,000.

(c)

Employee Litigation Matter

In July 2003, we were sued in the Ontario Superior Court of Justice by two former employees who claim, inter alia, that each was terminated, while on short-term disability, in a manner that exhibited bad faith and unfair dealings.  One is seeking against Diversinet Cdn$125,000 in special, general, punitive and exemplary damages.  The other is seeking against Diversinet Cdn$350,000 in special, general, punitive and exemplary damages.

(d)

Employee Litigation Matter

In January 2004, Diversinet and an officer of the Company were sued in the Ontario Superior Court of Justice by a former employee who claims, inter alia, that he was wrongfully terminated in a manner that exhibited bad faith and unfair dealings.  He is seeking a total of Cdn$450,000 against us and our officer in aggravated, general, punitive and exemplary damages.

8-B.  Significant Changes

On January 23, 2003 the Board of Directors approved a 1-for-10 reverse stock split of our outstanding common shares. This move followed a vote January 22, 2003, at the Annual and Special Shareholders' Meeting in which a majority of our shareholders authorized the board to effect the reverse stock split.



As a result of the reverse stock split, effective on January 28, 2003, every ten shares of Diversinet common stock were exchanged for one share of Diversinet common stock.  The reverse stock split affected all shares of common stock, stock options and warrants outstanding immediately prior to the effective time of the reverse stock split.



Our common shares have been quoted on the NASDAQ SmallCap MarketSM since June 1995.  NASDAQ requires that we maintain a minimum bid price of $1.00 for continued listing.  On March 9, 2002 we received notice from NASDAQ that we had not met the minimum $1.00 per share requirement and may be subject to delisting.  On April 30, 2003, after rejecting our appeal, NASDAQ delisted Diversinets securities.  Effective April 30, 2003, Diversinets common shares have traded on the Over the Counter Bulletin Board under the symbol DVNTF.



There have been no other significant changes or events between December 31, 2003 and March 3, 2004.

ITEM 9

THE OFFER AND LISTING

9-A.  Offer and Listing Details

Diversinet Corp.s common shares traded on the Canadian Dealing Network until it ceased to operate in August of 2000.  The following table lists the high, low, closing prices and the aggregate yearly trading volumes on the Canadian Dealing Network for shares of our common shares for the last five fiscal years ended October 31:

|Canadian Dealing Network Shares Trading Activity
|------------------------------------------------
|Year ended October 31,                          
|2003                                            
|2002                                            
|2001                                            
|2000                                            
|1999                                            

The following table lists the high, low and closing prices on the OTC Bulletin Board (from April 30, 2003) and NASDAQ (prior to April 30, 2003) of our common shares for the last five fiscal years ended December 31:

|OTC Bulletin Board and NASDAQ Trading Activity
|----------------------------------------------
|Year ended December 31,                       
|2003                                          
|2002                                          
|2001                                          
|2000                                          
|1999                                          

Diversinet Corp. has not been traded on The Canadian Dealing Network since it ceased to operate in August of 2000 so there has been no activity of our common shares for the last eight fiscal quarters. The following table lists the high, low and closing prices on the OTC Bulletin Board and NASDAQ of our common shares for the last eight fiscal quarters:

|NASDAQ Trading Activity
|-----------------------
|Quarter Ended          
|December 31, 2003      
|September 30, 2003     
|June 30, 2003          
|March 31, 2003         
|December 31, 2002      
|September 30, 2002     
|June 30, 2002          
|March 31, 2002         

The following table lists the high, low and closing prices on the OTC Bulletin Board of our common shares for the last six months:

|OTC Bulletin Board Trading Activity
|-----------------------------------
|Month Ended                        
|February 2004                      
|January 2004                       
|December 2003                      
|November 2003                      
|October 2003                       
|September 2003                     

Our common shares are issued in registered form and the following information is taken from the records of ComputerShare Trust Company of Canada located in Toronto, Ontario, Canada, the registrar and transfer agent for our common shares.

On March 3, 2004, the shareholders list for our common shares showed 122 registered shareholders and 12,043,277 shares outstanding.  Of the 122 registered shareholders, 109 list U.S. addresses, showing ownership of an aggregate of 10,233,641 shares, representing 85% of our outstanding common shares.

We have not declared any dividends for the last eight years and do not anticipate that we will do so in the foreseeable future.  Our present policy is to retain future earnings, if any, for use in our operations and the expansion of our business.

9-B.   Plan of Distribution

Not Applicable.

9-C.   Markets

Our common shares began trading on the NASDAQ SmallCap MarketSM on June 20, 1995.  Prior to December 3, 2002, our common shares traded on the NASDAQ SmallCap MarketSM under the symbol DVNT.  Effective December 3, 2002 our common shares trade under the symbol DVNTC with the exception of a 20 period from January 28, 2003 to February 25, 2003 when our common shares traded under the symbol DVNTD.  From February 25, 2003 until April 30, 2003 ours common shares traded under the symbol DVNTC.  On April 30, 2003 NASDAQ delisted our common shares.  From April 30, 2003 to present our common shares have been trading on the OTC Bulletin Board under the symbol DVNTF.

Prior to August 2000 our shares were also traded on the now defunct Canadian Dealers Network.

9-D.   Selling Shareholders

Not Applicable.

9-E.   Dilution

Not Applicable.

9-F.   Expenses of the Issue

Not Applicable.



ITEM 10.  ADDITIONAL INFORMATION

10-A.

Share Capital

Not Applicable.

10-B.

Memorandum and Articles of Association

1.

Our Certificate of Incorporation No. is 1054873 (Ontario).  Our objectives are not indicated on the registration form.  However, our objective is to enable mobile e-commerce (m-commerce) services with our wireless security infrastructure solutions.

2.

(a)

A Director shall disclose in writing to us or request to have entered into the minutes of the meeting the nature and extent of his interest regarding any material contracts.

(a)

Not Applicable.

(b)

Not Applicable.

(c)

Not Applicable.  Directors are appointed at the annual shareholders meeting or appointed by special resolution.

(d)

Not Applicable.

(e)

Not Applicable.

(f)

Not Applicable.

(g)

Not Applicable.

10-C.

Material Contracts

We have not entered into any material contracts, other than contracts entered into in the ordinary course of business and those listed herein to which we are a party, for the two years immediately preceding publication of this Form 20-F.

10-D.

Exchange Controls

The federal Investment Canada Act (the ICA), which became effective on June 30, 1985, regulates the acquisition by non-Canadians of control of a Canadian Business (as defined in the Investment Canada Act). Such an acquisition is either notifiable or reviewable depending on its structure and the value of the assets of the Canadian business being acquired.  In effect, the ICA requires review by Investment Canada, the agency which administers the ICA, and approval by the Canadian government in the case of an acquisition of control of a Canadian business by a non-Canadian that is a WTO Investor (as defined in the ICA) where: (i) in the case of a direct acquisition of control of a Canadian entity (i.e., through a share purchase), the assets of the entity carrying on the Canadian Business and of all other entities in Canada, the control of which is acquired exceeds$184 million (this threshold is adjusted annually for inflation and growth in Canadas domestic product); or (ii) in the case of a direct acquisition of assets of a Canadian Business (i.e., through an asset acquisition) the value of the assets used in carrying on the Canadian business exceeds$184 million.  Indirect acquisitions (for example, the acquisition of the foreign parent of the Canadian business) of assets or indirect acquisitions of control by a WTO investor are not reviewable, but are still notifiable.  Where an investor is not a WTO Investor, review is required where: (i) in the case of a direct acquisition of control of a Canadian Business, the value of the assets of the business and all other entities being acquired is$5 million or more; or (ii) in the case of an indirect acquisition of control of a Canadian Business, where the Canadian Business has assets of$50 million or more in value; or (iii) in the case of an acquisition of assets of a Canadian Business, the assets represents more than 50% of the assets of the original group and the value of the acquired assets exceeds$5 million.  These lower thresholds also apply, even where the investor is a WTO investor, where the Canadian Business is engaged in certain activities relating to Canadas cultural heritage or national identity such as book publishing, film production and distribution, television and radio, production and distribution of music, uranium production, certain financial services or transportation services.

In the context of Diversinet, in essence, three methods of acquiring control of a Canadian business are regulated by the ICA: (i) the acquisition of all or substantially all of the assets used in carrying on the Canadian business; (ii) the acquisition, directly or indirectly, of voting shares of a Canadian corporation carrying on the Canadian business; (iii) the acquisition of voting shares of an entity which controls, directly or indirectly, another entity carrying on a Canadian business. An acquisition of a majority of the voting interests of an entity, including a corporation, is deemed to be an acquisition of control in accordance with the ICA.  An acquisition of less than one-third of the voting shares of a corporation is deemed not to be an acquisition of control.  An acquisition of less than a majority, but one-third or more, of the voting shares of a corporation is presumed to be an acquisition of control unless it can be established that on the acquisition the corporation is not, in fact, controlled by the acquirer through the ownership of voting shares.  For partnerships, trusts joint ventures or other unincorporated entities, an acquisition of less than a majority of the voting interests is deemed not to be an acquisition of control.

If an acquisition of control of a Canadian business by a non-Canadian is not reviewable, the ICA requires a formal notification to the Canadian government.  These provisions require a foreign investor to give notice in the required form, which notices are for information, as opposed to review, purposes.

10-E.  Taxation

Certain Canadian Federal Income Tax Consequences

The following summary of the material Canadian federal income tax considerations generally applicable in respect of the holding and disposition of common shares reflects our opinion as of the date hereof.  The tax consequences to any particular holder of common shares will vary according to the status of that holder as an individual, trust, corporation or member of a partnership, the jurisdiction in which that holder is subject to taxation, the place where that holder is resident and, generally, according to that holders particular circumstances.

This summary is applicable only to holders who are resident solely in the United States, have never been resident in Canada, deal at arms length with us, hold their common shares as capital property and who will not use or hold the common shares in carrying on business in Canada.

This summary is based upon the provisions of the Income Tax Act (Canada) and the regulations thereunder (collectively, the Tax Act or ITA) and the Canada-United States Tax Convention (the Tax Convention) as at the date hereof and the current administrative practices of the Canada Customs and Revenue Agency.  This summary does not take into account provincial income tax consequences.

This summary is not exhaustive of all possible income tax consequences.  It is not intended as legal or tax advice to any particular holder of common shares and should not be so construed.  Each holder should consult his own tax advisor with respect to the income tax consequences applicable to him in his own particular circumstances.

Dividends

In the case of any dividends paid to non-resident shareholders, we withhold the Canadian tax, which remits only the net amount to the shareholder.  The rate of withholding tax is generally 25% but by virtue of Article X of the Tax Convention, the rate of tax on dividends paid to persons who are residents only of the United States for purposes of the Tax Convention is generally limited to 15% of the gross amount of the dividend (or 5% in the case of certain corporate shareholders owning at least 10% of our voting shares).

Dispositions

A non-resident of Canada is not subject to tax under the ITA in respect of a capital gain realized upon the disposition of a common share unless the share is taxable Canadian property to the holder thereof and the non-resident is not entitled to relief under a tax treaty.  In the case of a non-resident holder to whom our common shares are taxable Canadian property and who is resident only in the United States for purposes of the Tax Convention, no tax under the ITA will be payable on a capital gain realized on such shares by reason of the Tax Convention unless the value of such shares is derived principally from real property situated in Canada.  We believe that the value of our common shares is not derived from real property situated in Canada.

Our common shares will be taxable Canadian property to a non-resident holder if, at any time during the period of sixty months immediately preceding the disposition, the non-resident holder, persons with whom the non-resident holder did not deal at arms length, or the non-resident holder together with persons with whom the holder did not deal at arms length owned 25% or more of our issued shares of any class or series.  Holders to whom our common shares are taxable Canadian property and who are not entitled to relief under the Tax Convention should consult their own tax advisors in advance of any disposition of common shares.

United States Federal Income Tax Consequences

The following is a discussion of material United States Federal income tax consequences generally applicable to a U.S. Holder (as defined below) of our common shares.  This discussion does not address all potentially relevant Federal income tax matters, and it does not address consequences peculiar to persons subject to special provisions of Federal income tax law, such as, for example, tax-exempt organizations, qualified retirement plans, persons subject to alternative minimum tax, financial institutions, insurance companies, real estate investment trusts, regulated investment companies, broker-dealers, non-resident alien individuals or foreign corporations whose ownership of our common shares is not effectively connected with the conduct of a trade or business in the United States and shareholders who acquired their shares through the exercise of employee share options or otherwise as compensation.  In addition, this discussion only applies to common shares held by U.S. Holders as capital assets within the meaning of Section 1221 of the Internal Revenue Code of 1986, as amended, and does not cover any state, local or foreign tax consequences.

The following discussion is based upon the sections of the Internal Revenue Code, Treasury Regulations, published Internal Revenue Service rulings, published administrative positions of the Internal Revenue Service and court decisions that are currently applicable, any or all of which could be materially and adversely changed, possibly on a retroactive basis, at any time.  The following discussion is for general information only and is not intended to be, nor should it be construed to be, legal or tax advice to any holder or prospective holder of our common shares and no opinion or representation with respect to the United States Federal income tax consequences to any such holder or prospective holder is made. Accordingly, holders and prospective holders of our common shares should consult their own tax advisors about the federal, state, local, and foreign tax consequences of purchasing, owning and disposing of our common shares.

U.S. Holders

As used herein, a U.S. Holder includes any person, with the exception of those subject to special provisions of Federal income tax law, who holds our common shares who is a citizen or resident of the United States, a partnership or corporation organized under the laws of the United States, an estate, the income of which is subject to United States federal income tax without regard to its source and a trust if a United States court is able to exercise primary supervision over administration of the trust and one or more United States persons have authority to control all substantial decisions of the trust or if the trust was in existence on August 20, 1996 and has elected to continue to be treated as a United States person, and any other person or entity whose ownership of our common shares is effectively connected with the conduct of a trade or business in the United States.

Distributions on Our Common Shares

U.S. Holders receiving dividend distributions (including constructive dividends) with respect to our common shares are required to include in gross income for United States Federal income tax purposes the gross amount of such distributions to the extent that we have current or accumulated earnings and profits, without reduction for any Canadian income tax withheld from such distributions.  Such Canadian tax withheld may be credited, subject to certain limitations, against the U.S. Holders United States Federal Income tax liability or, alternatively, may be deducted in computing the U.S. Holders United States Federal taxable income by those who itemize deductions (see more detailed discussion at Foreign Tax Credit below).  To the extent that distributions exceed our current or accumulated earnings and profits, they will be treated first as a return of capital up to the U.S. Holders adjusted basis in the common shares and thereafter as gain from the sale or exchange of the common shares.  Preferential tax rates for long-term capital gains are applicable to an U.S. Holder, which is an individual, estate or trust.  There are currently no preferential tax rates for long-term capital gains for an U.S. Holder, which is a corporation.  Dividends paid in Canadian dollars will be included in income in an U.S. dollar amount based on the exchange rate at the time of their receipt.  U.S. Holders should consult their own tax advisors regarding the treatment of any foreign currency gain or loss on any Canadian dollars received as a dividend which are converted into U.S. dollars on a date subsequent to receipt.

Dividends paid on our common shares will not generally be eligible for the dividends received deduction provided to corporations receiving dividends from certain United States corporations. A U.S. Holder which is a corporation may, under certain circumstances, be entitled to a 70% deduction of the United States source portion of dividends received from us (unless we qualify as a foreign personal holding company or a passive foreign investment company, as defined below) if such U.S. Holder owns shares representing at least 10% of the voting power and value of Diversinet. The availability of this deduction is subject to several complex limitations, which are beyond the scope of this discussion.

Foreign Tax Credit

A U.S. Holder who pays (or has withheld from distributions) Canadian income tax with respect to the ownership of our common shares may be entitled, at the option of the U.S. Holder, to either a deduction or a tax credit for such foreign tax paid or withheld.  Generally, it will be more advantageous to claim a credit because a credit reduces United States Federal income taxes on a dollar-for-dollar basis, while a deduction merely reduces the taxpayers income subject to tax.  This election is made on an annual basis and applies to all foreign income taxes (or taxes in lieu of income tax) paid by (or withheld from) the U.S. Holder during the year.  There are significant and complex limitations which apply to the credit, among which is the general limitation that the credit cannot exceed the proportionate share of the U.S. Holder United States income tax liability that the U.S. Holders foreign source income bears to his/her or its worldwide taxable income.

