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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION


Washington D.C. 20549


FORM 20-F

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934


|                                                |  |                                
|----------------------------------------------- |  | -------------------------------
|For the Fiscal Year Ended
    December 31, 2002 |  | Commission File
    No. 0-29154

IONA Technologies PLC

(Exact name of Registrant as specified in its
charter and translation of Registrants name into
English)


Ireland

(Jurisdiction of incorporation or
organization)


The IONA Building

Shelbourne Road, Ballsbridge


Dublin 4, Ireland


(Address of principal executive
offices)


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

Securities registered pursuant to
Section 12(g) of the Act:

Ordinary Shares,
0.0025 Par Value
Per Share

(Title of Class)


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

Indicate number of shares outstanding of each
of the registrants

classes of capital or common stock as of
December 31, 2002:


32,543,021* Ordinary Shares,
0.0025 Par
Value

* Excludes an aggregate of
291,947 ordinary shares issuable as of December 31,
2002 pursuant to contractual obligations of the registrant.

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
during the preceding 12 months, 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                    Item 18     X



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TABLE OF CONTENTS



|                                                           |                                                                                       |  |  |  |  |  |  | 
|---------------------------------------------------------- | ------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|                                                           | Item 1. Identity of Directors, Senior Management and Advisors                        
|                                                           | Item 2. Offer Statistics and Expected Timetable                                      
|                                                           | Item 3. Key Information                                                              
|                                                           | Item 4. Information on the Company                                                   
|                                                           | A. History and Development of the Company                                            
|                                                           | B. Business Overview                                                                 
|                                                           | C. Organizational Structure                                                          
|                                                           | D. Property, Plants and Equipment                                                    
|                                                           | Item 5. Operating and Financial Review and Prospects                                 
|                                                           | A. Operating Results                                                                 
|                                                           | B. Liquidity and Capital Resources                                                   
|                                                           | C. Research and Development, Patents and Licenses, etc.                              
|                                                           | D. Trend Information                                                                 
|                                                           | Item 6. Directors, Senior Management and Employees                                   
|                                                           | B. Compensation                                                                      
|                                                           | C. Board Practices                                                                   
|                                                           | D. Employees                                                                         
|                                                           | E. Share Ownership                                                                   
|                                                           | Item 7. Major Shareholders and Related Party Transactions                            
|                                                           | A. Major Shareholders                                                                
|                                                           | B. Related Party Transactions                                                        
|                                                           | C. Interests of Experts and Counsel                                                  
|                                                           | Item 8. Financial Information                                                        
|                                                           | A. Consolidated Financial Statements and Other Financial Information                 
|                                                           | B. Significant Changes                                                               
|                                                           | Item 9. The Offer and Listing                                                        
|                                                           | A. Offer and Listing Details                                                         
|                                                           | B. Plan of Distribution                                                              
|                                                           | C. Markets on which Our Ordinary Shares Trade                                        
|                                                           | D. Selling Shareholder                                                               
|                                                           | E. Dilution                                                                          
|                                                           | F. Expenses of the Issue                                                             
|                                                           | Item 10. Additional Information                                                      
|                                                           | A. Share Capital                                                                     
|                                                           | B. Memorandum and Articles of Association                                            
|                                                           | C. Material Contracts                                                                
|                                                           | D. Exchange Controls                                                                 
|                                                           | E. Taxation                                                                          
|                                                           | F. Dividends and Paying Agents                                                       
|                                                           | G. Statements by Experts                                                             
|                                                           | H. Documents on Display                                                              
|                                                           | I. Subsidiary Information                                                            
|                                                           | Item 11. Quantitative and Qualitative Disclosures About Market Risk                  
|                                                           | Item 12. Description of Securities Other than Equity Securities                      
|                                                           | Item 13. Defaults, Dividends Arrearages and Delinquencies                            
|                                                           | Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds
|                                                           | Item 15. Controls and Procedures                                                     
|                                                           | Item 16. [Reserved]                                                                  
|                                                           | Item 17. Financial Statements                                                        
|                                                           | Item 18. Financial Statements                                                        
|                                                           | Item 19. Exhibits                                                                    
|SIGNATURES                                                
|CERTIFICATION                                             
|CERTIFICATION                                             
|CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
|Exhibit Index                                             
|EX-4.11 Severance Agreement                               
|EX-4.12 Non-Executive Directors Change in Control         
|EX-4.13 Change in Control Agreement                       
|EX-4.14 Change in Control Agreement Steven Fisch          
|EX-8.1 Subsidiaries of Iona Technologies PLC              
|EX-10.1 Consent of Ernst & Young                          
|EX-10.2 Certification of CEO                              
|EX-10.3 Certification of CFO                              



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This annual report on Form 20-F was not
prepared for filing in Ireland in compliance with Irish law or
the listing rules of the Irish Stock Exchange.

Unless otherwise provided herein or required
by the context, references to we, us,
IONA or the Company in this annual
report shall mean IONA Technologies PLC and its world-wide
subsidiaries, collectively.

We have a secondary listing on the Irish Stock
Exchange. For this reason, we are not subject to the same
ongoing regulatory requirements as those which would apply to an
Irish company with a primary listing on the Irish Stock
Exchange, including the requirement that certain transactions
require the approval of shareholders. For further information,
shareholders should consult their own financial
advisor.

Our financial statements are presented in
U.S. dollars and are prepared in accordance with accounting
principles generally accepted in the United States. All
references in this annual report to dollars and
$ are to U.S. dollars, and all references to
euro or
 are
to European Union euro. Except as otherwise stated herein, all
monetary amounts in this annual report have been presented in
dollars.

Except for amounts contained in or derived
from our Consolidated Financial Statements and unless otherwise
indicated, all conversions of amounts herein from euro to
dollars have been made at an exchange rate of .9537 dollars to
one euro, based upon the noon buying rate in New York City for
cable transfers in foreign currencies for customs purposes by
the Federal Reserve Bank of New York as of December 31,
2002.

The terms
Orbix®and IONA® used in
this annual report are our registered trademarks. The terms
Rapid Integrationtm and
Artixtm are our trademarks.
CORBA® is a registered trademark of the Object
Management Group, Inc. in the United States and other countries.
J2EEtm is a trademark of Sun
Microsystems, Inc. All other trademarks appearing in this annual
report are the property of their respective holders.



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TABLE OF CONTENTS

|        |  |                                                                           |  |      |    | 
|------- |  | ------------------------------------------------------------------------- |  | ---- | -- | 
|        |  |                                                                           |  | Page
|        |  |                                                                           |  |     
|ITEM 1. |  | IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND
    ADVISORS                 |  |      | 1  | 
|       
|ITEM 2. |  | OFFER STATISTICS AND EXPECTED TIMETABLE                                   |  |      | 1  | 
|       
|ITEM 3. |  | KEY INFORMATION                                                           |  |      | 2  | 
|        |  | A.  Selected Financial Data                                               |  |      | 2  | 
|        |  | B.  Capitalization And Indebtedness                                       |  |      | 3  | 
|        |  | C.  Reasons for the Offer and Use of
    Proceeds                         |  |      | 3  | 
|        |  | D.  Risk Factors                                                          |  |      | 3  | 
|       
|ITEM 4. |  | INFORMATION ON THE COMPANY                                                |  |      | 11 | 
|        |  | A.  History and Development of the
    Company                            |  |      | 11 | 
|        |  | B.  Business Overview                                                     |  |      | 12 | 
|        |  | C.  Organizational Structure                                              |  |      | 18 | 
|        |  | D.  Property, Plants and Equipment                                        |  |      | 18 | 
|       
|ITEM 5. |  | OPERATING AND FINANCIAL REVIEW AND PROSPECTS                              |  |      | 20 | 
|        |  | A.  Operating Results                                                     |  |      | 20 | 
|        |  | B.  Liquidity and Capital Resources                                       |  |      | 31 | 
|        |  | C.  Research and Development, Patents
    and Licenses, etc.              |  |      | 32 | 
|        |  | D.  Trend Information                                                     |  |      | 32 | 
|       
|ITEM 6. |  | DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES                                |  |      | 33 | 
|        |  | A.  Directors and Senior Management                                       |  |      | 33 | 
|        |  | B.  Compensation                                                          |  |      | 35 | 
|        |  | C.  Board Practices                                                       |  |      | 38 | 
|        |  | D.  Employees                                                             |  |      | 39 | 
|        |  | E.  Share Ownership                                                       |  |      | 40 | 
|       
|ITEM 7. |  | MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS                         |  |      | 43 | 
|        |  | A.  Major Shareholders                                                    |  |      | 43 | 
|        |  | B.  Related Party Transactions                                            |  |      | 44 | 
|        |  | C.  Interests of Experts and Counsel                                      |  |      | 44 | 
|       
|ITEM 8. |  | FINANCIAL INFORMATION                                                     |  |      | 44 | 
|        |  | A.  Consolidated Financial Statements
    and Other Financial Information |  |      | 44 | 
|        |  | B.  Significant Changes                                                   |  |      | 45 | 
|       
|ITEM 9. |  | THE OFFER AND LISTING                                                     |  |      | 45 | 
|        |  | A.  Offer and Listing Details                                             |  |      | 45 | 
|        |  | B.  Plan of Distribution                                                  |  |      | 46 | 
|        |  | C.  Markets on which Our Ordinary
    Shares Trade                        |  |      | 46 | 
|        |  | D.  Selling Shareholder                                                   |  |      | 46 | 
|        |  | E.  Dilution                                                              |  |      | 46 | 
|        |  | F.  Expenses of the Issue                                                 |  |      | 47 | 



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|         |  |                                                                                   |  |      |    | 
|-------- |  | --------------------------------------------------------------------------------- |  | ---- | -- | 
|         |  |                                                                                   |  | Page
|         |  |                                                                                   |  |     
|ITEM 10. |  | ADDITIONAL INFORMATION                                                            |  |      | 47 | 
|         |  | A.  Share Capital                                                                 |  |      | 47 | 
|         |  | B.  Memorandum and Articles of
    Association                                    |  |      | 47 | 
|         |  | C.  Material Contracts                                                            |  |      | 47 | 
|         |  | D.  Exchange Controls                                                             |  |      | 47 | 
|         |  | E.  Taxation                                                                      |  |      | 48 | 
|         |  | F.  Dividends and Paying Agents                                                   |  |      | 57 | 
|         |  | G.  Statements by Experts                                                         |  |      | 57 | 
|         |  | H.  Documents on Display                                                          |  |      | 57 | 
|         |  | I.   Subsidiary Information                                                       |  |      | 57 | 
|        
|ITEM 11. |  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
    MARKET  RISK                   |  |      | 58 | 
|        
|ITEM 12. |  | DESCRIPTION OF SECURITIES OTHER THAN EQUITY
    SECURITIES                        |  |      | 58 | 
|        
|ITEM 13. |  | DEFAULTS, DIVIDENDS ARREARAGES AND DELINQUENCIES                                  |  |      | 59 | 
|        
|ITEM 14. |  | MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY
    HOLDERS  AND USE OF PROCEEDS |  |      | 59 | 
|        
|ITEM 15. |  | CONTROLS AND PROCEDURES                                                           |  |      | 59 | 
|        
|ITEM 16. |  | [RESERVED]                                                                        |  |      | 59 | 
|        
|ITEM 17. |  | FINANCIAL STATEMENTS                                                              |  |      | 60 | 
|        
|ITEM 18. |  | FINANCIAL STATEMENTS                                                              |  |      | 60 | 
|        
|ITEM 19. |  | EXHIBITS                                                                          |  |      | 61 | 



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This annual report, and other reports, proxy
statements and other communications to shareholders, as well as
oral statements made by our officers or agents, contain
forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as
amended, made pursuant to the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995, with respect
to, among other things, our future revenues, operating income
(loss), net income (loss) per ordinary share and per ADS,
products and services, sources of liquidity, markets and plans
and objectives of management. All forward-looking statements
included herein are made as of the date hereof, based on
information available to us as of the date hereof, and we assume
no obligation to update any forward-looking statement or to
conform these statements to actual results. These
forward-looking statements are neither promises nor guarantees
and involve risks and uncertainties that could cause actual
results to differ materially from those discussed in the
forward-looking statements. Factors that may cause such
variation are discussed in Item 5 Operating and
Financial Review and Prospects, Item 3.D. Risk
Factors and our reports filed with the Securities and
Exchange Commission.

PART I






|        |                                                          
|------- | ---------------------------------------------------------
|Item 1. | IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND
    ADVISORS

Not required.






|        |                                            
|------- | -------------------------------------------
|Item 2. | OFFER STATISTICS AND EXPECTED
    TIMETABLE

Not required.

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|        |                
|------- | ---------------
|Item 3. | KEY INFORMATION



|   |                        
|-- | -----------------------
|A. | Selected Financial Data

The following selected consolidated financial
data as of December 31, 2002 and 2001, and for each of the
years ended December 31, 2002, 2001 and 2000, have been
derived from, and should be read in conjunction with, our
audited Consolidated Financial Statements and Notes thereto set
forth in Item 18 of this annual report. These financial
statements have been prepared in accordance with accounting
principles generally accepted in the United States
(U.S. GAAP) and audited by Ernst & Young. The
selected financial data as of December 31, 2000, 1999 and
1998 and for each of the years ended December 31, 1999 and
1998 have been derived from our audited consolidated financial
statements not appearing in this annual report, which have also
been prepared in accordance with U.S. GAAP. The financial
information set forth below is qualified by and should be read
in conjunction with our Consolidated Financial Statements and
the Notes thereto included in Item 18 of this annual report
and Operating Results included in Item 5.A. of
this annual report.

|                                               |                                                  |                                       |   |         |         |      |   |         |         |      |   |         |         |  |   |        |         |  |   |        |        | 
|---------------------------------------------- | ------------------------------------------------ | ------------------------------------- | - | ------- | ------- | ---- | - | ------- | ------- | ---- | - | ------- | ------- |  | - | ------ | ------- |  | - | ------ | ------ | 
|                                               |                                                  |                                      
|                                               |                                                  | Year Ended December 31,              
|                                               |                                                  |                                      
|                                               |                                                  | 2002                                  |   | 2001    |         | 2000 |   | 1999    |         | 1998
|                                               |                                                  |                                       |   |         |         |      |   |         |         |     
|                                               |                                                  |                                      
|                                               |                                                  | (In thousands, except per share data)
|Consolidated Statement of Operations
    Data: |                                                  |                                       |   |         |         |      |   |         |         |      |   |         |         |  |   |        |         |  |   |       
|Revenue:                                       |                                                  |                                       |   |         |         |      |   |         |         |      |   |         |         |  |   |        |         |  |   |       
|                                               | Product revenue                                  |                                       | $ | 73,452  |         |      | $ | 118,178 |         |      | $ | 105,533 |         |  | $ | 71,265 |         |  | $ | 58,900 |       
|                                               | Service revenue                                  |                                       |   | 49,778  |         |      |   | 62,526  |         |      |   | 47,530  |         |  |   | 34,175 |         |  |   | 24,727 |       
|                                               |                                                  |                                       |   |         |         |      |   |         |         |      |   |         |         |  |   |        |         |  |   |       
|                                               |                                                  | Total revenue                         |   |         | 123,230 |      |   |         | 180,704 |      |   |         | 153,063 |  |   |        | 105,440 |  |   |        | 83,627 | 
|                                               |                                                  |                                       |   |         |         |      |   |         |         |      |   |         |         |  |   |        |         |  |   |       
|Cost of revenue:                               |                                                  |                                       |   |         |         |      |   |         |         |      |   |         |         |  |   |        |         |  |   |       
|                                               | Cost of product revenue                          |                                       |   | 1,685   |         |      |   | 3,190   |         |      |   | 3,457   |         |  |   | 2,389  |         |  |   | 1,409  |       
|                                               | Cost of service revenue                          |                                       |   | 25,458  |         |      |   | 34,926  |         |      |   | 26,484  |         |  |   | 21,113 |         |  |   | 15,568 |       
|                                               |                                                  |                                       |   |         |         |      |   |         |         |      |   |         |         |  |   |        |         |  |   |       
|                                               |                                                  | Total cost of revenue                 |   |         | 27,143  |      |   |         | 38,116  |      |   |         | 29,941  |  |   |        | 23,502  |  |   |        | 16,977 | 
|                                               |                                                  |                                       |   |         |         |      |   |         |         |      |   |         |         |  |   |        |         |  |   |       
|                                               |                                                  | Gross profit                          |   |         | 96,087  |      |   |         | 142,588 |      |   |         | 123,122 |  |   |        | 81,938  |  |   |        | 66,650 | 
|Operating expenses:                            |                                                  |                                       |   |         |         |      |   |         |         |      |   |         |         |  |   |        |         |  |   |       
|                                               | In-process research and development              |                                       |   |        |         |      |   | 3,600   |         |      |   |        |         |  |   |       |         |  |   | 5,000  |       
|                                               | Research and development                         |                                       |   | 38,256  |         |      |   | 40,260  |         |      |   | 26,906  |         |  |   | 21,195 |         |  |   | 14,849 |       
|                                               | Sales and marketing                              |                                       |   | 72,888  |         |      |   | 88,419  |         |      |   | 63,669  |         |  |   | 43,794 |         |  |   | 28,136 |       
|                                               | General and administrative                       |                                       |   | 13,252  |         |      |   | 15,318  |         |      |   | 12,046  |         |  |   | 10,454 |         |  |   | 9,931  |       
|                                               | Amortization of other non-current assets(1)      |                                       |   | 10,115  |         |      |   | 14,151  |         |      |   | 2,858   |         |  |   | 390    |         |  |   |       |       
|                                               | Amortization of goodwill(1)                      |                                       |   |        |         |      |   | 61,403  |         |      |   | 4,973   |         |  |   | 64     |         |  |   |       |       
|                                               | Restructuring                                    |                                       |   | 20,763  |         |      |   | 5,705   |         |      |   |        |         |  |   |       |         |  |   |       |       
|                                               | Impairment of goodwill                           |                                       |   | 276,808 |         |      |   |        |         |      |   |        |         |  |   |       |         |  |   |       |       
|                                               | Impairment of intangible assets and fixed assets |                                       |   | 32,336  |         |      |   |        |         |      |   |        |         |  |   | 1,671  |         |  |   | 1,658  |       
|                                               | Settlement of litigation                         |                                       |   |        |         |      |   |        |         |      |   | 1,350   |         |  |   |       |         |  |   |       |       
|                                               |                                                  |                                       |   |         |         |      |   |         |         |      |   |         |         |  |   |        |         |  |   |       
|                                               |                                                  | Total operating expenses              |   |         | 464,418 |      |   |         | 228,856 |      |   |         | 111,802 |  |   |        | 77,568  |  |   |        | 59,574 | 
|                                               |                                                  |                                       |   |         |         |      |   |         |         |      |   |         |         |  |   |        |         |  |   |       

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|                                                                                                     |  |                                       |          |      |  |      |         |      |  |      |        |   |  |   |        |   |  |   |        |  
|---------------------------------------------------------------------------------------------------- |  | ------------------------------------- | -------- | ---- |  | ---- | ------- | ---- |  | ---- | ------ | - |  | - | ------ | - |  | - | ------ | -
|                                                                                                     |  |                                      
|                                                                                                     |  | Year Ended December 31,              
|                                                                                                     |  |                                      
|                                                                                                     |  | 2002                                  |          | 2001 |  | 2000 |         | 1999 |  | 1998
|                                                                                                     |  |                                       |          |      |  |      |         |      |  |     
|                                                                                                     |  |                                      
|                                                                                                     |  | (In thousands, except per share data)
|Income (loss) from operations                                                                        |  |                                       | (368,331 | )    |  |      | (86,268 | )    |  |      | 11,320 |   |  |   | 4,370  |   |  |   | 7,076  |  
|Interest income, net                                                                                 |  |                                       | 1,069    |      |  |      | 2,504   |      |  |      | 4,116  |   |  |   | 2,556  |   |  |   | 2,552  |  
|Net exchange loss                                                                                    |  |                                       | (502     | )    |  |      | (468    | )    |  |      | (384   | ) |  |   | (379   | ) |  |   | (541   | )
|Gain on sale of investment and other income                                                          |  |                                       |         |      |  |      | 164     |      |  |      | 1,912  |   |  |   |       |   |  |   |       |  
|                                                                                                     |  |                                       |          |      |  |      |         |      |  |      |        |   |  |   |        |   |  |   |        |  
|Income (loss) before provision for (benefit of)
    income taxes                                     |  |                                       | (367,764 | )    |  |      | (84,068 | )    |  |      | 16,964 |   |  |   | 6,547  |   |  |   | 9,087  |  
|Provision for (benefit of) income taxes                                                              |  |                                       | 1,543    |      |  |      | (568    | )    |  |      | 2,799  |   |  |   | 1,088  |   |  |   | 1,409  |  
|                                                                                                     |  |                                       |          |      |  |      |         |      |  |      |        |   |  |   |        |   |  |   |        |  
|Net income (loss) available to Ordinary
    Shareholders                                             |  | $                                     | (369,307 | )    |  | $    | (83,500 | )    |  | $    | 14,165 |   |  | $ | 5,459  |   |  | $ | 7,678  |  
|                                                                                                     |  |                                       |          |      |  |      |         |      |  |      |        |   |  |   |        |   |  |   |        |  
|Basic net income (loss) per Ordinary Share and
    per ADS                                           |  | $                                     | (11.58   | )    |  | $    | (3.27   | )    |  | $    | 0.67   |   |  | $ | 0.28   |   |  | $ | 0.40   |  
|                                                                                                     |  |                                       |          |      |  |      |         |      |  |      |        |   |  |   |        |   |  |   |        |  
|Shares used in computing basic net income (loss)
    per Ordinary Share and per ADS (in thousands)   |  |                                       | 31,890   |      |  |      | 25,556  |      |  |      | 21,177 |   |  |   | 19,797 |   |  |   | 19,268 |  
|                                                                                                     |  |                                       |          |      |  |      |         |      |  |      |        |   |  |   |        |   |  |   |        |  
|Diluted net income (loss) per Ordinary Share and
    per ADS                                         |  | $                                     | (11.58   | )    |  | $    | (3.27   | )    |  | $    | 0.60   |   |  | $ | 0.26   |   |  | $ | 0.37   |  
|                                                                                                     |  |                                       |          |      |  |      |         |      |  |      |        |   |  |   |        |   |  |   |        |  
|Shares used in computing diluted net income
    (loss) per Ordinary Share and per ADS (in thousands) |  |                                       | 31,890   |      |  |      | 25,556  |      |  |      | 23,520 |   |  |   | 21,224 |   |  |   | 20,893 |  
|                                                                                                     |  |                                       |          |      |  |      |         |      |  |      |        |   |  |   |        |   |  |   |        |  

|                                                                      |  |                                       |         |      |  |      |         |      |  |      |         |  |  |   |         |  |  |   |         | 
|--------------------------------------------------------------------- |  | ------------------------------------- | ------- | ---- |  | ---- | ------- | ---- |  | ---- | ------- |  |  | - | ------- |  |  | - | ------- | 
|                                                                      |  |                                      
|                                                                      |  | At December 31,                      
|                                                                      |  |                                      
|                                                                      |  | 2002                                  |         | 2001 |  | 2000 |         | 1999 |  | 1998
|                                                                      |  |                                       |         |      |  |      |         |      |  |     
|                                                                      |  |                                      
|                                                                      |  | (In thousands, except per share data)
|Consolidated Balance Sheet Data:                                      |  |                                       |         |      |  |      |         |      |  |      |         |  |  |   |         |  |  |   |         | 
|Cash, cash equivalents, restricted cash and
    marketable securities |  | $                                     | 81,650  |      |  | $    | 53,697  |      |  | $    | 95,640  |  |  | $ | 70,183  |  |  | $ | 60,549  | 
|Working capital                                                       |  |                                       | 59,221  |      |  |      | 40,262  |      |  |      | 99,234  |  |  |   | 77,841  |  |  |   | 61,802  | 
|Total assets                                                          |  |                                       | 131,604 |      |  |      | 437,698 |      |  |      | 202,559 |  |  |   | 144,342 |  |  |   | 108,881 | 
|Capital lease due after more than one year                            |  |                                       |        |      |  |      |        |      |  |      |        |  |  |   |        |  |  |   | 3       | 
|Ordinary Shares (number)                                              |  |                                       | 32,835  |      |  |      | 27,817  |      |  |      | 21,990  |  |  |   | 20,451  |  |  |   | 19,452  | 
|Ordinary Share value (par value)                                      |  |                                       | 91      |      |  |      | 80      |      |  |      | 66      |  |  |   | 63      |  |  |   | 61      | 
|Total shareholders equity                                            |  |                                       | 74,905  |      |  |      | 375,766 |      |  |      | 151,307 |  |  |   | 111,721 |  |  |   | 81,978  | 



---



|    |                                                                                                                   
|--- | ------------------------------------------------------------------------------------------------------------------
|(1) | Certain amounts reported in all prior periods
    have been reclassified to conform with the presentation in 2002.

B.     Capitalization
and Indebtedness

Not required.

C.     Reasons for
the Offer and Use of Proceeds

Not required.

D.     Risk
Factors

A further decline in information technology
spending may result in a decrease in our revenues or lower
growth rates.

-3-



---



##### Table of Contents



The slowdown in global economies has negatively
affected the level of spending of our customers on information
technology (IT) solutions. We cannot predict if or when the
growth rate of worldwide economies will rebound, or when or if
demand for IT solutions will increase. A further decline or lack
of growth in the demand for IT solutions may result in decreased
revenues or lower growth rates because our sales depend in part
on our customers level of funding for new or additional IT
systems or services. Continuation of the current economic
downturn may cause our customers to reduce or eliminate IT
spending, which would substantially reduce the number of new
software licenses we sell. An economic downturn may also cause
price erosion for our products, which would reduce the average
sales price for these licenses.

In addition, actual or threatened terrorist
attacks in the United States, related military actions and
events or effects occurring in response to those developments
may reduce the amount or delay the timing of capital
expenditures by corporations for IT. Accordingly, we cannot be
assured that we will be able to increase or maintain our
revenues.

Our lengthy and variable sales cycle makes it
difficult to predict our operating results.

It is difficult to forecast the timing and
recognition of our revenues because our prospective customers
often dedicate a significant amount of time to evaluating our
products before licensing them. The period between initial
customer contact and purchase by a customer may extend twelve
months or more. During the evaluation process, prospective
customers may decide not to purchase or may scale down proposed
orders of our products for various reasons including:



| |   |                                                                                                                       
| | - | ----------------------------------------------------------------------------------------------------------------------
| |  | reduced demand for our products or for
    integration software generally;                                            
|
| |  | introduction of products by our competitors;                                                                          
|
| |  | lower prices offered by our competitors;                                                                              
|
| |  | changes in budgets and purchasing
    priorities; and                                                                 
|
| |  | changes by prospective customers in their
    approach with respect to the integration of enterprise
    applications.

We may experience fluctuations in quarterly
revenue that could adversely impact our operating
results.

Our revenues and operating results are difficult
to predict and may fluctuate significantly from quarter to
quarter. Historically, our product revenue in the first quarter
of each year has declined from the fourth quarter of the prior
year. Revenue in any quarter depends substantially upon our
ability to sign contracts and our ability to recognize revenues
in that quarter in accordance with revenue recognition policies.
Therefore, you should not rely on period to period comparisons
of revenues or results of operations as an indication of future
performance. If our quarterly revenues or operating results fall
below expectations of investors or securities analysts, the
price of our ordinary shares and ADSs could fall substantially.

Our quarterly revenues may fluctuate as a result
of a variety of factors, including the following:



| |   |                                                                                                                                                                                                                                                                      
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | a significant number of our prospective customers
    decide whether to enter into license agreements with us within
    the last month of each quarter;                                                                                                             
|
| |  | the size of transactions can vary significantly;                                                                                                                                                                                                                     
|
| |  | the demand for our products may change;                                                                                                                                                                                                                              
|
| |  | customers may unexpectedly postpone orders due to
    changes in their strategic priorities, project objectives,
    budget or personnel;                                                                                                                            
|
| |  | customer evaluations and purchasing processes
    vary significantly from company to company, and a
    customers internal approval and expenditure authorization
    process can be difficult and time consuming to complete, even
    after selection of a vendor;

-4-



---



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| |   |                                                                                                                                                               
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the number, timing and significance of product
    enhancements and new product announcements by us and our
    competitors may affect purchase decisions; and
|
| |  | we may have to defer revenues under our revenue
    recognition policies.                                                                                     

Fluctuations in our quarterly revenues may
adversely affect our operating results. In each fiscal quarter
our expense levels, operating costs and hiring plans are based
on projections of future revenues and are relatively fixed. If
our actual revenues fall below expectations, we could experience
a reduction in operating results.

We have experienced significant variations in
profitability and anticipate that we will continue to do so in
the future.