In the determination of the application of this limitation, the various items of income and deduction must be classified into foreign and domestic sources. Complex rules govern this classification process. There are further limitations on the foreign tax credit for certain types of income such as passive income, high withholding tax interest, financial services income, shipping income, and certain other classifications of income.  In certain circumstances, recently enacted legislation and other guidance issued by the United States Treasury may deny a United States holder foreign tax credits (and instead may allow deductions) for foreign taxes imposed on a dividend if the United States holder (i) has not held the common shares for at least 16 days in the 30-day period beginning 15 days before the ex-dividend date, during which it is not protected from risk of loss; (ii) is obligated to make payments related to the dividends; or (iii) holds the common shares in arrangements in which the United States holders expected economic profit, after non-U.S. taxes, is insubstantial.

The availability of the foreign tax credit and the application of the limitations on the credit are fact specific and holders and prospective holders of our common shares should consult their own tax advisors regarding their individual circumstances.

Disposition of Our Common Shares

A U.S. Holder will recognize gain or loss upon the sale of our common shares equal to the difference, if any, between (i) the amount of cash plus the fair market value of any property received, and (ii) the shareholders tax basis in the our common shares.  Any gain recognized on the sale or other disposition of common shares will generally be U.S. source income.  Any loss recognized on the sale or other disposition of common shares will generally be U.S. source.  However, such loss will be foreign source to the extent certain dividends were received by the U.S. Holder within the 24-month period proceeding the date on which the loss was recognized.  This gain or loss will be capital gain or loss if the common shares are capital asset in the hands of the U.S. Holder, which will be a short-term or long-term capital gain or loss depending upon the holding period of the U.S. Holder.  Gains and losses are netted and combined according to special rules in arriving at the overall capital gain or loss for a particular tax year.  Deductions for net capital losses are subject to significant limitations.  For U.S. Holders who are individuals, a capital loss is deductible only to the extent of capital gains, plus ordinary income of up to U.S. $3,000; any unused portion of such net capital loss may be carried over to be used in later tax years until such net capital loss is thereby exhausted.  For U.S. Holders which are corporations (other than corporations subject to Subchapter S of the Internal Revenue Code), any unused net capital loss may be carried back three years from the loss year and carried forward five years from the loss year to be offset against capital gains until such net capital loss is thereby exhausted.  If the amount realized on a sale or exchange is not denominated in U.S. dollars, the amount realized will be equal to the U.S. dollar value thereof, determined at the spot rate on the date of the sale or exchange.

Until such time as our common shares are listed on a stock exchange prescribed for the purposes of the Income Tax Act (Canada) (which includes NASDAQ, but not the OTC BB) our common shares will be taxable Canadian property for the purposes of the Income Tax Act (Canada).



Under section 116 of the Income Tax Act (Canada), non-resident vendors who dispose of certain types of taxable Canadian property (including our common shares for as long as they are not listed on a prescribed stock exchange), have to notify Canada Customs and Revenue Agency (CCRA) about the disposition either before they dispose of the property or after they dispose of it.  This notification (the Notice of Disposition) is due not later than ten (10) days after the date the property was disposed of.  The vendor may be able to claim an exemption under an applicable tax treaty at the time the Notice of Disposition is filed.  If no exemption is available under an applicable treaty, before CCRA can issue a certificate of compliance to the vendor, CCRA must receive either an amount to cover the tax owing, or appropriate security for the tax on any gain the vendor may realize at the time the property is disposed of. Such payments or security the vendor provides will be credited to the vendor's account.  If the vendor does not comply with the section 116 requirements, which the vendor must do so before receiving the certificate of compliance, the purchaser of the property may deduct or withhold a specified amount from the proceeds of the disposition to cover any tax which the vendor owes.



When filing a Notice of Disposition and claiming an exemption under a specific tax treaty, necessary documentation to support the claim should be submitted along with the request.  The documentation which is acceptable must be based on the particular tax treaty under which the exemption is claimed, such as proof of residency, or that the gain has or will be reported in the vendor's country.  Tax officials, in some countries, will supply the necessary certification required to claim the exemption. The United States Department of the Treasury, Internal Revenue Service will provide certification for corporations, exempt organizations and individuals. Requests for certification should be sent to the appropriate service centre. The Department of the Treasury, Publication 686, Certification for Reduced Tax Rates in Tax Treaty Countries, outlines the certification process.



If the vendor does not obtain a certificate pursuant to section 116, the purchaser becomes liable to pay as tax, on behalf of the vendor, an amount equal to 25% of the proceeds of disposition.  The purchaser of the property is then entitled to withhold that amount from the proceeds of the disposition to cover any tax which the vendor owes or may owe.



The required amount must be remitted to the Receiver General for Canada 30 days after the end of the month is which the property was acquired.



Other Considerations

In the following three circumstances, the above sections of the discussion may not describe the United States Federal income tax consequences resulting from the holding and disposition of our common shares.  Based on (a) the number of shareholders of our common shares, and (b) the majority ownership of our shares by Canadian residents, we do not believe that we are either a Foreign Personal Holding Company or a Controlled Foreign Corporation.  However, we do believe that we are likely to be treated as a Passive Foreign Investment Company for the taxable years 2001, 2002 and 2003.

Foreign Personal Holding Company

If, at any time during a taxable year, more than 50% of the total combined voting power or the total value of our outstanding shares are owned, actually or constructively, by five or fewer individuals who are citizens or residents of the United States and 60% or more of our gross income for such year was derived from certain passive sources (e.g. from dividends received from unrelated persons), we would be treated as a foreign personal holding company.  In that event, U.S. Holders that hold our common shares would be required to include in gross income for such year their allowable portions of such foreign personal holding company income to the extent that we do not actually distribute such income.

Controlled Foreign Corporation

If more than 50% of the voting power of all classes of shares or the total value of our shares is owned, directly or indirectly, by U.S. shareholders, each of whom own 10% or more of our voting shares (U.S. Shareholders), we could be treated as a controlled foreign corporation (a CFC) under SubPart F of the Internal Revenue Code.  If we were classified as a CFC and as a PFIC, CFC treatment would prevail with respect to U.S. Shareholders.  CFC classification would effect many complex results including the required inclusion by such U. S. shareholders in income of their pro rata share: of SubPart F Income (as specially defined by the Internal Revenue Code) of Diversinet; and of our earnings invested in U.S. property.  In addition, under Section 1248 of the Internal Revenue Code, gain from the sale or exchange of our common shares by a U.S. person who is or was a U.S. shareholder (as defined in the Internal Revenue Code) at any time during the five years period ending with the sale or exchange is generally treated as ordinary dividend income to the extent of our earnings and profits attributable to the shares sold or exchanged.  Because of the complexity of SubPart F, and because it is not clear that we are a controlled foreign corporation, a more detailed review of these rules is outside of the scope of this discussion.

Passive Foreign Investment Company

As stated above, we believe that we will not be treated as a passive foreign investment company (PFIC), as defined in Section 1297 of the Internal Revenue Code, for our fiscal years 2001, 2002, and 2003.

United States income tax legislation contains rules governing PFICs, that can have significant tax effects on U.S. Holders of foreign corporations. These rules do not apply to non-U.S. Holders.  Section 1297 of the Internal Revenue Code defines a PFIC as a corporation that is not formed in the United States and, for any taxable year, either (i) 75% or more of its gross income is passive income, which includes interest, dividends and some types of rents and royalties or (ii) the average percentage, by fair market value (or, if the company is a controlled foreign corporation or makes an election, by adjusted tax basis), of its assets that produce or are held for the production of passive income is 50% or more.  Based on these tests we do not meet the definition of a PFIC in 2000, 2001, 2002 or 2003.

An U.S. Holder who holds shares in a foreign corporation during any year in which such corporation qualifies as a PFIC is subject to U.S. Federal income taxation under alternative tax regimes, depending upon whether such U.S. Holder makes elections.  The following is a discussion of these alternative tax regimes as applicable to our U.S. Holders.

A U.S. Holder of a PFIC who does not make either of the elections described below (a Non-electing U.S. Holder) is subject to special taxation rules under Section 1291 of the Internal Revenue Code with respect to (i) gains realized on the disposition (or deemed to be realized by reason of a pledge) of his/her common shares and (ii) excess distributions by us, defined as any distribution received by a U.S. Holder from a PFIC in a taxable year that is greater than 125% of the average distributions received by the U.S. Holder in the three preceding taxable years, or, if shorter, the U.S. Holders holding period for the shares.

A Non-electing U.S. Holder generally would be required to include in income pro rata all gains realized on the disposition of his/her common shares and all excess distributions over the entire holding period for the PFIC common shares.  All gains or excess distributions allocated to prior years of the U.S. Holder (other than years prior to the first taxable year of the company during such U.S. Holders holding period and beginning after January 1, 1987 for which it was a PFIC) would be taxed at the highest tax rate for each such prior year applicable to ordinary income.  The Non-electing U.S. Holder also would be liable for interest on the foregoing tax liability for each such prior year calculated as if such liability had been due with respect to each such prior year.  A Non-electing U.S. Holder that is not a corporation must treat this interest charge as personal interest which, as discussed above, is partially or wholly non-deductible.  The balance of the gain or the excess distribution will be treated as ordinary income in the year of the disposition or distribution, and no interest charge will be incurred with respect to such balance.

If we are a PFIC for any taxable year during which a Non-electing U.S. Holder holds common shares, then we will continue to be treated as a PFIC with respect to such common shares, even if we are no longer a PFIC as defined above.  A Non-electing U.S. Holder may terminate this deemed PFIC status by electing to recognize a gain (which will be taxed under the rules discussed above for Non-electing U.S. Holders) as if such common shares had been sold on the last day of the last taxable year for which it was a PFIC.

Under Section 1291(f) of the Internal Revenue Code, the Department of the Treasury has issued proposed regulations that would treat as taxable transfers of PFICshares by Non-electing U.S. Holders that are generally not otherwise taxed, such as gifts, exchanges pursuant to corporate reorganizations, and transfers at death.  Special, generally adverse, rules will apply with respect to the common shares while the company is a PFIC. For example under Section 1298(b)(6) of the Internal Revenue Code, a U.S. Holder who uses PFICshares as security for a loan (including a margin loan) will, except as may be provided in regulations, be treated as having made a taxable disposition of such shares.

Alternatively, if we are a PFIC, an U.S. Holder (an Electing U.S. Holder) who owns common shares is permitted generally to elect out of the tax treatment discussed above, if an U.S. Holder makes a mark-to-market election with respect to common shares.  Under such election, an Electing U.S. Holder would generally recognize as ordinary income for each taxable year an amount equal to the excess, if any, of the fair market value of common shares as of the close of the taxable year over the Electing U.S. Holders adjusted tax basis in such shares.  An Electing U.S. Holder would generally be allowed an ordinary deduction (to the extent of any net mark-to-market gains recognized for prior taxable years) for the excess, if any, of the adjusted tax basis of the common shares over their fair market value as of the close of the taxable year.  An Electing U.S. Holders adjusted tax basis of the common shares would generally be adjusted to reflect the amounts included or deducted under the mark-to-market election.  Additionally, any gain on the actual sale or other disposition of the common shares generally will be treated as ordinary income.  Ordinary loss treatment also would generally apply to any loss realized on the actual sale or other disposition of the common shares to the extent that the amount of such loss did not exceed the net mark-to-market gains previously included with respect to such shares.  An election to mark to market would generally apply to the taxable year made and all subsequent taxable years.  A mark-to-market election is subject to complex and specific rules and requirements, and U.S. Holders are strongly urged to consult their tax advisors concerning such election if the company is classified as a PFIC.

Finally, an U.S. Holder who elects in a timely manner to treat us as a qualified electing fund (a QEF) as defined in the Internal Revenue Code would be subject to another set of special rules different from those described above.  Although a QEF election may be beneficial to some U.S. Holders depending upon their particular tax situations, it requires us to make information available to such holders, and we do not intend to make such information available even if it is classified as a PFIC.  Accordingly, the QEF election will not be available to U.S. Holders.

The foregoing discussion is based on existing provisions of the Internal Revenue Code, existing and proposed regulations thereunder, and current administrative ruling and court decisions, all of which are subject to change. Any such change could affect the validity of this discussion. In addition, the implementation of aspects of the PFIC rules requires the issuance of regulations which in many instances have not been promulgated and which may have retroactive effect. There can be no certainty that any of these proposed regulations will be enacted or promulgated and if so, the form they will take or the effect that they may have on this discussion. Accordingly, and due to the complexity of the PFIC rules, U.S. Holders who are shareholders of Diversinet are strongly urged to consult their own tax advisors concerning the impact of these rules on their investment in us.

10-F.

Dividends and Paying Agents

Not Applicable.

10-G.

Statements by Experts

Not Applicable.

10-H.

Documents on Display

Documents are available either on SEDAR or EDGAR.

10-I.

Subsidiary Information

Our consolidated financial statements include the accounts of Atria Limited, a 50% owned joint venture operating in Hong Kong and its wholly-owned inactive subsidiaries, Diversinet Corporation of America, a Delaware corporation, Diversinet Inc., an Ontario corporation, Diversinet (Israel) Ltd., an Israeli corporation and The Instant Publisher Ltd., a Barbados corporation.  For the fiscal year ended December 31, 2003 our consolidated financial statements will also include the accounts of DSS Software Technologies, the wholly owned subsidiary we acquired in January 2003 and Caradas, Inc., the wholly owned subsidiary we acquired in September 2003.

ITEM 11.  Quantitative and Qualitative Disclosure about Market Risk

We believe that inflation has not had a material impact on our results of operations for each of our fiscal years in the three-year period ended December 31, 2003.  However, there can be no assurance that future inflation would not have an adverse impact on our operating results and financial condition.  We have limited market risk exposure since we do not have any outstanding variable rate debt or derivative financial and commodity instruments as of December 31, 2003.

ITEM 12.    Description of Securities Other than Equity Securities

Not Applicable.

PART II

ITEM 13.  Defaults, Dividend Arrearages and Delinquencies

Not Applicable.

ITEM 14.  Material Modifications to the Rights to Security Holders and Use of Proceeds

Not Applicable.

ITEM 15.  Controls and Procedures

Disclosure controls and procedures: are controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports we file with the Securities and Exchange Commission is recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms and that the information is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

We carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the fiscal year covered by this Annual Report on Form 20-F.  This evaluation was carried out under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer.  Based upon that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in reports that we files or submit is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms.

There have been no significant changes in the Companys internal control or the occurrence of events or other factors that could significantly affect these controls over financial reporting during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

ITEM 16A.  Audit Committee Financial Expert

Messrs. Beck, Steinman and Buntain (until December 17, 2004), all of whom are non-management and unrelated directors, currently comprise the Audit Committee.  Mr. Steinman is Chairman of the Audit Committee.

Mr. Steinman has thirty years of corporate finance experience, recently as Executive Vice President and Chief Financial Officer of Stelco Inc. and prior to 1999 as Chief Financial Officer of Spar Aerospace and Chief Financial Officer of Rogers Cablesystems.  The Board has determined that Mr. Steinman of the Audit Committee meets the requirements of an audit committee financial expert, as defined in Item 16A of Form 20-F.

ITEM 16B.  Code of Ethics

As part of its stewardship responsibilities, the Board of Directors is reviewing a formal Code of Business Conduct and Ethics that govern the behaviour of the directors, officers and employees of the Company.  The Board will monitor compliance with these standards and will be responsible for the granting of any waivers from these standards to directors or officers.  Disclosure will be made by the Company of any waiver from these standards granted to the directors or officers of the Company in the quarterly report of the Company that immediately follows the grant of such waiver.  Once adopted by the Board, a copy of our Code of Business Conduct and Ethics will be filed as an Exhibit to future Annual Reports on Form 20-F and will be available on our website, www.diversinet.com.

ITEM 16 C.  Principal Accountant Fees and Services

KPMG, LLP served as our auditors for the fiscal years ended December 31, 2003 and October 31, 2002.  The only fees paid to KPMG LLP were Audit Fees.