Our levels of profitability have varied
significantly on a quarterly and annual basis. These variations
were attributable to fluctuations in revenue and costs,
including costs associated with the development and introduction
of new products and services, charges associated with
acquisitions, and certain nonrecurring expenses attributable to
the settlement of litigation, restructuring and impairment of
goodwill and other non-current assets. There can be no certainty
that we will not experience similar variations in profitability
in future periods for these or other factors, and any such
variation could have a significant impact on the market value of
our ordinary shares and ADSs.

Our future revenue depends upon the evolution
and adoption of Web services and related integration
solutions.

We believe that there is an emerging demand for
Web services and related integration solutions. Therefore, we
have invested significant amounts in developing and introducing
products to meet the development, deployment and integration
requirements of enterprises implementing Web services. If the
market for Web services infrastructure solutions does not evolve
as we anticipate or fails to grow as quickly as we expect, we
may be unable to implement our strategy or achieve the growth
rate that we target.

The acceptance of our recently launched Rapid
Integration software also depends upon the development and
proliferation of Web services standards for application
integration. If these standards do not continue to develop or
gain widespread acceptance, the demand for our products and
services may not materialize. Consequently, our business
prospects and financial condition would suffer.

If we fail to keep pace with rapidly evolving
technology and changing customer needs, our business will
suffer.

The market for enterprise infrastructure software
is characterized by rapidly changing technology, evolving
industry standards and changing customer needs. Therefore, our
success will depend upon our ability to enhance our existing
products and to introduce and market new products to meet
changing customer requirements on a timely and cost-effective
basis. If we experience delays in the introduction of new or
enhanced products, or if we are unable to anticipate or respond
adequately to these changes, our products could be rendered
obsolete and our business could be materially harmed.

Potential defects in our products or our
failure to provide services for our customers could cause our
sales to decrease, cause us to lose customers and damage our
reputation.

The products that we offer include newly-launched
products with a short track record. These products may contain
defects that may be detected at any point in the products
life cycle. We have in the past discovered errors in certain of
our product enhancements and new products and have experienced
delays in generating revenue while correcting these errors. Our
products are often used in combination with products

-5-



---



##### Table of Contents



of other vendors. As a result, it may be
difficult to identify the source of any problem. If defects
occur, we could experience, among other things:




| |   |                                             
| | - | --------------------------------------------
| |  | loss of customers;                          
|
| |  | injury to our reputation;                   
|
| |  | loss or delay of market acceptance or sales;
|
| |  | increased service or warranty costs; or     
|
| |  | legal action by our customers.              

In addition, we may not be able to avoid or limit
liability for disputes relating to product performance or
provision of services.

If we do not manage our expenses and
geographically dispersed operations successfully, we may be
unable to respond to changing market conditions.

The IT integration market is becoming
increasingly volatile. To address this volatility and global
economic conditions generally, we have taken measures to bring
our workforce, staffing and structure in line with perceived
current demand for our products. If we misjudge our personnel
needs or cannot successfully manage our expenses, then our
business, financial condition and results of operations would be
materially adversely affected. Our future operating results will
depend substantially upon the ability of our officers and key
employees to anticipate changing business conditions and manage
personnel and other costs while increasing sales.

We face additional risks in managing
geographically dispersed operations. Some of our key executives
and managers are based in our Dublin, Ireland headquarters and
others in our wholly-owned U.S. subsidiarys Waltham,
Massachusetts office. Accordingly, our ability to compete
successfully will depend in part on the ability of a limited
number of key executives located in geographically dispersed
offices to integrate management, to address the needs of our
worldwide customer base and to respond to changes in our market.
In addition, our ability to manage our operations and financial
performance would be materially adversely affected if terrorist
attacks or military or other political events prohibit or
restrict the travel of our personnel.

We may be required to delay revenue
recognition into future periods which could adversely impact our
operating results.

We may have to defer revenue recognition due to
several factors, including whether:



| |   |                                                                                                    
| | - | ---------------------------------------------------------------------------------------------------
| |  | we are required to accept extended payment terms;                                                  
|
| |  | the transaction involves contingent payment terms
    or fees;                                     
|
| |  | the transaction involves acceptance criteria or
    there are identified product-related issues; or
|
| |  | license agreements include products that are
    under development or other undelivered elements.  

Because of the factors listed above and other
specific requirements under U.S. GAAP for software revenue
recognition, we must have very precise terms in our license
agreements to recognize revenue when we initially deliver our
products or perform services. Negotiation of mutually acceptable
terms and conditions can extend the sales cycle, and sometimes
we do not obtain terms and conditions that permit revenue
recognition at the time of delivery or even as work on the
project is completed.

We depend on large transactions to derive a
significant portion of our revenue, and the delay or loss of any
large customer order could adversely affect our quarterly or
annual operating results.

We derive a significant portion of our revenue
from large transactions. Customers face complex decisions
regarding approaches to the development, deployment and
integration of enterprise applications,

-6-



---



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competitive product offerings, rapidly changing
software technologies, and limited internal resources. We must
often negotiate terms and conditions in large sales
transactions. These terms and conditions can extend the sales
cycle and, in certain situations, result in deferred recognition
of revenue from the sale. Prospective sales are subject to
delays or cancellation over which we have little or no control.
If any large customer order anticipated for a particular quarter
is not realized or is delayed, we may experience an unplanned
shortfall in revenue, which could significantly and adversely
affect our operating results.


Our inability to create and preserve
relationships with software vendors, systems integrators or
other third parties that market and sell our products could
reduce our revenues.

Our ability to achieve revenue growth will depend
in large part on expanding our sales channels, as well as
leveraging our existing strategic alliances. If our
relationships with these software vendors or system integrators
deteriorate or terminate, or if we are unable to form new
relationships, we may lose important sales and marketing
opportunities. Our distribution arrangements could give rise to
disputes regarding marketing strategy, exclusive territories and
customer relationships which could negatively affect our
business or result in costly litigation. In addition, if these
software vendors and system integrators are unable to recruit
and adequately train a sufficient number of consulting personnel
to support the implementation of our software products, or they
otherwise do not adequately perform implementation services, we
may lose customers. These systems integrators may increase their
promotion of competing enterprise integration solutions or may
otherwise discontinue their relationships with or support of us.
Our relationships with software vendors and systems integrators
are an important part of our business, and a deterioration of
these relationships could adversely impact our business and
operating results.

We also may enter into joint arrangements with
strategic partners to develop new products or enhancements, or
to license our offerings as part of integrated products. Our
business may be adversely affected if these strategic partners
change their business priorities or experience difficulties in
their operations, which in either case causes them to terminate
or reduce their support for these joint arrangements.

We currently derive most of our revenue from a
limited number of our products.

To date, we have derived most of our revenue from
the licensing of our products that currently compose our Orbix
products and fees from related services. We expect these
products to continue to account for a substantial majority of
our revenue for the foreseeable future. As a result, a reduction
in demand for, or sales of, these products would have a material
adverse effect on our business, financial condition and results
of operations. In addition, our business will depend, in
significant part, on the successful development, introduction
and customer acceptance of new and enhanced versions of our
products. We may not successfully develop, introduce or market
new products or enhancements or additions to our existing
products. Any failure to do so would materially adversely affect
our business, financial condition and results of operations.

If we do not successfully expand and manage
our direct sales force and other distribution channels, we may
not be able to increase our sales.

To date, we have sold our products primarily
through our direct sales force, software vendors and system
integrators. We plan to continue to invest in, and rely on sales
through, these distribution channels and other indirect
channels. We experience lower profit margins on the distribution
of our products through third-party distribution channels. We
may not be able to expand or manage successfully our direct
sales force or other distribution channels. Further, any such
expansion may not result in an increase in revenue or operating
income. If we fail to expand or manage successfully our direct
sales force or other distribution channels, our business,
financial condition and results of operations would materially
suffer.

-7-



---



##### Table of Contents



We operate in highly competitive markets and
we may be unable to compete successfully.

The market for enterprise infrastructure software
solutions is highly competitive. We expect this competition to
increase. Our products compete with offerings from a number of
established infrastructure vendors, as well as offerings from
new software companies. Some of these companies offer products
that compete with single components of our product set, while
other companies market a set of products designed to solve broad
integration problems.

We compete principally against vendors of:



| |   |                                                     
| | - | ----------------------------------------------------
| |  | enterprise infrastructure software;                 
|
| |  | enterprise application integration
    software; and
|
| |  | Web services integration software.                  

We believe that our ability to compete depends in
part on a number of factors outside of our control, including:



| |   |                                                                                              
| | - | ---------------------------------------------------------------------------------------------
| |  | the demand for our products;                                                                 
|
| |  | the development by others of software that is
    competitive with our products;             
|
| |  | the price at which others offer comparable
    products;                                     
|
| |  | the ability of our competitors to respond
    effectively to customer needs;                 
|
| |  | the ability of our competitors to market their
    products aggressively and effectively; and
|
| |  | the ability of our competitors to hire, retain
    and motivate key personnel.               

In addition, a number of our competitors have
substantially greater technical, financial, sales, marketing,
customer support, professional services and other resources, as
well as greater name recognition, than we do. As a result, our
competitors may be able to adapt more quickly to new or emerging
technologies and changes in customer requirements, to devote
greater resources to the promotion and sale of their products,
or to establish more successful strategic relationships with
industry leaders and other third parties than we can. Further,
certain of our larger competitors may be able to offer
competitive products or technologies as part of their broader
product or service offerings or may make strategic acquisitions
or establish cooperative relationships among themselves or with
third parties, thereby increasing the ability of their products
to address the needs of our current and prospective customers.
Accordingly, it is possible that new competitors or alliances
among our current and potential competitors may emerge and
rapidly gain significant market share. This type of competition
could materially adversely affect our ability to license
products and provide services on terms favorable to us. In
addition, among our smaller competitors, the competition for
remaining market share is intense. Due to competitive pressures,
we could be forced to reduce the price of our products and
related services. Lower sales or reduced prices would negatively
impact our operating results and financial condition.

Many of our competitors have a significant
installed base that includes our current and potential
customers. Once a customer has installed the products of one of
our competitors, it may be difficult to convince the customer to
adopt or purchase our products. If we are unable to further
penetrate our existing customer base or sell to new clients, our
business prospects and financial condition would suffer.

We may be unable to identify or complete
suitable acquisitions, and any acquisitions we do complete may
create business difficulties or dilute our
shareholders.

As part of our business strategy, we may pursue
strategic acquisitions. We may be unable to identify suitable
acquisition candidates. We cannot assure you that we will be
able to make acquisitions on commercially acceptable terms or at
all. If we acquire a business, technology or product, we may
have difficulty integrating that business, technology or product
with our existing operations or our software. These difficulties
could disrupt our ongoing business, distract our management and
workforce, increase our

-8-



---



##### Table of Contents



expenses and adversely affect our operating
results. In addition, the key personnel of an acquired entity
may decide not to work for us. We may also incorrectly judge the
value or worth of an acquired business, technology or product.
Furthermore, we may incur significant debt or be required to
issue equity securities to pay for future acquisitions or
investments. The issuance of equity securities may be dilutive
to our shareholders.


If we are unable to attract and retain highly
qualified personnel, our future results would be adversely
affected.

We depend to a significant extent upon a limited
number of senior executives. We face intense competition for
highly qualified personnel. If we fail to attract, retain or
assimilate key personnel, our business, financial condition and
results of operations would materially suffer.

We face various risks associated with our
international operations that could cause our operating results
to suffer.

We are incorporated in Ireland and substantial
portions of our product development, marketing, sales and
administrative functions are located in Ireland. Our sales are
derived, and our operations are conducted, worldwide. We expect
that operations outside of the United States will continue to
account for a significant portion of our business and we intend
to continue to expand our operations outside of the United
States. Because of the international character of our business,
we are subject to risks such as:



| |   |                                                                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | fluctuations in currency exchange rates;                                                                                                               
|
| |  | political and economic conditions in various
    jurisdictions;                                                                                        
|
| |  | unexpected changes in regulatory requirements,
    tariffs and other trade barriers;                                                                   
|
| |  | failure to enter into relationships with local
    resellers, systems integrators or other third party vendors, or
    to introduce localized products;
|
| |  | difficulties in staffing and managing foreign
    operations;                                                                                          
|
| |  | longer accounts receivable payment
    cycles; and                                                                                                     
|
| |  | differing laws affecting the enforceability of
    intellectual property rights and product liability.                                                 

If any of these risks materializes, revenue
derived from customers outside the United States could decrease,
and our business, financial condition and results of operations
could materially suffer.

If our effective tax rate increases, our
business and financial results would be adversely
impacted.

We have significant operations and generate a
substantial portion of our taxable income in Ireland. In
general, the tax rate in Ireland on trading income, which is
12.5% as of January 1, 2003, is significantly lower than
U.S. tax rates. Moreover, our Irish taxable income derived
from software substantially developed in Ireland is taxed at a
10% effective tax rate. If our operations no longer qualify for
these lower tax rates or if the tax laws were rescinded or
changed, our effective tax rate would increase and our business,
financial condition and results of operations could be
materially adversely affected. In addition, if U.S., U.K.,
German, Australian or other tax authorities were to challenge
successfully the manner in which we recognize profits or, more
generally, the jurisdiction in which our income is subject to
taxation, our effective tax rate could increase and our cash
flow and results of operations could be materially adversely
affected. If our revenues fail to grow we will become
increasingly dependent on favorable tax rates to maintain our
earnings.

Our U.S. holders of our ordinary shares
or ADSs could suffer adverse tax consequences if we are
characterized as a passive foreign investment company.

If, for any taxable year, our passive income or
our assets that produce passive income exceed levels provided by
law, we may be characterized as a passive foreign investment
company, or PFIC, for

-9-



---



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U.S. federal income tax purposes. This
characterization could result in adverse U.S. tax
consequences to the holders of our ordinary shares or ADSs.
U.S. persons should consult with their own U.S. tax
advisors with respect to the U.S. tax consequences of
investing in our ordinary shares or ADSs.


The rights of shareholders in Irish
corporations may be more limited than the rights of shareholders
in U.S. corporations.

The rights of holders of our ordinary shares and,
therefore, some of the rights of the holders of our ADSs are
governed by Irish law and the laws of the European Union. As a
result, the rights of our shareholders differ from, and may be
more limited than, the rights of shareholders in typical
U.S. corporations. In particular, Irish law significantly
limits the circumstances under which shareholders of Irish
corporations may bring derivative actions.

We have a limited ability to protect our
intellectual property rights, and others could obtain and use
our technology without our authorization.

We regard certain of our technologies as
proprietary, and we rely primarily on a combination of patent,
copyright, trademark and trade secret laws, employee and
third-party non-disclosure agreements, and technical measures to
establish and protect our proprietary rights. The laws of
various countries in which our products may be licensed may not
protect our proprietary rights to the same extent as the laws of
the United States and Ireland. While we generally enter into
confidentiality agreements and limit access to, and distribution
of, our proprietary information, it is possible for a third
party to copy or otherwise obtain and use our technology without
authorization. Third parties may reproduce our software products
without our consent. In addition, it is possible that our means
of protecting our proprietary rights will not be adequate. Any
unauthorized reproduction or inadequate protection could have a
material adverse effect on our business, financial condition or
results of operations.

If we do not have the right to use third-party
technology, we may have to stop selling and shipping products
and incur significant development or license expenses.

We use and incorporate third-party technology in
our products. If we do not have adequate rights to use this
technology or our rights terminate, we could be required to:



| |   |                                                                                                                                                                         
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | stop using the third-party technology;                                                                                                                                  
|
| |  | stop selling and shipping our products in which
    the third-party technology is used; or                                                                              
|
| |  | incur significant expenses to identify and obtain
    replacement technology or develop similar technology or to
    obtain a new license to the third-party technology.

We may not be able to develop technology or
identify other technology with functionality similar to this
third-party technology. In addition, we may not be able to
obtain a license to this third-party technology on acceptable
terms or at all, and we may be liable for damages in the event
of any unauthorized use. If any of these events occur, our
business, financial condition and results of operations could be
materially adversely affected.

We may be exposed to significant liability if
we infringe upon the intellectual property or proprietary rights
of others.

Third parties have notified us, and others may
notify us, from time to time, that they believe we are
infringing certain of their patents and other intellectual
property rights. The cost of responding to any such assertion
may be material, whether or not the assertion is valid. In the
event that any such assertion is resolved adversely to us, we
could be required to:



| |   |                                                                
| | - | ---------------------------------------------------------------
| |  | discontinue the use of certain processes;                      
|
| |  | cease the use and sale of infringing products and
    services;

-10-



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| |   |                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------
| |  | expend significant resources to develop
    non-infringing technology;                                 
|
| |  | obtain licenses to competing technology; or                                                            
|
| |  | indemnify customers under certain clauses
    relating to intellectual property rights in our licenses.

We may be unable to obtain licenses on acceptable
terms or at all. We may become a party to litigation, and the
court may assess damages. If we fail to obtain licenses, adverse
or protracted litigation arises out of any such assertion or
damages are assessed, our business, financial condition or
results of operations could be materially adversely affected.

Legislative actions, higher insurance costs
and potential new accounting pronouncements may affect our
future financial position and results of operations.

To comply with the recently adopted
Sarbanes-Oxley Act of 2002, as well as proposed changes to
listing standards by Nasdaq, we may be required to hire
additional personnel and utilize additional outside legal,
accounting and advisory services, all of which will cause our
general and administrative costs to increase. Insurers may
increase premiums as a result of high claims rates experienced
by them over the past year, and so our premiums for our various
insurance policies, including our directors and
officers insurance policies, are likely to increase.
Proposed changes in the accounting rules, including legislative
and other proposals to account for employee stock options as a
compensation expense among others, could materially increase the
expenses that we report under generally accepted accounting
principles and adversely affect our operating results.






|        |                           
|------- | --------------------------
|Item 4. | INFORMATION ON THE COMPANY






|   |                                           
|-- | ------------------------------------------
|A. | History and Development of the
    Company



| |                  
| | -----------------
| | About the Company

We are an Irish resident public limited company
(company number 171387) and operate under Irish Company Law. We
were incorporated in Ireland on March 19, 1991 under the
legal and commercial name IONA Technologies Limited and
re-registered under the legal and commercial name IONA
Technologies PLC in February 1997. Our registered office and
principal place of business is The IONA Building, Shelbourne
Road, Ballsbridge, Dublin 4, Ireland. Our telephone number at
that location is +353 1 6372000.

The principal place of business in the United
States of our wholly-owned subsidiary, IONA Technologies, Inc.,
is 200 West Street, Waltham, MA, 02451, USA.



| |                                                   
| | --------------------------------------------------
| | Important Company Events and Company
    Takeovers

In 2002, we announced the public offering of
4,000,000 of our American Depositary Shares, representing
4,000,000 of our ordinary shares, at a price of $15.00 per
share. The underwriters exercised in full their option to
purchase an additional 600,000 shares to cover
over-allotments. The 4,600,000 shares were offered by an
underwriting group led by Lehman Brothers Inc., SG Cowen
Securities Corporation and Prudential Securities Incorporated.
The net cash proceeds of the offering is being used for general
corporate purposes, including working capital. We may also use a
portion of the net proceeds to acquire additional businesses,
technologies and products.

In 2001, we acquired Netfish Technologies, Inc.
(Netfish). The total consideration consisted of 4,221,216
newly-issued ordinary shares, 815,102 ordinary shares issuable
upon the exercise of replacement options and $30.9 million
of closing costs incurred in connection with the merger. Of the
newly-issued ordinary shares, 504,598 were held back by us as a
source of indemnification payments that may become due to us. If
we made no claims for indemnification, 75% of the 504,598
ordinary shares, or 378,448 shares, would have been
distributed to the former holders of Netfish shares in May 2002
and 25% of the 504,598 ordinary shares, or 126,150 shares,
would be distributed in May 2003. In May 2002, we held back
142,045 ordinary shares to cover indemnification claims made by
us. If we make no new claims,

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126,150 ordinary shares will be distributed in
May 2003. The 142,045 ordinary shares held back by us could be
distributed upon resolution of pending indemnification claims in
a manner unfavorable to us.




| |                    
| | -------------------
| | Certain Investments

During 2002, 2001 and 2000 we invested
$5.2 million, $5.4 million and $8.1 million,
respectively, for the purchase of furniture, fixtures and
equipment, for further investment in our management information
systems and for capital expenditures.

During 2002, 2001 and 2000 we invested
$0.2 million, $15.5 million and $8.8 million,
respectively, in technology, which had reached technological
feasibility.




B.     Business
Overview

Overview

IONA is in the integration software business. We
make software work together so our customers can make better
decisions, run their businesses more efficiently and improve
their business results. Our Rapid Integration software products
enable our customers to build, maintain and scale their
disparate computing environments while preserving and extending
existing information technology investments. We also offer
professional services, including ongoing customer support and
maintenance as well as high-level application design
consultation, education and product implementation.

Founded in 1991, we are headquartered in Dublin,
Ireland, with our wholly-owned U.S. subsidiary
headquartered in Waltham, Massachusetts. We have a long track
record of technology leadership and dedication to continuous
product improvement. From our inception, we have focused on
making software work together. We generate revenue from product
licenses as well as from professional services. Since our
inception, we have licensed our products, directly and
indirectly, to more than 4,500 enterprise or divisional
customers worldwide. We employ more than 600 people in more than
30 offices worldwide.

Industry Background

A typical enterprise information technology
infrastructure consists of multiple databases, application
servers, applications and integration software products that are
often separately maintained and largely incompatible. The
development and integration of applications to meet
ever-evolving computing requirements is highly complex.
Moreover, demand for greater efficiency, flexibility and ease of
use in business operations has resulted in the proliferation of
applications that automate an enterprises core processes.
Software vendors have developed numerous applications, based on
different programming languages, operating systems and hardware
specifications, to streamline business operations, such as
telecommunications network management systems, financial trading
systems, supply chains and internal administrative processes. To
perform a single business transaction, numerous distinct
processes must be coordinated across several different
applications and systems. For example, when a customer order is
submitted, Web-based front-end systems need to communicate with
inventory systems to determine the availability and location of
the item; coordinate with financial institutions to verify the
customers credit and process payment; synchronize shipment
dates and track logistics; and record the transaction in
internal back-end systems. To facilitate performance of these
functions, various infrastructure vendors, including
applications server and enterprise integration software
providers, have emerged to deploy, integrate and manage
disparate applications as well as connect legacy systems.

This proliferation of integration solutions has
created additional challenges for software developers and
vendors. Most solutions are proprietary in nature, do not
support cross-industry technological standards, and require
significant training and implementation. As a result,
organizations are struggling with slow returns on their IT
investments, the complexity of existing integration challenges
and the demands of an increasingly dynamic business environment.

Web services technology is emerging as the next
approach for the integration of software utilizing Internet
standards and protocols. Through the use of open standards, Web
services allow applications to

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more easily share data and leverage
functionalities of other applications. As a result, Web services
provide an opportunity to implement and manage dynamic business
applications and systems in a less disruptive, less costly and
faster manner than in existing integration solutions. The
deployment and integration of applications within a Web services
environment requires software infrastructure to provide
necessary quality of service and functionality, such as
reliability, scalability and security, as well as integration
with legacy applications. Due to the continued reliance on a
necessary number of heterogeneous applications and systems as
well as the emergence of Web services, organizations are seeking
comprehensive integration solutions that encompass a unifying,
standards-based, service-oriented architecture to facilitate
multi-level interoperability of software applications and
systems.


Traditional integration products are proprietary
and difficult to use, which means they require too many scarce,
highly skilled resources to implement the solutions. These
products tend to be monolithic systems that are not modular and
do not integrate easily or work well with one another. In
addition, they are very expensive to purchase and implement. The
result is a very high total cost of implementation. In short,
integration projects using traditional integration products are
expensive and consume time and scarce resources.

The Rapid Integration Opportunity

The opportunity for IONA is to offer products
that challenge traditional integration solutions and to change
the economics of IT through a new approach we call Rapid
Integration.

IONAs Rapid Integration products deliver
rapid solutions. Our customers can integrate systems quickly and
with lasting results. We provide a solid architectural approach
utilizing open standards on which customers can build over time.
Our deep commitment to standards mitigates the customers
risk of being locked into a proprietary solution from a single
vendor. The end result is lower total cost of ownership in terms
of license costs, training costs for developers, cost of
services required to develop and deploy the solution and ongoing
support costs.

Our approach is based on Service Oriented
Architectures (SOAs), which enable organizations to connect all
of their IT assets to a common backbone and thereby leverage and
reuse those existing assets. The best SOAs are based on
standards, which insulate the customers integration
investments from future changes in technology, products, selling
channels and business processes. CORBA is the most widely
deployed SOA to date, and has been typically deployed to address
technically complex applications. Web services are the next
generation of SOA and they address a broader class of problems
that, to date, have not been as technically challenging.

IONAs Rapid Integration solutions combine
SOAs, Web services and incremental deployment capabilities and
are designed to dramatically change the economics of IT.

Strategy

Our objective is to be the leading independent
provider of Rapid Integration software. To achieve this
objective, we intend to pursue the following strategies:

Maintain our Technological Leadership.We have a long track record of
technological leadership and dedication to continuous product
improvement. Our Rapid Integration products enable our customers
to rapidly and efficiently develop, deploy, integrate and manage
applications and systems. We intend to further expand our core
product functionality as well as continue to develop
complementary products that enhance and extend our Rapid
Integration software products. We will continue to invest
heavily in research and development. By promoting and embracing
existing and emerging industry standards, we intend to
facilitate the broad acceptance of our products. We may acquire
businesses, products or technologies that we believe will
enhance and expand our current product offerings.

Leverage and Expand our Strategic Alliances.We believe that relationships with
leading software and other technology vendors, as well as system
integrators, provide opportunities to gain customers in markets
where our products and services are potentially in demand. We
intend to leverage our established

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relationships and forge new alliances to enhance
our marketing, selling and implementation initiatives. We
believe that many of these vendors and system integrators seek
to partner with strong infrastructure technology providers that
will enable them to more rapidly satisfy customer needs. We have
relationships with leading software and technology vendors, such
as Business Objects, Hewlett-Packard and Manugistics, and global
system integrators, such as HP Services, BearingPoint, IBM, CSC
and SAIC. We believe that these relationships better enable us
to sell additional products to our existing customer base,
acquire new customers and enhance our market presence.


Further Penetrate our Existing Customer Base
and Core Vertical Markets.We have a
large and growing customer base across a wide variety of
industries. The strategic importance of our products allows us
to develop strong relationships with the key technology decision
makers within our customer base. In addition, our strategic
selling approach facilitates broad adoption of our products
throughout a company. Accordingly, we intend to generate
incremental sales from our existing customer base through the
introduction of new and enhanced products. We also intend to
generate incremental sales from key vertical markets where we
have significant penetration, particularly telecommunications,
government/defense and financial services.

Products

Integration is a complex problem requiring
sophisticated technologies and thorough expertise at multiple
levels. Our Rapid Integration solutions enable integration at
the component, middleware, application and process levels.

Component integration provides a distributed
computing infrastructure for business critical applications.
These systems tend to be closely coupled, and require high
performance, low latency and transactional integrity. Challenges
include integrating different languages and interoperability
among different component models such as .NET, J2EE and CORBA.
Integration across disparate middleware domains also requires
solutions that offer high-performance, reliability,
availability, and security but at a higher level of granularity.
Application integration also calls for the transformation of
data from application to application, content-based routing,
adapters to packaged applications and various technology
systems, including databases and transaction monitors. Process
integration involves automating long-lived, multi-step business
processes, which requires business process modeling, managing
the flow of documents, events, and exceptions, coordinating and
managing collaborations, activity monitoring, and process
optimization.

IONA Orbixis our
CORBA and J2EE product line for component-level integration.
Orbix provides a single, common platform for the configuration,
deployment, management, and security of service-oriented
architectures. Orbix contains the worlds leading CORBA
implementation, an enterprise-class J2EE application server and
an innovative Web services platform. Orbix is differentiated by
its breadth of support for disparate computing
technologiesincluding Web services, COBOL, C++, Java,
PL/I, IMS, CICS and COM/.NETand its ability to deploy SOAs
on the mainframe.

IONA Artixis a
high-performance middleware switch that provides seamless
interoperability of multiple middleware technologies. Artix
enables SOAs through request brokering of disparate messaging
and component middleware. It also enables the deployment of
enterprise class Web services with fault tolerance, load
balancing, legacy integration, security and management. Artix is
intended for use by enterprise system architects and developers
who are challenged with integrating diverse software
applications and middleware domains. We expect to launch Artix
in the second quarter of 2003.

IONA Enterprise
Integratoris an application-level
integration broker designed for enterprise system architects and
developers who require quick solutions to technology integration
challenges. Enterprise Integrator provides faster results and is
more cost effective than traditional Enterprise Application
Integration (EAI) solutions. Enterprise Integrator features
out-of-the-box adapters and an extensible adapter development
kit and provides enterprise-class qualities of service,
including load balancing and fault tolerance.

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IONA Orchestratoris
a Web services integration broker intended for business analysts
and IT developers who need to quickly automate business
processes among Web services based applications. Orchestrator
offers rapid Web services orchestration, an easy-to-use
graphical user interface (GUI) for connecting and
transforming Web services into flexible business processes,
connections from any endpoint to any endpoint using Web services
and sequencing, coordination and management of composite Web
services. In addition, Orchestrator enables business process
modeling and execution, transformation of data and security.

Services

Our professional services organization provides
educational, product consultancy and solutions architecture
services to our customers and partners, as well as to our
internal field organizations. Our professional services
personnel have substantial expertise in leading integration and
development technologies, including CORBA, J2EE and XML. Our
professional services organization consisted of 45 employees as
of December 31, 2002.

We have a customer engineering organization,
comprised of 57 employees as of December 31, 2002,
dedicated to supporting our products through ongoing support and
maintenance. As part of our support services, we offer our
customers a knowledge base of technical information
and advice. We encourage our customers to purchase customer
support for an annual fee. Most product support is provided
through a combination of telephone and e-mail support at our
Dublin, Ireland headquarters and our
U.S. subsidiaries offices in Waltham, Massachusetts
and Santa Clara, California. Our original equipment
manufacturers (OEMs), value-added resellers and independent
software vendors depend on our customer service team to provide
backup for the front-line support that they provide to their
customers.

Product Development

We have developed our technology and products
primarily through internal development personnel, strategic
acquisitions and third-party contractors. Product development is
concentrated primarily at our Dublin, Ireland headquarters as
well as our U.S. subsidiaries offices in Waltham,
Massachusetts, Santa Clara, California and Reston,
Virginia. Our product management organization collaborates with
our marketing and sales organizations to increase sales of
products and to develop customer and indirect sales
relationships.

We have a long-standing commitment to
standards-based technologies. We were an early provider of
products based on CORBA, a broadly embraced standard for
component interoperability. We have expanded our support for
industry standards to include J2EE, XML and Web services
standards. We continue to be actively involved in other industry
organizations and standards-setting bodies, particularly the
Object Management Group, World Wide Web Consortium, the
Organization for the Advancement of Structured Information
Standards (OASIS), the TeleManagement Forum and the Web Services
Interoperability Organization. We are a member of the Executive
Committee of the Java Community ProcessTM
(JCP) Program 2.0, an open community-based process to
further develop and revise Java technology specifications.

As of December 31, 2002, we had
197 employees dedicated to research and development. Our
research and development expenditures in 2002, 2001 and 2000
were approximately $38.3 million, $40.3 million and
$26.9 million, representing 31.0%, 22.3% and 17.6% of total
revenue in 2002, 2001 and 2000, respectively. We expect to
continue investing significant resources in research and
development in the future.

Customers

Since our inception, we have licensed, directly
or indirectly, our products to more than 4,500 enterprise or
divisional customers worldwide. These customers operate in a
wide variety of industries

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including telecommunications, finance,
manufacturing, banking, defense, medical, computing, research
and software. The following is a selected list of customers
across some of our targeted industries:


|                     |  |                           |  |                                     
|-------------------- |  | ------------------------- |  | ------------------------------------
|Financial            |  | Telecom                   |  | Government/Defense                  
|                     |  |                           |  |                                     
|ABN AMRO             |  | BellSouth                 |  | Lockheed Martin                     
|Credit Suisse Group  |  | Con Edison Communications |  | Lombardia Informatica               
|JPMorgan Chase       |  | Ericsson                  |  | Raytheon                            
|Lehman Brothers      |  | Nokia                     |  | U.S. Dept. of Defense               
|Winterthur Insurance |  | Omnitel                   |  | U.S. Environmental Protection Agency

No customer accounted for more than ten percent
of our total revenue in 2002, 2001 or 2000.

We derive a significant amount of our total
revenue from customers located outside the United States. Total
revenue from customers located outside the United States were
approximately 38.8%, 33.8% and 32.6% of total revenue for 2002,
2001 and 2000, respectively. We expect revenue from customers
located outside the United States to continue to represent a
significant percentage of our total revenue for the foreseeable
future.

Sales and Marketing

We market our products and services through our
marketing and direct sales organizations and through indirect
channels including software vendors, system integrators,
original equipment manufacturers, value-added resellers and
third-party distributors. As of December 31, 2002, our
sales and marketing organization consisted of 234 professionals.

The direct sales force consists of account
managers and field and telesales personnel, complemented by
technical pre-sales and high-level product specialists who are
available for customer visits. Our sales force and executive
team maintain relationships with customers senior
management for large-scale projects. Our sales force also
maintains contact at the developer level to understand and serve
the developers requirements.

Our sales organization is divided into three
geographical regions: the Americas, Asia-Pacific and Europe/
Middle East/ Africa. In addition, we dedicate members of our
sales force to developing strategic relationships with our
indirect channel partners.

The indirect distribution channels consist of
leading software vendors, such as Business Objects and
Manugistics; global system integrators, such as HP Services,
BearingPoint, IBM, CSC and SAIC; leading original equipment
manufacturers, such as Intel, Hewlett-Packard and Sun; and
resellers and distributors. We believe that relationships with
leading software and other technology vendors, as well as system
integrators, provide opportunities to gain customers in markets
where our products and services are in demand.

We have marketing teams in the United States,
Europe and Asia that execute global marketing programs designed
to create demand for our products and services. We use a variety
of marketing programs, including trade shows, limited duration
evaluation software, direct marketing communications, Web casts,
public relations, product literature and collateral, trade
advertising, and a corporate Web site.

Competition

The market for enterprise infrastructure software
solutions is rapidly changing and highly competitive. Our
products compete with offerings from a number of established
infrastructure vendors, as well as offerings from new software
companies and, in some instances, freeware. Some of these
offerings compete with single components of our products, while
others market a set of products designed to solve broad
integration problems.

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We compete against:



| |   |                                                                                                          
| | - | ---------------------------------------------------------------------------------------------------------
| |  | Enterprise application server providers: BEA
    Systems, IBM, Microsoft, Prismtech and Sun Microsystems;
|
| |  | EAI software vendors: Borland, SeeBeyond, TIBCO
    Software, Vitria Technology and webMethods;          
|
| |  | Web services integration companies: Actional,
    Cape Clear, Collaxa and Intelio.                       

We believe that the principal competitive factors
that affect the market for our products include:



| |   |                                                            
| | - | -----------------------------------------------------------
| |  | perception by potential customers of market
    leadership;
|
| |  | product features and functionality;                        
|
| |  | breadth of product offerings;                              
|
| |  | standards;                                                 
|
| |  | ease-of-use;                                               
|
| |  | quality;                                                   
|
| |  | performance;                                               
|
| |  | security;                                                  
|
| |  | price;                                                     
|
| |  | customer service and support;                              
|
| |  | effectiveness of sales and marketing
    efforts; and      
|
| |  | company reputation and financial viability.                

Patents and Proprietary Technology

We regard much of our intellectual property as
proprietary to us and rely primarily on a combination of
copyright, trademark, patent and trade secret laws, employee and
third-party non-disclosure agreements and technical measures to
establish and protect our proprietary rights. We own numerous
registered trademarks and trademark applications pending in the
United States, the European Union, Australia and Asia, as well
as other jurisdictions throughout the world.

While we generally use negotiated, signed license
agreements or shrink-wrap type licenses to restrict copying and
use of our software products, we do not generally embed
mechanisms in our software to prevent or inhibit unauthorized
use or copying of our software. We do not currently rely
significantly on patents or other registered intellectual
property rights to protect our software. We have a number of
U.S. and international patent applications pending. Because
shrink-wrap licenses are not signed by licensees, they may be
unenforceable under the laws of certain jurisdictions. In
addition, the laws of various countries in which our products
may be sold may not protect proprietary rights to the same
extent as the laws of the United States and Ireland.

We license from time to time technologies and
products from third parties for incorporation in our products.

We generally enter into confidentiality
agreements with our employees and consultants, and limit access
to, and distribution of, our proprietary information to
customers and potential customers.

Employees

As of December 31, 2002, we had
approximately 628 full-time employees, with 322 based in
the Americas, 249 based in Europe/ Middle East/ Africa and 57
based in Asia-Pacific. These employees

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include 197 in product development and
management, 57 in customer engineering, 25 in marketing, 209 in
sales, 45 in professional services and 95 in finance, legal,
human resources, administration and information technology. Our
employees are not represented by any collective bargaining
organizations, and we have not experienced any work stoppages.
Our relations with our employees are good.


Legal Proceedings

We are not a party to any legal proceedings that,
if resolved or determined adversely to us, would have a material
adverse effect on our business, financial condition and results
of operation. We, however, are subject to claims and litigation
in the ordinary course of business. In the event that any such
claims or litigation are resolved against us, such outcomes or
resolutions could have a material adverse effect on our
business, financial condition or results of operations.

Government Regulations

We have significant operations and generate a
substantial portion of our taxable income in Ireland. In
general, the tax rate in Ireland on trading income, which is
12.5% as of January 1, 2003, is significantly lower than
U.S. tax rates. Moreover, our Irish taxable income derived
from software substantially developed in Ireland is taxed at a
10% effective tax rate. Therefore, our effective tax rate is
affected by the percentage of revenue that qualifies for this
favorable tax treatment. We anticipate that we will continue to
benefit from this tax treatment, although the extent of the
benefit could vary from period to period, and our tax treatment
may change in the future. Any variation in the amount of our
benefit from this tax treatment could have a material adverse
effect on our business, financial condition and results of
operations.

For more information regarding the impact of tax
regimes on our business, please see Item 3.D. Risk
FactorsIf our effective tax rate increases, our business
and financial results would be adversely impacted and
Item 10.E. Taxation.

Principal Markets

For a description of the principal markets in
which we compete, including a breakdown of total revenues by
category of activity and geographic market for each of the last
three financial years, see Item 5 Operating and
Financial Review and Prospects.

Seasonality and Raw Materials

Historically, our product revenue in the first
quarter of each year has declined from the fourth quarter of the
prior year. Our products and services do not materially depend
on the availability of raw materials.






|   |                         
|-- | ------------------------
|C. | Organizational Structure

IONA Technologies PLC has 28 direct and indirect
subsidiaries, of which two are significantIONA
Technologies, Inc. (IONA U.S.), incorporated in Delaware and
IONA Technologies Finance (IONA Finance), incorporated in the
Cayman Islands. IONA U.S. and IONA Finance are wholly-owned by
IONA Technologies PLC.






|   |                                   
|-- | ----------------------------------
|D. | Property, Plants and
    Equipment

Our headquarters are currently located in a
leased facility in Dublin, Ireland. This facility consists of
approximately 55,900 square feet of office space, under a
lease expiring in August 2023, subject to our right to terminate
the lease in August 2013. We currently occupy 26,650 square
feet of the office space and sublet approximately
11,250 square feet with the remainder deemed idle. The
principal U.S. office of our wholly-owned subsidiary, IONA
Technologies, Inc., is located in a leased facility in Waltham,
Massachusetts. This facility consists of approximately
65,500 square feet of office space, under a lease expiring
2006, subject to our right to renew for an additional term of
five years expiring in 2011. We

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currently occupy approximately 48,000 square
feet and sublet approximately 4,800 square feet with the
remainder deemed idle. Our wholly-owned
U.S. subsidiarys Santa Clara, California
facility consists of approximately 38,500 square feet of
office space under a lease expiring January 2005 through January
2006. We currently occupy approximately 19,400 square feet
with the remainder deemed idle. In addition, our wholly-owned
subsidiaries maintain offices in California, Colorado, Florida,
Georgia, Illinois, Michigan, New York, Texas, Virginia,
Washington, Newfoundland (Canada), Frankfurt, Karlsruhe
(Germany), London, Milan, Paris, Reading (U.K.), Singapore, Hong
Kong, Sydney and Tokyo. We believe that these facilities are
adequate for our present operations and that additional
facilities to support our present and future operations are
available on commercially reasonable terms. We do not expect in
the near future to move to new or expand into additional
facilities. However, in the event of any such move or expansion
there could be a material adverse effect on our business,
financial condition and results of operation or a disruption in
the development or marketing of products. For more information,
please see Item 3.D. Risk Factors.


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|        |                                                 
|------- | ------------------------------------------------
|Item 5. | OPERATING AND FINANCIAL REVIEW AND
    PROSPECTS

The following discussion and analysis of
financial condition and results of operations should be read in
conjunction with the condensed consolidated financial statements
for the periods specified and associated notes included in
Item 3.A. Selected Financial Data. The
following discussion and analysis of financial condition and
results of operations contains forward-looking statements made
pursuant to the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995 including statements of our plans,
objectives, expectations and intentions. These forward-looking
statements are neither promises nor guarantees and involve risks
and uncertainties that could cause actual results to differ
materially from those indicated by such forward looking
statements, including risks and uncertainties relating to the
integration of recent and future acquisitions; the launch of
IONAs Rapid Integration software; growth in market demand
for Web services and integration; IONAs enterprise sales
model; volume, timing and seasonal patterns of product sales;
impact of competitive products and pricing; development and
market acceptance of new and improved products; undetected
errors in software; and general economic conditions. Further
reference should be made to Item 3.D. Risk
Factors.






|   |                  
|-- | -----------------
|A. | Operating Results

Overview

IONA is in the integration software business. We
make software work together so our customers can make better
decisions, run their businesses more efficiently and improve
their business results. Our Rapid Integration software products
enable our customers to build, maintain and scale their
disparate computing environments while preserving and extending
existing information technology investments. We also offer
professional services, including ongoing customer support and
maintenance as well as high-level design consultation, education
and product implementation.

Our revenue is derived from product license fees
and charges for support and professional services. We recognize
revenues in accordance with the provisions of the American
Institute of Certified Public Accountants Statement of Position
(SOP) 97-2, Software Revenue Recognition, as
amended by SOP 98-4 and SOP 98-9. In accordance with
U.S. GAAP, we recognize software license revenue when
persuasive evidence of an arrangement exists, delivery has
occurred, our fee is fixed or determinable, and collectibility
is probable. We recognize customer support revenue over the term
of the support agreement, generally 12 months. We recognize
professional service revenue when the services are performed.

Our total revenue decreased by 31.8% to
$123.2 million in 2002 from $180.7 million in 2001 and
grew by 18.1% to $180.7 million in 2001 from
$153.1 million in 2000. Total revenue from customers
located outside the United States was $47.8 million in
2002, $61.0 million in 2001 and $50.0 million in 2000.
Total revenue from customers located outside the United States
accounted for approximately 38.8% of total revenue in 2002,
33.8% of total revenue in 2001 and 32.6% of total revenue in
2000. No single customer accounted for more than 10% of total
revenue in 2002, 2001 or 2000.

To date, we have derived most of our revenue from
the licensing of our enterprise integration and application
server software products that currently compose our Orbix
products, and fees from related services. We expect that our
other Rapid Integration products will increasingly contribute to
our revenue. We market our product and services through our
direct marketing and sales organizations and through indirect
channels, including software vendors, system integrators,
original equipment manufacturers, value-added resellers and, to
a lesser extent, third-party distributors. Our total revenue is
dependent on the growth in demand for our software. In general,
product revenue in the first quarter of each year declines from
the fourth quarter of the prior year in line with traditional
seasonal trends.

Our gross margins are affected by the mix of
product and service revenue and the mix of distribution channels
used by us. We typically realize significantly higher gross
margins on product revenue than on service revenue.

Our operating expenses on a pro forma basis,
which excludes stock compensation, in-process research and
development, amortization of other non-current assets,
amortization of goodwill, restructuring,

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impairment of goodwill, impairment of intangible
assets and fixed assets, and settlement of litigation, decreased
in absolute dollars in 2002 for the first time since 1996. This
decrease reflects the cost reduction measures and restructuring
plans implemented by management in 2002 in response to the
decrease in IONA revenues resulting from the general economic
conditions affecting the software market as a whole. We intend
to continue to control costs in all operating areas in future
periods.


We have significant operations and generate a
substantial portion of our taxable income in Ireland. In general
the tax rate in Ireland on trading income, which is 12.5% as of
January 1, 2003, is significantly lower than U.S. tax
rates. Moreover, our Irish taxable income derived from software
substantially developed in Ireland is taxed at a 10% effective
tax rate. Therefore, our effective tax rate is affected by the
percentage of revenue that qualifies for such favorable tax
treatment. We anticipate that we will continue to benefit from
this tax treatment, although the extent of the benefit could
vary from period to period, and our tax treatment may change in
the future.

Impact of Recent Acquisitions

In 2001, we acquired Netfish Technologies, Inc.
(Netfish). The total consideration consisted of 4,221,216
newly-issued ordinary shares, 815,102 ordinary shares issuable
upon the exercise of replacement options and $30.9 million
of closing costs incurred in connection with the merger. Of the
newly-issued ordinary shares, 504,598 were held back by us as a
source of indemnification payments that may become due to us. If
we made no claims for indemnification, 75% of the 504,598
ordinary shares, or 378,448 shares, would have been
distributed to the former holders of Netfish shares in May 2002
and 25% of the 504,598 ordinary shares, or 126,150 shares,
would be distributed in May 2003. In May 2002, we held back
142,045 ordinary shares to cover indemnification claims made by
us. If we make no new claims, 126,150 ordinary shares will be
distributed in May 2003. The 142,045 ordinary shares held back
by us could be distributed upon resolution of pending
indemnification claims in a manner unfavorable to us. The
aggregate purchase price plus related expenses have been
allocated to the acquired assets and liabilities at their
estimated fair values at the date of acquisition based primarily
on an independent valuation, and to acquired in-process research
and development for which technological feasibility had not been
established and for which alternative future uses did not exist
based on independent valuation.

In 2001, we acquired Object-Oriented Concepts,
Inc. (OOC). The total consideration consisted of
$3.0 million in cash, 730,453 newly-issued ordinary shares
and 178,131 ordinary shares issuable upon the exercise of
replacement options. Of the newly-issued ordinary shares,
262,129 were subject to return to us as a purchase price
adjustment upon the failure of OOC to achieve certain
performance targets. In 2001, 174,735 ordinary shares no longer
subject to return were recorded as additional purchase price
based on fair market value at the time the performance targets
were achieved. In 2002, the remaining 87,394 ordinary shares
were no longer subject to return to us and were recorded as
additional purchase price. The aggregate purchase price plus
related expenses have been allocated to the acquired assets and
liabilities at their estimated fair values at the date of the
acquisition based primarily on an independent valuation.

In 2001, we obtained from Software AG, Inc. a
non-exclusive license to Sagavista application integration
software for $10.0 million and hired a substantial portion
of the Software AG, Inc. engineering team responsible for the
development of the technology.

In 2000, we acquired Genesis Development
Corporation (Genesis). At the time of acquisition, 176,156
ordinary shares were subject to return to us as a purchase price
adjustment upon the failure of Genesis to achieve certain
performance targets. The contingency was resolved in May 2001
and, consequently, the ordinary shares no longer subject to
return were recorded as additional purchase price based on their
fair market value at the time the contingency was resolved.

Critical Accounting Policies and
Estimates

Our consolidated financial statements are
prepared in accordance with accounting principles generally
accepted in the United States (GAAP). These accounting
principles require us to make certain estimates, judgments and
assumptions. We believe that the estimates, judgments and
assumptions upon which we

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rely are reasonable based upon information
available to us at the time that these estimates, judgments and
assumptions are made. These estimates, judgments and assumptions
can affect the reported amounts of assets and liabilities as of
the date of the financial statements, as well as the reported
amounts of revenues and expenses during the periods presented.
To the extent there are material differences between these
estimates, judgments or assumptions and actual results, our
financial statements will be affected. The significant
accounting policies that we believe are the most critical to aid
in fully understanding and evaluating our reported financial
results include the following:




| |   |                                                         
| | - | --------------------------------------------------------
| |  | Revenue Recognition                                     
|
| |  | Allowances for Doubtful Accounts                        
|
| |  | Legal Contingencies                                     
|
| |  | Accounting for Income Taxes                             
|
| |  | Impairment of Intangible Assets (including
    Goodwill)

In many cases, the accounting treatment of a
particular transaction is specifically dictated by GAAP and does
not require managements judgment in its application. There
are also areas in which managements judgment in selecting
among available alternatives would not produce a materially
different result. Please see Notes to Consolidated Financial
Statements, which contain additional information regarding our
accounting policies and other disclosures required by GAAP.



| |                    
| | -------------------
| | Revenue Recognition

We recognize the majority of our revenue pursuant
to software license agreements. While the basis for software
license revenue recognition is substantially governed by the
provisions of SOP 97-2, Software Revenue
Recognition, issued by the American Institute of Certified
Public Accountants and as amended by SOP 98-4 and
SOP 98-9 and related interpretations, we exercise judgment
and use estimates in connection with the determination of the
amount of software license and services revenues to be
recognized in each accounting period.

For software license arrangements that do not
require significant modification or customization of the
underlying software, we recognize revenue when: (1) we
enter into a legally binding arrangement with a customer for the
license of software; (2) we deliver the products or perform
the services; (3) customer payment is deemed fixed or
determinable and free of contingencies or significant
uncertainties; and (4) collection is probable.
Substantially all of our license revenues are recognized in this
manner.

For arrangements with multiple elements, we
allocate revenue to each element of a transaction based upon its
fair value as determined by vendor specific objective
evidence. Vendor specific objective evidence of fair value
for each element of an arrangement is based upon the normal
pricing and discounting practices for each element when sold
separately, including the renewal rate for support services. If
we cannot objectively determine the fair value of any
undelivered element included in the multiple element
arrangement, we defer revenue until all elements are delivered,
services have been performed, or until fair value can be
objectively determined. When the fair value of an element cannot
be established, we use the residual method to record license
revenue, provided the fair value of all undelivered elements is
determinable. Under the residual method, the fair value of the
undelivered elements is deferred and the remaining portion of
the arrangement fee is allocated to the delivered elements and
is recognized as revenue.

We assess whether fees are fixed or determinable
at the time of sale and recognize revenue if all other revenue
recognition requirements are met. Our standard payment terms are
net 30; however, terms may vary based on the country in which
the agreement is executed. Payments that extend beyond
30 days from the contract date but that are due within
twelve months are generally deemed to be fixed or determinable
based on our successful collection history on such arrangements,
and thereby satisfy the required criteria for revenue
recognition.

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While most of our arrangements include payment
terms of less than one year, we have provided payment terms of
more than one year to credit worthy customers. We have
established a history of collection, without concessions, on
these receivables with payment terms that extend beyond one
year. Provided all other revenue recognition criteria have been
met, we recognize license revenue for these arrangements upon
delivery.

Revenue for consulting services is generally
recognized as the services are performed. Revenue from royalty
arrangements in excess of guaranteed amounts is recognized upon
notification of such royalties payable by the customer.



| |                                 
| | --------------------------------
| | Allowances for Doubtful Accounts

We make judgments as to our ability to collect
outstanding receivables and provide allowances for the portion
of receivables when collection becomes doubtful. Provisions are
made based upon a specific review of all significant outstanding
receivables. In determining the provision, we analyze our
historical collection experience and current economic trends. If
the historical data we use to calculate the allowance provided
for doubtful accounts does not reflect the future ability to
collect outstanding receivables, additional provisions for
doubtful accounts may be needed and the future results of
operations could be materially affected.



| |                    
| | -------------------
| | Legal Contingencies

We are currently involved in various claims and
legal proceedings. Periodically, we review the status of each
significant matter and assess our potential financial exposure.
If the potential loss from any claim or legal proceeding is
considered probable and the amount can be estimated, we accrue a
liability for the estimated loss. Because of uncertainties
related to these matters, accruals are based only on the best
information available at the time. As additional information
becomes available, we reassess the potential liability related
to our pending claims and litigation and may revise our
estimates. Such revisions in the estimates of the potential
liabilities could have a material impact on our results of
operations and financial position.



| |                            
| | ---------------------------
| | Accounting for Income Taxes

Significant judgment is required in determining
our worldwide income tax expense provision. In the ordinary
course of a global business, there are many transactions and
calculations where the ultimate tax outcome is uncertain. Some
of these uncertainties arise as a consequence of income sharing
and cost reimbursement arrangements among related entities, the
process of identifying items of income and expense that qualify
for preferential tax treatment and segregation of foreign and
domestic income and expense to avoid double taxation. Although
we believe that our estimates are reasonable, no assurance can
be given that the final tax outcome of these matters will not be
different than that which is reflected in our historical income
tax provisions and accruals. Such differences could have a
material effect on our income tax provision and net income in
the period in which such determination is made.



| |                                                         
| | --------------------------------------------------------
| | Impairment of Intangible Assets (including
    Goodwill)

We made acquisitions in the past that included a
significant amount of goodwill and other intangible assets.
Under accounting principles generally accepted, which were in
effect through December 31, 2001, these assets were
amortized over their estimated useful lives and were tested
periodically to determine if they were recoverable from
operating earnings on an undiscounted basis over their useful
lives.

Effective January 1, 2002, we adopted the
new rules on accounting for goodwill and other intangible assets
in accordance with Financial Accounting Standards Board
Statement No. 142, Goodwill and Other Intangible
Assets, (SFAS 142). Under the new rules, goodwill and
intangible assets deemed to have indefinite lives are no longer
amortized but are subject to annual impairment tests based on
estimated fair value in accordance with SFAS 142. Estimated
fair value is typically less than values based on undiscounted
operating earnings because fair value estimates include a
discount factor in valuing future

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cash flows. There are many assumptions and
estimates underlying the determination of an impairment loss.
Another estimate using different, but still reasonable,
assumptions could produce a different result. As discussed below
in Impairment of Goodwill and Impairment of
Intangible Assets and Fixed Assets, we recorded a non-cash
impairment loss during the year.


Taxation

We have significant operations and generate a
substantial portion of our taxable income in Ireland. In
general, the tax rate in Ireland on trading income, which is
12.5% as of January 1, 2003, is significantly lower than
U.S. tax rates. Moreover, our Irish taxable income derived
from software substantially developed in Ireland is taxed at a
10% effective tax rate. Therefore, our effective tax rate is
affected by the percentage of revenue that qualifies for such
favorable tax treatment. See Item 10.E.
Taxation. We anticipate that we will continue to
benefit from this tax treatment, although the extent of the
benefit could vary from period to period, and our tax treatment
may change in the future. Any variation in the amount of our
benefit from this tax treatment could have a material adverse
effect on our business, financial condition and results of
operations. See Item 3.D. Risk FactorsIf our
effective tax rate increases, our business and financial results
would be adversely impacted.

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Results of Operations

The following table sets forth certain operating
data as a percentage of total revenue for the periods indicated:

|                              |                                                                  |                          |        |        |       |      |       |       |       |  |     |      |       | 
|----------------------------- | ---------------------------------------------------------------- | ------------------------ | ------ | ------ | ----- | ---- | ----- | ----- | ----- |  | --- | ---- | ----- | 
|                              |                                                                  |                         
|                              |                                                                  | Year Ended December 31, 
|                              |                                                                  |                         
|                              |                                                                  | 2002                     |        | 2001   |       | 2000
|                              |                                                                  |                          |        |        |       |     
|Revenue:                      |                                                                  |                          |        |        |       |      |       |       |       |  |     |     
|                              | Product revenue                                                  |                          |        | 59.6   | %     |      |       | 65.4  | %     |  |     | 68.9 | %    
|                              | Service revenue                                                  |                          |        | 40.4   |       |      |       | 34.6  |       |  |     | 31.1 |      
|                              |                                                                  |                          |        |        |       |      |       |       |       |  |     |     
|                              |                                                                  | Total revenue            |        |        | 100.0 |      |       |       | 100.0 |  |     |      | 100.0 | 
|                              |                                                                  |                          |        |        |       |      |       |       |       |  |     |     
|Cost of revenue:              |                                                                  |                          |        |        |       |      |       |       |       |  |     |     
|                              | Cost of product revenue                                          |                          |        | 1.4    |       |      |       | 1.8   |       |  |     | 2.3  |      
|                              | Cost of service revenue                                          |                          |        | 20.6   |       |      |       | 19.3  |       |  |     | 17.3 |      
|                              |                                                                  |                          |        |        |       |      |       |       |       |  |     |     
|                              |                                                                  | Total cost of revenue    |        |        | 22.0  |      |       |       | 21.1  |  |     |      | 19.6  | 
|                              |                                                                  |                          |        |        |       |      |       |       |       |  |     |     
|                              |                                                                  | Gross profit             |        |        | 78.0  |      |       |       | 78.9  |  |     |      | 80.4  | 
|Operating expenses:           |                                                                  |                          |        |        |       |      |       |       |       |  |     |     
|                              | In-process research and development                              |                          |        |       |       |      |       | 2.0   |       |  |     |     |      
|                              | Research and development                                         |                          |        | 31.0   |       |      |       | 22.3  |       |  |     | 17.6 |      
|                              | Sales and marketing                                              |                          |        | 59.1   |       |      |       | 48.9  |       |  |     | 41.6 |      
|                              | General and administrative                                       |                          |        | 10.8   |       |      |       | 8.5   |       |  |     | 7.9  |      
|                              | Amortization of other non-current assets                         |                          |        | 8.2    |       |      |       | 7.8   |       |  |     | 1.8  |      
|                              | Amortization of goodwill                                         |                          |        |       |       |      |       | 34.0  |       |  |     | 3.2  |      
|                              | Restructuring                                                    |                          |        | 16.9   |       |      |       | 3.1   |       |  |     |     |      
|                              | Impairment of goodwill                                           |                          |        | 224.6  |       |      |       |      |       |  |     |     |      
|                              | Impairment of intangible assets and fixed assets                 |                          |        | 26.3   |       |      |       |      |       |  |     |     |      
|                              | Settlement of litigation                                         |                          |        |       |       |      |       |      |       |  |     | 0.9  |      
|                              |                                                                  |                          |        |        |       |      |       |       |       |  |     |     
|                              |                                                                  | Total operating expenses |        |        | 376.9 |      |       |       | 126.6 |  |     |      | 73.0  | 
|                              |                                                                  |                          |        |        |       |      |       |       |       |  |     |     
|Income (loss) from operations |                                                                  |                          | (298.9 | )      |       |      | (47.7 | )     |       |  | 7.4 |     
|                              | Interest income, net                                             |                          |        | 0.9    |       |      |       | 1.4   |       |  |     | 2.7  |      
|                              | Net exchange loss                                                |                          |        | (0.4   | )     |      |       | (0.3  | )     |  |     | (0.2 | )    
|                              | Gain on sale of investment and other income                      |                          |        |       |       |      |       | 0.1   |       |  |     | 1.2  |      
|                              |                                                                  |                          |        |        |       |      |       |       |       |  |     |     
|                              | Income (loss) before provision for (benefit of)
    income taxes |                          |        | (298.4 | )     |      |       | (46.5 | )     |  |     | 11.1 |      
|                              | Provision for (benefit of) income taxes                          |                          |        | 1.3    |       |      |       | (0.3  | )     |  |     | 1.8  |      
|                              |                                                                  |                          |        |        |       |      |       |       |       |  |     |     
|                              | Net income (loss) available to Ordinary
    Shareholders         |                          |        | (299.7 | )%    |      |       | (46.2 | )%    |  |     | 9.3  | %    
|                              |                                                                  |                          |        |        |       |      |       |       |       |  |     |     
|Gross profit:                 |                                                                  |                          |        |        |       |      |       |       |       |  |     |     
|                              | Product (as a percentage of product revenue)                     |                          |        | 97.7   | %     |      |       | 97.3  | %     |  |     | 96.7 | %    
|                              | Service (as a percentage of service revenue)                     |                          |        | 48.9   | %     |      |       | 44.1  | %     |  |     | 44.3 | %    

Year Ended December 31, 2002 Compared to
Year Ended December 31, 2001



| |              
| | -------------
| | Total Revenue

Total revenue decreased by 31.8% to
$123.2 million in 2002 from $180.7 million in 2001.
Total revenue from customers located outside the United States
represented 38.8% of total revenue in 2002 and 33.8% of total
revenue in 2001, or $47.8 million and $61.0 million,
respectively.