Audit Fees

KPMG LLP billed the Company Cdn$109,000 in fiscal 2003 (Cdn$136,000 in fiscal 2002) for professional services rendered for the audit of the Annual Consolidated Financial Statements and services that are normally provided in connection with statutory and regulatory filings.

Audit Fees are the aggregate fees billed by KPMG for the audit of the Companys annual financial statements, attestation services that are provided in connection with statutory and regulatory filings or engagements and assistance in responding to comment letters from securities regulatory bodies and consultations with the Companys management as to accounting or disclosure treatment of transactions or events and/or the actual or potential impact of final or proposed rules, standards or interpretation by the securities regulatory authorities, accounting standard vetting bodies or other regulatory or standard setting bodies.

Audit Committee Pre-Approval Policies

The Audit Committee nominate and engages the independent auditors to audit the financial statements, and approves all audit, audit-related services, tax services and other services provided by KPMG, LLP.  Any services provided by KPMG, LLP that are not specifically included within the scope of the audit must be pre-approved by the Audit Committee prior to any engagement.  The Audit Committee is permitted to approve certain fees for audit-related services, tax services and other services pursuant to a de minimus exception before the completion of the engagement

ITEM 16 D.  Exemptions from the Listing Standards for Audit Committees

None

ITEM 16 E.  Purchases of Equity Securities by the Issuer and Affiliated Purchasers

Not Applicable.

PART III

ITEM 17.  Financial Statements

Our financial statements have been prepared in accordance with Canadian GAAP.  These principles conform in all material respects with U.S. GAAP except as described in Note 15 to our 2003 consolidated financial statements.  The differences between line items under Canadian GAAP and those as determined under U.S. GAAP are not significant except that, under U.S. GAAP, our total loss would be greater by $nil for the fourteen month period ended December 31, 2003, $35,000 for the year ended October 31, 2002, greater by $37,000 for the year ended October 31, 2001, greater by $983,000 for the year ended October 31, 2000 and less by$120,000 for the year ended October 31, 1999.  Under U.S. GAAP share capital would be greater and deficit would be less by $30,089,000 for each of the years due to the elimination of reduction in stated capital offset against accumulated shareholders deficit in March of 1999.

Reference is made to our consolidated financial statements and related footnotes attached as an exhibit to this Report.

ITEM 18.  Financial Statements

We have elected to provide financial statements pursuant to Item 17.

ITEM 19.  Exhibits

Financial Statements:

•

KPMG Auditors Report dated January 29, 2004, except for note 16(b) which is as of February 23, 2004.

•

Consolidated Balance Sheets as at December 31, 2003, October 31, 2003 and October 31, 2002.

•

Consolidated Statements of Loss and Deficit for the fourteen-month period ended December 31, 2003 and the years ended October 31, 2003, 2002 and 2001.

•

Consolidated Statements of Cash Flows for the fourteen-month period ended December 31, 2003 and the years ended October 31, 2003, 2002 and 2001.

•

Notes to Consolidated Financial Statements.

•

Unaudited Consolidated Statements of Loss and Deficit for the two-month period ending December 31, 2003 and 2002 and Consolidated Statements of Cash Flows for the two-month period ended December 31, 2003 and 2002.

Exhibits:

|1.1  | Underwriting Agreement, dated as of June 12, 2000, between Diversinet and Tucker Anthony Incorporated.(1)
|---- | ---------------------------------------------------------------------------------------------------------
|1.2  | Private Agency Agreement between Allen & Company and Diversinet Corp. dated March 27, 2002.(1)           
|1.3  | Form of Stock Purchase Agreement dated March 27, 2002.(1)                                                
|1.4  | Form of Stock Purchase Agreement dated June 23, 2003.(1)                                                 
|1.5  | Form of Stock Purchase Agreement dated January 19, 2004, 2004. (2)                                       
|5.1  | Opinion of Lang Michener. (1)                                                                            
|10.1 | Form of Diversinet General Product License & Support Agreement.(1)                                       
|12.1 | Certification of the Chief Executive Officer Pursuant to Sarbanes-Oxley Act of 2002                      
|12.2 | Certification of the Chief Financial Officer Pursuant to Sarbanes-Oxley Act of 2002                      
|13.1 | Certification of Periodic Financial Report Pursuant to Sarbanes-Oxley Act of 2002, U.S.C. Section 1350   
|13.2 | Certification of Periodic Financial Report Pursuant to Sarbanes-Oxley Act of 2002, U.S.C. Section 1350   
|23.1 | Consent of KPMG LLP.                                                                                     

(1)

Previously filed with prior years Form 20-F.

(2)

Previously filed with our F-3 on March 15, 2004.

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SIGNATURE PAGE

Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, as amended, the Registrant certifies that it meets all of the requirements for filing on Form 20-F and has duly caused this registration statement to be signed on its behalf by the undersigned, there unto duly authorized.

DIVERSINET CORP.



By:

/s/ NAGY MOUSTAFA

Nagy Moustafa

President and Chief Executive Officer

Dated: April 9, 2004







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MANAGEMENTS REPORT

The accompanying consolidated financial statements and all information in the Annual Report have been prepared by management and approved by the Board of Directors of the Company.  The consolidated financial statements were prepared in accordance with generally accepted accounting principles and, where appropriate, reflect managements best estimates and judgements.  Management is responsible for the accuracy, integrity and objectivity of the consolidated financial statements within reasonable limits of materiality and for the consistency of financial data included in the text of the Annual Report with that contained in the consolidated financial statements.  To assist management in the discharge of these responsibilities, the Company maintains a system of internal controls designed to provide reasonable assurance that its assets are safeguarded, that only valid and authorized transactions are executed and that accurate, timely and comprehensive financial information is prepared and disclosed.  Consistent with the concept of reasonable assurance, the Company recognizes that the relative cost of maintaining these controls should not exceed their expected benefits.



The Companys Audit Committee is appointed by the Board of Directors annually and is comprised of non-management directors.  The Audit Committee meets with management as well as with the independent auditors to satisfy itself that management is properly discharging its financial reporting responsibilities and to review the consolidated financial statements and the independent auditors report.  The Audit Committee reports its findings to the Board of Directors for consideration in approving the consolidated financial statements for presentation to the shareholders.  The independent auditors have direct access to the Audit Committee.



The consolidated financial statements have been audited by KPMG LLP, Chartered Accountants, on behalf of the shareholders, in accordance with generally accepted auditing standards.  Their report outlines the scope of their audit and expresses their opinion on the consolidated financial statements of the Company.

|/s/ Nagy Moustafa                                  | /s/David Hackett                      
|-------------------------------------------------- | --------------------------------------
|Nagy Moustafa, President & Chief Executive Officer | David Hackett, Chief Financial Officer



KPMG LLP



CharteredAccountants

Telephone (416) 228-7000

Yonge Corporate Centre

Telefax (416) 228-7123

4100 Yonge Street Suite 200

www.kpmg.ca



North York, Ontario M2P 2H3



AUDITORS REPORT TO THE SHAREHOLDERS

We have audited the consolidated balance sheets of Diversinet Corp. as at December 31, 2003, October 31, 2003 and October 31, 2002 and the consolidated statements of earnings and deficit and cash flows for each of the years in the three-year period ended October 31, 2003 and for the fourteen-month period ended December 31, 2003.  These 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 Canadian generally accepted auditing standards and 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.



In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Company as at December 31, 2003, October 31, 2003 and October 31, 2002 and the results of its operations and its cash flows for each of the years in the three-year period ended October 31, 2003 and the fourteen month period ended December 31, 2003 in accordance with Canadian generally accepted accounting principles.



/s/ KPMG LLP

Chartered Accountants, Toronto, Canada, January 29, 2004, except for note 16(b) which is as of February 23, 2004



COMMENTS BY AUDITORS FOR U.S. READERS ON CANADA - U.S. REPORTING DIFFERENCE

In the United States, reporting standards for auditors require the addition of an explanatory paragraph (following the opinion paragraph) when the financial statements are affected by conditions and events that cast substantial doubt on the Companys ability to continue as a going concern, such as those described in note 1 to the financial statements.  Our report to the shareholders dated January 29, 2004, except for note 16(b) which is as of February 23, 2004, is expressed in accordance with Canadian reporting standards which do not permit a reference to such events and conditions in the auditors report when these are adequately disclosed in the financial statements.



/s/ KPMG LLP

Chartered Accountants, Toronto, Canada

#







DIVERSINET CORP.

Consolidated Balance Sheets

(In United States dollars)



As at

December 31

October 31

October 31

2003

2003

2002



Assets

Current assets:

Cash and cash equivalents

$

722,569

$

863,977

$

608,692

Short-term investments

1,243,960

1,853,369

1,843,657

Accounts receivable (including $62,293, $62,293,

$110,148 from joint venture, note 8)

1,081,760

1,422,943

265,672

Other receivables

85,748

77,720

15,933

Prepaid expenses

375,009

232,812

77,012

Total current assets

3,509,046

4,450,821

2,810,966



Capital assets, net (note 4)

986,316

1,053,544

1,198,527

Purchased technology, net of $62,833, $31,416,

$nil amortization (note 3)

314,167

345,584



Customer assets net of $110,256, $55,129,

$nil amortization (note 3)

882,048

937,175



Goodwill (note 3)

5,311,932

5,311,932



Total assets

$

11,003,509

$

12,099,056

$

4,009,493



Liabilities and Shareholders' Equity

Current liabilities:

Accounts payable

$

899,644

$

845,757

$

352,025

Accrued liabilities (note 5)

1,351,400

1,504,319

698,137

Notes payable

28,192

33,178



Current portion of promissory note

300,000

300,000



Deferred revenue

477,449

653,350

9,228

Total current liabilities

3,056,685

3,336,604

1,059,390



Promissory note

300,000

300,000





Shareholders' equity:

Share capital (note 6):

Authorized:

Unlimited common shares

Issued and outstanding:

11,043,027, 11,043,027, 3,222,308

common shares

49,191,482

49,201,868

40,677,645

Contributed surplus

126,173

72,680

72,680

Cumulative translation adjustment

(1,520,721)

(1,445,932)

(1,936,534)

Share purchase warrants (note 6)

1,331,652

1,331,652



Deficit

(41,481,762)

(40,697,816)

(35,863,688)

Total shareholders' equity

7,646,824

8,462,452

2,950,103



Future operations (note 1)

Commitments and contingencies (note 11)



Total liabilities and shareholders' equity

$

11,003,509

$

12,099,056

$

4,009,493



See accompanying notes to consolidated financial statements.



On behalf of the Board:

/s/ Mark Steinman

/s/ Nagy Moustafa

Mark Steinman, Director

Nagy Moustafa, Director

#







DIVERSINET CORP.

Consolidated Statements of Earnings and Deficit

(In United States dollars)





| | Fourteen month period ended | Years ended
| | --------------------------- | -----------

December 31

October 31

October 31

October 31

2003

2003

2002

2001



Revenue (including $nil, $nil, $85,138, $127,034,

from joint venture, note 8)

$

8,562,676

$

7,108,003

$

710,250

$

792,814



Cost of sales

6,622,495

5,491,029





Gross margin

1,940,181

1,616,974

710,250

792,814



Expenses:

Research and development

1,513,323

1,243,545

1,478,980

4,484,608

Sales and marketing

2,656,099

2,270,982

1,103,722

4,711,785

General and administrative

2,345,572

2,139,020

1,754,696

3,019,805

Foreign exchange loss (gain)

308,642

229,883

144,606

(403,520)

Depreciation and amortization

740,049

573,672

404,015

1,226,022

Severance costs







474,008

7,563,685

6,457,102

4,886,019

13,512,708



Loss before the following

(5,623,504)

(4,840,128)

(4,175,769)

(12,719,894)



Interest income and other income

(26,302)

(25,653)

(111,096)

(447,736)

Interest expense

20,872

19,653







Loss for the period

(5,618,074)

(4,834,128)

(4,064,673)

(12,272,158)



Deficit, beginning of period

(35,863,688)

(35,863,688)

(31,799,015)

(19,526,857)

Deficit, end of period

$

(41,481,762)

$

(40,697,816)

$

(35,863,688)

$

(31,799,015)



Basic and diluted loss per share (note 7)

$

(0.87)

$

(0.85)

$

(1.37)

$

(4.65)





Weighted average number of

common shares

6,478,296

5,715,423

2,971,692

2,637,648





See accompanying notes to consolidated financial statements.

#







DIVERSINET CORP.

Consolidated Statements of Cash Flows

(In United States dollars)





| | Fourteen-month period ended | Years ended
| | --------------------------- | -----------

December 31

October 31

October 31

October 31

2003

2003

2002

2001



Cash provided by (used in):



Operating activities:

Loss from continuing operations

$

(5,618,074)

$

(4,834,128)

$

(4,064,673)

$

(12,272,158)

Items not involving cash:

Depreciation and amortization

740,049

573,672

404,015

1,226,022

Stock-based compensation expense

825,010

771,519





Unrealized foreign exchange loss (gain)

415,813

490,602

71,603

(185,117)

Change in non-cash operating working capital:

Accounts receivable

2,425,570

2,084,387

(91,726)

908,489

Other receivables

(69,815)

(61,787)

47,094

37,949

Prepaid expenses

(98,846)

43,350

300,700

(7,180)

Accounts payable

(571,786)

(625,673)

(402,707)

480,399

Accrued liabilities

431,892

584,811

(777,766)

(758,104)

Deferred revenue

(156,371)

19,530

(18,552)

(26,634)

Cash used in continuing operations

(1,676,558)

(953,717)

(4,532,012)

(10,596,334)



Financing activities:

Issue of common shares, common share

purchase options and warrants for cash

2,920,646

2,931,032

3,108,317

68,651

Notes payable

(873,323)

(868,337)





Bank indebtedness

(240,979)

(240,979)





Cash provided by financing activities

1,806,344

1,821,716

3,108,317

68,651



Investing activities:

Short-term investments

599,698

(9,712)

112,799

(1,956,457)

Acquisitions, net of cash received

(541,084)

(541,084)





Additions to capital assets

(74,523)

(61,918)

(20,525)

(719,453)

Cash provided by (used in) investing activities

(15,909)

(612,714)

92,274

(2,675,910)



Increase (decrease) in cash and cash 
equivalents

113,877

255,285

(1,331,421)

(13,203,593)



Cash and cash equivalents, beginning of period

608,692

608,692

1,940,113

15,143,706



Cash and cash equivalents, end of period

$

722,569

$

863,977

$

608,692

$

1,940,113



Supplementary non-cash financing and

investing activities:

Issue of warrants on acquisitions

$

1,044,640

$

1,044,640

$



$



Issue of common shares on acquisitions

4,959,875

4,959,875







See accompanying notes to consolidated financial statements.

#







DIVERSINET CORP.

Notes to Consolidated Financial Statements

(In United States dollars)

Years ended October 31, 2003, 2002 and 2001 and the fourteen month period ended December 31, 2003

Diversinet Corp. (the "Company"), an Ontario corporation, develops and markets secured wireless and identity management solutions and professional services to the enterprise, financial services, government and gaming and wagering marketplaces.

1.

Future operations:

These consolidated financial statements have been prepared on a going concern basis, which assumes the Company will continue in operation in the foreseeable future and be able to realize assets and satisfy liabilities in its normal course of business.  Certain conditions and events exist that cast substantial doubt on the Company's ability to continue as a going concern.

The Company has incurred significant losses and used significant amounts of cash in operating activities in recent years.

Continued operations depend upon the Company's ability to generate future profitable operations and/or obtain additional financing to fund future operations and, ultimately, to generate positive cash flows from operating activities.  There can be no assurance that the Company will be successful in obtaining additional financing or generating positive cash flows from operations.

Should the Company be unable to generate positive cash flows from operations or secure additional financing in the foreseeable future, the application of the going concern principle for financial statement reporting purposes may no longer be appropriate.  These financial statements do not include any adjustments related to the valuation or classification of recorded asset amounts or the amounts or classification of liabilities that may be necessary should the Company be unable to continue as a going concern.

2.