Product Revenue.Product revenue decreased by 37.8% to
$73.5 million, or 59.6% of total revenue in 2002, compared
to $118.2 million, or 65.4% of total revenue, in 2001. The
decrease in product revenue was primarily attributable to
decreased sales of our products as a result of general economic
conditions affecting the software market as a whole.

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Service Revenue.We
provide professional services, consisting of consulting and
training, technical support for all of our products and, to a
limited extent, product customization and enhancement.
Consulting services provided by us include training and
assisting customers with the effective use and deployment of our
products. Customer support generally includes support by means
of telephone, e-mail, facsimile and customer on-site assistance
as well as access to certain product upgrades. Service revenue
decreased by 20.4% to $49.8 million, or 40.4% of total
revenue in 2002, from $62.5 million, or 34.6% of total
revenue, in 2001. The decrease in service revenue was
principally due to general economic conditions affecting the
software market as a whole as well as decreased consulting
revenue resulting from our efforts to develop and leverage our
relationships with system integrators.



| |                
| | ---------------
| | Cost of Revenue

Cost of Product Revenue.Cost of product revenue consists
primarily of product media and duplication, manuals, packaging
materials, shipping and handling expenses, third-party royalties
and, to a lesser extent, the salaries and benefits of certain
personnel and related operating costs of computer equipment.
Cost of product revenue was $1.7 million, resulting in a
product gross margin of 97.7%, in 2002 compared to
$3.2 million, resulting in a product gross margin of 97.3%,
in 2001. The increase in product gross margin was primarily
attributable to a decrease in third-party royalties as a
percentage of product revenue.

Cost of Service
Revenue.Cost of service revenue
consists primarily of personnel costs for consultancy, training,
customer support, product customization and enhancement, and
related operating costs of computer equipment and non-billable
travel expenses. Cost of service revenue was $25.5 million,
resulting in a service gross margin of 48.9%, in 2002 compared
to $34.9 million, resulting in a service gross margin of
44.1%, in 2001. The increase in service gross margin was
primarily attributable to efficiencies in our service delivery
structure.



| |                   
| | ------------------
| | Operating Expenses

In-process Research and
Development.In 2001, in connection
with our acquisition of Netfish, we recorded a $3.6 million
charge, or 2.0% of total revenue, to account for acquired
in-process research and development, for which technological
feasibility had not been established and for which alternative
future uses did not exist. There were no events that required a
charge to in-process research and development in 2002.

Research and Development.Research and development expenses
consist primarily of salaries and benefits of research and
development personnel, costs of third-party contractors,
personnel-related overhead allocation, depreciation expenses
arising from the acquisition of computer equipment, software
license fees, and related indirect costs. Research and
development expenses were $38.3 million, or 31.0% of total
revenue, in 2002 compared to $40.3 million, or 22.3% of
total revenue, in 2001. The decrease in research and development
expenses in dollar amount was primarily the result of cost
reduction measures and restructuring plans implemented by
management in 2002 (as described below in
Restructuring) with the increase in research and
development expenses as a percentage of total revenue due to
declining revenues. We expect that research and development
expenses will decrease in dollar amount in 2003.

Sales and Marketing.Sales and marketing expenses consist
primarily of salaries, sales commissions and benefits earned by
sales and marketing personnel, personnel-related overhead
allocation, travel, entertainment, advertising and promotional
expenses, and related indirect costs. Sales and marketing
expenses were $72.9 million, or 59.1% of total revenue, in
2002 compared to $88.4 million, or 48.9% of total revenue,
in 2001. The decrease in sales and marketing expenses in dollar
amount was primarily the result of compensation expense related
to revenue, cost reduction measures and restructuring plans
implemented by management in 2002 (as described below in
Restructuring) with the increase in sales and
marketing expenses as a percentage of total revenue due to
declining revenues. We expect that sales and marketing expenses
will decrease in dollar amount in 2003.

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General and
Administrative.General and
administrative expenses consist primarily of salaries and
benefits of financial, administrative and management personnel,
general office administration expenses (rent and occupancy,
telephone and other office supply costs), and related indirect
costs. General and administrative expenses also include
professional fees and depreciation. General and administrative
expenses were $13.3 million, or 10.8% of total revenue, in
2002 compared to $15.3 million, or 8.5% of total revenue,
in 2001. The decrease in general and administrative expenses in
dollar amount was primarily the result of cost reduction
measures and restructuring plans implemented by management in
2002 (as described below in Restructuring) with the
increase in general and administrative expenses as a percentage
of total revenue due to declining revenues. We expect that
general and administrative expenses will decrease in dollar
amount in 2003.

Amortization of Other Non-Current
Assets.Amortization of other
non-current assets consists of the amortization of purchased
technologies acquired by IONA, which have reached technological
feasibility. Effective January 1, 2002, we adopted the new
rules on accounting for goodwill and other intangible assets in
accordance with SFAS 142, which changed the accounting for
goodwill and intangible assets with indefinite lives, but
required intangible assets such as purchased technologies to
continue to be amortized over their useful economic lives. Upon
adoption of SFAS 142 in January 2002, the net carrying
amount of assembled workforce of $6.9 million was
reclassifed from other non-current assets to goodwill.
SFAS 142 requires intangible assets that are amortizable to
be reviewed for impairment in accordance with Financial
Accounting Standards Board Statement No. 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets, (SFAS 144).

In October 2002, we completed the assessment of
the carrying value of purchased technologies and the relevant
impairment tests as required by SFAS 144, which resulted in
a non-cash impairment charge of $28.6 million, representing
the amount by which the carrying value exceeded the fair value
of purchased technologies. Amortization of other non-current
assets was $10.1 million, or 8.2% of total revenue in 2002,
compared to $14.2 million, or 7.8% of total revenue in
2001. The decrease in amortization of other non-current assets
is primarily attributable to the reduction in the carrying value
of purchased technologies resulting from the impairment charge
recorded in October 2002. The increase in amortization of other
non-current assets as a percentage of total revenue is due to
declining revenues.

Amortization of Goodwill.Amortization of goodwill, including
assembled workforce, arose from acquisitions in previous years.
Effective January 1, 2002, we adopted the new rules on
accounting for goodwill and other intangible assets in
accordance with SFAS 142. Upon adoption of SFAS 142,
the net carrying amount of assembled workforce of
$6.9 million was reclassifed from other non-current assets
to goodwill. Under the new rules, goodwill and intangible assets
deemed to have indefinite lives are no longer amortized but are
subject to annual impairment tests in accordance with
SFAS 142. Amortization of goodwill was nil in 2002 compared
to $61.4 million or 34.0% of total revenue in 2001, as a
result of the adoption of SFAS 142 on January 1, 2002.

Restructuring.In
2002, our management and board of directors approved
restructuring plans, which included consolidation of excess
facilities, a reduction in workforce and other related costs.
Total accrued restructuring costs of $20.8 million were
recorded related to these initiatives. Restructuring expenses
included approximately $12.3 million representing the cost
of involuntary employee separation and related costs for
approximately 300 employees worldwide. Employee separations
affected the majority of business functions, job classes and
geographies, with most of the reductions in sales and marketing,
engineering and professional services functions in the United
States and Europe. In addition, the restructuring plans included
costs totaling approximately $8.1 million associated with
the closure and consolidation of office space, principally in
the United States and approximately $0.4 million of other
related costs. Cash outlays associated with restructuring plans
initiated in 2002 totaled approximately $11.2 million
during 2002, including approximately $9.3 million in
severance and related benefits paid to employees worldwide,
$1.5 million in facility closure costs and
$0.4 million in other costs. Amounts of restructuring costs
remaining at December 31, 2002 of $9.6 million relate
to remaining separation and facility closure and consolidation
costs with all cash outlays expected to be completed by the end
of 2006.

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In 2001, our management and board of directors
approved restructuring plans, which included initiatives to
integrate the operations of the recently acquired companies,
consolidate duplicative facilities and reduce overhead. Total
accrued restructuring costs of $5.7 million were recorded.
Restructuring expenses consist of involuntary employee
separation benefits related to the reduction of approximately
195 employees worldwide and costs associated with the closure
and consolidation of office space principally in the United
States. In 2001, we substantially completed these restructuring
plans, resulting in payments of $3.7 million in severance
and related benefits to employees worldwide and approximately
$0.7 million in facility closure costs. In 2002, cash
outlays related to the 2001 restructuring plan totaled
approximately $0.7 million. Amounts remaining at
December 31, 2002 of $0.6 million relate to additional
facility closure and consolidation costs with cash outlays
expected to be completed by the end of 2004.

Impairment of Goodwill.Effective January 1, 2002, we
adopted the new rules on accounting for goodwill and other
non-current assets in accordance with SFAS 142. There was
no impairment of goodwill upon adoption of SFAS 142. In
October 2002, as required by SFAS 142, we completed the
annual impairment test and assessment of the carrying value of
goodwill. As a result of unfavorable market conditions and a
decline in our market capitalization, this assessment resulted
in a non-cash impairment charge of $276.8 million,
equivalent to the carrying value of goodwill at October 1,
2002. No impairment of goodwill occurred in 2001.

Impairment of Intangible Assets and Fixed
Assets.In 2002, we recorded a
$32.3 million impairment of intangible assets and fixed
assets. In October 2002, in accordance with SFAS 142, we
completed the assessment of the carrying value of purchased
technologies and the relevant impairment tests as required by
SFAS 144. As a result of unfavorable market conditions and
changes in IONAs product strategy, we recorded a non-cash
impairment charge of $28.6 million, representing the amount
by which the carrying value exceeded the fair value of purchased
technologies. We also recorded a $3.7 million charge for
the fixed assets and related costs of which $1.6 million
was primarily attributable to our implementation of a new sales
force automation system that replaced an existing system. The
remainder of the write-offs relate to fixed assets no longer in
use in 2002, resulting in the reduction of their net book value
to nil. No impairment of intangible assets or fixed assets
occurred in 2001.



| |                     
| | --------------------
| | Loss from Operations

We generated an operating loss of
$368.3 million, or 298.9% of total revenue, in 2002
compared to an operating loss of $86.3 million, or 47.7% of
total revenue, in 2001. The operating loss in 2002 reflects the
decrease in total revenue primarily as a result of general
economic conditions affecting the software market as a whole and
the non-cash impairment loss incurred during the year.



| |                  
| | -----------------
| | Other Income, Net

Interest income, net, primarily represents
interest earned on cash and investment balances. Interest
income, net, was $1.1 million in 2002 compared to
$2.5 million in 2001. The decrease in interest income, net,
was due primarily to declining interest rates during 2002.

Net exchange loss was $0.5 million in 2002
compared to $0.5 million in 2001. The net exchange loss for
2002 was primarily due to the weakness of the dollar against the
euro.

Gain on sale of investment and other income was
$0.2 million in 2001, as a result of the sale of the
remaining shares of our investment in a publicly-owned company
in 2001. There were no sale of investments in 2002.



| |             
| | ------------
| | Income Taxes

Income taxes were $1.5 million in 2002
compared to an income tax benefit of $0.6 million in 2001.
Deferred tax assets were not recognized in respect of the net
operating loss carryforwards in either year because realization
was not sufficiently assured.

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If tax authorities were to challenge successfully
the manner in which profits are recognized within IONA or, more
generally, the jurisdiction in which income is subject to
taxation, our prevailing effective tax rate could increase and
our cash flows and results of operations could be materially
adversely affected.

At December 31, 2002, we had a net operating
loss carryforward of approximately $103.6 million for
U.S. federal income tax purposes, including approximately
$65.0 million pre-acquisition losses from the Netfish
acquisition, which will expire in tax years 2011 through 2022 if
not previously utilized. At December 31, 2002, we also had
net operating loss carryforwards of approximately
$4.5 million and $2.0 million for Irish and Australian
tax purposes, respectively, both of which carry forward
indefinitely. At December 31, 2001, we had a net operating
loss carryforward of approximately $42.0 million for
U.S. federal income tax purposes. At December 31,
2001, we had a net operating loss carryforward of approximately
$2.0 million for Australian tax purposes, which carries
forward indefinitely.

Year Ended December 31, 2001 Compared to
Year Ended December 31, 2000



| |              
| | -------------
| | Total Revenue

Total revenue increased by 18.1% to
$180.7 million in 2001 from $153.1 million in 2000.
Total revenue from customers located outside the United States
represented 33.8% of total revenue in 2001 and 32.6% of total
revenue in 2000, or $61.0 million and $50.0 million,
respectively.

Product Revenue.Product revenue increased by 12.0% to
$118.2 million, or 65.4% of total revenue, in 2001 compared
to $105.5 million, or 68.9% of total revenue, in 2000. The
increase in product revenue was primarily attributable to our
continued efforts to develop and market our product set and to
expand our enterprise sales capability, offset in part by a
reduced demand for our products in the third and fourth quarters
of 2001 due to general economic conditions and the events of
September 11, 2001.

Service Revenue.Service revenue increased by 31.6% to
$62.5 million, or 34.6% of total revenue, in 2001 from
$47.5 million, or 31.1% of total revenue, in 2000. The
increase in service revenue was principally due to the increase
of our enterprise sales combined with increasing professional
service and support revenues associated with a growing customer
base.



| |                
| | ---------------
| | Cost of Revenue

Cost of Product Revenue.Cost of product revenue was
$3.2 million, resulting in a product gross margin of 97.3%,
in 2001 compared to $3.5 million, resulting in a product
gross margin of 96.7%, in 2000. The increase in product gross
margin was primarily attributable to shipping and material
efficiencies and lower third-party royalty expenses as a
percentage of product revenue.

Cost of Service
Revenue.Cost of service revenue was
$34.9 million, resulting in a service gross margin of
44.1%, in 2001 compared to $26.5 million, resulting in a
service gross margin of 44.3%, in 2000. The decrease in service
gross margin was primarily attributable to an increase in
service personnel to support our expanding customer base.



| |                   
| | ------------------
| | Operating Expenses

In-process Research and
Development.In connection with our
acquisition of Netfish, we recorded a $3.6 million charge,
or 2.0% of total revenue, in 2001 to account for acquired
in-process research and development, for which technological
feasibility had not been established and for which alternative
future uses did not exist. There were no events that required a
charge to in-process research and development in 2000.

Research and Development.Research and development expenses were
$40.3 million, or 22.3% of total revenue, in 2001 compared
to $26.9 million, or 17.6% of total revenue, in 2000. The
increase in research and development expenses both in dollar
amount and as a percentage of total revenue was primarily the
result of an increase in personnel and the development of our
Orbix E2A software products.

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Sales and Marketing.Sales and marketing expenses were
$88.4 million, or 48.9% of total revenue, in 2001 compared
to $63.7 million, or 41.6% of total revenue, in 2000. The
increase in sales and marketing expenses both in dollar amount
and as a percentage of total revenue was due to continuing
investment in direct enterprise sales capability as well as
increased investment in marketing our product set.

General and
Administrative.General and
administrative expenses also include professional fees and
depreciation. General and administrative expenses were
$15.3 million, or 8.5% of total revenue, in 2001 compared
to $12.0 million, or 7.9% of total revenue, in 2000. The
increase in general and administrative expenses both in dollar
amount and as a percentage of total revenue was due primarily to
the integration of Netfish.

Amortization of Other Non-Current Assets.Amortization of other non-current
assets was $14.2 million, or 7.8% of total revenue, in 2001
compared to $2.9 million, or 1.8% of total revenue, in
2000. The increase in amortization of other non-current assets
is attributable to the acquisitions of Netfish in May 2001 and
OOC in February 2001 as well as purchases of other technologies
in 2001.

Amortization of
Goodwill.Amortization of goodwill was
$61.4 million, or 34.0% of total revenue, in 2001 compared
to $5.0 million, or 3.2% of total revenue, in 2000. The
increase in amortization of goodwill is attributable to the
acquisitions of Netfish in May 2001 and OOC in February 2001, as
well as other acquisitions in 2000 and 2001.

Restructuring.In
2001, our management and board of directors approved
restructuring plans, which included initiatives to integrate the
operations of the recently acquired companies, consolidate
duplicative facilities and reduce overhead. Total accrued
restructuring costs of $5.7 million were recorded.
Restructuring expenses consist of involuntary employee
separation benefits related to the reduction of approximately
195 employees worldwide and costs associated with the closure
and consolidation of office space principally in the United
States. In 2001, we substantially completed these restructuring
plans, resulting in payments of $3.7 million in severance
and related benefits to employees worldwide and approximately
$0.7 million in facility closure costs. At
December 31, 2001, $1.3 million related to additional
facility closure and consolidation costs remained to be paid,
with cash outlays expected to be completed by the end of 2004.
There were no events that required a charge to restructuring in
2000.

Settlement of Litigation.In March 2000, RSA Securities, Inc.
(RSA) and the Massachusetts Institute of Technology filed
suit against us alleging that we breached the terms of our
patent license agreement with RSA. In June 2000, we entered into
a confidential settlement agreement with RSA to settle all
outstanding claims among the parties. Costs associated with the
settlement of this litigation amounted to $1.4 million.
There were no costs associated with the settlement of this
litigation incurred in 2001, and we do not believe that any
additional payments will be due in connection with this
settlement.



| |                              
| | -----------------------------
| | Income (Loss) from Operations

We generated an operating loss of
$86.3 million, or 47.7% of total revenue, in 2001 compared
to an operating profit of $11.3 million, or 7.4% of total
revenue, in 2000. The amount of operating income in 2001
reflects our consistent investment in our direct enterprise
sales capability, continued efforts to develop and market our
product set and the integration of Netfish, as well as general
economic conditions and more cautious IT spending in the second
half of 2001.



| |                  
| | -----------------
| | Other Income, Net

Interest income, net, primarily represents
interest earned on cash and investment balances. Interest
income, net was $2.5 million in 2001 compared to
$4.1 million in 2000. The decrease in interest income, net
was due primarily to lower average balances held in these
accounts as well as declining interest rates during 2001.

Net exchange loss was $0.5 million in 2001
compared to $0.4 million in 2000. The net exchange loss for
2001 was primarily due to the strength of the dollar against the
Japanese yen.

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Gain on sale of investment and other income was
$0.2 million in 2001 compared to $1.9 million in 2000.
During 2000, we sold over 75% of our investment in a
publicly-owned company and sold the remaining shares in the
first quarter of 2001.



| |             
| | ------------
| | Income Taxes

Income tax benefit was $568,000 in 2001 compared
to income tax of $2.8 million in 2000. Deferred tax assets
were not recognized in respect of the net operating loss
carryforwards in either year because realization was not
sufficiently assured.

If tax authorities were to challenge successfully
the manner in which profits are recognized within IONA or, more
generally, the jurisdiction in which income is subject to
taxation, our prevailing effective tax rate could increase and
our cash flows and results of operations could be materially
adversely affected.

At December 31, 2001, we had a net operating
loss carryforward of approximately $42.0 million for
U.S. federal income tax purposes. At December 31,
2001, we had a net operating loss carryforward of approximately
$2.0 million for Australian tax purposes, which carries
forward indefinitely. At December 31, 2000, we had a net
operating loss carryforward of approximately $24.5 million
for U.S. federal income tax purposes. At December 31,
2000, we had a net operating loss carryforward of approximately
$1.9 million for Australian tax purposes, which carries
forward indefinitely.

Exposure to Currency Fluctuations

Our consolidated financial statements are
prepared in U.S. dollars, our functional currency. A
percentage of our revenues, expenses, assets and liabilities are
denominated in currencies other than our functional currency.
Fluctuations in exchange rates may have a material adverse
effect on our results of operations, particularly our operating
margins, and could also result in exchange gains and losses. As
a result of currency fluctuations, we recognized exchange losses
of $0.5 million in both 2002 and 2001. We cannot accurately
predict the impact of future exchange rate fluctuations on our
results of operations. Prior to 1999, we had undertaken
transactions to hedge the risks associated with fluctuations in
exchange rates of the Irish pound and the euro to the dollar. In
the future, we may undertake transactions to hedge the risks
associated with fluctuations in exchange rates of the euro and
other currencies to the dollar. Any hedging techniques
implemented by us may not be successful and exchange rate
fluctuations may materially adversely affect our business,
financial condition and results of operations. See also
Item 11 Quantitative and Qualitative Disclosure About
Market Risk. We had no derivative or hedging transactions
in 2002.




B.     Liquidity
and Capital Resources

In 2002, we received approximately
$66.0 million in net proceeds from the sale of our ordinary
shares, which included approximately $63.4 million from a
public offering of 4,600,000 American Depositary Shares (ADSs)
and the remaining proceeds from shares issued pursuant to the
1999 Employee Share Purchase Plan and employee share option
schemes.

Net cash (used in) provided by operating
activities was ($66.8) million in 2002, $38.1 million
in 2001 and $24.0 million in 2000 which includes
investments in high quality, marketable securities (net of sales
and maturities) of $33.8 million in 2002, the net sale of
marketable securities of $34.7 million in 2001 and
investments in high quality, marketable securities (net of sales
and maturities) of $4.3 million in 2000. Net cash provided
by financing activities which includes the issuance of shares
(net of issuance costs) was $66.0 million in 2002,
$7.6 million in 2001 and $22.6 million in 2000.

During 2002, we:



| |   |                                                                                                                                                   
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------
| |  | invested $5.2 million for the purchase of
    furniture, fixtures and equipment, for further investment in our
    management information systems;
|
| |  | invested $0.2 million in technology which
    had reached technological feasibility.                                                              

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We are obligated to make average lease payments
of approximately $1.3 million per year through 2023
(subject to an option to exit in 2013) with respect to our
Dublin, Ireland facility; approximately $1.9 million per
year through 2006 with respect to our
U.S. subsidiarys Waltham, Massachusetts facility;
approximately $0.5 million per year through 2006 with
respect to our U.S. subsidiarys San Mateo,
California facility; approximately $2.2 million per year
through 2006 with a majority ending in 2005 with respect to our
U.S. subsidiarys Santa Clara, California
facility; approximately $0.3 million per year through 2004
with respect to our U.S. subsidiarys Reston, Virginia
facility; approximately $0.2 million per year through 2014
(subject to an option to exit in 2009) with respect to our
Reading, U.K. facility; approximately $0.2 million per year
through 2004 with respect to our Tokyo, Japan facility;
approximately $0.2 million per year through 2007 with
respect to our New York, New York facility; approximately
$0.1 million per year through 2005 with respect to our
McLean, Virginia facility; and approximately $0.1 million
per year through 2009 (subject to an option to exit in 2004)
with respect to our Frankfurt, Germany facility.

We believe that our current sources of liquidity
are sufficient to finance our operations for at least the next
twelve months. The foregoing estimate of the period of time
through which our current sources of liquidity will be
sufficient to finance our operations is a forward-looking
statement that involves risks and uncertainties, and actual
results could vary.

It is possible that, when needed, adequate
funding may not be available to us or, if available, may not be
available on terms favorable to us. In addition, we may decide
to issue additional equity or debt securities for such funding,
which could dilute the ownership of existing shareholders. Any
shortfall in our capital resources could result in our limiting
the introduction or marketing of new products and services,
which could have a material adverse effect on our business,
financial condition and results of operations.




C.     Research
and Development, Patents and Licenses, etc.

For a discussion of our research and development
activities, patents and licenses, please see Item 4.B.
Business OverviewProduct Development and
Business OverviewPatents and Proprietary
Technology.

The total amount spent in the last three years on
IONA-sponsored research and development activities is
$105.5 million excluding intangible assets and in-process
research and development. Of that amount, $38.3 million was
spent in 2002, $40.3 million was spent in 2001 and
$26.9 million was spent in 2000.




D.     Trend
Information

For information about our expectations regarding
our future operating expenses and capital resources, please see
Items 5.A. Operating Results and
5.B. Liquidity and Capital Resources.

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|        |                                               
|------- | ----------------------------------------------
|Item 6. | DIRECTORS, SENIOR MANAGEMENT AND
    EMPLOYEES

A.     Directors
and Senior Management

The names of our executive officers and directors
as of April 1, 2003, and certain biographical information
furnished by them, are set forth below.

|                     |  |     |    |          |  |                                                
|-------------------- |  | --- | -- | -------- |  | -----------------------------------------------
|Name                 |  | Age |    | Position
|                     |  |     |    |         
|Christopher J. Horn |  |     | 46 |          |  | Non-Executive Chairman of the Board            
|Barry S. Morris+     |  |     | 39 |          |  | Chief Executive Officer and Director           
|Steven Fisch         |  |     | 56 |          |  | Chief Operating Officer                        
|Daniel Demmer        |  |     | 38 |          |  | Chief Financial Officer                        
|Eric Newcomer        |  |     | 48 |          |  | Chief Technology Officer                       
|Sean Baker           |  |     | 44 |          |  | Chief Corporate Scientist and Director         
|David James          |  |     | 50 |          |  | Executive Vice President, Corporate Development
|Susan H. Alexander   |  |     | 46 |          |  | General Counsel and Secretary                  
|William Burgess      |  |     | 56 |          |  | Non-Executive Director                         
|John Conroy        |  |     | 43 |          |  | Non-Executive Director                         
|Ivor Kenny*         |  |     | 72 |          |  | Non-Executive Director                         
|James D. Maikranz   |  |     | 56 |          |  | Non-Executive Director                         
|Kevin Melia*        |  |     | 55 |          |  | Non-Executive Director                         
|Francesco Violante*  |  |     | 52 |          |  | Non-Executive Director                         



---



|  |                          
|- | -------------------------
| | Member of Audit Committee



|  |                                 
|- | --------------------------------
|* | Member of Compensation Committee



|  |                               
|- | ------------------------------
| | Member of Nominating Committee



|  |                                             
|- | --------------------------------------------
|+ | Ex OfficioMember of
    Nominating Committee

Christopher J. Hornhas served as our Chairman of the Board since our inception.
Dr. Horn co-founded IONA in March 1991. He was the initial
developer of IONAs Orbix product and served as our
President and Chief Executive Officer from our inception until
May 2000. Dr. Horn received his Doctorate in Computer
Science from Trinity College, Dublin. Dr. Horn is a board
member of CR2 Limited, a provider of banking and card payment
solutions, and Sepro Telecom International Limited, a billing
software company. He is a member of the advisory board of Delta
Partners, a venture capital company, and of HotOrigin, an
early-stage investment and specialist consultancy company.
Dr. Horn is Chairman of the Irish Management
Institute (IMI) in Dublin and Chairman of the Ireland China
Association; and serves as a director for a number of charities
including the Irish Brain Research Foundation, the Community
Foundation for Ireland, UNICEF Ireland and the Trinity
Foundation. Dr. Horn received an honorary Doctor of Science
from Trinity College, Dublin and the Gold Medal for Industry
from the Industry and Commerce Committee of the Royal Dublin
Society in 2001.