Significant accounting policies:

These consolidated financial statements have been prepared in accordance with accounting principles generally accepted in Canada, which, except as described in note 14, conform in all material respects with accounting principles generally accepted in the United States.  Significant accounting policies adopted by the Company are as follows:

(a)

Fiscal Year:

In 2003, the Company changed its fiscal year end from October 31 to December 31.  As a result, financial statements for the fourteen-month period ended December 31, 2003 in addition to the financial statements for the year ended October 31, 2003 have been presented.

(b)

Basis of consolidation:

The consolidated financial statements include the accounts of the Company and its subsidiaries.  The Company accounts for its interest in a joint venture by the proportionate consolidation method.  All significant intercompany transactions and balances have been eliminated.

(c)

Goodwill:

Handbook section 3062 Goodwill and Other Intangible Assets, requires that goodwill no longer be amortized but instead be tested for impairment at least annually by comparing the carrying value of a reporting unit with its fair value.  If any potential impairment is indicated, then it is quantified by comparing the carrying value of goodwill to its fair value.

During the fourth quarter the Company completed its goodwill impairment test and concluded that no write-down was required.

(d)

Revenue recognition:

The majority of our revenues are derived from consulting services delivered on a stand alone basis.  We provide technical consulting services to our customers in the areas of systems integration, software development and Customer Relationship Management and enterprise Relationship Management implementation.  We also provide technical consulting services relating to smart card based application security systems.  We also derive revenues from products and services for mobile commerce over wireless networks.

Consulting revenues are recognized on a time and materials basis, or on a percentage of completion basis, depending on the specifics of the contract, as employees and subcontractors provide services. Revenue from time and materials service contracts are recognized as the services are provided.  Revenue from fixed price long-term contracts is recognized in accordance with CICA 3400 Revenue and related guidance, and Statement of Position 81-1 Accounting for performance of construction type and certain production type contracts using the percentage of completion method based on direct labour costs incurred to date as a percentage of total estimated direct labour costs to complete the project.  Losses on contracts are recognized during the period in which the loss first becomes probable and reasonably estimable. Contract losses are determined to be the amount by which the estimated direct and indirect costs of the contract exceed the estimated total revenues that will be generated by the contract. Revenue recognized in excess of billings is recorded as unbilled services.  Billings in excess of revenue recognized are recorded as deferred revenue until the above revenue recognition criteria are met.  Reimbursements, including those relating to travel and other out-of-pocket expenses, and other similar third-party costs, are included in revenues.

Revenue from software license agreements is recognized in accordance with CICA 3400 Revenue and Statement of Position 97-2 Software Revenue Recognition as amended upon execution of a license agreement and the shipment of the software, as long as all vendor obligations have been satisfied, the license fee is fixed and determinable and collection of the license fees is probable.  We consider fees related to arrangements with significant payments due beyond our normal trading terms not to be fixed or determinable.  If the fee is not fixed or determinable, revenue is recognized as the payments become due from the customer.  If collectibility is not considered probable, revenue is recognized when the fee is collected.  Revenue from the sale of additional software products is recognized as software is delivered.

Revenue earned on software arrangements involving multiple elements (i.e., software products, upgrades/enhancements, post contract customer support, installation, training, et cetera) is allocated to each element based on vendor specific objective evidence (VSOE) of relative fair value of the elements. When arrangements contain multiple elements and VSOE only exists for all undelivered elements, the Company recognizes revenue for the delivered elements using the residual method, whereby the total arrangement fee is assigned to the undelivered elements based on their fair value, with the residual assigned to the delivered elements and recognized.  VSOE used in determining the fair value for installation, integration and training is based on the standard daily rates for the type of service being provided multiplied by the estimated time to complete the task.  VSOE used in determining the fair value of maintenance and technical support is based on annual renewal rates.  For arrangements containing multiple elements where VSOE does not exist for all undelivered elements, revenue for the delivered and undelivered elements is deferred until either VSOE exists for the remaining undelivered elements or all elements have been delivered.  The revenue allocated to post contract customer 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.

The Companys sales arrangements generally include standard payment terms ranging up to 90 days.  The Company provides a limited product warranty, the costs of which have historically been insignificant.  The Companys products are not subject to rights of return, stock rotation rights or price protection.

(e)

Cash and cash equivalents:

Cash and cash equivalents include cash on account and short-term investments in money market instruments with original maturities of 90 days or less when acquired.

(f)

Short-term investments:

Short-term investments consist of bonds having a term of 90 days when acquired which are recorded at cost plus accrued interest.

(g)

Investment tax credits:

Investment tax credits are accrued when qualifying expenditures are made and there is reasonable assurance that the credits will be realized.  Investment tax credits earned with respect to current expenditures for qualified research and development activities are included in the consolidated statements of earnings and deficit as a reduction of related expenses in the year incurred.  Assistance related to the acquisition of capital assets used for research and development is credited against the related capital assets.  The Company has recorded no investment tax credits.

(h)

Research and development costs:

Research costs are expensed as incurred.  Software development costs are deferred once costs meet the criteria under Canadian generally accepted accounting principles for deferral and amortization.  Such deferred costs are amortized, commencing when the product is commercially released, on a straight-line basis over two years.  The recoverability of any unamortized deferred development costs is reviewed on an ongoing basis.

(i)

Purchased and acquired technology:

The Company capitalizes purchased technology and amortizes such costs over two years.  The carrying value is assessed on a periodic basis to determine if a write-down is required.

(j)

Customer assets:

Customer relationships are amortized over three years. Customer contracts are amortized as services are performed.  The carrying value is accessed on a periodic basis to determine if a write-down is required.

(k)

Foreign currency translation:

Monetary assets and liabilities denominated in foreign currencies are translated into United States dollars at the exchange rates prevailing at the consolidated balance sheet dates.  Non-monetary assets and liabilities are translated at historical rates.  Transactions in foreign currencies are translated into United States dollars at the approximate rates prevailing at the dates of the transactions.  Foreign exchange gains and losses are included in loss for the period.

The Company has historically prepared its consolidated financial statements in Canadian dollars and used the Canadian dollar as its measurement currency.  As a result of a number of circumstances, including the current year financing activities, the acquisition of DSS Software Technologies and Caradas, Inc. and the U.S. dollar becoming the measurement currency in which most of the Companys business is transacted, effective October 1, 2003, the Company adopted the U.S. dollar as its measurement and reporting currency for preparation of its consolidated financial statements.  Comparative financial information has been restated in U.S. dollars using the current rate method.

Share capital has been translated at the exchange rate in effect at the time of the transaction.  Deficit has been translated at the approximate rates prevailing at the dates of the transactions and monetary assets and liabilities have been translated into United States dollars at the exchange rates prevailing at the consolidated balance sheet dates.  The resulting difference has been classified as a cumulative translation adjustment on the balance sheet.

(l)

Capital assets:

Capital assets are stated at cost less accumulated depreciation and amortization.  Depreciation and amortization is provided over the estimated useful lives of the assets at the following annual rates and bases:

Asset

Basis

Rate

Computer hardware

Declining balance

30%

Computer software

Declining balance

30%

Furniture and fixtures

Declining balance

20%

Leasehold improvements

Straight-line

Over term of lease

The Company regularly reviews the carrying values of its capital assets by comparing the carrying amount of the asset to the expected future undiscounted cash flows to be generated by the asset.  If the carrying value exceeds the amount recoverable, a write-down of the asset to its estimated net recoverable amount is charged to the statements of earnings and deficit.

(m)

Income taxes:

The Company accounts for income taxes using the asset and liability method.  Under this method, future income taxes are recognized at the enacted or substantively enacted tax rate expected to be applicable at the date of reversal for all significant temporary differences between the tax and accounting bases of assets and liabilities and for certain tax carry forward items.  Future income tax assets are recognized only to the extent that, in the opinion of management, it is more likely than not that the future income tax assets will be realized.  Future income tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of the substantive enactment of the change.

(n)

Earnings per share:

Basic earnings per share is computed using the weighted average number of common shares that are outstanding during the year.  Diluted earnings per share is computed using the weighted average number of common and potential common shares outstanding during the year.  Potential common shares consist of the incremental number of common shares issuable upon the exercise of stock options and warrants and are calculated using the treasury stock method.

(o)

Stock-based compensation:

Effective November 1, 2002, the Company adopted the new CICA Handbook section 3870, "Stock-Based Compensation and Other Stock-Based Payments", which requires that a fair value based method of accounting be applied to all stock-based payments to non-employees and to direct awards of stock to employees.  However, the standard permits the Company to continue its existing policy of recording no compensation cost on the grant of stock options and warrants to employees with the addition of pro-forma information as if the fair value method has been applied.

Had the company determined compensation expense based on the fair value of stock options granted subsequent to November 1, 2002, the Companys loss and loss per share would have been reported as the pro-forma amounts indicated below:

Fourteen months ended

Year ended

December 31, 2003

October 31, 2003

Loss for the period as reported

$

(5,618,074)

$

(4,834,128)

Pro forma loss

(5,804,961)

(4,925,828)

Pro forma loss per common share:

Basic and diluted

$

(0.90)

$

(0.86)

Weighted average number of common shares

6,478,296

5,715,423

(p)

Use of estimates:

The preparation of these consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of these consolidated financial statements and the reported amounts of revenue and expenses during the year.  Actual results could differ from those estimates.

1.

Acquisitions:

a)

In January 2003, the Company acquired 100% of the outstanding shares of DSS Software Technologies, a consulting services provider.  The aggregate purchase price was $1,301,038 consisting of $300,000 in cash, $26,998 in the costs associated with the acquisition, $600,000 of promissory note payable in instalments of $300,000 on January 2, 2004 and $300,000 on January 2, 2005 and 120,000 share purchase warrants with a value of $374,040.  The share purchase warrants vest equally on January 2, 2003, 2004 and 2005 and are exercisable at $3.75 per share for five years.  Additional future cash consideration in the amount of $800,000 is payable based on the achievement of certain financial targets over the next two years and will be recorded with an increase to goodwill if and when the targets have been met.  The acquisition was accounted for using the purchase method and the purchase price was allocated as follows:

|Fair value of net capital assets acquired | $        93,374
|----------------------------------------- | ---------------
|Working capital                           | 290,422        
|Goodwill                                  | 917,242        
|Purchase price                            | $   1,301,038  

b)

In September 2003, the Company acquired 100% of the outstanding shares of Caradas, Inc., a credential management provider.  The aggregate purchase price was $5,630,475 consisting of 1,417,500 common shares with a value of $4,895,310, $64,565 in the costs associated with the acquisition and 200,000 common share purchase warrants with a value of $670,600.  The share purchase warrants vest equally on a quarterly basis over three years and each is exercisable to purchase one common share at $2.45 per share for five years from the date of vesting.  The acquisition was accounted for using the purchase method and the purchase price was allocated as follows:

|Fair value of net capital assets acquired | $       186,853
|----------------------------------------- | ---------------
|Working capital                           | (320,372)      
|Purchased technology                      | 377,000        
|Customer assets                           | 992,304        
|Goodwill                                  | 4,394,690      
|Purchase price                            | $   5,630,475  

The customer assets of $992,304 are comprised of customer relationships and other customer contracts.  The customer relationships were assigned a useful life of three years, while the customer contracts will be amortized as services are performed.  The purchased technology of $377,000 has been assigned a useful life of two years.

1.

Capital assets:

Accumulated

Net

December 31, 2003

Cost

depreciation

book

and amortization

value

Computer hardware

$

1,342,228

$

817,852

$

524,376

Computer software

556,319

365,310

191,009

Furniture and fixtures

291,174

138,401

152,773

Leasehold improvements

234,865

116,707

118,158

$

2,424,586

$

1,438,270

$

986,316

In the fourteen months ended December 31, 2003, depreciation expense and amortization amounted to $566,960.

Accumulated

Net

October 31, 2003

Cost

depreciation

book

and amortization

value

Computer hardware

$

1,333,937

$

771,806

$

562,131

Computer software

556,318

347,894

208,424

Furniture and fixtures

286,860

131,629

155,231

Leasehold improvements

234,865

107,107

127,758

$

2,411,980

$

1,358,436

$

1,053,544

In the year ended October 31, 2003, depreciation expense and amortization amounted to $499,732.

Accumulated

Net

October 31, 2002

Cost

depreciation

book

and amortization

value

Computer hardware

$

984,343

$

510,752

$

473,591

Computer software

444,153

226,521

217,632

Furniture and fixtures

339,985

137,793

202,192

Leasehold improvements

466,936

161,824

305,112

$

2,235,417

$

1,036,890

$

1,198,527

In the year ended October 31, 2002, depreciation and amortization expense amounted to $404,015.

2.

Accrued liabilities:

December 31

October 31

October 31

2003

2003

2002

Remuneration

$

815,135

$

914,523

$

236,045

Professional fees

372,663

511,944

300,971

Miscellaneous

163,602

77,852

161,121

$

1,351,400

$

1,504,319

$

698,137

3.

Share capital, warrants and common share purchase options:

There are an unlimited number of authorized common shares with no par value.

The following details the changes in issued and outstanding shares, compensation options and warrants:

|                                              | Compensation options and warrants | Common shares    
|--------------------------------------------- | --------------------------------- | -----------------
|                                              | Number                            | Amount           
|Balance, October 31, 2000 (b)                 | 41,350                            | $               
|Stock options exercised and shares issued (a) |                                  |                 
|Balance, October 31, 2001                     | 41,350                            |                 
|Private placement (c)                         | 471,554                           |                 
|Balance, October 31, 2002                     | 512,904                           |                 
|Reverse stock split (d)                       |                                  |                 
|Private placement (e)                         | 60,000                            | 68,304           
|Stock options exercised and shares issued (a) |                                  |                 
|Acquisition of DSS (f)                        | 120,000                           | 374,040          
|Acquisition of Caradas (g)                    | 200,000                           | 670,600          
|Professional services (h)                     | 127,500                           | 218,708          
|Balance, October 31, 2003                     | 1,020,404                         | 1,331,652        
|Private placement (e)                         |                                  |                 
|Balance, December 31, 2003                    | 1,020,404                         | $  1,331,652     

(a)

During 2001, 2002 and 2003, the Company granted options to certain employees, officers and directors under a share option plan (note 12), enabling them to purchase common shares of the Company.

(b)

Warrants outstanding as of October 31, 2001 and 2000 consist of 15,000 warrants issued in October 1999 as an exercise price of $131.25 per share, expiring October 2004 and 26,350 warrants issued in May 2000 at an exercise price of $85.90 per share, expiring May 2005.

(c)

On April 4, 2002, the Company completed a private placement of 518,670 units at a price of $6.00 per unit for gross proceeds before expenses $3,112,022.  Each unit was comprised of one common share and three-quarters of one common share purchase warrant.  Each warrant entitles the holder thereof to acquire one common share at a price of $7.20 per common share for a period of up to three years from April 4, 2002.

The following consideration was issued to placement agents in connection with the private placement:  (i) cash consideration of $140,400 plus out-of-pocket expenses of approximately $7,500; (ii) compensation options to purchase up to 23,400 units on the same terms as described above; (iii) 50,000 common share purchase warrants to purchase common shares at prices of $6.00 and $7.20 and expiring on April 2 and 3, 2005; (iv) 18,750 common share purchase warrants to purchase common shares at a price of $0.10 per common share.

On April 8, 2002, the compensation options noted in (ii) above, were exercised and the Company issued 23,400 common shares and 17,550 common share purchase warrants to the placement agents.

On May 8, 2002, upon issuance of the common share purchase warrants noted in (iv) above, the warrants were immediately exercised and the Company issued 18,750 common shares.  The fair value of these warrants in the amount of $110,625 was recorded as share issue costs.

On May 8, 2002, the Company issued an additional 20,000 units at a price of $6.00 per unit for gross proceeds of $120,000.  Each unit was comprised of one common share and three quarters of one common share purchase warrant.  Each common share purchase warrant entitles the holder to purchase one common share at a price of $7.20 for a period of three years from May 8, 2002.

(d)

On January 28, 2003 the Company completed a reverse stock split of its issued and outstanding common shares whereby every ten shares of common stock were exchanged for one share of common stock. All common share amounts in the financial statements have been restated to give effect to the stock split.

(e)

On June 23, 2003, the Company completed a private placement of 5,000,000 common shares at a price of $0.62 per common share for gross proceeds of $3,100,000.