Barry S. Morrishas
served as our Chief Executive Officer since May 2000. Since
joining IONA in 1994, Mr. Morris has served as our Chief
Operating Officer from April 1999 to May 2000, as our Executive
Vice President, Operations from July 1998 to April 1999, as our
Senior Vice President, Product Development from September 1996
until July 1998, as our Vice President, Business Development
from December 1995 until September 1996, as our Vice President,
Product Management from April 1995 until December 1995, and as
our Channel Manager and Business Development Manager from
November 1994 until April 1995. Prior to joining IONA,
Mr. Morris was a consultant at Digital Equipment
Corporation and worked at Lotus Development Corporation, Protek
Electronics Limited and Leading Technology Inc. Mr. Morris
currently serves as a director of Agama Energy, an energy
services company in South Africa. Mr. Morris was awarded an
Honorary Doctorate in Business Administration (DBA)
conferred by the International Management Centres
Association (IMCA) in August of 2001. He received his B.A.
in Engineering Science from New College, Oxford University.

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##### Table of Contents



Steven Fischhas
served as our Chief Operating Officer since August 2002. Prior
to joining IONA, Mr. Fisch served as the Chief Executive
Officer of Virtual Access Networks from June 2001 to June 2002.
From March 2000 to March 2001, Mr. Fisch served as
President of Attunity Inc. From August 1994 to March 2000,
Mr. Fisch served as President of ISG, Inc. He received his
B.S. in Electrical Engineering from Tufts University and his
M.B.A. from Temple University.

Daniel Demmerhas
served as our Chief Financial Officer since May 2000.
Mr. Demmer served as our Vice President Finance and
Treasurer from February 1998 until May 2000. From 1987 to 1997,
Mr. Demmer worked at Digital Equipment Corporation in a
variety of positions including Director of Corporate Financial
Planning and Analysis and Assistant Corporate Controller.
Mr. Demmer holds a B.S. in Finance from the University of
Maryland.

Eric Newcomerhas
served as Chief Technology Officer at IONA since April 2002.
From November 1999 to March 2002, he served as our Vice
President of Engineering, Web Services Integration Products.
Before joining IONA, Mr. Newcomer was a Senior Member of
Technical Staff and Manager of the COM+ Expertise Center,
Enterprise Application Server Engineering, NT Program Office, at
Digital Equipment Corporation/ Compaq Computer from October 1997
to October 1999. Mr. Newcomer is a member of the XML
Protocols and Web Services Architecture working groups at the
W3C and IONAs Advisory Committee representative to
UDDI.org. Mr. Newcomer is the author of Understanding
Web Services published in May 2002 by Addison Wesley,
co-author of Principles of Transaction Processing
published in January 1997 by Morgan Kaufman and the author of
numerous whitepapers and articles. Mr. Newcomer received
his B.A. in American Studies from Antioch College, with a minor
in computer science.

Sean Bakerhas
served as our Chief Corporate Scientist since September 2001.
Dr. Baker co-founded IONA in March 1991, and served as our
Senior Vice President from March 1991 until 1996, as our
Executive Vice President, Customer Services from 1996 until
1999, as our Chief Scientific Officer from 1999 until November
2000 and as our Executive Vice President and Chief Technology
Officer from November 2000 until September 2001. Dr. Baker
currently serves as a director of Telekinesys Research Limited.
From 1981 to 1994, Dr. Baker held a tenured post in the
Computer Science Department at Trinity College, Dublin, where he
received his Doctorate in computer science.

David Jameshas
served as our Executive Vice President, Corporate Development
since May 2000. Mr. James served as our Senior Vice
President and Chief Financial Officer from July 1997 until May
2000. He also held the position of Treasurer from July 1997 to
February 1998. Prior to joining IONA, Mr. James was Vice
President Finance and Treasurer of Marcam Corporation, a
provider of enterprise resource planning software, from February
1995 until July 1997 and a financial analyst, manager and
controller for Digital Equipment Corporation from 1981 to 1995.
Mr. James received his B.A. from the University of
Pennsylvania and holds a M.B.A. from the Colgate Darden School
at the University of Virginia.

Susan H. Alexanderhas served as our General Counsel and Secretary since June 2001.
Prior to joining IONA, Ms. Alexander was counsel for Cabot
Corporation, a specialty chemical company, from January 1995
until June 2001. From 1990 to 1995, Ms. Alexander was a
partner with the law firm of Hinckley Allen & Snyder of
Boston, Massachusetts. Prior to joining Hinckley
Allen & Snyder, Ms. Alexander was a partner with
the law firm of Fine & Ambrogne of Boston.
Ms. Alexander received her J.D. from Boston University and
received her B.A. from Wellesley College.

William Burgesshas
served as a non-executive director since January 2003. From 1991
to 2002, Mr. Burgess served as Managing Director of IBM
Ireland, an Irish subsidiary of IBM Corporation.
Mr. Burgess joined IBM in 1967 and held a variety of
positions in sales, technology and management. Mr. Burgess
also serves as a director of Ulster Bank Limited and Ulster Bank
Ireland Limited, wholly-owned subsidiaries of the Royal Bank of
Scotland. Mr. Burgess holds a degree in engineering from
Trinity College, Dublin.

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##### Table of Contents



John Conroyhas
served as a non-executive director since May 2001.
Mr. Conroy has served as Chief Executive Officer and
director of Merrion Capital Group Ltd., a Dublin-based stock
brokerage and corporate finance company, since 1999.
Mr. Conroy also serves as a director for several Merrion
Capital Group affiliates, Parima Limited and eircom plc,
an Irish communications company. Prior to joining Merrion
Capital Group, Mr. Conroy was Head of Equities for NCB
Stockbrokers Limited from 1997 to 1999. Mr. Conroy is a
chartered engineer and holds an M.B.A. from Trinity College,
Dublin.

Ivor Kennyhas
served as a non-executive director since August 1999.
Dr. Kenny, as a Senior Research Fellow at University
College Dublin, works with international organizations on their
business strategies. He is also the author of eleven books on
strategic leadership. He is a director of Independent News and
Media PLC and a former Chairman of Smurfit Paribas Bank and of
Odyssey PLC. He was a director of Kerry Group PLC until May
2001. He is also President of the International Management
Centres. He was Director General of the Irish Management
Institute from 1962 to 1983, Chancellor of the International
Academy of Management from 1982 to 1987, Executive-in-Residence
at Indiana University in 1986 and a Fulbright Fellow at American
universities.

James Maikranzhas
served as a non-executive director since July 2001.
Mr. Maikranz served J.D. Edwards, a provider of
collaborative software solutions, from October 1998 to March
2001, most recently as senior vice president of worldwide sales.
Prior to joining J.D. Edwards, Mr. Maikranz served SAP, a
provider of e-business software solutions, from January 1992
until September 1998, most recently as senior vice president of
sales. Mr. Maikranz has also served in senior executive
positions for Computer Application Specialists, an oil and gas
industry firm, and Info Services, a provider of HR software
applications. Mr. Maikranz was a founder and member of the
Board of Directors of Chaptec Company and Splash Pond.
Mr. Maikranz has also been an advisory board member for I2
and is currently on the board of directors for Healy-Hudson
Corporation, Swift Rivers, Stratascope and Lombardi Software.

Kevin Meliahas
served as a non-executive director since May 1994.
Mr. Melia served as Chairman of Manufacturers
Services Limited, an electronics manufacturing outsourcing
company from June 1994 to January 2003. From June 1994 to
January 2002, Mr. Melia served as Chief Executive Officer
of Manufacturers Services Limited. From January 1992 to
June 1994, he was Chief Financial Officer of Sun Microsystems, a
workstation manufacturer. In addition, from January 1993 until
February 1994, Mr. Melia was President of Sun Microsystems
Computer Co., a division of Sun Microsystems. He is also a
non-executive director of Horizon Technology Group PLC and
Lightbridge, Inc.

Francesco Violantehas served as a non-executive director since May 2001. Since
October 2000, Mr. Violante has served as Regional Vice
President of EDS Europe. Mr. Violante served as Senior Vice
President at SITA, a global airline reservation systems company
from October 1999 to September 2000, and as Chief Information
Officer of Telecom Italia from September 1998 to October 1999.
Mr. Violante has also held numerous executive management
positions at Compaq Europe and Digital Equipment Corporation.




B.     Compensation

The following table sets forth information
concerning the aggregate compensation paid to or accrued on
behalf of our directors and executive officers as a group for
the fiscal year ended December 31, 2002:

|                                                                 |  |            |           |          |  |                        |         |                        |  |  |           |  |  |   |        | 
|---------------------------------------------------------------- |  | ---------- | --------- | -------- |  | ---------------------- | ------- | ---------------------- |  |  | --------- |  |  | - | ------ | 
|                                                                 |  |            |           |          |  |                       
|                                                                 |  |            |           |          |  | Long-Term Compensation
|                                                                 |  |            |           |          |  |                       
|                                                                 |  |            |           |          |  | Number of              |         |                       
|                                                                 |  | Salary and |           |          |  | Securities Underlying  |         | Pension Retirement and
|                                                                 |  | Fees($)    |           | Bonus($) |  | Options(1)             |         | Similar Benefits($)   
|                                                                 |  |            |           |          |  |                        |         |                       
|All directors and executive officers as a group
    (18 persons) |  | $          | 3,075,566 |          |  | $                      | 606,670 |                        |  |  | 1,950,850 |  |  | $ | 79,598 | 



---



|    |                                                                                                                                                                                                                                                
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes options to purchase our ordinary shares
    that were canceled pursuant to the option exchange program, or,
    in the case of Mr. Morris, by agreement with us. For more
    information, please see Item 6.E. Share
    Ownership.

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---



##### Table of Contents



The following table sets forth information
concerning total compensation earned by or paid to our directors
for the fiscal year ended December 31, 2002:

|                    |  |        |         |       |  |            |         |       |  |   |         |     |  |   |         | 
|------------------- |  | ------ | ------- | ----- |  | ---------- | ------- | ----- |  | - | ------- | --- |  | - | ------- | 
|                    |  |        |         |       |  | Directors |         |      
|Name(1)             |  | Salary |         | Bonus |  | Fees       |         | Total
|                    |  |        |         |       |  |            |         |      
|Christopher J. Horn |  | $      |        |       |  | $          | 46,921  | (2)   |  | $ | 132,665 | (3) |  | $ | 179,586 | 
|Barry S. Morris     |  | $      | 394,625 |       |  | $          | 134,750 |       |  |   |        |     |  | $ | 529,375 | 
|Sean Baker          |  | $      | 102,184 |       |  | $          | 2,169   |       |  |   |        |     |  | $ | 104,353 | 
|John Conroy         |  |        |        |       |  |            |        |       |  | $ | 52,500  |     |  | $ | 52,500  | 
|Ivor Kenny          |  |        |        |       |  |            |        |       |  | $ | 61,500  |     |  | $ | 61,500  | 
|James D. Maikranz   |  |        |        |       |  |            |        |       |  | $ | 43,500  |     |  | $ | 43,500  | 
|Kevin Melia         |  |        |        |       |  |            |        |       |  | $ | 58,500  |     |  | $ | 58,500  | 
|Annrai OToole(4)   |  |        |        |       |  |            |        |       |  |   |        |     |  |   |        | 
|Francesco Violante  |  |        |        |       |  |            |        |       |  | $ | 49,500  |     |  | $ | 49,500  | 



---



|    |                                                                                                                                                         
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Mr. Burgess became a non-executive director
    of IONA in January 2003 and, therefore, is not included in the
    above table.                         
|(2) | Consists of bonus paid to Dr. Horn for his
    services as an executive officer in 2001. Dr. Horn ceased
    to be an executive officer of IONA in 2001.
|(3) | Consists of $119,165 of special remuneration for
    serving as Chairman of the Board and $13,500 for attendance at
    committee meetings of the Board.
|(4) | Mr. OToole resigned from our Board of
    Directors effective April 26, 2002.                                                                          

In 2002, our non-executive Chairman of the Board
received special remuneration of $119,165 for serving as the
Chairman of the Board. In addition, each other non-executive
director received fees of $3,000 per month and
$1,500 per meeting attended for service on our Board of
Directors, subject to an annual maximum of $48,000 per
person. Each committee chairman received $3,000 per meeting
of the committee of which he served as chairman, subject to an
annual maximum of $12,000 per person. Each committee member
(other than the chairmen) received $1,500 per committee
meeting attended, subject to an annual per person maximum of
$6,000 per committee. All directors were reimbursed for
reasonable out-of-pocket travel expenses incurred by them in
attending meetings of the Board of Directors or committee
meetings.

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The following table sets forth information
concerning share options granted to our directors and executive
officers during the fiscal year ended December 31, 2002.

|                       |  |                      |         |           |  |                 |            |  |  |  |           | 
|---------------------- |  | -------------------- | ------- | --------- |  | --------------- | ---------- |  |  |  | --------- | 
|                       |  | Number of Options    |         | Exercise  |  |                
|                       |  | To Purchase Ordinary |         | Price Per |  |                
|Name(1)                |  | Shares Granted(2)    |         | Share     |  | Expiration Date
|                       |  |                      |         |           |  |                
|Christopher J. Horn    |  |                      |        |           |  |                 |           |  |  |  |          | 
|Barry S. Morris        |  |                      | 653,700 |           |  | $               | 5.87-14.35 |  |  |  | 2002-2012 | 
|Steven Fisch           |  |                      | 150,000 |           |  | $               | 1.77       |  |  |  | 2012      | 
|James Boak(3)          |  |                      | 5,000   |           |  | $               | 14.35      |  |  |  | 2002      | 
|Daniel Demmer          |  |                      | 226,250 |           |  | $               | 5.87-14.35 |  |  |  | 2002      | 
|Eric Newcomer          |  |                      | 85,000  |           |  | $               | 5.87-14.35 |  |  |  | 2002      | 
|Sean Baker             |  |                      |        |           |  | $               |           |  |  |  |          | 
|David James            |  |                      | 189,250 |           |  | $               | 5.87-14.35 |  |  |  | 2002      | 
|Robert J. Potter       |  |                      | 211,750 |           |  | $               | 5.87-14.35 |  |  |  | 2002      | 
|John Giblin            |  |                      | 136,900 |           |  | $               | 5.87-14.35 |  |  |  | 2002      | 
|Michael Waclawiczek(4) |  |                      | 140,000 |           |  | $               | 5.87-14.35 |  |  |  | 2002      | 
|Susan H. Alexander     |  |                      | 120,000 |           |  | $               | 5.87-14.35 |  |  |  | 2002      | 
|John Conroy            |  |                      | 3,000   |           |  | $               | 2.25       |  |  |  | 2012      | 
|Ivor Kenny             |  |                      | 3,000   |           |  | $               | 2.25       |  |  |  | 2012      | 
|James D. Maikranz      |  |                      | 3,000   |           |  | $               | 2.25       |  |  |  | 2012      | 
|Kevin Melia            |  |                      | 21,000  |           |  | $               | 2.25       |  |  |  | 2012      | 
|Annrai OToole(5)      |  |                      |        |           |  | $               |           |  |  |  |          | 
|Francesco Violante     |  |                      | 3,000   |           |  | $               | 2.25       |  |  |  | 2012      | 



---



|    |                                                                                                                                                                                                                                                                                                                        
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Mr. Burgess became a non-executive director
    of IONA in January 2003 and, therefore, is not included in the
    above table.                                                                                                                                                                                        
|(2) | Includes options to purchase our ordinary shares
    that were canceled pursuant to the option exchange program, or,
    in the case of Mr. Morris, by agreement with us. For more
    information about the option exchange program and our agreement
    with Mr. Morris, please see Item 6.E. Share
    Ownership.
|(3) | Mr. Boak resigned from IONA effective
    May 31, 2002.                                                                                                                                                                                                                                                                
|(4) | Mr. Waclawiczek resigned from IONA effective
    September 23, 2002.                                                                                                                                                                                                                                                   
|(5) | Mr. OToole resigned from our Board of
    Directors effective April 26, 2002.                                                                                                                                                                                                                                         

All of the share options listed above were
granted under the 1997 Share Option Scheme or the 1997
Director Share Option Scheme. For a brief description of each of
these option schemes and of arrangements for future grants of
options to our executive officers, please see Item 6.E.
Share Ownership.

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|   |                
|-- | ---------------
|C. | Board Practices

The following table sets forth certain
information concerning our directors and executive officers as
of December 31, 2002. Mr. Burgess became a
non-executive director of IONA in January 2003 and, therefore,
is not included in the following table.

|                    |  |                                                                |  |                        |                          |                     |  |  |                    | 
|------------------- |  | -------------------------------------------------------------- |  | ---------------------- | ------------------------ | ------------------- |  |  | ------------------ | 
|                    |  |                                                                |  |                        |                          | Termination/Renewal
|Name                |  | Office(s) Held                                                 |  | Commencement of Office |                          | Date of Office(1)  
|                    |  |                                                                |  |                        |                          |                    
|Christopher J. Horn |  | Non-Executive Director Chairman                                |  |                        | March 1991May 2000       |                     |  |  | 2003Not applicable | 
|Barry S. Morris     |  | Director
    Chief Executive Officer                           |  |                        | May 2000May 2000         |                     |  |  | 2004Not applicable | 
|Steven Fisch        |  | Chief Operating Officer                                        |  |                        | August 2002              |                     |  |  | Not applicable     | 
|Daniel Demmer       |  | Chief Financial Officer                                        |  |                        | May 2000                 |                     |  |  | Not applicable     | 
|Eric Newcomer       |  | Chief Technology Officer                                       |  |                        | April 2002               |                     |  |  | Not applicable     | 
|Sean Baker          |  | Director
    Chief Corporate Scientist                         |  |                        | March 1991September 2001 |                     |  |  | 2005Not applicable | 
|David James         |  | Executive Vice President,
    Corporate Development            |  |                        | May 2000                 |                     |  |  | Not applicable     | 
|Robert J. Potter    |  | Executive Vice President,
    Business Operations              |  |                        | May 2000                 |                     |  |  | Not applicable     | 
|John Giblin         |  | Senior Vice President,
    Engineering & Customer
    Services |  |                        | February 1999            |                     |  |  | Not applicable     | 
|Susan H. Alexander  |  | General Counsel
    and Secretary                              |  |                        | June 2001                |                     |  |  | Not applicable     | 
|John Conroy         |  | Non-Executive Director                                         |  |                        | May 2001                 |                     |  |  | 2003               | 
|Ivor Kenny          |  | Non-Executive Director                                         |  |                        | August 1999              |                     |  |  | 2004               | 
|James D. Maikranz   |  | Non-Executive Director                                         |  |                        | July 2001                |                     |  |  | 2005               | 
|Kevin Melia         |  | Non-Executive Director                                         |  |                        | May 1994                 |                     |  |  | 2005               | 
|Francesco Violante  |  | Non-Executive Director                                         |  |                        | May 2001                 |                     |  |  | 2004               | 



---



|    |                                                                                                                                                                                                                                                                                               
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Unless otherwise indicated, the date of
    termination or renewal is the date of our Annual General Meeting
    in the calendar year listed. In January 2003, our Board of
    Directors redesignated our executive officers to include only
    those individuals listed in Item 6.A. above.

We have not entered into any service agreements
with our non-executive directors. We pay our non-executive
Chairman of the Board annual special remuneration of $119,165
for serving as chairman of the Board of Directors. We pay each
other non-executive director fees of $3,000 per month and
$1,500 per meeting attended for service on our Board of
Directors, subject to an annual maximum of $48,000 per
person. In addition, we pay each committee chairman
$3,000 per meeting of the committee of which he served as
chairman, subject to an annual maximum of $12,000 per
person. We pay each committee member (other than the chairmen)
$1,500 per committee meeting attended, subject to an annual
per person maximum of $6,000 per committee.

In February 2003, our Board of Directors adopted
the Non-Executive Directors Change in Control Plan, a copy of
which is an exhibit to this annual report. Under this plan, if
there is a change in control of IONA, all of the unvested stock
options held by our non-executive directors will vest and our
non-executive directors will receive additional fees equal to
two times the fees payable to them for the year in which the
change occurs or for the previous year, whichever are higher.

-38-



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The executive directors each have contracts of
employment (for Irish-resident directors) or terms of engagement
(for US-resident directors). For more information concerning
benefits provided to our executive officers upon termination of
employment, please see Item 10.C. Material
Contracts.



| |                 
| | ----------------
| | Board Committees

Audit Committee.The
Audit Committee oversees actions taken by our independent
auditors, engages our auditors subject to shareholder approval,
approves the fees and other compensation to be paid to the
auditors, and reviews any internal audits we may perform. The
members of the Audit Committee are Mr. Conroy,
Dr. Kenny and Mr. Melia. Mr. Melia serves as
chairman of the Audit Committee. The responsibilities of the
Audit Committee are set forth in its Charter and include
reviewing our annual and quarterly financial statements and
taking steps to ensure that an independent accounting firm
reviews our financial statements prior to our filing them with
the Securities and Exchange Commission, the Irish Stock Exchange
or other regulatory bodies. The Audit Committee also reviews the
terms of all material transactions and arrangements between us
and our affiliates at least once each year. The Audit Committee
also reviews the performance of our independent accounting firm
and reviews the adequacy of the internal financial and
accountancy controls.

Compensation Committee.The Compensation Committee establishes
and reviews overall policy and structure with respect to
compensation matters, including the determination of
compensation arrangements for our executive directors, executive
officers and key employees. The Compensation Committee is also
responsible for the administration and award of options to
purchase shares pursuant to our Executive Share Option Scheme
and our 1997 Share Option Scheme and administration of our
1997 Director Share Option Scheme and 1999 Employee Share
Purchase Plan. The members of the Compensation Committee are
Dr. Kenny, Mr. Melia and Mr. Violante.
Dr. Kenny serves as chairman of the Compensation Committee.

Nominating Committee.The Nominating Committee reviews the
structure, size and composition of the Board of Directors and
makes recommendations to the Board of Directors with regard to
any adjustments deemed necessary. The Nominating Committee is
responsible for identifying and nominating candidates for the
approval of the Board of Directors to fill Board vacancies as
and when they arise. The Nominating Committee reviews potential
conflicts of prospective Board members and prospective outside
directorships of other companies by our existing Board members
and executive officers. No Board member or executive officer may
accept an outside directorship without the prior approval of the
Nominating Committee. The Nominating Committee is composed of
the Chairman of the Board, who serves as the chairman of the
Committee, two (2) non-executive directors, and our Chief
Executive Officer, who serves ex officio. The members of
the Nominating Committee are Dr. Horn, Mr. Maikranz,
Mr. Conroy and Mr. Morris (ex officio).
Dr. Horn serves as chairman of the Nominating Committee.




D.     Employees

For a discussion regarding our employees, please
see Item 4.B. Business OverviewEmployees.

The following table sets forth information
concerning the number of persons employed by us at the end of
each of our last three fiscal years:

|                                                                     |       |              |     |      |  |      |     |     |  |  |     |     | 
|-------------------------------------------------------------------- | ----- | ------------ | --- | ---- |  | ---- | --- | --- |  |  | --- | --- | 
|                                                                     |       |             
|                                                                     |       | As of       
|                                                                     |       | December 31,
|                                                                     |       |             
|                                                                     |       | 2002         |     | 2001 |  | 2000
|                                                                     |       |              |     |      |  |     
|Business operations (Sales, Marketing and
    Professional Services) |       |              | 279 |      |  |      | 471 |     |  |  | 395 |    
|Product management                                                   |       |              | 17  |      |  |      | 19  |     |  |  | 16  |    
|Engineering                                                          |       |              | 237 |      |  |      | 295 |     |  |  | 248 |    
|Finance, legal and administration                                    |       |              | 95  |      |  |      | 122 |     |  |  | 112 |    
|                                                                     |       |              |     |      |  |      |     |     |  |  |     |    
|                                                                     | Total |              |     | 628  |  |      |     | 907 |  |  |     | 771 | 
|                                                                     |       |              |     |      |  |      |     |     |  |  |     |    

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---



##### Table of Contents






E.     Share
Ownership

The following table sets forth certain
information as of April 1, 2003 concerning the share
ownership and outstanding share options of those individuals
serving as directors and executive officers during the fiscal
year ended December 31, 2002.

|                       |  |              |           |                 |  |                |         |                 |  |   |             |  |  |  |           | 
|---------------------- |  | ------------ | --------- | --------------- |  | -------------- | ------- | --------------- |  | - | ----------- |  |  |  | --------- | 
|                       |  | Number of    |           | Number of       |  |                |         |                
|                       |  | Ordinary     |           | Ordinary Shares |  |                |         |                
|                       |  | Shares       |           | Which May be    |  | Range of       |         |                
|                       |  | Beneficially |           | Acquired Under  |  | Exercise Price |         | Expiration Date
|Name                   |  | Owned        |           | Option Schemes  |  | of Options     |         | of Options     
|                       |  |              |           |                 |  |                |         |                
|Christopher J. Horn    |  |              | 2,338,414 |                 |  |                | 1,126   |                 |  | $ | 0.32-18.75  |  |  |  | 2012      | 
|Barry S. Morris        |  |              | 81,424    |                 |  |                | 409,031 | (1)             |  | $ | 12.50-65.25 |  |  |  | 2007-2013 | 
|Steven Fisch           |  |              |          |                 |  |                | 150,000 | (2)             |  | $ | 1.77        |  |  |  | 2012      | 
|James Boak(3)          |  |              |          |                 |  |                |        |                 |  | $ |            |  |  |  |          | 
|Daniel Demmer          |  |              | 18,000    |                 |  |                | 155,350 |                 |  | $ |            |  |  |  | 2013      | 
|Eric Newcomer          |  |              | 3,724     | (5)             |  |                | 59,632  | (4)             |  | $ |            |  |  |  | 2013      | 
|Sean Baker             |  |              | 1,170,885 |                 |  |                | 20,626  | (6)             |  | $ | 0.32-5.00   |  |  |  | 2006-2013 | 
|David James            |  |              | 21,710    |                 |  |                | 147,683 | (4)             |  | $ |            |  |  |  | 2013      | 
|Robert J. Potter       |  |              | 1,250     |                 |  |                | 140,250 | (7)             |  | $ |            |  |  |  | 2013      | 
|John Giblin            |  |              | 3,161     |                 |  |                | 112,400 | (7)             |  | $ |            |  |  |  | 2013      | 
|Michael Waclawiczek(8) |  |              |          |                 |  |                |        |                 |  | $ |            |  |  |  |          | 
|Susan H. Alexander     |  |              | 5,000     |                 |  |                | 110,000 | (7)             |  | $ |            |  |  |  | 2013      | 
|John Conroy            |  |              | 13,000    |                 |  |                | 33,000  |                 |  | $ | 2.25-43.15  |  |  |  | 2012      | 
|Ivor Kenny             |  |              | 8,000     |                 |  |                | 50,334  |                 |  | $ | 2.25-74.50  |  |  |  | 2009-2012 | 
|James Maikranz         |  |              |          |                 |  |                | 33,000  |                 |  | $ | 2.25-33.80  |  |  |  | 2012      | 
|Kevin Melia            |  |              | 24,444    |                 |  |                | 60,250  |                 |  | $ | 2.25-74.50  |  |  |  | 2007-2012 | 
|Annrai OToole(9)      |  |              | 929,200   |                 |  |                |        |                 |  | $ |            |  |  |  |          | 
|Francesco Violante     |  |              |          |                 |  |                | 33,000  |                 |  | $ | 2.25-43.15  |  |  |  | 2012      | 



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes 322,191 options to purchase our ordinary
    shares that will be granted on May 15, 2003 pursuant our
    agreement with Mr. Morris dated October 10, 2002 for
    which the exercise price is not currently known. For more
    information, please see the description of our agreement with
    Mr. Morris below.                                                                                                                                                                                                                          
|   
|(2) | Excludes 50,000 options to purchase our ordinary
    shares that will be granted to Mr. Fisch upon the
    achievement of certain milestones and conditioned upon his
    continued employment pursuant to an agreement between IONA and
    Mr. Fisch. The agreement also provides that the vesting of
    any options granted pursuant thereto will accelerate in full if,
    within twelve months after a change in control of IONA,
    Mr. Fischs position is eliminated or materially
    reduced or if he is terminated without cause by IONA.
|   
|(3) | Mr. Boak resigned from IONA effective
    May 31, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   
|(4) | Consists of options to purchase our ordinary
    shares that will be granted pursuant to the option exchange
    program described below and other options, all of which will be
    granted on May 15, 2003 and for which the exercise price is
    not currently known.                                                                                                                                                                                                                                                                              
|   
|(5) | Includes 400 ordinary shares owned by
    Mr. Newcomers wife.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   
|(6) | Includes 19,700 options to purchase our ordinary
    shares that will be granted on May 15, 2003 pursuant to the
    option exchange program described below for which the exercise
    price is not currently known.                                                                                                                                                                                                                                                                                                                                  
|   
|(7) | Consists solely of options to purchase our
    ordinary shares that will be granted on May 15, 2003
    pursuant to the option exchange program described below for
    which the exercise price is not currently known.                                                                                                                                                                                                                                                                                                                               
|   
|(8) | Mr. Waclawiczek resigned from IONA effective
    September 23, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   
|(9) | Mr. OToole resigned from our Board of
    Directors effective April 26, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

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---



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On October 10, 2002, Barry S. Morris agreed
with us to forfeit all options to purchase our ordinary shares
that we granted to him on or after April 16, 2002 and to
cancel other options to purchase an aggregate of 516,860 of our
ordinary shares in consideration of, and exchange for, our
agreement to grant him on May 15, 2003 options to
purchase 322,191 of our ordinary shares with an exercise
price per share equal to the fair market value on that date. Our
obligation to grant Mr. Morris options pursuant to this
agreement is subject to his continued employment by IONA through
May 15, 2003. The number of options to be granted to
Mr. Morris on May 15, 2003 is the same number that
would have been granted to him in accordance with the exchange
ratio in connection with our employee option exchange program in
the fourth quarter of 2002 had he been eligible to participate
and participated in the offer and, as is the case with new
options that will be issued to eligible executive officers who
participate in the option exchange program,
Mr. Morris options will have the same vesting
commencement date and the same vesting schedule as the options
for which they were exchanged. As is also the case under the
option exchange program, we have agreed with Mr. Morris
that, if a change of control of IONA occurs prior to
May 15, 2003, we would require our successor to inherit our
obligation to grant him options.