The placement agent exercised its option to receive 500,000 common shares in lieu of its $310,000 fee from the Private Placement.  The placement agent also received 40,000 common shares in lieu of its $24,000 retainer fee to act as placement agent.  Further compensation was issued as a three-year broker cashless exercisable warrant terminating on June 20, 2006 to purchase up to 500,000 common shares of the Corporation at $0.62 per share.  The placement agent has exercised 440,000 in a cashless exercise to receive 304,037 common shares.

(f)

In January 2003, the Company acquired 100% of the outstanding shares of DSS Software Technologies. The purchase price included 120,000 share purchase warrants with a value of $374,040.  The share purchase warrants vest equally on January 2, 2003, 2004 and 2005 and are exercisable at $3.75 per share for five years.

(g)

On September 1, 2003, Diversinet Corp acquired 100% of the outstanding shares of Caradas, Inc. The aggregate consideration was 1,417,500 Diversinet common shares and 200,000 share purchase warrants.  The share purchase warrants are exercisable at $2.45 per share for five years.  The share purchase warrants will vest to the holder quarterly over three years.

(h)

Professional services:

The following chart summarizes the activity during the year ended December 31, 2003:

|                                        | Compensation options and warrants | Common shares
|--------------------------------------- | --------------------------------- | -------------
|                                        | Number                            | Amount       
|Consulting services (i)                 | 20,000                            | $    42,088  
|Consulting services (ii)                | 2,500                             | 5,260        
|Business development services (iii)     |                                  |             
|Public relations services (iv)          | 100,000                           | 57,620       
|Warrants exercised (iv)                 | (100,000)                         | (57,620)     
|Advisory board consulting services (v)  | 50,000                            | 59,260       
|Advisory board consulting services (vi) | 25,000                            | 52,508       
|Consulting services (vii)               |                                  |             
|Consulting services (viii)              | 25,000                            | 39,640       
|Consulting services (ix)                | 5,000                             | 19,952       
|                                        | 127,500                           | $  218,708   

(i)

On November 1, 2002 the Company entered into an agreement for consulting services.  In consideration for the services to be rendered in accordance with the agreement, Diversinet issued a three-year warrant terminating on October 23, 2005 to purchase up to 20,000 of our common shares at $2.60 per share in regards to the compensation payable by us for these services.

(ii)

On November 1, 2002 the Company entered into an agreement for consulting services.  In consideration for the services to be rendered in accordance with the agreement, Diversinet issued a three-year warrant terminating on October 23, 2005 to purchase up to 2,500 of our common shares at $2.60 per share in regards to the compensation payable by us for these services.

(iii)

On May 14, 2003, the Company entered into an agreement for business development services.  This agreement is subject to certain milestones that if not met may allow Diversinet to terminate the retainer portion of the agreement and /or the entire agreement.  In consideration for the services to be rendered Diversinet will pay a retainer equal to $25,000 per month, which at our discretion may be paid as follows: (i) $25,000 per month in cash, or (ii) $25,000 per month by the issuance of 41,667 common shares per month, or (iii) $20,000 per month in cash and issuance of 8,333 common shares per month.  The Company has elected to pay the first six months by way of 250,000 common shares.

(iv)

On May 14, 2003, the Company entered into an agreement for public relations services.  In consideration for the services to be rendered in accordance with the agreement, the Company issued a three-year cashless exercisable warrant terminating on May 12, 2006 to purchase up to 100,000 of our common shares at $0.60 per share and 200,000 common shares, being 16,667 common shares per month for 12 months in regards to the compensation payable by us for these services.  The consultant opted to have a cashless exercise and received 69,099 common shares.

(v)

On July 1, 2003, the Company entered into an agreement for advisory board consulting services.  In consideration for the services to be rendered in accordance with the agreement, we issued a three-year warrant terminating on June 30, 2006 to purchase up to 50,000 of our common shares at $0.62 per share in regards to the compensation payable by us for these services.

(vi)

On July 1, 2003, the Company entered into an agreement for advisory board consulting services.  In consideration for the services to be rendered in accordance with the agreement, we issued a five-year warrant terminating on August 1, 2008, vesting equally on a quarterly basis over three years, to purchase up to 25,000 of our common shares at $0.62 per share in regards to the compensation payable by us for these services.

(vii)

On July 17, 2003, the Company entered into an agreement for consulting services.  In consideration for the services to be rendered in accordance with the agreement, we issued 40,000 of our common shares in regards to the compensation payable by us for these services.

(viii)

On August 20, 2003 the Company entered into an agreement for consulting services.  In consideration for the services to be rendered in accordance with the agreement, Diversinet issued a one-year warrant terminating on August 20, 2004 to purchase up to 25,000 of our common shares at $3.40 per share in regards to the compensation payable by us for these services.

(ix)

On September 1, 2003 the Company entered into an agreement for consulting services.  In consideration for the services to be rendered in accordance with the agreement, Diversinet issued a two-year warrant terminating on September 30, 2005 to purchase up to 5,000 of our common shares at $2.50 per share in regards to the compensation payable by us for these services.

1.

Basic and diluted loss per share:

Common shares issuable upon the exercise of options and warrants that could dilute basic loss per share in the future were not included in the computation of diluted loss per share because to do so would have been anti-dilutive for the years ended December 31, 2003, October 31, 2003, 2002 and 2001.  Anti-dilutive options amounted to 783,946 at December 31, 2003 and 739,646 at October 31, 2003 (2002  256,979; 2001  298,518). Anti-dilutive warrants amounted to 905,404 at December 31, 2003 and October 31, 2003 (2002  512,904; 2001  41,350), respectively.

2.

Interest in joint venture:

On June 4, 2001, the Company entered into an agreement with an Asian company to establish a joint venture to conduct certain of the Company's Asian activities.  Each party holds a 50% interest in the joint venture.  These financial statements reflect the Company's proportionate interest in the joint venture's assets, liabilities, revenue and expenses.

The following amounts included in the consolidated financial statements represent the Company's proportionate interest in the joint venture at December 31, 2003, October 31, 2003 and October 31, 2002:

December 31

October 31

October 31

2003

2003

2002

Cash

$

37

$

37

$

50

Accounts receivable

56

56

1,264

Prepaid expenses

445

1,334

103

Capital assets

172,495

196,644

258,736

Total assets

$

173,033

$

198,071

$

260,153

Accounts payable

$

80,950

$

80,950

$

100,468

Accrued liabilities

4,369

1,335

3,991

Total liabilities

$

85,319

$

82,285

$

104,459

Revenue

$

181

$

181

$

3,483

Expenses

170,944

134,445

(188,825)

Loss

$

(170,763)

$

(134,264)

$

(185,342)

During fiscal 2003, the Company recognized revenue of $nil (2002 - $85,138) from sales to the joint venture.  As at December 31, 2003, the Company had contributed approximately $636,993 (2002 - $626,054) into the joint venture.  The Company has to date committed to contribute an additional $6,200 to the joint venture for the Company's proportionate share of the joint venture requirements.  This amount is expected to be contributed within the next six months.

3.

Income taxes:

The tax effects of significant temporary differences representing future tax assets is as follows:

December 31

October 31

October 31

2003

2003

2002

Future tax assets:

Operating loss carryforwards

$

10,813,090

$

10,635,743

$

8,046,570

Capital loss carryforwards

567,607

558,094

510,187

Share issue costs

121,514

119,478

273,562

Research and development costs

2,736,323

2,631,275

1,607,807

Capital assets, accounting basis less than tax basis

5,706,491

5,604,328

3,735,410

19,945,025

19,548,918

14,173,536

Valuation allowance

(19,945,025)

(19,548,918)

(14,173,536)

Net future tax assets

$



$



$



In assessing the realizability of future tax assets, management considers whether it is more likely than not that some portion or all of the future tax assets will not be realized.  The ultimate realization of future tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible.  Management considers projected future taxable income, uncertainties related to the industry in which the Company operates and tax planning strategies in making this assessment.

At December 31, 2003, the Company has non-capital losses available for carryforward for Canadian income tax purposes amounting to $28,324,000.  These losses expire in the following fiscal years:

2004

$

2,854,000

2005

4,250,000

2006

4,142,000

2007

10,862,000

2008

3,254,000

2009

2,539,000

2010

423,000

$

28,324,000

The Company also has non-capital losses available for carryforward for United States income tax purposes amounting to $1,628,000, expiring between 2018 and 2023.

4.

Segmented information:

The Company operates in a single reportable operating segment.  This segment derives its revenue from the sale of secured wireless and identity management solutions and related products and services.  As at October 31, 2003 and December 31, 2003, 60% [78% - October 31, 2002] of the capital assets were located in Canada, 22% [nil - October 31, 2002] were located in the United States and 18% [22% - October 31, 2002] in Hong Kong.

A summary of sales to major customers that exceeded 10% of total sales and the approximate amount due from these customers during each of the years in the three-year period ended October 31, 2003 and the fourteen month period ended December 31, 2003, are as follows:

Sales

Accounts Receivable

December 31 and

October 31

October 31

December 31

October 31

October 31, 2003

2002

2001

2003

2003

Customer 1

30%





$

203,752

$

278,504

Customer 2

20%





125,746

191,452

Customer 3





40%





Customer 4



12%

19%

62,293

62,293

Customer 5



25%

17%





Customer 6



28%







Customer 7



17%



42,500

42,500

The Company does not consider itself to be economically dependent on any single customer or supplier.

Revenue is attributable to geographic location based on the location of the customer, as follows:

December 31

October 31

October 31

October 31

2003

2003

2002

2001

Sales:

United States

$

8,219,149

$

6,840,380

$

17,259

$

191,324

Canada

9,665

9,665

204,159

138,498

Other

70,000



45,082

28,672

Asia

263,862

257,958

443,750

434,320

$

8,562,676

$

7,108,003

$

710,250

$

792,814

Revenue is attributable as follows:

December 31

October 31

October 31

October 31

2003

2003

2002

2001

Sales:

Consulting services

$

8,202,336

$

6,892,663

$

207,192

$

640,452

Licensing

360,340

215,340

503,058

152,362

$

8,562,676

$

7,108,003

$

710,250

$

792,814

5.

Commitments and contingencies:

(a)

Litigation:

Management is of the opinion that the claims listed below are without merit and will not materially impact the Company.  As a result, no provision for loss has been made in these consolidated financial statements.

(i)

The Company has been served with a statement of complaint, as a co-defendant, wherein the plaintiff is seeking rescission of an international offering private placement transaction it entered into with the Company in August 1995, in which the plaintiff purchased 212,500 common shares (850,000 common shares prior to a one-for-four reverse split) from the Company for $3,700,000.  The plaintiff is also seeking damages in the amount of $3,700,000 plus interest and costs.

(ii)

During fiscal 2000, the Company and its wholly owned Barbados subsidiary, The Instant Publisher Ltd., were sued by a company that alleged that the Company breached a dealer agreement entered into in 1995 by the Company's former printing business and is seeking damages of $1,533,950 and damages of $25,000,000 for loss of reputation and loss of opportunity, pre-judgment and post-judgment interest, and costs.

(iii)

One of the Companys wholly owned subsidiaries is being sued in Bankruptcy Court by a company alleging the subsidiary received preferential payments.  The plaintiff is seeking to receive $200,000.

(iv)

In addition to the above, in the ordinary course of business, the Company and its subsidiaries have legal proceedings brought against them.

(b)

Lease commitments:

Total future minimum lease payments including operating costs are as follows:

2004

$

620,188

2005

458,585

2006

307,605

$

1,386,378

6.

Stock incentive plan:

The Company grants options to certain employees, officers, directors and consultants under a share option plan (the "Plan"), enabling them to purchase common shares of the Company.  The exercise price of an option under the Plan may not be less than the current market price of common shares on the day immediately proceeding the day the share option was granted.  The Plan provides that the number of common shares reserved for issuance under the Plan shall not exceed 2,022,291 common shares.  These options generally vest on a quarterly basis over three years and expire five years after the date of grant.  As at December 31, 2003, the number of common shares reserved for future issues of stock options amounts to 688,573.

The following table summarizes information about stock options outstanding at December 31, 2003:

|Options outstanding     |                    | Options vested                                     
|----------------------- | ------------------ | ---------------------------------------------------
|Range of exercise price | Number outstanding | Weighted average remaining contractual life  years
|$0.62 - $3.00           | 897,400            | 4.51                                               
|$3.70 - $6.10           | 109,726            | 3.62                                               
|$12.40 - $30.00         | 85,520             | 2.12                                               
|$45.60  $48.80         | 4,750              | .045                                               
|$51.88 - $149.40        | 21,450             | 1.17                                               
|                        | 1,118,846          | 3.55                                               

Changes for the employee stock option plan during the fourteen month period ended December 31, 2003 were as follows:

|                                                               |  | Fourteen months ended 2003 |                                 | Year ended 2002
|-------------------------------------------------------------- |  | -------------------------- | ------------------------------- | ---------------
|                                                               |  | Number of shares           | Weighted average exercise price |                
|Options outstanding, beginning of year                         |  | 286,979                    | $ 22.28                         |                
|Options granted                                                |  | 940,600                    | 2.00                            |                
|Options exercised                                              |  | (83)                       | 0.62                            |                
|Options cancelled                                              |  | (108,650)                  | 20.96                           |                
|Options outstanding, end of year                               |  | 1,118,846                  | $    5.45                       |                
|Options exercisable, end of year                               |  | 248,860                    | $  16.23                        |                
|Weighted average fair value of options granted during the year |  |                            | $    1.61                       |                

The following table summarizes information about stock options outstanding at October 31, 2003:

|Options outstanding     |                    | Options vested                                     
|----------------------- | ------------------ | ---------------------------------------------------
|Range of exercise price | Number outstanding | Weighted average remaining contractual life  years
|$0.62 - $3.00           | 817,400            | 4.61                                               
|$3.70 - $6.10           | 110,226            | 3.77                                               
|$12.40 - $30.00         | 85,720             | 2.30                                               
|$45.60  $48.80         | 4,750              | 0.62                                               
|$51.88 - $149.40        | 21,450             | 1.34                                               
|                        | 1,039,546          | 3.59                                               

Changes for the employee stock option plan during the year ended October 31, 2003 were as follows:

|                                                               |  | 2003            
|-------------------------------------------------------------- |  | ----------------
|                                                               |  | Number of shares
|Options outstanding, beginning of year                         |  | 286,979         
|Options granted                                                |  | 859,600         
|Options exercised                                              |  | (83)            
|Options cancelled                                              |  | (106,950)       
|Options outstanding, end of year                               |  | 1,039,546       
|Options exercisable, end of year                               |  | 176,328         
|Weighted average fair value of options granted during the year |  |                 

7.

Financial instruments and risk management:

The Company is exposed to the following risks related to financial assets and liabilities:

(a)

Currency risk:

The Company is subject to currency risk through its activities in Canada, United Kingdom, Europe and Asia.  Unfavourable changes in the exchange rate may affect the operating results of the Company.

The Company does not actively use derivative instruments to reduce its exposure to foreign currency risk.  However, dependent on the nature, amount and timing of foreign currency receipts and payments, the Company may enter into forward exchange contracts to mitigate the associated risks.

(b)

Fair values:

The fair values of the Company's financial instruments approximate their carrying amounts due to their short-term nature.

(c)

Credit risk:

Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of cash equivalents, short-term investments and accounts receivable.  Cash equivalents and short-term investments are maintained at high-quality financial institutions.

The Company generally does not require collateral for sales on credit.  The Company closely monitors extensions of credit.  Management assesses the need for allowances for potential credit losses by considering the credit risk of specific customers, historical trends and other information.

Valuation Accounts and Reserves:

December 31

October 31

October 31

Allowance for Doubtful Accounts

2003

2003

2002

Opening balance

$

-

$

-

$

-

Additions (deductions)

235,582

235,582

-

Closing balance

$

235,582

$

235,582

$

-

Additions (deductions) to the allowance to doubtful accounts are charged to the income statement through the bad debt expense as part of the general and administrative account.



8.

Related party transactions:

Related party transactions are in the normal course of operations and are measured at the exchange amount, which is the amount established and agreed to by the related parties.

As at December 31, 2003 and October 31, 2003, the Company had a promissory note payable in the amount  $600,000 due to an officer of the Company.  This note is payable in instalments of $300,000 on January 2, 2004 and $300,000 on January 2, 2005 and bears no interest.

9.

Reconciliation of Canadian and United States generally accepted accounting principles ("GAAP"):

The consolidated financial statements are prepared in accordance with Canadian generally accepted accounting principles.  Material differences between Canadian and United States generally accepted accounting principles are described below.

December 31

October 31

October 31

October 31

2003

2003

2002

2001

Share capital:

Canadian GAAP

$

49,191,482

$

49,201,868

$

40,677,545

$

37,569,328

Elimination of reduction

of share capital (a)

30,089,054

30,089,054

30,089,054

30,089,054

U.S. GAAP

$

79,280,536

$

79,290,922

$

70,766,599

$

67,658,382

Deficit and comprehensive loss:

Canadian GAAP

$

(41,481,762)

$

(40,697,816)

$

(35,863,688)

$

(31,494,254)

Elimination of reduction

of share capital (a)

(30,089,054)

(30,089,054)

(30,089,054)

(30,089,054)

Compensation expense (b)

(991,696)

(991,696)

(991,696)

(977,584)

U.S. GAAP

$

(72,562,512)

$

(71,778,566)

$

(66,944,438)

$

(62,560,892)

Consolidated statements of loss:

Loss under Canadian GAAP

$

(5,618,074)

$

(4,834,128)

$

(4,064,673)

$

(12,272,158)

Compensation expense (b)





(35,052)

(36,673)

Loss under U.S. GAAP

$

(5,618,074)

$

(4,834,128)

$

(4,099,725)

$

(12,308,831)

Basic and diluted loss per share

under U.S. GAAP

$

(0.87)

$

(0.85)

$

(1.38)

$

(4.67)



Loss under U.S. GAAP

$

(5,618,074)

$

(4,834,128)

$

(4,099,725)

$

(12,308,831)

Other comprehensive loss

being cumulative

translation adjustment (c)

(74,789)

(490,602)

(1,936,534)



Compensation loss under U.S.

GAAP

$

(5,695,863)

$

(5,324,730)

$

(6,036,259)

$

(12,308,831)

(a)

Share capital and deficit:

On March 1, 1999, the shareholders approved a resolution to reduce the stated capital of the Company by $30,089,054 to eliminate the deficit as at October 31, 1999.  Under Canadian GAAP, a reduction of the share capital of outstanding common shares is allowed with a corresponding offset to deficit.  This reclassification, which the Company made in 2000 to eliminate the deficit that existed at October 31, 1999, did not meet the criteria specified by U.S. GAAP and results in an increase to share capital with a corresponding increase in deficit of $30,089,054.

(b)

Options to consultants:

Effective November 1, 2002, the Company adopted the new CICA Handbook section 3870, Stock-Based compensation and Other Stock Based Payments.  As a result, the Company has recognized compensation expense on options issued to consultants in the current period.  This resulted in no U.S. GAAP differences in the current period.  Prior to the adoption of 3870, the company did not recognize compensation expense when stock or stock options were issued to consultants.  Any consideration paid on exercise of stock options or purchase of stock was credit to share capital.

Under U.S. GAAP, the Company recorded compensation expense for stock or stock options granted in exchange for services from consultants.  During the year ended October 31, 2001, the Company issued 50,000 stock options to consultants.  The Company has recorded compensation expense of $36,673, of which $9,033 relates to the options issued in fiscal 2001 to consultants.

During the fiscal year 2002, the Company has recorded compensation expense of $35,052 relating to options granted to consultants.

(a)

Other comprehensive loss (income):

FASB Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income (SFAS 130) requires disclosure of comprehensive income, which includes reported net income as adjusted for other comprehensive income.  Other comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources.

(d)

Interest in joint venture:

Canadian GAAP requires the proportionate consolidation of interests in joint ventures.  Proportionate consolidation is not permitted under U.S. GAAP and interests in joint ventures are accounted for on the equity basis.  However, as allowed by the Securities and Exchange Commission ("SEC"), reclassification is not required in a SEC filing when specified criteria are met and information disclosed.  These criteria have been met and the information is disclosed in note 8.

Although the adoption of proportionate consolidation has no impact on net earnings or shareholders' equity, it does increase assets, liabilities, revenue, expenses and cash flows from operations from those amounts otherwise reported under U.S. GAAP.

(e)

Short-term investments:

Short-term investments consist of corporate debt securities.  For U.S. GAAP purposes, the Company classifies its debt securities as available-for-sale, which are recorded at fair value.

Unrealized holding gains and losses, net of the related tax effect, on available-for-sale securities are excluded from earnings and are reported as a separate component of other comprehensive income until realized.  Realized gains and losses from the sale of available-for-sale securities are determined on a specific identification basis.  During the periods presented, there have been no unrealized holding gains or losses on short-term investments.

A decline in the market value of any available-for-sale security below cost that is deemed to be other than temporary results in a reduction in carrying amount to fair value.  The impairment is charged to earnings and a new cost basis for the security is established.

(f)

Notes to consolidated financial statements:

In order to comply with U.S. GAAP, the following notes to the consolidated financial statements would need to be added:

(i)

Stock-based compensation plan:

Under U.S. GAAP, for any stock options with an exercise price that is less than the market price on the date of grant, the difference between the exercise price and the market price on the date of grant is recorded as compensation expense ("intrinsic value-based method").  As the Company grants stock options at the fair market value of the shares on the day immediately preceding the date of the grant of the options, no compensation expense is recognized under the intrinsic value-based method.

SFAS No. 123, Accounting for Stock-Based Compensation, requires pro forma disclosures of net income and earnings per share, as if the fair value-based method as opposed to the intrinsic value-based method of accounting for employee stock options had been applied.  The disclosures in the following table show the Company's loss for the year and loss per share on a pro forma basis using the fair value method as determined by using the Black-Scholes option-pricing model.  Assumptions used when valuing the options at their date of grant using in the Black-Scholes option pricing model include: risk-free interest rate of 3.092%, estimated life of three years, expected divided yield of 0% and volatility of 150%.

December 31

October 31

October 31

October 31

2003

2003

2002

2001

Loss under U.S. GAAP

$

(5,618,074)

$

(4,834,128)

$

(4,099,725)

$

(12,308,831)

Compensation expense

1,281,680

1,283,886

4,258,204

4,102,960

Pro forma loss under

U.S. GAAP

(6,899,754)

(6,118,014)

(8,357,929)

(16,411,791)

Pro forma loss per common share:

Basic and diluted

$

(1.07)

$

(1.07)

$

(2.81)

$

(6.22)

Weighted average number of

common shares

6,478,296

5,715,423

2,971,692

2,637,648



(ii)

Recent accounting pronouncements:

In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities which requires companies to recognized costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan.  SFAS No. 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002.  The Company does not believe that adoption of SFAS No. 146 will have a material effect on its results of operations and financial position.

In December 2001, the Accounting Standards Board in Canada issued CICA Handbook Section 3870 Stock-Based Compensation and Other Stock-Based Payments.  This section establishes standards for the recognition, measurement, and disclosure of stock-based compensation and other stock-based payments made in exchange for goods and services provided by employees and non-employees.  It applies to transactions in which shares of common stock, stock options, or other equity instruments are granted or liabilities incurred based on the price of common stock or other equity instruments. The Company will adopt Section 3870 for its fiscal year beginning November 1, 2002.  The adoption of this standard will not have a material impact on the Companys financial position or results of operations.

In January 2003, the FASB issued interpretation No. 46, Consolidation of Variable Interest Entities (FIN 46).  Its consolidation provisions are applicable for all newly created entities created after January 31, 2003, and are applicable to existing variable interest entities as of the beginning of the Companys fiscal year being January 1, 2004.  With respect to entities that do not quality to be assess for consolidation based on voting interests, FIN 46 generally requires a company that has variable interests that will absorb a majority of the variable interests expected losses if they occur, or both, to consolidate that variable interest entity.  For periods prior to FIN 46s effective date, certain disclosures will be required if it is reasonably possible that the Company will have a significant variable interest in or be the primary beneficiary of a variable interest entity when FIN 46 guidance if effective.  The adoption of this standard will have no material impact on its financial results or operations or cash flows.

1.

Subsequent events:

(a)

On January 20, 2004, the Company completed a private placement through the issuance of 1,000,000 common shares and 1,100,000 common share purchase warrants. The Company received gross proceeds of $2,000,000 in the transaction. The warrants were comprised of 500,000 warrants exercisable at $2.00 and 600,000 at $2.05. Each warrant entitles the holder thereof to acquire one common share for a period of three years. The common shares cannot be re-sold in the public markets until a registration statement has been filed and declared effective by the U.S. Securities and Exchange Commission.

(b)

In February 2004, the Company amended the DSS Software Technologies share purchase agreement.  The promissory note (see note 3) in the amount of $600,000 payable in instalments of $300,000 on January 2, 2004 and $300,000 on January 2, 2005 has been replaced by the issuance of 200,000 Diversinet common shares and cash payments of $50,000 in February 2004, $50,000 on April 2004 and $100,000 on January 2005.  The existing 120,000 warrants exercisable at $3.75 have been replaced by issuance of 120,000 warrants exercisable at $2.05, exercisable after January 1, 2005 expiring on December 31, 2006.  The common shares cannot be re-sold in the public markets until a registration statement has been filed and declared effective by the U.S. Securities and Exchange Commission.

#









DIVERSINET CORP.

Unaudited Consolidated Balance Sheets

(In United States dollars)



As at December 31, 2003





Assets



Current assets:

Cash and cash equivalents

$

722,569

Short-term investments

1,243,960

Accounts receivable (including $62,293 from joint venture, note 8)

1,081,760

Other receivables

85,748

Prepaid expenses

375,009

Total current assets

3,509,046



Capital assets, net (note 4)

986,316

Purchased technology, net of $62,833, $31,416,

$nil amortization (note 3)

314,167

Customer assets net of $110,256 amortization (note 3)

882,048

Goodwill (note 3)

5,311,932

Total assets

$

11,003,509



Liabilities and Shareholders' Equity



Current liabilities:

Accounts payable

$

899,644

Accrued liabilities (note 5)

1,351,400

Notes payable

28,192

Current portion of promissory note

300,000

Deferred revenue

477,449

Total current liabilities

3,056,685



Promissory note

300,000



Shareholders' equity:

Share capital (note 6):

Authorized:

Unlimited common shares

Issued and outstanding:

11,043,027 common shares

49,191,482

Contributed surplus

126,173

Cumulative translation adjustment

(1,520,721)

Share purchase warrants (note 6)

1,331,652

Deficit

(41,481,762)

Total shareholders' equity

7,646,824



Future operations (note 1)

Commitments and contingencies (note 11)



Total liabilities and shareholders' equity

$

11,003,509



See accompanying notes to the unaudited consolidated financial statements.

DIVERSINET CORP.

Unaudited Consolidated Statements of Earnings and Deficit

(In United States dollars)





Two-month period ended

December 31, 2003



Revenue

$

1,454,673



Cost of sales

1,131,466

Gross margin

323,207



Expenses:

Research and development

269,778

Sales and marketing

385,117

General and administrative

285,311

Depreciation and amortization

166,377

1,106,583



Loss before the following

(783,376)



Interest expense

570



Loss for the period

(783,946)



Deficit, beginning of period

(40,697,816)

Deficit, end of period

$

(41,481,762)



Basic and diluted loss per share (note 7)

$

(0.07)





Weighted average number of common shares

11,043,027





See accompanying notes to the unaudited consolidated financial statements.

DIVERSINET CORP.

Unaudited Consolidated Statements of Cash Flows

(In United States dollars)





Two-month period ended

December 31, 2003



Cash provided by (used in):



Operating activities:

Loss from continuing operations

$

(783,946)

Items not involving cash:

Depreciation and amortization

166,377

Stock-based compensation expense

53,493

Unrealized foreign exchange loss (gain)

(74,789)

Change in non-cash operating working capital:

Accounts receivable

341,182

Other receivables

(8,028)

Prepaid expenses

(142,196)

Accounts payable

53,887

Accrued liabilities

(152,919)

Deferred revenue

(175,901)

Cash used in continuing operations

(722,840)



Financing activities:

Issue of common shares, common share 
purchase options and warrants for cash

(10,386)

Notes payable

(4,986)

Cash provided by financing activities

(15,372)



Investing activities:

Short-term investments

609,409

Additions to capital assets

(12,605)

Cash provided by (used in) investing activities

596,804



Increase (decrease) in cash and cash 
equivalents

(141,408)



Cash and cash equivalents, beginning of period

863,977



Cash and cash equivalents, end of period

$

722,569



See accompanying notes to the unaudited consolidated financial statements.

DIVERSINET CORP.

Notes to Unaudited Consolidated Financial Statements

(In United States dollars)

Two month period ended December 31, 2003.

Diversinet Corp. (the "Company"), an Ontario corporation, develops and markets secured wireless and identity management solutions and professional services to the enterprise, financial services, government and gaming and wagering marketplaces.

1.

Future operations:

These consolidated financial statements have been prepared on a going concern basis, which assumes the Company will continue in operation in the foreseeable future and be able to realize assets and satisfy liabilities in its normal course of business.  Certain conditions and events exist that cast substantial doubt on the Company's ability to continue as a going concern.

The Company has incurred significant losses and used significant amounts of cash in operating activities in recent years.

Continued operations depend upon the Company's ability to generate future profitable operations and/or obtain additional financing to fund future operations and, ultimately, to generate positive cash flows from operating activities.  There can be no assurance that the Company will be successful in obtaining additional financing or generating positive cash flows from operations.

Should the Company be unable to generate positive cash flows from operations or secure additional financing in the foreseeable future, the application of the going concern principle for financial statement reporting purposes may no longer be appropriate.  These financial statements do not include any adjustments related to the valuation or classification of recorded asset amounts or the amounts or classification of liabilities that may be necessary should the Company be unable to continue as a going concern.

2.

Significant accounting policies:

These consolidated financial statements have been prepared in accordance with accounting principles generally accepted in Canada, which, except as described in note 15, conform in all material respects with accounting principles generally accepted in the United States.  Significant accounting policies adopted by the Company are as follows:

(a)

Fiscal Year:

In 2003, the Company changed its fiscal year end from October 31 to December 31.  As a result of the change in year end, the Company is providing unaudited financial statements for the two months ended December 31, 2003.

(b)

Basis of consolidation:

The consolidated financial statements include the accounts of the Company and its subsidiaries.  The Company accounts for its interest in a joint venture by the proportionate consolidation method.  All significant intercompany transactions and balances have been eliminated.

(c)

Goodwill:

Handbook section 3062 Goodwill and Other Intangible Assets, requires that goodwill no longer be amortized but instead be tested for impairment at least annually by comparing the carrying value of a reporting unit with its fair value.  If any potential impairment is indicated, then it is quantified by comparing the carrying value of goodwill to its fair value.

During December 2003 the Company completed its goodwill impairment test and concluded that no write-down was required.

(d)

Revenue recognition:

Consulting revenues are recognized on a time and materials basis, or on a percentage of completion basis, depending on the contract, as employees and subcontractors provide services. Revenue from time and materials service contracts are recognized as the services are provided.  Revenue from fixed price long-term contracts is recognized over the contract term based on the percentage of services provided during the period compared to the total estimated services to be provided over the entire contract.  Losses on contracts are recognized during the period in which the loss first becomes probable and reasonably estimable. Contract losses are determined to be the amount by which the estimated direct and indirect costs of the contract exceed the estimated total revenues that will be generated by the contract. Revenue recognized in excess of billings is recorded as unbilled services.  Billings in excess of revenue recognized are recorded as deferred revenue until the above revenue recognition criteria are met.  Reimbursements, including those relating to travel and other out-of-pocket expenses, and other similar third-party costs, are included in revenues.

Revenue from software license agreements is recognized upon execution of a license agreement and the shipment of the software, as long as all vendor obligations have been satisfied, the license fee is fixed and determinable and collection of the license fees is probable.  Revenue from the sale of additional software products is recognized as software is delivered.