In the fourth quarter of 2002, we made an offer
to our employees, including executive officers other than our
Chief Executive Officer and Chief Operating Officer, to exchange
their outstanding options to purchase our ordinary shares that
had an exercise price of more than $3.00 per share.
Eligible options included options granted under the
1997 Share Option Scheme, the Genesis Development
Corporation 1997 Stock Option Plan, the Object-Oriented
Concepts, Inc. Stock Option Plan and the Netfish Technologies,
Inc. 1999 Stock Option Plan. In exchange for eligible options,
employees received a commitment for new stock options to be
granted under the 1997 Share Option Scheme on or after
May 15, 2003. Only those participants in the option
exchange who are employees of IONA on the date the new options
are granted will be eligible to receive the new grant.
Participating executive officers were required to forfeit,
without exchange, all options granted on or after April 16,
2002. A total of 4,815,444 options were accepted for exchange
under the offer and accordingly were canceled in November 2002.
An additional 869,150 options were canceled without exchange. We
intend to grant the new options, to purchase approximately
3,156,807 shares, on or after May 15, 2003. The new
options will have an exercise price equal to the fair market
value of our ordinary shares on the date of grant, as determined
by the last reported sale price of our ordinary shares on the
Nasdaq National Market on the trading day immediately prior to
the grant date.

The following is a brief description of each of
our share option schemes:



| |                              
| | -----------------------------
| | Executive Share Option Scheme

In 1995, we adopted the Executive Share Option
Scheme, under which we reserved 1,125,500 ordinary shares for
issuance. Options under the Executive Share Option Scheme may
only be granted to our directors and full-time employees or
those of one of our subsidiaries and must have an exercise price
that is not less than the par value of the ordinary shares.
Options lapse when not exercised:



| |   |                                                                                                                                                             
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | within seven years of the date of grant;                                                                                                                    
|
| |  | twelve months after the death of an
    optionee; or                                                                                                        
|
| |  | prior to termination of the optionees
    employment for any reason, although our Board of Directors has
    discretion to delay lapse in individual cases.

As of December 31, 2002, an aggregate of
168,622 of our ordinary shares remain issuable upon the exercise
of options outstanding and options available for grant under the
Executive Share Option Scheme.



| |                         
| | ------------------------
| | 1997 Share Option Scheme

Our Board of Directors and shareholders approved
the 1997 Share Option Scheme in 1997, and approved
amendments in 1998, 2000 and 2001 to increase the number of
ordinary shares reserved for issuance under the 1997 Share
Option Scheme. The 1997 Share Option Scheme, as amended,
provides for the issuance of up to 12,900,000 of our ordinary
shares pursuant to share option grants to our employees,

-41-



---



##### Table of Contents



consultants, directors and officers. Generally,
under the 1997 Share Option Scheme, options are not
transferable by the option holder except by will or by the laws
of descent and distribution. Options granted under the
1997 Share Option Scheme expire ten years from the date of
grant or five years from the date of grant in the case of an
incentive stock option granted to an employee holding more than
10% of our total combined voting power.


Subject to the provisions of the 1997 Share
Option Scheme, the Compensation Committee has the authority to
select the optionees and determine the terms of the options
granted, including:



| |   |                                                                                                                                                                                                                                                                                                                                                              
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the number of shares subject to each option;                                                                                                                                                                                                                                                                                                                 
|
| |  | the date the option becomes exercisable;                                                                                                                                                                                                                                                                                                                     
|
| |  | the exercise price of the option (which in the
    case of an incentive stock option cannot be less than the market
    price of the ordinary shares as of the date of grant or, in the
    case of an employee holding more than 10% of the combined voting
    power of IONA, 110% of the market price of the ordinary shares
    as of the date of grant);
|
| |  | the duration of the option; and                                                                                                                                                                                                                                                                                                                              
|
| |  | the time, manner and form of payment upon
    exercise of an option.                                                                                                                                                                                                                                                                                         

As of December 31, 2002, an aggregate of
11,109,898 of our ordinary shares remain issuable upon the
exercise of options outstanding and options available for grant
under the 1997 Share Option Scheme.



| |                                      
| | -------------------------------------
| | 1997 Director Share Option
    Scheme

Our Board of Directors and shareholders approved
the 1997 Director Share Option Scheme in 1997, and approved an
amendment in 2002 to increase the number of ordinary shares
reserved for issuance under the 1997 Director Share Option
Scheme from 250,000 to 500,000 shares. The 1997 Director
Share Option Scheme provides for the automatic grant of options
at periodic intervals to our non-employee directors.

Under the 1997 Director Share Option Scheme, each
of our directors who is not also one of our employees or
officers will automatically receive an option to
purchase 30,000 ordinary shares on the date such person is
first elected to our Board of Directors. In addition, each
non-employee director will automatically receive (1) an
option to purchase an additional 21,000 ordinary shares at the
time of each annual meeting of shareholders at which such
director is re-elected by rotation and (2) an option to
purchase an additional 3,000 ordinary shares at the time of each
other annual meeting of shareholders following which such person
will continue to serve as a director without re-election,
provided, however, that such person has participated in no fewer
than 75% of the meetings of our Board of Directors held in the
period measured from the date of the previous annual meeting of
shareholders and provided also that no option to purchase
ordinary shares will be granted to a non-employee director
unless at least one year has elapsed since the date on which the
non-employee director was granted an option to
purchase 30,000 ordinary shares on his first election to
our Board of Directors. The exercise price per share for all
options granted under the 1997 Director Share Option Scheme will
be equal to the fair market value of the ordinary shares on the
date of grant. All options granted under the 1997 Director Share
Option Scheme are exercisable in three equal annual
installments, beginning on the date of grant of the option. The
options accelerate and become exercisable in full, however, in
the event the optionholders service on our Board of
Directors ceases by reason of his or her death or permanent
disability or in the event of an acquisition of IONA. The term
of each option will be for a period of ten years from the date
of grant. As of December 31, 2002, an aggregate of 196,000
ordinary shares remain issuable upon the exercise of options
outstanding and options available for grant under the 1997
Director Share Option Scheme.



| |                                                           
| | ----------------------------------------------------------
| | Genesis Development Corporation 1997 Stock
    Option Plan

In connection with our 2000 acquisition of
Genesis Development Corporation (Genesis), all of the
outstanding stock options under the Genesis Development
Corporation 1997 Stock Option Plan were converted into options
to purchase our ordinary shares. As of December 31, 2002,
an aggregate of 20,942

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---



##### Table of Contents



of our ordinary shares remained reserved for
issuance upon exercise of these converted Genesis stock options.
We do not intend to grant any more options under the Genesis
1997 Stock Option Plan.




| |                                                     
| | ----------------------------------------------------
| | Object-Oriented Concepts, Inc. Stock Option
    Plan

In connection with our 2001 acquisition of
Object-Oriented Concepts, Inc. (OOC), all of the outstanding
stock options under the Object-Oriented Concepts, Inc. Stock
Option Plan were converted into options to purchase our ordinary
shares. As of December 31, 2002, an aggregate of 7,550 of
our ordinary shares remained reserved for issuance upon exercise
of these converted OOC stock options. We do not intend to grant
any more options under the OOC Stock Option Plan.



| |                                                      
| | -----------------------------------------------------
| | Netfish Technologies, Inc. 1999 Stock
    Option Plan

In connection with our 2001 acquisition of
Netfish Technologies, Inc. (Netfish), all of the outstanding
stock options under the Netfish Technologies, Inc. 1999 Stock
Option Plan were converted into options to purchase our ordinary
shares. As of December 31, 2002, an aggregate of 86,462 of
our ordinary shares remained reserved for issuance upon exercise
of these converted Netfish stock options. An aggregate of
529,505 shares were available for future grant or issuance
under Netfish 1999 Stock Option Plan as of December 31,
2002. We do not intend to grant any more options under the
Netfish 1999 Stock Option Plan.



| |                                      
| | -------------------------------------
| | 1999 Employee Share Purchase
    Plan

In 1999, we established a qualified Employee
Share Purchase Plan under which up to 500,000 ordinary shares
may be issued. Our Board of Directors and shareholders approved
in 2002 an amendment to the 1999 Employee Share Purchase Plan to
increase the number of our ordinary shares issuable under the
plan to 1,000,000. All of our employees and employees of our
participating subsidiaries who are employed full-time for more
than five months in any calendar year are eligible to
participate. The purchase price per ordinary share for each
payment period (a six-month period commencing February 1 and
August 1 and ending July 31 and January 31,
respectively, in each year) is the lesser of (1) 85% of the
average market price of our ADSs on the first business day of
the payment period and (2) 85% of the average market price
of our ADSs on the last business day of the payment period, in
either event rounded up to the nearest cent. In each payment
period, an employee may authorize payroll deductions in an
amount not less than 1% but not more than 10% of the
employees salary for participation in the 1999 Employee
Share Purchase Plan. Rights under the 1999 Employee Share
Purchase Plan terminate in certain specified events including
retirement, resignation and death. Unless terminated sooner, the
1999 Employee Share Purchase Plan terminates on June 9,
2009. As of December 31, 2002, 497,402 shares have
been issued under the 1999 Employee Share Purchase Plan.






|        |                                                      
|------- | -----------------------------------------------------
|Item 7. | MAJOR SHAREHOLDERS AND RELATED PARTY
    TRANSACTIONS




A.     Major
Shareholders

The following table sets forth, as of
April 1, 2003, the number of ordinary shares owned by all
shareholders who we know to own beneficially more than five
percent (5%) of our ordinary shares.

In addition, Guaranty Nominees Limited is the
nominee holder of JPMorgan Chase Bank (as successor to Morgan
Guaranty Trust Company of New York), as depositary under the
Deposit Agreement dated as of February 24, 1997 among us,
the depositary and the holders from time to time of American
Depositary Receipts issued thereunder, and as such is the holder
of record as depositary of 28,346,103 ADSs representing the
28,346,103 ordinary shares deposited under the deposit
agreement. Guaranty Nominees Limited is not the beneficial owner
of the shares as determined in accordance with the rules of the
Securities and Exchange Commission.

Beneficial ownership is determined in accordance
with the rules of the Securities and Exchange Commission and is
based on 33,049,043 ordinary shares outstanding as of
April 1, 2003, which includes an

-43-



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##### Table of Contents



aggregate of up to 291,947 ordinary shares
issuable as of April 1, 2003 to the former Netfish
shareholders prior to reduction for indemnification payments to
which we may be entitled. For the purposes of calculating the
number of ordinary shares and the percentage beneficially owned
by a person or entity, ordinary shares issuable by us to that
person or entity pursuant to options which may be exercised
within 60 days of April 1, 2003 are deemed to be
beneficially owned and outstanding. Except as otherwise
indicated, each shareholder named in the following table has
sole voting and investment power with respect to the shares set
forth opposite that shareholders name.


|                                |  |                    |           |                    |  |  |     |  
|------------------------------- |  | ------------------ | --------- | ------------------ |  |  | --- | -
|                                |  | Number of          |           | Percentage of     
|                                |  | Ordinary Shares    |           | Ordinary Shares   
|Name of Beneficial Owner        |  | Beneficially Owned |           | Beneficially Owned
|                                |  |                    |           |                   
|Christopher J. Horn(1)          |  |                    | 2,339,540 |                    |  |  | 7.1 | %
|Merrill Lynch & Co., Inc.(2)    |  |                    | 1,682,471 |                    |  |  | 5.1 | %
|Mellon Financial Corporation(3) |  |                    | 3,274,720 |                    |  |  | 9.9 | %
|Janus Capital Management LLC(4) |  |                    | 1,614,700 |                    |  |  | 4.9 | %



| | 
| | 
| | 



| |     |                                                                                                                                                   
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | Includes 1,126 ordinary shares subject to
    outstanding share options that are exercisable within the 60-day
    period following April 1, 2003.



| |     |                                                                                                                                                                                                                                                           
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (2) | Merrill Lynch & Co., Inc. filed a
    Schedule 13G on January 9, 2003, in which Merrill
    Lynch & Co., Inc. reported that its direct and indirect
    subsidiaries beneficially owned an aggregate of
    1,682,471 ADRs as of December 31, 2002.       
|
| | (3) | Mellon Financial Corporation filed a
    Schedule 13G on February 7, 2003, in which Mellon
    Financial Corporation reported that its direct and indirect
    subsidiaries beneficially owned an aggregate of
    3,274,720 ADRs as of December 31, 2002.
|
| | (4) | Janus Capital Management LLC reported to IONA
    that as of January 28, 2003, Janus Capital Management LLC
    beneficially owned 1,614,700 ADRs.                                                                                                        

We are not directly or indirectly owned or
controlled by another corporation, by any foreign government or
by any other natural or legal person.

Our major shareholders do not have different
voting rights.

As of April 1, 2003, 0.7% of our ordinary
shares are held of record in ordinary share form by 39
U.S. holders, excluding up to 291,947 ordinary shares
issuable as of April 1, 2003 to the former Netfish
shareholders.






|   |                           
|-- | --------------------------
|B. | Related Party Transactions

For information concerning fees we paid to our
directors in 2002, please see Item 6.B.
Compensation. For information concerning fees that
we currently pay to our non-executive directors for their
service in their capacity as directors, please see
Item 6.C. Board Practices. For information
concerning agreements with our executive officers, please see
Item 10.C. Material Contracts.






|   |                                     
|-- | ------------------------------------
|C. | Interests of Experts and
    Counsel

Not required.






|        |                      
|------- | ---------------------
|Item 8. | FINANCIAL INFORMATION




A.     Consolidated
Financial Statements and Other Financial
Information

Please see Item 18 Financial
Statements for our Consolidated Financial Statements. In
addition, for information regarding the percentages and amounts
of our revenues from customers located in the United States and
outside of the United States, please see Item 5.A.
Operating Results and Note 18 of Notes to
Consolidated Financial Statements.

-44-



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##### Table of Contents



Legal Proceedings

As of the date of this annual report, we are not
a party to any legal proceeding, which, if resolved or
determined adversely to us, would have a material adverse effect
on our business, financial condition and results of operation.
We, however, have in the past been and may in the future be
subject to claims and litigation in the ordinary course of
business. In the event that any such claims or litigation are
resolved against us, such outcomes or resolutions could have a
material adverse effect on our business, financial condition or
results of operations.

Dividend Distribution Policy

We do not expect to pay dividends in the
foreseeable future.






|   |                    
|-- | -------------------
|B. | Significant Changes

No significant change has occurred since
December 31, 2002.






|        |                      
|------- | ---------------------
|Item 9. | THE OFFER AND LISTING






|   |                          
|-- | -------------------------
|A. | Offer and Listing Details



| |                         
| | ------------------------
| | Market Price Information

Our ordinary shares have been listed as a
secondary listing on the Official List of the Irish Stock
Exchange since December 19, 1997. For this reason, we are
not subject to the same ongoing regulatory requirements as those
which would apply to an Irish company with a primary listing on
the Irish Stock Exchange, including the requirement that certain
transactions receive the approval of shareholders. For further
information, shareholders should consult their own financial
advisors. The following table sets forth the high and low sales
prices of our ordinary shares for the fiscal years, the fiscal
quarters and the months indicated:

|                             |                |      |        |       |  |   |       |       | 
|---------------------------- | -------------- | ---- | ------ | ----- |  | - | ----- | ----- | 
|                             |                | High |        | Low  
|                             |                |      |        |      
|Year Ended December 31, 1998 |                |     | 28.79  |       |  |  | 11.60 |      
|Year Ended December 31, 1999 |                |     | 50.75  |       |  |  | 11.70 |      
|Year Ended December 31, 2000 |                |     | 106.00 |       |  |  | 40.64 |      
|Year Ended December 31, 2001 |                |     | 73.50  |       |  |  | 8.30  |      
|Year Ended December 31, 2002 |                |     | 29.75  |       |  |  | 1.70  |      
|Year Ended December 31, 2001 |                |      |        |       |  |   |       |      
|                             | First Quarter  |      |       | 73.50 |  |   |      | 29.00 | 
|                             | Second Quarter |      |       | 52.00 |  |   |      | 26.00 | 
|                             | Third Quarter  |      |       | 46.50 |  |   |      | 9.00  | 
|                             | Fourth Quarter |      |       | 27.00 |  |   |      | 8.30  | 
|Year Ended December 31, 2002 |                |      |        |       |  |   |       |      
|                             | First Quarter  |      |       | 29.75 |  |   |      | 15.50 | 
|                             | Second Quarter |      |       | 19.20 |  |   |      | 5.10  | 
|                             | Third Quarter  |      |       | 5.90  |  |   |      | 1.75  | 
|                             | Fourth Quarter |      |       | 3.50  |  |   |      | 1.70  | 
|Year Ended December 31, 2003 |                |      |        |       |  |   |       |      
|                             | First Quarter  |      |       | 3.15  |  |   |      | 1.80  | 
|Month Ended                  |                |      |        |       |  |   |       |      
|                             | October 2002   |      |       | 2.77  |  |   |      | 1.70  | 
|                             | November 2002  |      |       | 3.50  |  |   |      | 2.35  | 
|                             | December 2002  |      |       | 3.35  |  |   |      | 2.40  | 
|                             | January 2003   |      |       | 3.15  |  |   |      | 2.30  | 
|                             | February 2003  |      |       | 2.82  |  |   |      | 2.60  | 
|                             | March 2003     |      |       | 2.75  |  |   |      | 1.80  | 

-45-



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##### Table of Contents



Our American Depositary Receipts (ADRs),
evidencing American Depositary Shares (ADSs), which represent
ordinary shares deposited with the Depositary under the Deposit
Agreement dated as of February 24, 1997 among IONA, Morgan
Guaranty Trust Company of New York and the holders from time to
time of ADRs, have been traded in the United States on the
Nasdaq National Market (Nasdaq) since our initial public
offering on February 25, 1997. Currently, our ADRs are
trading under the symbol IONA. Morgan Guaranty Trust
Company of New York serves as Depositary for our ADRs.
Currently, each ADR evidences one ADS and each ADS represents
one ordinary share. The following table sets forth the high and
low sales prices of our ADRs for the fiscal years, the fiscal
quarters and the months indicated:

|                             |                |      |        |       |  |   |       |       | 
|---------------------------- | -------------- | ---- | ------ | ----- |  | - | ----- | ----- | 
|                             |                | High |        | Low  
|                             |                |      |        |      
|Year Ended December 31, 1998 |                | $    | 41.00  |       |  | $ | 14.88 |      
|Year Ended December 31, 1999 |                | $    | 55.25  |       |  | $ | 12.13 |      
|Year Ended December 31, 2000 |                | $    | 102.00 |       |  | $ | 38.00 |      
|Year Ended December 31, 2001 |                | $    | 66.44  |       |  | $ | 6.90  |      
|Year Ended December 31, 2002 |                | $    | 27.14  |       |  | $ | 1.65  |      
|Year Ended December 31, 2001 |                |      |        |       |  |   |       |      
|                             | First Quarter  |      | $      | 66.44 |  |   | $     | 25.25 | 
|                             | Second Quarter |      | $      | 47.04 |  |   | $     | 22.13 | 
|                             | Third Quarter  |      | $      | 39.33 |  |   | $     | 6.90  | 
|                             | Fourth Quarter |      | $      | 25.74 |  |   | $     | 7.65  | 
|Year Ended December 31, 2002 |                |      |        |       |  |   |       |      
|                             | First Quarter  |      | $      | 27.14 |  |   | $     | 13.19 | 
|                             | Second Quarter |      | $      | 17.11 |  |   | $     | 5.00  | 
|                             | Third Quarter  |      | $      | 5.61  |  |   | $     | 1.65  | 
|                             | Fourth Quarter |      | $      | 3.46  |  |   | $     | 1.67  | 
|Year Ended December 31, 2003 |                |      |        |       |  |   |       |      
|                             | First Quarter  |      | $      | 3.44  |  |   | $     | 1.97  | 
|Month Ended                  |                |      |        |       |  |   |       |      
|                             | October 2002   |      | $      | 2.77  |  |   | $     | 1.67  | 
|                             | November 2002  |      | $      | 3.46  |  |   | $     | 2.31  | 
|                             | December 2002  |      | $      | 3.38  |  |   | $     | 2.43  | 
|                             | January 2003   |      | $      | 3.44  |  |   | $     | 2.72  | 
|                             | February 2003  |      | $      | 3.15  |  |   | $     | 2.67  | 
|                             | March 2003     |      | $      | 3.25  |  |   | $     | 1.97  | 






|   |                     
|-- | --------------------
|B. | Plan of Distribution

Not required.






|   |                                               
|-- | ----------------------------------------------
|C. | Markets on which Our Ordinary Shares
    Trade

Our ordinary shares have been listed as a
secondary listing on the Official List of the Irish Stock
Exchange since December 19, 1997. Our ADRs have been traded
in the United States on Nasdaq since our initial public offering
on February 25, 1997.






|   |                    
|-- | -------------------
|D. | Selling Shareholder

Not required.






|   |         
|-- | --------
|E. | Dilution

Not required.

-46-



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##### Table of Contents








|   |                      
|-- | ---------------------
|F. | Expenses of the Issue

Not required.






|         |                       
|-------- | ----------------------
|Item 10. | ADDITIONAL INFORMATION






|   |              
|-- | -------------
|A. | Share Capital

Not required.






|   |                                           
|-- | ------------------------------------------
|B. | Memorandum and Articles of
    Association

Our Memorandum of Association, as amended, filed
as Exhibit 3.3 to our Registration Statement on
Form F-1 (File No. 333-6396) and our Restated Articles
of Association, as amended, filed as Exhibit 4.2 to our
Registration Statement on Form S-8 (File
No. 333-11384) are incorporated herein by reference. In
addition, we incorporate by reference the Description of
Share Capital included in our Registration Statement on
Form F-3 (File No. 333-81212). The Transfer Agent and
Registrar for our ordinary shares is Computershare Investor
Services (Ireland) Limited, Ireland. The Transfer Agent and
Registrar for our ADRs is JPMorgan Chase Bank (as successor to
Morgan Guaranty Trust Company of New York).






|   |                   
|-- | ------------------
|C. | Material Contracts

On August 8, 2002, we agreed with Steven
Fisch that we would make payments to him in the event that his
employment with IONA is involuntarily terminated by IONA other
than for cause. If Mr. Fischs employment is
terminated during his first year of employment, he will be
entitled to a cash payment equal to his annual salary and bonus
less the amount of all cash paid to Mr. Fisch through his
date of termination. If Mr. Fischs employment is
terminated after his first year of employment, he will be
entitled to a cash payment equal to his annual salary and bonus.

In March 2003, we entered into Change in Control
Agreements with each of our six executive officers, forms of
which are exhibits to this annual report. Under each of these
agreements, if there is a change in control of IONA and the
surviving company does not assume IONAs stock option plans
or provide the executive officer with comparable substitute
options, the executive officers unvested stock options
will vest. In addition, if the executive officers
employment is terminated (1) without cause within the
period beginning three months prior to the announcement of the
change in control and ending two years after the change in
control or (2) by the executive officer for good reason
within two years after the change in control, the executive
officers unvested stock options will vest and the
executive officer will be entitled to continued health, vision
and dental insurance benefits and a severance payment. The
executive officers severance payment would equal two times
the sum of the executive officers highest annual base
salary during the period commencing immediately prior to the
change of control through the date of termination and highest
annual target bonus during the period commencing the calendar
year prior to the change of control through the calendar year of
the date of termination.

For information on additional material contracts,
please see Item 4, Information on the Company.






|   |                  
|-- | -----------------
|D. | Exchange Controls

Irish exchange control regulations ceased to
apply from and after December 31, 1992. Except as indicated
below, there are no restrictions on non-residents of Ireland
dealing in domestic securities, which includes shares or
depositary receipts of Irish companies such as us, and dividends
and redemption proceeds (subject to the withholding where
appropriate of withholding tax as described under
Item 10.E. Taxation) are freely transferable to
non-resident holders of such securities.

The Financial Transfers Act, 1992 was enacted in
December 1992. This Act gives power to the Minister for Finance
of Ireland to make provision for the restriction of financial
transfers between Ireland and other countries. Financial
transfers are broadly defined and include all transfers which
would be movements of capital or payments within the meaning of
the treaties governing the European

-47-



---



##### Table of Contents



Communities. The acquisition or disposal of ADRs
representing shares issued by an Irish incorporated company,
like our ADRs, and associated payments may fall within this
definition. In addition, dividends or interest payments or
payments on redemption or purchase of shares, debentures or
other securities in an Irish incorporated company and payments
on a liquidation of an Irish incorporated company would fall
within this definition. Currently, orders under this Act
prohibit any financial transfer to or by the order of or on
behalf of residents of the Federal Republic of Yugoslavia,
Serbia, Iraq, Angola or in respect of funds and financial
resources belonging to the Taliban of Afghanistan (or related
terrorist organizations), unless permission for the transfer has
been given by the Central Bank of Ireland.


We do not anticipate that orders under the
Financial Transfers Act, 1992 will have a material effect on our
business, results of operations or financial condition.






|   |         
|-- | --------
|E. | Taxation

Irish Tax Considerations

The following is a general summary of certain
Irish tax consequences applicable to Irish Holders and
U.S. Holders (as defined below in this summary) in respect
of the purchase, ownership and disposition of ordinary shares or
ADSs evidenced by ADRs.

This summary is based on Irish taxation laws
currently in force, regulations promulgated thereunder, the
current provisions of the Ireland-United States Double Taxation
Convention (the Treaty), specific proposals to amend any of the
forgoing publicly announced prior to the date hereof and the
currently published administrative practices of the Irish
Revenue Commissioners, all as of the date of this annual report.
Taxation laws are subject to change, from time to time, and no
representation is or can be made as to whether such laws will
change, or what impact, if any, such changes will have on the
statements contained in this summary. It is assumed that any
proposed amendments will be enacted in the form proposed. No
assurance can be given that proposed amendments will be enacted
as proposed, or that legislative or judicial changes, or changes
in administrative practice, will not modify or change the
statements expressed herein.

This summary is of a general nature only. It does
not constitute legal or tax advice nor does it discuss all
aspects of Irish taxation that may be relevant to any particular
Irish Holder or U.S. Holder of ordinary shares or ADSs.



| |                                                                                                                                                                                                                                                                            
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | HOLDERS OF ORDINARY SHARES OR ADSs ARE ADVISED
    TO CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THE
    APPLICATION OF IRISH TAXATION LAWS TO THEIR PARTICULAR
    CIRCUMSTANCES IN RELATION TO THE PURCHASE, OWNERSHIP OR
    DISPOSITION OF ORDINARY SHARES OR ADSs.

The summary only applies to Irish Holders and
U.S. Holders that legally and beneficially hold their
ordinary shares or ADSs evidenced by ADRs as capital assets
(i.e. investments) and does not address special classes of
holders including, but not limited to, dealers in securities,
insurance companies, pension schemes, employee share ownership
trusts, collective investment undertakings, charities,
tax-exempt organizations, financial institutions and close
companies, each of which may be subject to special rules not
discussed below.

(i)     Irish Tax
Considerations Applicable to Irish Holders

For the purposes of this summary, an Irish
Holder means a holder of ordinary shares or ADSs evidenced
by ADRs that (i) beneficially owns the ordinary shares or
ADSs registered in their name; (ii) in the case of
individual holders, are resident, ordinarily resident and
domiciled in Ireland under Irish taxation laws; (iii) in
the case of holders that are companies, are resident in Ireland
under Irish taxation laws; and (iv) are not also resident
in any other country under any double taxation agreement entered
into by Ireland.

-48-



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##### Table of Contents



For Irish taxation purposes, Irish Holders of
ADSs will be treated as the owners of the underlying ordinary
shares represented by such ADSs.



| |                      
| | ---------------------
| | Taxation of Dividends

We do not expect to pay dividends in the
foreseeable future. Should we begin paying dividends, such
dividends will generally be subject to dividend withholding tax
(DWT) in Ireland at the standard rate of income tax
(currently 20%). Where DWT applies, we will be responsible for
withholding such tax at source.

Corporate Irish Holders will generally be
entitled to claim an exemption from DWT by delivering a
declaration to us in the form prescribed by the Irish Revenue
Commissioners. Such corporate Irish Holders will generally not
otherwise be subject to Irish tax in respect of dividends
received.

Individual Irish Holders will be subject to
income tax on the gross amount of any dividend (that is the
amount of the dividend received plus any DWT withheld), at their
marginal rate of tax (currently either 20% or 42% depending on
the individuals circumstances). Individual Irish Holders
will be able to claim a credit against their resulting income
tax liability in respect of DWT withheld.

Individual Irish Holders may, depending on their
circumstances, also be subject to the Irish health levy of 2%
and pay related social insurance contribution of up to 3% in
respect of their dividend income.



| |                                     
| | ------------------------------------
| | Disposals of Ordinary Shares or ADSs

Irish Holders that acquire ordinary shares or
ADSs will generally be considered, for Irish tax purposes, to
have acquired their ordinary shares or ADSs at a base cost equal
to the amount paid for the ordinary shares or ADSs. On
subsequent dispositions, ordinary shares or ADSs acquired at an
earlier time will generally be deemed, for Irish tax purposes,
to be disposed of on a first in first out basis
before ordinary shares or ADSs acquired at a later time.

Irish Holders that dispose of their ordinary
shares or ADSs will be subject to Irish capital gains tax
(CGT) to the extent that the proceeds realized from such
disposition exceed the indexed base cost of the ordinary shares
or ADSs disposed of and any incidental expenses. The current
rate of CGT is 20%. Indexation of the base cost of the ordinary
shares or ADSs will only be available up to December 31,
2002, and only in respect of ordinary shares or ADSs held for
more than 12 months prior to their disposal.

Irish Holders that have unutilised capital losses
from other sources in the current, or any previous tax year, can
generally apply such losses to reduce gains realized on the
disposal of the ordinary shares or ADSs.

An annual exemption allows individuals to realize
chargeable gains of up to
1,270 in each
tax year without giving rise to CGT. This exemption is specific
to the individual and cannot be transferred between spouses.
Irish Holders are required, under Irelands self-assessment
system, to file a tax return reporting any chargeable gains
arising to them in a particular tax year.

Where disposal proceeds are received in a
currency other than euro they must be translated into euro
amounts to calculate the amount of any chargeable gain or loss.
Similarly, acquisition costs denominated in a currency other
than euro must be translated at the date of acquisition in euro
amounts.

Irish Holders that realize a loss on the
disposition of ordinary shares or ADSs will generally be
entitled to offset such allowable losses against capital gains
realized from other sources in determining their CGT liability
in a year. Allowable losses which remain unrelieved in a year
may generally be carried forward indefinitely for CGT purposes
and applied against capital gains in future years.

Transfers between spouses will not give rise to
any chargeable gain or loss for CGT purposes with the acquiring
spouse acquiring the same pro rata base cost and acquisition
date as that of the transferring spouse.

-49-



---



##### Table of Contents





| |                         
| | ------------------------
| | Capital Acquisitions Tax

A gift or inheritance of ordinary shares or ADSs
will fall within the charge to Irish capital acquisitions tax
(CAT). CAT is currently chargeable at a rate of 20% on the value
of gifts or inheritances above specified tax free thresholds.
Different classes of tax free thresholds apply depending upon
the relationship between the donor and the recipient. These tax
free thresholds are also affected by the value of previous gifts
or inheritances received since December 5, 1991. CAT is
generally payable by the recipient of the gift or inheritance.
Gifts or inheritances between spouses are not subject to Irish
CAT. Gifts of up to
1,270 can be
received each year from any given individual without triggering
a charge to CAT. Where a charge to CGT and CAT arises on the
same event, CAT payable on the event can be reduced by the
amount of the CGT payable.



| |           
| | ----------
| | Stamp Duty

Irish stamp duty, which is a tax imposed on
certain documents, is payable on all transfers of ordinary
shares (other than transfers made between spouses, transfers
made between 90% associated companies, or certain other exempt
transfers) regardless of where the document of transfer is
executed. Irish stamp duty is also payable on electronic
transfers of ordinary shares.

A transfer of ordinary shares made as part of a
sale or gift will generally be stampable at the ad valorem rate
of 1% of the value of the consideration received for the
transfer, or, if higher, the market value of the shares
transferred. A minimum stamp duty of
1.00 will apply
to a transfer of ordinary shares. Where the consideration for a
sale is expressed in a currency other than euro, the duty will
be charged on the euro equivalent calculated at the rate of
exchange prevailing at the date of the transfer.

Transfers of ordinary shares where no beneficial
interest passes (e.g. a transfer of shares from a beneficial
owner to a nominee), will generally be exempt from stamp duty if
the transfer form contains an appropriate certification,
otherwise a nominal stamp duty rate of
12.50 will apply.

Transfers of ADRs (representing ADSs) by Irish
Holders are generally exempt from Irish stamp duty.

Transfers of ordinary shares from the Depositary
or the Depositarys custodian upon surrender of ADRs for
the purposes of withdrawing the underlying ordinary shares from
the ADS/ ADR system, and transfers of ordinary shares to the
Depositary or the Depositarys custodian for the purposes
of transferring ordinary shares onto the ADS/ ADR system, will
be stampable at the ad valorem rate of 1% of the value of the
shares transferred if the transfer relates to a sale or
contemplated sale or any other change in the beneficial
ownership of ordinary shares. Such transfers will be exempt from
Irish stamp duty if the transfer does not relate to or involve
any change in the beneficial ownership in the underlying
ordinary shares and the transfer form contains the appropriate
certification. In the absence of an appropriate certification,
stamp duty will be applied at the nominal rate of
12.50.

The person accountable for the payment of stamp
duty is the transferee or, in the case of a transfer by way of
gift or for consideration less than the market value, both
parties to the transfer. Stamp duty is normally payable within
30 days after the date of execution of the transfer. Late
or inadequate payment of stamp duty will result in liability for
interest, penalties and fines.

(ii)     Irish Tax
Considerations Applicable to U.S. Holders

Solely for the purposes of this summary of Irish
Tax Considerations, a U.S. Holder means a
holder of ordinary shares or ADSs evidenced by ADRs that
(i) beneficially owns the ordinary shares or ADSs
registered in their name; (ii) is resident in the United
States for the purposes of the Treaty; (iii) in the case of
an individual holder, is not also resident or ordinarily
resident in Ireland for Irish tax purposes; (iv) in the
case of a corporate holder, is not a resident in Ireland for
Irish tax purposes and is not ultimately controlled by persons
resident in Ireland; and (v) is not engaged in any trade or
business and does not perform independent personal services
through a permanent establishment or fixed base in Ireland.

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For Irish taxation purposes, and for the purposes
of the Treaty, U.S. Holders of ADSs will be treated as the
owners of the underlying ordinary shares represented by such
ADSs.



| |                      
| | ---------------------
| | Taxation of Dividends

We do not expect to pay dividends in the
foreseeable future. Should we begin paying dividends, such
dividends will generally be subject to dividend withholding tax
(DWT) in Ireland at the standard rate of income tax
(currently 20%). Where DWT applies, we will be responsible for
withholding such tax at source.

Dividends paid by us to U.S. Holders of
ordinary shares will be exempt from DWT if, prior to the payment
of such dividends, the recipient U.S. Holder delivers to us
a declaration, a certificate of residency and, in the case of
U.S. Holders that are corporations, an auditors
certificate, each in the form prescribed by the Irish Revenue
Commissioners.

Special DWT arrangements may be available to
U.S. Holders of ADSs evidenced by ADRs, as the Depositary
for the ADSs (JPMorgan Chase Bank, as successor to Morgan
Guaranty Trust Company of New York, the depositary under the
Deposit Agreement dated as of February 24, 1997 among IONA,
Morgan Guaranty Trust Company and the holders from time to time
of ADSs issued thereunder) has entered into an intermediary
agreement with the Irish Revenue Commissioners for DWT purposes.
Under such an agreement, it is possible for the Depositary to
receive dividends from us and pass such dividends onto
U.S. Holders of ADSs on a gross basis, without DWT, if
either:



| |   |                                                                                                                                                                                                                                                     
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the ADR register maintained by the Depositary
    shows the U.S. Holder as having a U.S. address on the
    register; or                                                                                                                            
|
| |  | where there is an intermediary between the
    Depositary and the beneficial holder of ADSs, the Depositary
    receives confirmation from the intermediary that the beneficial
    owners address in the intermediarys records is in
    the U.S.

Where the above procedures have not been complied
with and DWT is withheld from dividend payments to
U.S. Holders of ordinary shares or ADSs evidenced by ADRs,
such U.S. Holders can apply to the Irish Revenue
Commissioners claiming a full refund of DWT paid by filing a
declaration, a certificate of residency and, in the case of
U.S. Holders that are corporations, an auditors
certificate, each in the form prescribed by the Irish Revenue
Commissioners.

The DWT rate applicable to U.S. Holders is
reduced to 5% under the terms of the Treaty for corporate
U.S. Holders holding 10% or more of our voting shares, and
to 15% for other U.S. Holders. While this will, subject to
the application of Article 23 of the Treaty, generally
entitle U.S. Holders to claim a partial refund of DWT from
the Irish Revenue Commissioners, U.S. Holders will, in most
circumstances, likely prefer to seek a full refund of DWT under
Irish domestic legislation.



| |                                                          
| | ---------------------------------------------------------
| | Capital Gains on Disposals of Ordinary Shares
    or ADSs

U.S. Holders will not be subject to Irish
capital gains tax (CGT) on the disposal of ordinary shares
or ADSs provided that such ordinary shares or ADSs are quoted on
a stock exchange at the time of disposition. A stock exchange
for this purpose includes, among others, the Irish Stock
Exchange (the ISE) or the Nasdaq National Market (NASDAQ). While
it is our intention to continue the quotation of our ordinary
shares on the ISE and the quotation of ADSs on NASDAQ, no
assurances can be given in this regard.

If, for any reason, our ADSs cease to be quoted
on NASDAQ and our ordinary shares cease to be quoted on the ISE,
U.S. Holders will not be subject to CGT on the disposal of
their ordinary shares or ADSs provided that the ordinary shares
or ADSs do not, at the time of the disposal, derive the greater
part of their value from land, buildings, minerals, or mineral
rights or exploration rights in Ireland.

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| |                               
| | ------------------------------
| | Irish Capital Acquisitions Tax

A gift or inheritance of ordinary shares or ADSs
will fall within the charge to Irish capital acquisitions tax
(CAT) because our ordinary shares are considered to be
Irish property for CAT purposes. CAT is currently chargeable at
a rate of 20% on the value of gifts or inheritances above
specified tax free thresholds. Different classes of tax free
thresholds apply depending upon the relationship between the
donor and the recipient. These tax free thresholds are also
affected by the value of previous gifts or inheritances received
since December 5, 1991. Gifts or inheritances between
spouses are not subject to CAT.

Gifts of up to
1,270 can be
received each year from any individual without triggering a
charge to CAT.

In a case where an inheritance of ordinary shares
or ADSs is subject to both CAT and U.S. federal estate tax,
the Estate Tax Convention between Ireland and the
U.S. should allow for the crediting, in whole or in part,
of the CAT against the U.S. federal estate tax payable.
Similar relief is not available in a case where a gift of
ordinary shares or ADSs evidenced by ADRs is subject both to CAT
and U.S. federal gift tax as the Estate Tax Convention only
applies to estate taxes.



| |           
| | ----------
| | Stamp Duty

Irish Stamp Duty will apply to transfers of
ordinary shares or ADSs by U.S. Holders on the same basis
as outlined above for Irish Holders.

Certain U.S. Federal Income Tax
Considerations

The following discussion summarizes certain of
the material U.S. federal income tax considerations for
U.S. Holders from the purchase, ownership and disposition
of our ordinary shares or ADSs which evidence the ADRs. The
following discussion assumes that, for U.S. federal income
tax purposes, U.S. Holders will be treated as the owners of
our underlying ordinary shares represented by the ADSs. The
following discussion is based on the Internal Revenue Code of
1986, as amended (the Code), current and proposed Treasury
Regulations, judicial decisions and published administrative
positions of the Internal Revenue Service, all as in effect on
the date of this Annual Report, and all of which are subject to
change, possibly with retroactive effect. For purposes of this
discussion, a person is a U.S. Holder if such person holds
ordinary shares or ADSs and if such person is:



| |   |                                                                                                                                                                                                                                                                                        
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | a citizen or resident of the United States,
    including an alien individual who is a lawful permanent resident
    of the United States or who meets the substantial presence
    residency test under U.S. federal income tax laws;                                                 
|
| |  | a corporation (or other entity treated as a
    corporation for U.S. federal income tax purposes) that is
    created or organized under the laws of the United States, any of
    the fifty states or the District of Columbia, unless otherwise
    provided by Treasury Regulations;
|
| |  | an estate the income of which is includible in
    gross income for U.S. federal income tax purposes
    regardless of source; or                                                                                                                                                      
|
| |  | a trust, if a U.S. court is able to exercise
    primary supervision over its administration and one or more
    U.S. persons have the authority to control all substantial
    decisions of the trust.                                                                                

This discussion does not address all aspects of
U.S. federal income taxation that may be relevant to a
U.S. Holder based on such holders particular
situation. For example, the following discussion does not
address the application of the alternative minimum tax rules or
rules applicable to U.S. Holders in special circumstances.
Special rules may apply to a U.S. Holder who is:



| |   |                                                                                                                                      
| | - | -------------------------------------------------------------------------------------------------------------------------------------
| |  | a bank, thrift, insurance company, regulated
    investment company, or other financial institution or financial
    service company;
|
| |  | a broker or dealer in securities or foreign
    currency;                                                                            

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| |   |                                                                                                                                                                                                                   
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | a person who has a functional currency other than
    the U.S. dollar;                                                                                                                                            
|
| |  | a partnership or other flow-through entity
    (including a limited liability company treated as a partnership
    for U.S. federal income tax purposes);                                                         
|
| |  | an S corporation;                                                                                                                                                                                                 
|
| |  | a person subject to alternative minimum tax;                                                                                                                                                                      
|
| |  | a person who owns our ordinary shares or ADSs
    evidenced by ADRs as part of a straddle, hedging transaction,
    conversion transaction, constructive sale transaction or other
    risk-reduction transaction;
|
| |  | a tax-exempt entity;                                                                                                                                                                                              
|
| |  | investors who own (directly, indirectly or
    through attribution) 10% or more of our outstanding voting
    shares;                                                                                             
|
| |  | a person who has ceased to be a U.S. citizen
    or to be taxed as a resident alien; or                                                                                                                           
|
| |  | a person who acquired our ordinary shares or ADSs
    evidenced by ADRs in connection with employment or the
    performance of services generally.                                                               

The following discussion does not address any
aspect of state, local or non-U.S. tax laws or any aspect
of U.S. estate or gift taxation and does not address
aspects of U.S. federal income taxation applicable to
U.S. Holders holding options, warrants, or other rights to
acquire our ordinary shares. Further, this discussion generally
considers only U.S. Holders that hold their ordinary shares
or ADSs as capital assets and does not consider the tax
treatment of holders who are partnerships or who hold ordinary
shares or ADSs through a partnership or other pass-through
entity. This discussion does not apply to any person who is
not a U.S. Holder or to any person who does not hold
ordinary shares or ADSs.

This discussion also assumes that we will not be
treated as a controlled foreign corporation. Under the Code, a
controlled foreign corporation generally means any foreign
corporation if, on any day during its taxable year, more than
50% of either the total combined voting power of all classes of
stock of the corporation entitled to vote, or the total value of
the stock of the corporation, is owned, directly, indirectly or
by attribution, by U.S. persons who each, in turn, own
directly, indirectly or by attribution, 10% or more of the total
combined voting power of all classes of stock of the corporation
entitled to vote. Further, this discussion assumes that we are
not a collapsible corporation as defined in the
Code. If a partnership (or an entity treated as a partnership)
holds our ordinary shares, the tax treatment of a partner will
generally depend upon the status of the partner and upon the
activities of the partnership. If you are a partner in a
partnership (or an interest holder in an entity treated as a
partnership), you should consult your tax advisor.



| |                                                                                                                                                                                                                                                                                                              
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | U.S. HOLDERS OF OUR ORDINARY SHARES OR
    ADSs ARE ADVISED TO CONSULT THEIR OWN TAX ADVISORS WITH RESPECT
    TO THE U.S. FEDERAL, STATE, LOCAL OR NON-U.S. TAX
    CONSEQUENCES OF THE PURCHASE, OWNERSHIP OR DISPOSITION OF
    ORDINARY SHARES OR ADSs APPLICABLE IN THEIR PARTICULAR TAX
    SITUATIONS.



| |          
| | ---------
| | Dividends

We have never paid dividends, and do not expect
to pay dividends in the foreseeable future. In general, and
subject to the discussion below under Foreign Investment
Company and Passive Foreign Investment
Company, if we make certain distributions on our ordinary
shares and with respect to ADSs, U.S. Holders will be
required to include in gross income as ordinary income the gross
amount (i.e., including the amount of any Irish tax withheld) of
the distributions, on the date the distributions are received
(or treated as received) to the extent the distributions are
paid out of our current or accumulated earnings and profits, as
determined for U.S. federal income tax purposes.
Distributions in excess of earnings and profits will be applied
against and will reduce a U.S. Holders adjusted tax
basis in our ordinary shares or ADSs and, to the extent in
excess of such basis, will be treated as capital gain.

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Distributions generally will not be eligible for
the dividends received deduction allowed to
U.S. corporations.


Distributions of current or accumulated earnings
and profits paid in a foreign currency to a U.S. Holder
will generally be includible in the income of a U.S. Holder
in a U.S. dollar amount calculated by reference to the
exchange rate on the date the distributions are received (or
treated as received). A U.S. Holder who receives a foreign
currency distribution and converts the foreign currency into
U.S. dollars subsequent to receipt will have exchange gain
or loss based on any appreciation or depreciation in the value
of the foreign currency against the U.S. dollar, which
generally will be U.S. source ordinary income or loss.

U.S. Holders who are able, under Irish
domestic tax legislation, to claim a refund or exemption of
Irish tax withheld should not expect to obtain a credit against
U.S. federal income tax liability for that withheld tax.
For more information, please see Irish Tax
Consequences.

Because the tax rules that apply to the
availability or use of foreign tax credits and deductions for
foreign taxes are complex, U.S. Holders should consult
with, and rely solely upon, their personal tax advisors with
respect to such matters.



| |                                    
| | -----------------------------------
| | Sale, Exchange or Other Disposition

Subject to the discussion below under
Foreign Investment Company and Passive Foreign
Investment Company, a U.S. Holder generally will
recognize capital gain or loss for U.S. federal income tax
purposes upon the sale or other disposition of ordinary shares
or ADSs evidenced by ADRs in an amount equal to the difference
between the amount realized on the sale or other disposition and
the U.S. Holders adjusted tax basis in his, her or
its ordinary shares or ADSs. The capital gain or loss recognized
on such sale or other disposition will be long-term capital gain
or loss if the ordinary shares or ADSs have been held for more
than one year at the time of sale or other disposition. In the
case of individuals, long-term capital gains are generally taxed
at a maximum rate of 20%, or 18% for assets acquired after the
year 2000 and held for more than five years. The deductibility
of capital losses is subject to limitations. In general, any
gain or loss recognized by a U.S. Holder on the sale or
other disposition of ordinary shares or ADSs will be
U.S. source income or loss for foreign tax credit purposes.



| |                         
| | ------------------------
| | Personal Holding Company

A foreign corporation may be classified as a
personal holding company for U.S. federal income tax
purposes if both of the following two tests are satisfied:



| |   |                                                                                                                                                                                                                                                                                  
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | at any time during the last half of the
    companys taxable year, five or fewer individuals (without
    regard to their citizenship or residency) actually or
    constructively own, under attribution rules, more than 50% of
    the stock of the corporation by value; and
|
| |  | 60% or more of the foreign corporations
    gross income derived from U.S. sources or effectively
    connected with a U.S. trade or business, as specifically
    adjusted, is from passive sources such as dividends, interest,
    rent and royalty payments.                

In general, a personal holding company is
currently taxed at a rate of 38.6% on its undistributed personal
holding company income, which is generally calculated based on
the corporations taxable income, after making certain
adjustments. We cannot provide any assurance that either test
will not be satisfied in 2003 or in future years because it is
difficult to make accurate predictions of future income and the
amount of our shares an individual will actually or
constructively own.

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| |                                 
| | --------------------------------
| | Foreign Personal Holding Company

A foreign corporation may be classified as a
foreign personal holding company for U.S. federal income
tax purposes if both of the following two tests are satisfied:



| |   |                                                                                                                                                                                                                                                                                                             
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | five or fewer individuals (who are
    U.S. citizens or residents) actually or constructively own,
    under attribution rules, more than 50% of all classes of the
    corporations stock measured by voting power or value at
    any time during the corporations taxable year; and                    
|
| |  | the corporation receives at least 60% (50% if
    previously a foreign personal holding company) of its gross
    income regardless of source, as specifically adjusted, from
    passive sources such as dividends, interest, gains from the sale
    or exchange of securities, rent and royalty payments.

If a corporation is classified as a foreign
personal holding company, a portion of its undistributed foreign
personal holding company income, as defined for
U.S. federal income tax purposes, is imputed to all of its
shareholders who are U.S. Holders on the last taxable day
of the corporations taxable year, or, if earlier, the last
day on which it is treated as a foreign personal holding
company. The imputed income is taxable as a dividend, even if no
cash dividend is actually paid. U.S. Holders who dispose of
their ordinary shares or ADSs before that date generally would
not be subject to U.S. federal income tax under these
rules. We cannot provide any assurance that we will not be
classified as a foreign personal holding company in 2003 or in
future years because it is difficult to make accurate
predictions of future income and the amount of our shares a
U.S. citizen or resident will actually or constructively
own.



| |                           
| | --------------------------
| | Foreign Investment Company

A foreign corporation may be classified as a
foreign investment company for U.S. federal income tax
purposes if, at any time during a taxable year when 50% or more
by vote or value of the corporations outstanding stock is
owned, directly or indirectly, by U.S. Holders, it is:



| |   |                                                                                                                                                                                                                                                           
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | registered as a management company or unit
    investment trust under the Investment Company Act of 1940, as
    amended; or                                                                                                                              
|
| |  | engaged, or holding itself out as being engaged,
    primarily in the business of investing, reinvesting, or trading
    in securities, commodities, or any interest, including a futures
    or forward contract or option, in securities or commodities.

In general, if a corporation is classified as a
foreign investment company at any time during the period a
U.S. Holder holds the corporations stock, any gain
from the sale or exchange of stock in that corporation by the
U.S. Holder will be taxable as ordinary income to the
extent of the U.S. Holders ratable share of the
corporations accumulated earnings and profits. We cannot
provide assurance that we will not be classified a foreign
investment company in 2003 or future years because it is
difficult to make accurate predictions of the amount of our
capital stock U.S. Holders will directly or indirectly own.



| |                                   
| | ----------------------------------
| | Passive Foreign Investment Company

In general, a foreign corporation may be
classified as a passive foreign investment company for
U.S. federal income tax purposes if:



| |   |                                                                                                                                                                                                                      
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 75% or more of its gross income in a taxable year
    falls within specific categories of passive income; or                                                                                                         
|
| |  | the average percentage of its assets in a taxable
    year (ordinarily determined based on their market value) which
    produce passive income or are held for the production of passive
    income is at least 50%.

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If we were classified as a passive foreign
investment company, and a U.S. Holder did not make a
qualifying election either to treat us as a qualified
electing fund or to mark our ordinary shares or ADSs to
market, as described below:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Excess distributions by us to a U.S. Holder
    would be taxed in a special way. Excess
    distributions are amounts received by a U.S. Holder
    with respect to our ordinary shares or ADSs in any taxable year
    that exceed 125% of the average distributions received by such
    U.S. Holder from us in the shorter of either the three
    previous years or the U.S. Holders holding period for
    the ordinary shares or ADSs before the current taxable year.
    Excess distributions must be allocated ratably to each day that
    a U.S. Holder has held our ordinary shares or ADSs. A
    U.S. Holder would be required to include amounts allocated
    to the current taxable year and years before we became a passive
    foreign investment company as ordinary income. In addition,
    amounts allocated to each taxable year beginning with the year
    we first became a passive foreign investment company would be
    taxed at the highest rate in effect for that year on ordinary
    income and the tax would be subject to an interest charge at the
    rate applicable to deficiencies for income tax.
|
| |  | The entire amount of gain that is realized by a
    U.S. Holder upon the sale or other disposition of our
    ordinary shares or ADSs evidenced by ADRs would also be
    considered an excess distribution and would be subject to tax as
    described above.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| |  | The adjusted tax basis in our ordinary shares or
    ADSs evidenced by ADRs acquired from a decedent who was a
    U.S. Holder of the ordinary shares or ADSs would not be
    increased to equal the fair market value of such ordinary shares
    or ADSs as of the date of the decedents death but would
    instead be equal to the decedents adjusted tax basis, if
    lower. A U.S. Holder could not avoid this result by
    electing to mark our ordinary shares or ADSs to market.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

If a U.S. Holder has made a qualified
electing fund election for all taxable years during which the
U.S. Holder owned our ordinary shares or ADSs and we were a
passive foreign investment company, the passive foreign
investment company rules described above would not apply to the
U.S. Holder. Instead, that U.S. Holder would be
required to include in income for each taxable year a pro rata
share of our ordinary earnings as ordinary income and a pro rata
share of our net capital gain as long-term capital gain. The
qualified electing fund election is made on a
shareholder-by-shareholder basis and can be revoked only with
the consent of the Internal Revenue Service. A U.S. Holder
generally makes a qualified electing fund election by attaching
a completed Internal Revenue Service Form 8621, including a
passive foreign investment company annual information statement,
to a timely filed U.S. federal income tax return. Even if a
qualified electing fund election is not made, a shareholder in a
passive foreign investment company who is a U.S. Holder
must file a completed Internal Revenue Service Form 8621
every year.

Alternatively, if a U.S. Holder is eligible
to elect to mark our ordinary shares or ADSs evidenced by ADRs
to market annually and makes a mark to market election, the
following rules generally would apply for each of the
U.S. Holders taxable years:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | if the fair market value of the
    U.S. Holders ordinary shares or ADSs exceeds the
    U.S. Holders adjusted tax basis in such ordinary
    shares or ADSs as of the close of the U.S. Holders
    taxable year, the U.S. Holder would recognize the amount of
    the excess as ordinary income;                                                                                                                                                                                  
|
| |  | if the fair market value of the
    U.S. Holders ordinary shares or ADSs is less than the
    U.S. Holders adjusted tax basis in those ordinary
    shares or ADSs as of the close of the U.S. Holders
    taxable year, the U.S. Holder might recognize the amount of
    the difference as ordinary loss. Losses would be allowed only
    for the amount of net mark to market gain previously included by
    the U.S. Holder under the election for prior taxable
    years; and
|
| |  | if the U.S. Holder has elected to mark our
    ordinary shares or ADSs to market for all taxable years during
    which the U.S. Holder owned our ordinary shares or ADSs and
    we were a passive foreign investment company, the excess
    distribution rules generally would not apply to the
    U.S. Holder.                                                                                                                                                                   

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U.S. Holders who hold ordinary shares or
ADSs evidenced by ADRs during a period when we are a passive
foreign investment company will be subject to the preceding
rules, even if we cease to be a passive foreign investment
company, subject to exceptions for U.S. Holders who made a
qualified electing fund election or mark to market election.
U.S. Holders are urged to consult their tax advisors about
the passive foreign investment company rules, including the
specific rules and requirements applicable to making qualified
electing fund and mark to market elections.



| |                                                           
| | ----------------------------------------------------------
| | Status of IONA as a Passive Foreign Investment
    Company

Passive foreign investment company status is
determined as of the end of each taxable year and is dependent
upon a number of factors, including the value of a
corporations assets and the amount and character of its
gross income. The determination of whether we are or will become
a passive foreign investment company will be affected by how
rapidly we use our cash and investment assets in our business.
If the market price of our ordinary shares or ADSs is relatively
low, we may be classified as a passive foreign investment
company. Therefore, we cannot provide any assurance that we are
not or will not become a passive foreign investment company.



| |                                                 
| | ------------------------------------------------
| | Backup Withholding and Information
    Reporting

Dividends on our ordinary shares or ADSs, and
payments of the proceeds of a sale of our ordinary shares or
ADSs, paid within the United States or through certain
U.S. related financial intermediaries are subject to
information reporting and may be subject to backup withholding
at a current rate of 30% if a U.S. Holder fails to:



| |   |                                                                                                                                                
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------
| |  | furnish its taxpayer identification number
    (social security or employer identification number) and certify
    that such number is correct;
|
| |  | certify that such U.S. Holder is not subject
    to backup withholding; or                                                                     
|
| |  | otherwise comply with the applicable requirements
    of the backup withholding rules.                                                         

Any amounts withheld under the backup withholding
rules from a payment to a U.S. Holder will be allowed as a
credit against such U.S. Holders U.S. federal
income tax and may entitle the U.S. Holder to a refund,
provided that the required information is furnished to the IRS.
U.S. Holders should consult their tax advisors regarding
their qualification for exemption from backup withholding and
the procedure for obtaining such an exemption if applicable.






|   |                            
|-- | ---------------------------
|F. | Dividends and Paying Agents

Not required.






|   |                      
|-- | ---------------------
|G. | Statements by Experts

Not required.






|   |                     
|-- | --------------------
|H. | Documents on Display

The documents concerning IONA referred to in this
document and required to be made available to the public are
available at our registered offices at The IONA Building,
Shelbourne Road, Ballsbridge, Dublin 4, Ireland.






|   |                       
|-- | ----------------------
|I. | Subsidiary Information

Not required.