Revenue earned on software arrangements involving multiple elements (i.e., software products, upgrades/enhancements, post contract customer support, installation, training, et cetera) is allocated to each element based on vendor specific objective evidence of relative fair value of the elements. When arrangements contain multiple elements and vendor specific objective evidence only exists for all undelivered elements, the Company recognizes revenue for the delivered elements using the residual method, whereby the total arrangement fee is assigned to the undelivered elements based on their fair value, with the residual assigned to the delivered elements and recognized.  For arrangements containing multiple elements where vendor specific objective evidence does not exist for all undelivered elements, revenue for the delivered and undelivered elements is deferred until either vendor specific objective evidence exists for the remaining undelivered elements or all elements have been delivered.  The revenue allocated to post contract customer 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.

The Companys sales arrangements generally include standard payment terms ranging up to 90 days.  The Company provides a limited product warranty, the costs of which have historically been insignificant.

(e)

Cash and cash equivalents:

Cash and cash equivalents include cash on account and short-term investments in money market instruments with original maturities of 90 days or less when acquired.

(f)

Short-term investments:

Short-term investments consist of bonds having a term of 90 days when acquired which are recorded at cost plus accrued interest.

(g)

Investment tax credits:

Investment tax credits are accrued when qualifying expenditures are made and there is reasonable assurance that the credits will be realized.  Investment tax credits earned with respect to current expenditures for qualified research and development activities are included in the consolidated statements of earnings and deficit as a reduction of related expenses in the year incurred.  Assistance related to the acquisition of capital assets used for research and development is credited against the related capital assets.  The Company has recorded no investment tax credits.

(h)

Research and development costs:

Research costs are expensed as incurred.  Software development costs are deferred once costs meet the criteria under Canadian generally accepted accounting principles for deferral and amortization.  Such deferred costs are amortized, commencing when the product is commercially released, on a straight-line basis over two years.  The recoverability of any unamortized deferred development costs is reviewed on an ongoing basis.

(i)

Purchased and acquired technology:

The Company capitalizes purchased technology and amortizes such costs over two years.  The carrying value is assessed on a periodic basis to determine if a write-down is required.

(j)

Customer assets:

Customer relationships are amortized over three years. Customer contracts are amortized as services are performed.  The carrying value is accessed on a periodic basis to determine if a write-down is required.

(k)

Foreign currency translation:

Monetary assets and liabilities denominated in foreign currencies are translated into United States dollars at the exchange rates prevailing at the consolidated balance sheet dates.  Non-monetary assets and liabilities are translated at historical rates.  Transactions in foreign currencies are translated into United States dollars at the approximate rates prevailing at the dates of the transactions.  Foreign exchange gains and losses are included in loss for the period.

The Company has historically prepared its consolidated financial statements in Canadian dollars and used the Canadian dollar as its measurement currency.  As a result of a number of circumstances, including the current year financing activities, the acquisition of DSS Software Technologies and Caradas, Inc. and the U.S. dollar becoming the measurement currency in which most of the Companys business is transacted, effective October 1, 2003, the Company adopted the U.S. dollar as its measurement and reporting currency for preparation of its consolidated financial statements.

Share capital has been translated at the exchange rate in effect at the time of the transaction.  Deficit has been translated at the approximate rates prevailing at the dates of the transactions and monetary assets and liabilities have been translated into United States dollars at the exchange rates prevailing at the consolidated balance sheet dates.  The resulting difference has been classified as a cumulative translation adjustment on the balance sheet.

(l)

Capital assets:

Capital assets are stated at cost less accumulated depreciation and amortization.  Depreciation and amortization is provided over the estimated useful lives of the assets at the following annual rates and bases:

Asset

Basis

Rate

Computer hardware

Declining balance

30%

Computer software

Declining balance

30%

Furniture and fixtures

Declining balance

20%

Leasehold improvements

Straight-line

Over term of lease

The Company regularly reviews the carrying values of its capital assets by comparing the carrying amount of the asset to the expected future undiscounted cash flows to be generated by the asset.  If the carrying value exceeds the amount recoverable, a write-down of the asset to its estimated net recoverable amount is charged to the statements of earnings and deficit.

(m)

Income taxes:

The Company accounts for income taxes using the asset and liability method.  Under this method, future income taxes are recognized at the enacted or substantively enacted tax rate expected to be applicable at the date of reversal for all significant temporary differences between the tax and accounting bases of assets and liabilities and for certain tax carry forward items.  Future income tax assets are recognized only to the extent that, in the opinion of management, it is more likely than not that the future income tax assets will be realized.  Future income tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of the substantive enactment of the change.

(n)

Earnings per share:

Basic earnings per share is computed using the weighted average number of common shares that are outstanding during the year.  Diluted earnings per share is computed using the weighted average number of common and potential common shares outstanding during the year.  Potential common shares consist of the incremental number of common shares issuable upon the exercise of stock options and warrants and are calculated using the treasury stock method.

(o)

Stock-based compensation:

Effective November 1, 2002, the Company adopted the new CICA Handbook section 3870, "Stock-Based Compensation and Other Stock-Based Payments", which requires that a fair value based method of accounting be applied to all stock-based payments to non-employees and to direct awards of stock to employees.  However, the standard permits the Company to continue its existing policy of recording no compensation cost on the grant of stock options and warrants to employees with the addition of pro-forma information as if the fair value method has been applied.

Had the company determined compensation expense based on the fair value of stock options granted subsequent to November 1, 2002, the Companys loss and loss per share would have been reported as the pro-forma amounts indicated below:

Two months ended

December 31, 2003

Loss for the period as reported

$

(783,946)

Pro forma loss

(879,133)

Pro forma loss per common share:



Basic and diluted

$

(0.08)

Weighted average number of common shares

11,043,027

(p)

Use of estimates:

The preparation of these consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of these consolidated financial statements and the reported amounts of revenue and expenses during the year.  Actual results could differ from those estimates.

1.

Acquisitions:

a)

In January 2003, the Company acquired 100% of the outstanding shares of DSS Software Technologies, a consulting services provider.  The aggregate purchase price was $1,301,038 consisting of $300,000 in cash, $26,998 in the costs associated with the acquisition, $600,000 of promissory note payable in instalments of $300,000 on January 2, 2004 and $300,000 on January 2, 2005 and 120,000 share purchase warrants with a value of $374,040.  The share purchase warrants vest equally on January 2, 2003, 2004 and 2005 and are exercisable at $3.75 per share for five years.  Additional future cash consideration in the amount of $800,000 is payable based on the achievement of certain financial targets over the next two years and will be recorded with an increase to goodwill if and when the targets have been met.  The acquisition was accounted for using the purchase method and the purchase price was allocated as follows:

|Fair value of net capital assets acquired | $        93,374
|----------------------------------------- | ---------------
|Working capital                           | 290,422        
|Goodwill                                  | 917,242        
|Purchase price                            | $   1,301,038  

b)

In September 2003, the Company acquired 100% of the outstanding shares of Caradas, Inc., a credential management provider.  The aggregate purchase price was $5,630,475 consisting of 1,417,500 common shares with a value of $4,895,310, $64,565 in the costs associated with the acquisition and 200,000 common share purchase warrants with a value of $670,600.  The share purchase warrants vest equally on a quarterly basis over three years and each is exercisable to purchase one common share at $2.45 per share for five years from the date of vesting.  The acquisition was accounted for using the purchase method and the purchase price was allocated as follows:

|Fair value of net capital assets acquired | $       186,853
|----------------------------------------- | ---------------
|Working capital                           | (320,372)      
|Purchased technology                      | 377,000        
|Customer assets                           | 992,304        
|Goodwill                                  | 4,394,690      
|Purchase price                            | $   5,630,475  

The customer assets of $992,304 are comprised of customer relationships and other customer contracts.  The customer relationships were assigned a useful life of three years, while the customer contracts will be amortized as services are performed.  The purchased technology of $377,000 has been assigned a useful life of two years.

1.

Capital assets:

Accumulated

Net

December 31, 2003

Cost

depreciation

book

and amortization

value

Computer hardware

$

1,342,228

$

817,852

$

524,376

Computer software

556,319

365,310

191,009

Furniture and fixtures

291,174

138,401

152,773

Leasehold improvements

234,865

116,707

118,158

$

2,424,586

$

1,438,270

$

986,316

In the two months ended December 31, 2003, depreciation expense and amortization amounted to $166,377.

2.

Accrued liabilities:

December 31, 2003

Remuneration

$

815,135

Professional fees

372,663

Miscellaneous

163,602

$

1,351,400

3.

Share capital, warrants and common share purchase options:

There are an unlimited number of authorized common shares with no par value.

The following details the changes in issued and outstanding shares, compensation options and warrants:

|                                              | Compensation options and warrants | Common shares    
|--------------------------------------------- | --------------------------------- | -----------------
|                                              | Number                            | Amount           
|Balance, October 31, 2000 (b)                 | 41,350                            | $               
|Stock options exercised and shares issued (a) |                                  |                 
|Balance, October 31, 2001                     | 41,350                            |                 
|Private placement (c)                         | 471,554                           |                 
|Balance, October 31, 2002                     | 512,904                           |                 
|Reverse stock split (d)                       |                                  |                 
|Private placement (e)                         | 60,000                            | 68,304           
|Stock options exercised and shares issued (a) |                                  |                 
|Acquisition of DSS (f)                        | 120,000                           | 374,040          
|Acquisition of Caradas (g)                    | 200,000                           | 670,600          
|Professional services (h)                     | 127,500                           | 218,708          
|Balance, October 31, 2003                     | 1,020,404                         | 1,331,652        
|Private placement (e)                         |                                  |                 
|Balance, December 31, 2003                    | 1,020,404                         | $   1,331,652    

(a)

During 2001, 2002 and 2003, the Company granted options to certain employees, officers and directors under a share option plan (note 12), enabling them to purchase common shares of the Company.

(b)

Warrants outstanding as of October 31, 2001 and 2000 consist of 15,000 warrants issued in October 1999 as an exercise price of $131.25 per share, expiring October 2004 and 26,350 warrants issued in May 2000 at an exercise price of $85.90 per share, expiring May 2005.

(c)

On April 4, 2002, the Company completed a private placement of 518,670 units at a price of $6.00 per unit for gross proceeds before expenses $3,112,022.  Each unit was comprised of one common share and three-quarters of one common share purchase warrant.  Each warrant entitles the holder thereof to acquire one common share at a price of $7.20 per common share for a period of up to three years from April 4, 2002.

The following consideration was issued to placement agents in connection with the private placement:  (i) cash consideration of $140,400 plus out-of-pocket expenses of approximately $7,500; (ii) compensation options to purchase up to 23,400 units on the same terms as described above; (iii) 50,000 common share purchase warrants to purchase common shares at prices of $6.00 and $7.20 and expiring on April 2 and 3, 2005; (iv) 18,750 common share purchase warrants to purchase common shares at a price of $0.10 per common share.

On April 8, 2002, the compensation options noted in (ii) above, were exercised and the Company issued 23,400 common shares and 17,550 common share purchase warrants to the placement agents.

On May 8, 2002, upon issuance of the common share purchase warrants noted in (iv) above, the warrants were immediately exercised and the Company issued 18,750 common shares.  The fair value of these warrants in the amount of $110,625 was recorded as share issue costs.

On May 8, 2002, the Company issued an additional 20,000 units at a price of $6.00 per unit for gross proceeds of $120,000.  Each unit was comprised of one common share and three quarters of one common share purchase warrant.  Each common share purchase warrant entitles the holder to purchase one common share at a price of $7.20 for a period of three years from May 8, 2002.

(d)

On January 28, 2003 the Company completed a reverse stock split of its issued and outstanding common shares whereby every ten shares of common stock were exchanged for one share of common stock. All common share amounts in the financial statements have been restated to give effect to the stock split.

(e)

On June 23, 2003, the Company completed a private placement of 5,000,000 common shares at a price of $0.62 per common share for gross proceeds of $3,100,000.

The placement agent exercised its option to receive 500,000 common shares in lieu of its $310,000 fee from the Private Placement.  The placement agent also received 40,000 common shares in lieu of its $24,000 retainer fee to act as placement agent.  Further compensation was issued as a three-year broker cashless exercisable warrant terminating on June 20, 2006 to purchase up to 500,000 common shares of the Corporation at $0.62 per share.  The placement agent has exercised 440,000 in a cashless exercise to receive 304,037 common shares.

(f)

In January 2003, the Company acquired 100% of the outstanding shares of DSS Software Technologies. The purchase price included 120,000 share purchase warrants with a value of $374,040.  The share purchase warrants vest equally on January 2, 2003, 2004 and 2005 and are exercisable at $3.75 per share for five years.

(g)

On September 1, 2003, Diversinet Corp acquired 100% of the outstanding shares of Caradas, Inc. The aggregate consideration was 1,417,500 Diversinet common shares and 200,000 share purchase warrants.  The share purchase warrants are exercisable at $2.45 per share for five years.  The share purchase warrants will vest to the holder quarterly over three years.

(h)

Professional services:

The following chart summarizes the activity during the year ended December 31, 2003:

|                                        | Compensation options and warrants | Common shares
|--------------------------------------- | --------------------------------- | -------------
|                                        | Number                            | Amount       
|Consulting services (i)                 | 20,000                            | $    42,088  
|Consulting services (ii)                | 2,500                             | 5,260        
|Business development services (iii)     |                                  |             
|Public relations services (iv)          | 100,000                           | 57,620       
|Warrants exercised (iv)                 | (100,000)                         | (57,620)     
|Advisory board consulting services (v)  | 50,000                            | 59,260       
|Advisory board consulting services (vi) | 25,000                            | 52,508       
|Consulting services (vii)               |                                  |             
|Consulting services (viii)              | 25,000                            | 39,640       
|Consulting services (ix)                | 5,000                             | 19,952       
|                                        | 127,500                           | $  218,708   

(i)

On November 1, 2002 the Company entered into an agreement for consulting services.  In consideration for the services to be rendered in accordance with the agreement, Diversinet issued a three-year warrant terminating on October 23, 2005 to purchase up to 20,000 of our common shares at $2.60 per share in regards to the compensation payable by us for these services.

(ii)

On November 1, 2002 the Company entered into an agreement for consulting services.  In consideration for the services to be rendered in accordance with the agreement, Diversinet issued a three-year warrant terminating on October 23, 2005 to purchase up to 2,500 of our common shares at $2.60 per share in regards to the compensation payable by us for these services.

(iii)

On May 14, 2003, the Company entered into an agreement for business development services.  This agreement is subject to certain milestones that if not met may allow Diversinet to terminate the retainer portion of the agreement and /or the entire agreement.  In consideration for the services to be rendered Diversinet will pay a retainer equal to $25,000 per month, which at our discretion may be paid as follows: (i) $25,000 per month in cash, or (ii) $25,000 per month by the issuance of 41,667 common shares per month, or (iii) $20,000 per month in cash and issuance of 8,333 common shares per month.  The Company has elected to pay the first six months by way of 250,000 common shares.

(iv)

On May 14, 2003, the Company entered into an agreement for public relations services.  In consideration for the services to be rendered in accordance with the agreement, the Company issued a three-year cashless exercisable warrant terminating on May 12, 2006 to purchase up to 100,000 of our common shares at $0.60 per share and 200,000 common shares, being 16,667 common shares per month for 12 months in regards to the compensation payable by us for these services.  The consultant opted to have a cashless exercise and received 69,099 common shares.

(v)

On July 1, 2003, the Company entered into an agreement for advisory board consulting services.  In consideration for the services to be rendered in accordance with the agreement, we issued a three-year warrant terminating on June 30, 2006 to purchase up to 50,000 of our common shares at $0.62 per share in regards to the compensation payable by us for these services.

(vi)

On July 1, 2003, the Company entered into an agreement for advisory board consulting services.  In consideration for the services to be rendered in accordance with the agreement, we issued a five-year warrant terminating on August 1, 2008, vesting equally on a quarterly basis over three years, to purchase up to 25,000 of our common shares at $0.62 per share in regards to the compensation payable by us for these services.

(vii)

On July 17, 2003, the Company entered into an agreement for consulting services.  In consideration for the services to be rendered in accordance with the agreement, we issued 40,000 of our common shares in regards to the compensation payable by us for these services.

(viii)

On August 20, 2003 the Company entered into an agreement for consulting services.  In consideration for the services to be rendered in accordance with the agreement, Diversinet issued a one-year warrant terminating on August 20, 2004 to purchase up to 25,000 of our common shares at $3.40 per share in regards to the compensation payable by us for these services.

(ix)

On September 1, 2003 the Company entered into an agreement for consulting services.  In consideration for the services to be rendered in accordance with the agreement, Diversinet issued a two-year warrant terminating on September 30, 2005 to purchase up to 5,000 of our common shares at $2.50 per share in regards to the compensation payable by us for these services.

1.

Basic and diluted loss per share:

Common shares issuable upon the exercise of options and warrants that could dilute basic loss per share in the future were not included in the computation of diluted loss per share because to do so would have been anti-dilutive for the two-months ended December 31, 2003.  Anti-dilutive options amounted to 783,946 at December 31, 2003.  Anti-dilutive warrants amounted to 905,404 at December 31, 2003.

2.

Interest in joint venture:

On June 4, 2001, the Company entered into an agreement with an Asian company to establish a joint venture to conduct certain of the Company's Asian activities.  Each party holds a 50% interest in the joint venture.  These financial statements reflect the Company's proportionate interest in the joint venture's assets, liabilities, revenue and expenses.

The following amounts included in the consolidated financial statements represent the Company's proportionate interest in the joint venture at December 31, 2003:



December 31, 2003

Cash

$

37

Accounts receivable

56

Prepaid expenses

445

Capital assets

172,495

Total assets

$

173,033

Accounts payable

$

80,950

Accrued liabilities

4,369

Total liabilities

$

85,319

Revenue

$

181

Expenses

170,944

Loss

$

(170,763)

During the two months ended December 31, 2003, the Company recognized revenue of $nil from sales to the joint venture.  As at December 31, 2003, the Company had contributed approximately $636,993 (2002 - $626,054) into the joint venture.  The Company has to date committed to contribute an additional $6,200 to the joint venture for the Company's proportionate share of the joint venture requirements.  This amount is expected to be contributed within the next six months.

3.

Income taxes:

The tax effects of significant temporary differences representing future tax assets is as follows:

December 31, 2003

Future tax assets:

Operating loss carryforwards

$

10,813,090

Capital loss carryforwards

567,607

Share issue costs

121,514

Research and development costs

2,736,323

Capital assets, accounting basis less than tax basis

5,706,491

19,945,025

Valuation allowance

(19,945,025)

Net future tax assets

$



In assessing the realizability of future tax assets, management considers whether it is more likely than not that some portion or all of the future tax assets will not be realized.  The ultimate realization of future tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible.  Management considers projected future taxable income, uncertainties related to the industry in which the Company operates and tax planning strategies in making this assessment.

At December 31, 2003, the Company has non-capital losses available for carryforward for Canadian income tax purposes amounting to $28,324,000.  These losses expire in the following fiscal years:

2004

$

2,854,000

2005

4,250,000

2006

4,142,000

2007

10,862,000

2008

3,254,000

2009

2,539,000

2010

423,000

$

28,324,000

The Company also has non-capital losses available for carryforward for United States income tax purposes amounting to $1,628,000, expiring between 2018 and 2023.

4.

Segmented information:

The Company operates in a single reportable operating segment.  This segment derives its revenue from the sale of secured wireless and identity management solutions and related products and services.  As at December 31, 2003, 60% of the capital assets were located in Canada, 22% were located in the United States and 18% in Hong Kong.

A summary of sales to major customers that exceeded 10% of total sales and the approximate amount due from these customers during each of the years in the three-year period ended October 31, 2003 and the fourteen month period ended December 31, 2003, are as follows:

Sales

Accounts Receivable

December 31, 2003

December 31, 2003

Customer 1

30%

$

203,752

Customer 2

20%

125,746

The Company does not consider itself to be economically dependent on any single customer or supplier.

Revenue for the two months ended December 31, 2003 is attributable to geographic location based on the location of the customer, as follows:

December 31, 2003

Sales:

United States

$

1,378,769

Canada

-

Other

70,000

Asia

5,904

$

1,454,673

5.

Commitments and contingencies:

(a)

Litigation:

Management is of the opinion that the claims listed below are without merit and will not materially impact the Company.  As a result, no provision for loss has been made in these consolidated financial statements.

(i)

The Company has been served with a statement of complaint, as a co-defendant, wherein the plaintiff is seeking rescission of an international offering private placement transaction it entered into with the Company in August 1995, in which the plaintiff purchased 212,500 common shares (850,000 common shares prior to a one-for-four reverse split) from the Company for $3,700,000.  The plaintiff is also seeking damages in the amount of $3,700,000 plus interest and costs.

(ii)

During fiscal 2000, the Company and its wholly owned Barbados subsidiary, The Instant Publisher Ltd., were sued by a company that alleged that the Company breached a dealer agreement entered into in 1995 by the Company's former printing business and is seeking damages of $1,533,950 and damages of $25,000,000 for loss of reputation and loss of opportunity, pre-judgment and post-judgment interest, and costs.

(iii)

One of the Companys wholly owned subsidiaries is being sued in Bankruptcy Court by a company alleging the subsidiary received preferential payments.  The plaintiff is seeking to receive $200,000.

(iv)

In addition to the above, in the ordinary course of business, the Company and its subsidiaries have legal proceedings brought against them.

(b)

Lease commitments:

Total future minimum lease payments including operating costs are as follows:

2004

$

620,188

2005

458,585

2006

307,605

$

1,386,378

6.

Stock incentive plan:

The Company grants options to certain employees, officers, directors and consultants under a share option plan (the "Plan"), enabling them to purchase common shares of the Company.  The exercise price of an option under the Plan may not be less than the current market price of common shares on the day immediately proceeding the day the share option was granted.  The Plan provides that the number of common shares reserved for issuance under the Plan shall not exceed 2,022,291 common shares.  These options generally vest on a quarterly basis over three years and expire five years after the date of grant.  As at December 31, 2003, the number of common shares reserved for future issues of stock options amounts to 688,573.

The following table summarizes information about stock options outstanding at December 31, 2003:

|Options outstanding     |                    | Options vested                                     
|----------------------- | ------------------ | ---------------------------------------------------
|Range of exercise price | Number outstanding | Weighted average remaining contractual life  years
|$0.62 - $3.00           | 897,400            | 4.51                                               
|$3.70 - $6.10           | 109,726            | 3.62                                               
|$12.40 - $30.00         | 85,520             | 2.12                                               
|$45.60  $48.80         | 4,750              | .045                                               
|$51.88 - $149.40        | 21,450             | 1.17                                               
|                        | 1,118,846          | 3.55                                               

Changes for the employee stock option plan during the two month period ended December 31, 2003 were as follows:

|                                                                           |  | Two months ended December 31, 2003
|-------------------------------------------------------------------------- |  | ----------------------------------
|                                                                           |  | Number of shares                  
|Options outstanding, October 31, 2003                                      |  | 1,037,929                         
|Options granted                                                            |  | 81,000                            
|Options exercised                                                          |  | (83)                              
|Options outstanding, December 31, 2003                                     |  | 1,118,846                         
|Options exercisable, December 31, 2003                                     |  | 248,860                           
|Weighted average fair value of options granted during the two month period |  |                                   

7.

Financial instruments and risk management:

The Company is exposed to the following risks related to financial assets and liabilities:

(a)

Currency risk:

The Company is subject to currency risk through its activities in Canada, United Kingdom, Europe and Asia.  Unfavourable changes in the exchange rate may affect the operating results of the Company.

The Company does not actively use derivative instruments to reduce its exposure to foreign currency risk.  However, dependent on the nature, amount and timing of foreign currency receipts and payments, the Company may enter into forward exchange contracts to mitigate the associated risks.

(b)

Fair values:

The fair values of the Company's financial instruments approximate their carrying amounts due to their short-term nature.

(c)

Credit risk:

Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of cash equivalents, short-term investments and accounts receivable.  Cash equivalents and short-term investments are maintained at high-quality financial institutions.

The Company generally does not require collateral for sales on credit.  The Company closely monitors extensions of credit.  Management assesses the need for allowances for potential credit losses by considering the credit risk of specific customers, historical trends and other information.

8.

Related party transactions:

Related party transactions are in the normal course of operations and are measured at the exchange amount, which is the amount established and agreed to by the related parties.

As at December 31, 2003, the Company had a promissory note payable in the amount  $600,000 due to an officer of the Company.  This note is payable in instalments of $300,000 on January 2, 2004 and $300,000 on January 2, 2005 and bears no interest.

9.

Reconciliation of Canadian and United States generally accepted accounting principles ("GAAP"):

The consolidated financial statements are prepared in accordance with Canadian generally accepted accounting principles.  Material differences between Canadian and United States generally accepted accounting principles are described below.

December 31, 2003

Share capital:

Canadian GAAP

$

49,191,482

Elimination of reduction

of share capital (a)

30,089,054

U.S. GAAP

$

79,280,536

Deficit and comprehensive loss:

Canadian GAAP

$

(41,481,762)

Elimination of reduction

of share capital (a)

(30,089,054)

Compensation expense (b)

(991,696)

U.S. GAAP

$

(72,562,512)

Consolidated statements of loss:

Loss under Canadian GAAP

$

(783,376)

Compensation expense (b)



Loss under U.S. GAAP

$

(783,376)

Basic and diluted loss per share

under U.S. GAAP

$

(0.07)



Loss under U.S. GAAP

$

(783,376)

Other comprehensive loss

being cumulative

translation adjustment (c)

415,813

Compensation loss under U.S.

GAAP

$

(367,563)

(a)

Share capital and deficit:

On March 1, 1999, the shareholders approved a resolution to reduce the stated capital of the Company by $30,089,054 to eliminate the deficit as at October 31, 1999.  Under Canadian GAAP, a reduction of the share capital of outstanding common shares is allowed with a corresponding offset to deficit.  This reclassification, which the Company made in 2000 to eliminate the deficit that existed at October 31, 1999, did not meet the criteria specified by U.S. GAAP and results in an increase to share capital with a corresponding increase in deficit of $30,089,054.

(b)

Options to consultants:

Effective November 1, 2002, the Company adopted the new CICA Handbook section 3870, Stock-Based compensation and Other Stock Based Payments.  As a result, the Company has recognized compensation expense on options issued to consultants in the current period.  This resulted in no U.S. GAAP differences in the current period.  Prior to the adoption of 3870, the company did not recognize compensation expense when stock or stock options were issued to consultants.  Any consideration paid on exercise of stock options or purchase of stock was credit to share capital.

Under U.S. GAAP, the Company recorded compensation expense for stock or stock options granted in exchange for services from consultants.  During the year ended October 31, 2001, the Company issued 50,000 stock options to consultants.  The Company has recorded compensation expense of $36,673, of which $9,033 relates to the options issued in fiscal 2001 to consultants.

During the fiscal year 2002, the Company has recorded compensation expense of $35,052 relating to options granted to consultants.

(a)

Other comprehensive loss (income):

FASB Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income (SFAS 130) requires disclosure of comprehensive income, which includes reported net income as adjusted for other comprehensive income.  Other comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources.

(d)

Interest in joint venture:

Canadian GAAP requires the proportionate consolidation of interests in joint ventures.  Proportionate consolidation is not permitted under U.S. GAAP and interests in joint ventures are accounted for on the equity basis.  However, as allowed by the Securities and Exchange Commission ("SEC"), reclassification is not required in a SEC filing when specified criteria are met and information disclosed.  These criteria have been met and the information is disclosed in note 8.

Although the adoption of proportionate consolidation has no impact on net earnings or shareholders' equity, it does increase assets, liabilities, revenue, expenses and cash flows from operations from those amounts otherwise reported under U.S. GAAP.

(e)

Short-term investments:

Short-term investments consist of corporate debt securities.  For U.S. GAAP purposes, the Company classifies its debt securities as available-for-sale, which are recorded at fair value.

Unrealized holding gains and losses, net of the related tax effect, on available-for-sale securities are excluded from earnings and are reported as a separate component of other comprehensive income until realized.  Realized gains and losses from the sale of available-for-sale securities are determined on a specific identification basis.  During the periods presented, there have been no unrealized holding gains or losses on short-term investments.

A decline in the market value of any available-for-sale security below cost that is deemed to be other than temporary results in a reduction in carrying amount to fair value.  The impairment is charged to earnings and a new cost basis for the security is established.

(f)

Notes to consolidated financial statements:

In order to comply with U.S. GAAP, the following notes to the consolidated financial statements would need to be added:

(i)

Stock-based compensation plan:

Under U.S. GAAP, for any stock options with an exercise price that is less than the market price on the date of grant, the difference between the exercise price and the market price on the date of grant is recorded as compensation expense ("intrinsic value-based method").  As the Company grants stock options at the fair market value of the shares on the day immediately preceding the date of the grant of the options, no compensation expense is recognized under the intrinsic value-based method.

SFAS No. 123, Accounting for Stock-Based Compensation, requires pro forma disclosures of net income and earnings per share, as if the fair value-based method as opposed to the intrinsic value-based method of accounting for employee stock options had been applied.  The disclosures in the following table show the Company's loss for the year and loss per share on a pro forma basis using the fair value method as determined by using the Black-Scholes option-pricing model.  Assumptions used when valuing the options at their date of grant using in the Black-Scholes option pricing model include: risk-free interest rate of 3.092%, estimated life of three years, expected divided yield of 0% and volatility of 150%.

December 31, 2003

Loss under U.S. GAAP

$

(783,946)

Compensation expense

(2,206)

Pro forma loss under

U.S. GAAP

(781,740)

Pro forma loss per common share:

Basic and diluted

$

(0.12)

Weighted average number of

common shares

6,478,296

(ii)

Recent accounting pronouncements:

In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities which requires companies to recognized costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan.  SFAS No. 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002.  The Company does not believe that adoption of SFAS No. 146 will have a material effect on its results of operations and financial position.

In December 2001, the Accounting Standards Board in Canada issued CICA Handbook Section 3870 Stock-Based Compensation and Other Stock-Based Payments.  This section establishes standards for the recognition, measurement, and disclosure of stock-based compensation and other stock-based payments made in exchange for goods and services provided by employees and non-employees.  It applies to transactions in which shares of common stock, stock options, or other equity instruments are granted or liabilities incurred based on the price of common stock or other equity instruments. The Company will adopt Section 3870 for its fiscal year beginning November 1, 2002.  The adoption of this standard will not have a material impact on the Companys financial position or results of operations.

In January 2003, the FASB issued interpretation No. 46, Consolidation of Variable Interest Entities (FIN 46).  Its consolidation provisions are applicable for all newly created entities created after January 31, 2003, and are applicable to existing variable interest entities as of the beginning of the Companys fiscal year being January 1, 2004.  With respect to entities that do not quality to be assess for consolidation based on voting interests, FIN 46 generally requires a company that has variable interests that will absorb a majority of the variable interests expected losses if they occur, or both, to consolidate that variable interest entity.  For periods prior to FIN 46s effective date, certain disclosures will be required if it is reasonably possible that the Company will have a significant variable interest in or be the primary beneficiary of a variable interest entity when FIN 46 guidance if effective.  The adoption of this standard will have no material impact on its financial results or operations or cash flows.

1.

Subsequent events:

(a)

On January 20, 2004, the Company completed a private placement through the issuance of 1,000,000 common shares and 1,100,000 common share purchase warrants. The Company received gross proceeds of $2,000,000 in the transaction. The warrants were comprised of 500,000 warrants exercisable at $2.00 and 600,000 at $2.05. Each warrant entitles the holder thereof to acquire one common share for a period of three years. The common shares cannot be re-sold in the public markets until a registration statement has been filed and declared effective by the U.S. Securities and Exchange Commission.

(b)

In February 2004, the Company amended the DSS Software Technologies share purchase agreement.  The promissory note (see note 3) in the amount of $600,000 payable in instalments of $300,000 on January 2, 2004 and $300,000 on January 2, 2005 has been replaced by the issuance of 200,000 Diversinet common shares and cash payments of $50,000 in February 2004, $50,000 on April 2004 and $100,000 on January 2005.  The existing 120,000 warrants exercisable at $3.75 have been replaced by issuance of 120,000 warrants exercisable at $2.05, exercisable after January 1, 2005 expiring on December 31, 2006.  The common shares cannot be re-sold in the public markets until a registration statement has been filed and declared effective by the U.S. Securities and Exchange Commission.