-57-



---



##### Table of Contents








|         |                                                               
|-------- | --------------------------------------------------------------
|Item 11. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
    MARKET RISK

The following discussion regarding our market
risk contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as
amended, made pursuant to the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. These
forward-looking statements are neither promises nor guarantees
and involve risks and uncertainties, including risks of exchange
rate fluctuations, interest rate fluctuations and general market
volatility, that could cause actual results to differ materially
from those discussed in the forward-looking
statements.

Prior to 1999, we had undertaken transactions to
hedge the risks associated with fluctuations in exchange rates
of the Irish pound and the euro to the dollar. In the future, we
may undertake transactions to hedge the risks associated with
fluctuations in exchange rates of the euro and other currencies
to the dollar. Any market value gains or losses recognized on
hedges of payables in the future will be offset against foreign
exchange gains or losses on those payables. The gain or loss and
premium or discount on forward contracts designated as hedges of
firm commitments will be deferred until the hedged transaction
is completed and included in the measurement of the value of the
hedged transaction. At December 31, 2002, we had no foreign
exchange contracts outstanding.

Our trading portfolio of investments is not
considered to be subject to material market (interest rate) risk
because of the relatively short-term maturities of investments
included in the portfolio.

For further discussion of our market risk, please
see Item 5.A. Operating Results  Exposure
to Currency Fluctuations.






|         |                                                           
|-------- | ----------------------------------------------------------
|Item 12. | DESCRIPTION OF SECURITIES OTHER THAN EQUITY
    SECURITIES

Not required.

-58-



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##### Table of Contents



PART II






|         |                                                     
|-------- | ----------------------------------------------------
|Item 13. | DEFAULTS, DIVIDENDS ARREARAGES AND
    DELINQUENCIES

None.






|         |                                                                                 
|-------- | --------------------------------------------------------------------------------
|Item 14. | MATERIAL MODIFICATIONS TO THE RIGHTS OF
    SECURITY HOLDERS AND USE OF PROCEEDS

During the fiscal quarter ended June 29,
1997, IONA paid $380,000 to redeem all of its outstanding
redeemable Preference Shares, #0.0025 par value per share,
and paid all accrued and unpaid dividends payable thereon to the
date of redemption.

Certain of our ordinary shares are held by
JPMorgan Chase Bank (as successor to Morgan Guaranty Trust
Company of New York) under a Deposit Agreement dated
February 24, 1997.



| |                                                 
| | ------------------------------------------------
| | Use of Proceeds from Initial Public
    Offering

On February 24, 1997, our Registration
Statement on Form F-1 (File No. 333-6396) became
effective. Our net proceeds from the related offering were
$59,574,654. We have filed Form SR disclosing the sale of
securities and the use of proceeds therefrom through
May 24, 1997. Except for the information regarding the use
of proceeds, no information disclosed in such Form SR has
changed. The following are the uses of proceeds from the
effective date of the Registration Statement through
December 31, 2002:

|                                                                                                    |  |   |            | 
|--------------------------------------------------------------------------------------------------- |  | - | ---------- | 
|Purchase and installation of furniture and
    fixtures                                             |  | $ | 13,789,000 | 
|Purchase and installation of machinery and
    equipment                                            |  | $ | 31,447,000 | 
|Short-term debt instruments                                                                         |  | $ | 13,958,654 | 
|Redemption of outstanding Preference Shares and
    payment of accrued and unpaid dividends thereon |  | $ | 380,000    | 






|         |                        
|-------- | -----------------------
|Item 15. | CONTROLS AND PROCEDURES

Our Chief Executive Officer, Barry S. Morris, and
our Chief Financial Officer, Daniel Demmer, (our principal
executive officer and principal financial officer, respectively)
have concluded, based on their evaluation as of a date within
90 days prior to the filing date of this report, that our
disclosure controls and procedures (as defined in
U.S. Exchange Act Rules 13a-14(c)) are effective to
ensure that information required to be disclosed by us in the
reports filed or submitted by us under the Securities Exchange
Act of 1934, as amended, is recorded, processed, summarized and
reported within the time periods specified in the Securities and
Exchange Commissions rules and forms, and include controls
and procedures designed to ensure that information required to
be disclosed by IONA in such reports is accumulated and
communicated to our management, including the Chief Executive
Officer and Chief Financial Officer, as appropriate to allow
timely decisions regarding required disclosure. There were no
significant changes in our internal controls or in other factors
that could significantly affect these controls subsequent to the
date of such evaluation including any corrective actions with
regard to significant deficiencies and material weaknesses.






|         |           
|-------- | ----------
|Item 16. | [RESERVED]

-59-



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PART III






|         |                     
|-------- | --------------------
|Item 17. | FINANCIAL STATEMENTS

Not applicable. Please see Item 18
Financial Statements.






|         |                     
|-------- | --------------------
|Item 18. | FINANCIAL STATEMENTS

INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS

|                                                                                                                                     |  |      |     | 
|------------------------------------------------------------------------------------------------------------------------------------ |  | ---- | --- | 
|                                                                                                                                     |  | Page
|                                                                                                                                     |  |     
|Report of Independent Auditors                                                                                                       |  |      | F-1 | 
|Consolidated Balance Sheets at December 31,
    2002 and 2001                                                                        |  |      | F-2 | 
|Consolidated Statements of Operations for each of
    the three years in the period ended December 31, 2002                          |  |      | F-3 | 
|Consolidated Statements of Changes in
    Shareholders Equity for each of the three years in the
    period ended December 31, 2002 |  |      | F-4 | 
|Consolidated Statements of Cash Flows for each of
    the three years in the period ended December 31, 2002                          |  |      | F-5 | 
|Notes to Consolidated Financial Statements                                                                                           |  |      | F-6 | 

-60-



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Item 19.     EXHIBITS

|            |       |                        |  |                                                                                                                                                                                                                                                                                                                                                                                                 
|----------- | ----- | ---------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |       | Description of Exhibit
|            |       |                       
|            | 1.1   |                        |  | Restated Articles of Association, as amended, of
    IONA Technologies PLC (filed as Exhibit 4.2 to IONAs
    Registration Statement on Form S-8 (File
    No. 333-11384) and incorporated herein by reference)                                                                                                                                                                                
|            | 1.2   |                        |  | Memorandum of Association, as amended, of IONA
    Technologies PLC (filed as Exhibit 3.3 to IONAs
    Registration Statement on Form F-1 (File No. 333-6396)
    and incorporated herein by reference)                                                                                                                                                                                        
|            | 2.1   |                        |  | Specimen Certificate representing Ordinary Shares
    (filed as Exhibit 4.1 to IONAs Registration Statement
    on Form F-1 (File No. 333-6396) and incorporated
    herein by reference)                                                                                                                                                                                                      
|            | 2.2   |                        |  | Deposit Agreement dated as of February 24,
    1997, by and among IONA Technologies PLC, JPMorgan Chase Bank
    (as successor to Morgan Guaranty Trust Company of New York) and
    the holders from time to time of IONAs American Depositary
    Shares (filed as Exhibit 4.2 to IONAs Registration
    Statement on Form F-1 (File No. 333-6396) and
    incorporated herein by reference)
|            | 4.1   |                        |  | Agreement and Plan of Reorganization dated as of
    February 14, 2001, by and among IONA Technologies PLC, NV
    Acquisition Corp. and Netfish Technologies, Inc. (filed as
    Exhibit 4.4 to IONAs annual report on Form 20-F
    for the year ending December 31, 2000 and incorporated
    herein by reference)                                                                          
|            | 4.2   |                        |  | Lease dated July 31, 1998, by and between
    AIB Custodial Nominees Limited and IONA Technologies PLC (filed
    as Exhibit 4.5 to IONAs annual report on Form 20-F
    for the year ending December 31, 2000 and incorporated
    herein by reference)                                                                                                                                       
|            | 4.3   |                        |  | Lease dated March 2, 1999, by and between
    Boston Properties Limited Partnership and IONA Technologies,
    Inc. (filed as Exhibit 4.6 to IONAs annual report on
    Form 20-F for the year ending December 31, 2000 and
    incorporated herein by reference)                                                                                                                              
|            | 4.4  |                        |  | Executive Share Option Scheme (filed as
    Exhibit 10.1 to IONAs Registration Statement on
    Form F-1 (File No. 333-6396) and incorporated herein
    by reference)                                                                                                                                                                                                                         
|            | 4.5  |                        |  | 1997 Share Option Scheme, as amended (filed
    as Exhibit 4.4 to IONAs Registration Statement on
    Form S-8 (File No. 333-12326) and incorporated herein
    by reference)                                                                                                                                                                                                                  
|            | 4.6  |                        |  | 1997 Director Share Option Scheme (filed as
    Exhibit 10.3 to IONAs Registration Statement on
    Form F-1 (File No. 333-6396) and incorporated herein
    by reference)                                                                                                                                                                                                                     
|            | 4.7  |                        |  | 1999 Employee Share Purchase Plan, as amended
    (filed as Exhibit 4.5 to IONAs Registration Statement
    on Form S-8 (File No. 333-11384) and incorporated
    herein by reference)                                                                                                                                                                                                         
|            | 4.8  |                        |  | Genesis Development Corporation 1997 Stock Option
    Plan (filed as Exhibit 4.5 to IONAs Registration
    Statement on Form S-8 (File No. 333-12326) and
    incorporated herein by reference)                                                                                                                                                                                                
|            | 4.9  |                        |  | Object-Oriented Concepts, Inc. Stock Option Plan
    (filed as Exhibit 4.4 to IONAs Registration Statement
    on Form S-8 (File No. 333-13224) and incorporated
    herein by reference)                                                                                                                                                                                                      
|            | 4.10 |                        |  | Netfish Technologies, Inc. 1999 Stock Option Plan
    (filed as Exhibit 4.5 to IONAs Registration Statement
    on Form S-8 (File No. 333-13494) and incorporated
    herein by reference)                                                                                                                                                                                                     
|            | 4.11 |                        |  | Letter agreement regarding severance payments
    dated August 8, 2002 by and between Steven Fisch and IONA
    Technologies, Inc.                                                                                                                                                                                                                                                              
|            | 4.12 |                        |  | Non-Executive Directors Change in Control Plan                                                                                                                                                                                                                                                                                                                                                  

-61-



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|            |       |                        |  |                                                                                                                                                                                                          
|----------- | ----- | ---------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |       | Description of Exhibit
|            |       |                       
|            | 4.13 |                        |  | Form of Change of Control Agreement by and among
    IONA Technologies, Inc., IONA Technologies PLC and each of Barry
    S. Morris, Daniel Demmer, Eric Newcomer, David James and Susan
    H. Alexander
|            | 4.14 |                        |  | Change of Control Agreement dated March 17,
    2003 by and among IONA Technologies, Inc., IONA Technologies PLC
    and Steven Fisch                                                                    
|            | 8.1   |                        |  | Active Subsidiaries of IONA Technologies PLC                                                                                                                                                             
|            | 10.1  |                        |  | Consent of Ernst & Young                                                                                                                                                                                 
|            | 10.2  |                        |  | Certification of Chief Executive Officer pursuant
    to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                   
|            | 10.3  |                        |  | Certification of Chief Financial Officer pursuant
    to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                   



---



|  |                                                                                       
|- | --------------------------------------------------------------------------------------
| | Indicates a management contract or any
    compensatory plan, contract or arrangement.

-62-



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##### Table of Contents






SIGNATURES

The Registrant hereby certifies that it meets all
of the requirements for filing on Form 20-F and that it has
duly caused and authorized the undersigned to sign this annual
report on its behalf.



| |                                         
| | ----------------------------------------
| | IONA TECHNOLOGIES PLC                   
|
| | By: /s/ BARRY S. MORRIS                 
| |                                         
| | Barry S. Morris                         
| | Chief Executive Officer and
    Director

Date: April 4, 2003

-63-



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##### Table of Contents






CERTIFICATION

I, Barry S. Morris, certify that:

1. I have reviewed this annual report on
Form 20-F of IONA Technologies PLC;

2. Based on my knowledge, this annual report
does not contain any untrue statement of a material fact or omit
to state a material fact necessary to make the statements made,
in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this
annual report;

3. Based on my knowledge, the financial
statements, and other financial information included in this
annual report, fairly present in all material respects the
financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual
report;

4. The registrants other certifying
officers and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:



| |                                                                                                                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a. designed such disclosure controls and
    procedures to ensure that material information relating to the
    registrant, including its consolidated subsidiaries, is made
    known to us by others within those entities, particularly during
    the period in which this annual report is being prepared;
|
| | b. evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this annual
    report (the Evaluation Date); and                                                                                                      
|
| | c. presented in this annual report our
    conclusions about the effectiveness of the disclosure controls
    and procedures based on our evaluation as of the Evaluation Date;                                                                                                                                

5. The registrants other certifying
officers and I have disclosed, based on our most recent
evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons
performing the equivalent function):



| |                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a. all significant deficiencies in the
    design or operation of internal controls which could adversely
    affect the registrants ability to record, process,
    summarize and report financial data and have identified for the
    registrants auditors any material weaknesses in internal
    controls; and
|
| | b. any fraud, whether or not material, that
    involves management or other employees who have a significant
    role in the registrants internal controls; and                                                                                                                                                    

6. The registrants other certifying
officers and I have indicated in this annual report whether
or not there were significant changes in internal controls or in
other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies
and material weaknesses.



| |                        
| | -----------------------
| | /s/ BARRY S. MORRIS    
| |                        
| | Barry S. Morris        
| | Chief Financial Officer

Date: April 4, 2003

-64-



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##### Table of Contents






CERTIFICATION

I, Daniel Demmer, certify that:

1. I have reviewed this annual report on
Form 20-F of IONA Technologies PLC;

2. Based on my knowledge, this annual report
does not contain any untrue statement of a material fact or omit
to state a material fact necessary to make the statements made,
in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this
annual report;

3. Based on my knowledge, the financial
statements, and other financial information included in this
annual report, fairly present in all material respects the
financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual
report;

4. The registrants other certifying
officers and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:



| |                                                                                                                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a. designed such disclosure controls and
    procedures to ensure that material information relating to the
    registrant, including its consolidated subsidiaries, is made
    known to us by others within those entities, particularly during
    the period in which this annual report is being prepared;
|
| | b. evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this annual
    report (the Evaluation Date); and                                                                                                      
|
| | c. presented in this annual report our
    conclusions about the effectiveness of the disclosure controls
    and procedures based on our evaluation as of the Evaluation Date;                                                                                                                                

5. The registrants other certifying
officers and I have disclosed, based on our most recent
evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons
performing the equivalent function):



| |                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a. all significant deficiencies in the
    design or operation of internal controls which could adversely
    affect the registrants ability to record, process,
    summarize and report financial data and have identified for the
    registrants auditors any material weaknesses in internal
    controls; and
|
| | b. any fraud, whether or not material, that
    involves management or other employees who have a significant
    role in the registrants internal controls; and                                                                                                                                                    

6. The registrants other certifying
officers and I have indicated in this annual report whether
or not there were significant changes in internal controls or in
other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies
and material weaknesses.



| |                        
| | -----------------------
| | /s/ DANIEL DEMMER      
| |                        
| | Daniel Demmer          
| | Chief Financial Officer

Date: April 4, 2003

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REPORT OF INDEPENDENT AUDITORS

To the Board of Directors and Shareholders of

IONA Technologies PLC


We have audited the accompanying consolidated
balance sheets of IONA Technologies PLC as of December 31,
2002 and 2001, and the related consolidated statements of
operations, changes in shareholders equity and cash flows
for each of the three years in the period ended
December 31, 2002. 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
auditing standards generally accepted in the United States.
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.

In our opinion, the consolidated financial
statements referred to above present fairly, in all material
respects, the consolidated financial position of IONA
Technologies PLC at December 31, 2002 and 2001, and the
consolidated results of their operations and their cash flows
for each of the three years in the period ended
December 31, 2002, in conformity with accounting principles
generally accepted in the United States.

As discussed in Note 1 to the consolidated
financial statements, the Company changed its method of
accounting for amortization of goodwill and other identifiable
intangible assets.



| |                  
| | -----------------
| | /s/ ERNST & YOUNG

Dublin, Ireland

January 21, 2003


F-1



---



##### Table of Contents



IONA TECHNOLOGIES PLC

CONSOLIDATED BALANCE SHEETS

(U.S. dollars in thousands, except share
and per share data)


|                                                                                                                                  |                                                                                                                                                                                                  |                                          |                                            |          |   |         |         |         |   |         | 
|--------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ---------------------------------------- | ------------------------------------------ | -------- | - | ------- | ------- | ------- | - | ------- | 
|                                                                                                                                  |                                                                                                                                                                                                  |                                         
|                                                                                                                                  |                                                                                                                                                                                                  | December 31,                            
|                                                                                                                                  |                                                                                                                                                                                                  |                                         
|                                                                                                                                  |                                                                                                                                                                                                  | 2002                                     |                                            | 2001    
|                                                                                                                                  |                                                                                                                                                                                                  |                                          |                                            |         
|ASSETS                                                                                                                            |                                                                                                                                                                                                  |                                          |                                            |          |   |         |         |        
|Current assets:                                                                                                                   |                                                                                                                                                                                                  |                                          |                                            |          |   |         |         |        
|                                                                                                                                  | Cash and cash equivalents                                                                                                                                                                        |                                          | $                                          | 22,287   |   |         | $       | 28,509  |  
|                                                                                                                                  | Restricted cash (Note 6)                                                                                                                                                                         |                                          |                                            | 1,223    |   |         |         | 1,078   |  
|                                                                                                                                  | Marketable securities (Note 2)                                                                                                                                                                   |                                          |                                            | 58,140   |   |         |         | 24,110  |  
|                                                                                                                                  | Accounts receivable, net of allowance for
    doubtful accounts of $1,132 and $1,321 at December 31, 2002
    and 2001, respectively                                                             |                                          |                                            | 29,733   |   |         |         | 44,207  |  
|                                                                                                                                  | Prepaid expenses and other assets                                                                                                                                                                |                                          |                                            | 4,537    |   |         |         | 4,290   |  
|                                                                                                                                  |                                                                                                                                                                                                  |                                          |                                            |          |   |         |         |        
|                                                                                                                                  |                                                                                                                                                                                                  |                                          | Total current assets                       |          |   | 115,920 |         |         |   | 102,194 | 
|Property and equipment, net (Note 12)                                                                                             |                                                                                                                                                                                                  |                                          | 12,987                                     |          |   |         | 18,789  |        
|Other non-current assets, net (Note 10)                                                                                           |                                                                                                                                                                                                  |                                          | 2,697                                      |          |   |         | 47,998  |        
|Goodwill, net (Note 11)                                                                                                           |                                                                                                                                                                                                  |                                          |                                           |          |   |         | 268,717 |        
|                                                                                                                                  |                                                                                                                                                                                                  |                                          |                                            |          |   |         |         |        
|                                                                                                                                  |                                                                                                                                                                                                  |                                          | Total assets                               |          | $ | 131,604 |         |         | $ | 437,698 | 
|                                                                                                                                  |                                                                                                                                                                                                  |                                          |                                            |          |   |         |         |        
|                                                                                                                                  |                                                                                                                                                                                                  | LIABILITIES AND SHAREHOLDERS
    EQUITY |                                            |          |   |         |         |         |   |        
|Current liabilities:                                                                                                              |                                                                                                                                                                                                  |                                          |                                            |          |   |         |         |        
|                                                                                                                                  | Accounts payable                                                                                                                                                                                 |                                          | $                                          | 2,447    |   |         | $       | 3,429   |  
|                                                                                                                                  | Accrued payroll and related expenses                                                                                                                                                             |                                          |                                            | 8,103    |   |         |         | 12,134  |  
|                                                                                                                                  | Other accrued liabilities (Note 7)                                                                                                                                                               |                                          |                                            | 20,186   |   |         |         | 14,017  |  
|                                                                                                                                  | Deferred revenue                                                                                                                                                                                 |                                          |                                            | 25,963   |   |         |         | 32,352  |  
|                                                                                                                                  |                                                                                                                                                                                                  |                                          |                                            |          |   |         |         |        
|                                                                                                                                  |                                                                                                                                                                                                  |                                          | Total current liabilities                  |          |   | 56,699  |         |         |   | 61,932  | 
|Redeemable Preference Shares,
    0.0025 par
    value, 101,250,000 shares authorized; None issued and
    outstanding (Note 13) |                                                                                                                                                                                                  |                                          |                                           |          |   |         |        |        
|Shareholders equity:                                                                                                             |                                                                                                                                                                                                  |                                          |                                            |          |   |         |         |        
|                                                                                                                                  | Ordinary Shares,
    0.0025 par
    value; 150,000,000 shares authorized; 32,834,968 and
    27,816,711 shares issued and outstanding at
    December 31, 2002 and 2001, respectively (Note 13) |                                          |                                            | 91       |   |         |         | 80      |  
|                                                                                                                                  | Additional paid-in capital                                                                                                                                                                       |                                          |                                            | 491,165  |   |         |         | 427,128 |  
|                                                                                                                                  | Accumulated deficit                                                                                                                                                                              |                                          |                                            | (415,927 | ) |         |         | (46,620 | )
|                                                                                                                                  | Deferred stock-based compensation                                                                                                                                                                |                                          |                                            | (424     | ) |         |         | (4,822  | )
|                                                                                                                                  |                                                                                                                                                                                                  |                                          |                                            |          |   |         |         |        
|                                                                                                                                  |                                                                                                                                                                                                  |                                          | Total shareholders equity                 |          |   | 74,905  |         |         |   | 375,766 | 
|                                                                                                                                  |                                                                                                                                                                                                  |                                          |                                            |          |   |         |         |        
|                                                                                                                                  |                                                                                                                                                                                                  |                                          | Total liabilities and shareholders equity |          | $ | 131,604 |         |         | $ | 437,698 | 
|                                                                                                                                  |                                                                                                                                                                                                  |                                          |                                            |          |   |         |         |        

The accompanying notes are an integral part of
these statements.

F-2



---



##### Table of Contents



IONA TECHNOLOGIES PLC

CONSOLIDATED STATEMENTS OF
OPERATIONS

(U.S. dollars in thousands, except share
and per share data)


|                                                                                                     |                                                  |                          |          |         |         |      |         |         |         |   |        |         |         | 
|---------------------------------------------------------------------------------------------------- | ------------------------------------------------ | ------------------------ | -------- | ------- | ------- | ---- | ------- | ------- | ------- | - | ------ | ------- | ------- | 
|                                                                                                     |                                                  |                         
|                                                                                                     |                                                  | Year Ended December 31, 
|                                                                                                     |                                                  |                         
|                                                                                                     |                                                  | 2002                     |          | 2001    |         | 2000
|                                                                                                     |                                                  |                          |          |         |         |     
|Revenue:                                                                                             |                                                  |                          |          |         |         |      |         |         |         |   |        |        
|                                                                                                     | Product revenue                                  |                          | $        | 73,452  |         |      | $       | 118,178 |         |   | $      | 105,533 |        
|                                                                                                     | Service revenue                                  |                          |          | 49,778  |         |      |         | 62,526  |         |   |        | 47,530  |        
|                                                                                                     |                                                  |                          |          |         |         |      |         |         |         |   |        |        
|                                                                                                     |                                                  | Total revenue (Note 18)  |          |         | 123,230 |      |         |         | 180,704 |   |        |         | 153,063 | 
|                                                                                                     |                                                  |                          |          |         |         |      |         |         |         |   |        |        
|Cost of Revenue:                                                                                     |                                                  |                          |          |         |         |      |         |         |         |   |        |        
|                                                                                                     | Cost of product revenue                          |                          |          | 1,685   |         |      |         | 3,190   |         |   |        | 3,457   |        
|                                                                                                     | Cost of service revenue                          |                          |          | 25,458  |         |      |         | 34,926  |         |   |        | 26,484  |        
|                                                                                                     |                                                  |                          |          |         |         |      |         |         |         |   |        |        
|                                                                                                     |                                                  | Total cost of revenue    |          |         | 27,143  |      |         |         | 38,116  |   |        |         | 29,941  | 
|                                                                                                     |                                                  |                          |          |         |         |      |         |         |         |   |        |        
|                                                                                                     |                                                  | Gross profit             |          |         | 96,087  |      |         |         | 142,588 |   |        |         | 123,122 | 
|                                                                                                     |                                                  |                          |          |         |         |      |         |         |         |   |        |        
|Operating expenses:                                                                                  |                                                  |                          |          |         |         |      |         |         |         |   |        |        
|                                                                                                     | In-process research and development              |                          |          |        |         |      |         | 3,600   |         |   |        |        |        
|                                                                                                     | Research and development                         |                          |          | 38,256  |         |      |         | 40,260  |         |   |        | 26,906  |        
|                                                                                                     | Sales and marketing                              |                          |          | 72,888  |         |      |         | 88,419  |         |   |        | 63,669  |        
|                                                                                                     | General and administrative                       |                          |          | 13,252  |         |      |         | 15,318  |         |   |        | 12,046  |        
|                                                                                                     | Amortization of other non-current assets         |                          |          | 10,115  |         |      |         | 14,151  |         |   |        | 2,858   |        
|                                                                                                     | Amortization of goodwill                         |                          |          |        |         |      |         | 61,403  |         |   |        | 4,973   |        
|                                                                                                     | Restructuring (Note 5)                           |                          |          | 20,763  |         |      |         | 5,705   |         |   |        |        |        
|                                                                                                     | Impairment of goodwill                           |                          |          | 276,808 |         |      |         |        |         |   |        |        |        
|                                                                                                     | Impairment of intangible assets and fixed assets |                          |          | 32,336  |         |      |         |        |         |   |        |        |        
|                                                                                                     | Settlement of litigation (Note 19)               |                          |          |        |         |      |         |        |         |   |        | 1,350   |        
|                                                                                                     |                                                  |                          |          |         |         |      |         |         |         |   |        |        
|                                                                                                     |                                                  | Total operating expenses |          |         | 464,418 |      |         |         | 228,856 |   |        |         | 111,802 | 
|                                                                                                     |                                                  |                          |          |         |         |      |         |         |         |   |        |        
|Income (loss) from operations                                                                        |                                                  |                          | (368,331 | )       |         |      | (86,268 | )       |         |   | 11,320 |        
|Interest income, net                                                                                 |                                                  |                          | 1,069    |         |         |      | 2,504   |         |         |   | 4,116  |        
|Net exchange loss                                                                                    |                                                  |                          | (502     | )       |         |      | (468    | )       |         |   | (384   | )      
|Gain on sale of investment and other income                                                          |                                                  |                          |         |         |         |      | 164     |         |         |   | 1,912  |        
|                                                                                                     |                                                  |                          |          |         |         |      |         |         |         |   |        |        
|Income (loss) before provision for (benefit of)
    income taxes (Note 17)                           |                                                  |                          | (367,764 | )       |         |      | (84,068 | )       |         |   | 16,964 |        
|Provision for (benefit of) income taxes
    (Note 17)                                                |                                                  |                          | 1,543    |         |         |      | (568    | )       |         |   | 2,799  |        
|                                                                                                     |                                                  |                          |          |         |         |      |         |         |         |   |        |        
|Net income (loss) available to Ordinary
    Shareholders                                             |                                                  | $                        | (369,307 | )       |         | $    | (83,500 | )       |         | $ | 14,165 |        
|                                                                                                     |                                                  |                          |          |         |         |      |         |         |         |   |        |        
|Basic net income (loss) per Ordinary Share and
    per ADS                                           |                                                  | $                        | (11.58   | )       |         | $    | (3.27   | )       |         | $ | 0.67   |        
|                                                                                                     |                                                  |                          |          |         |         |      |         |         |         |   |        |        
|Shares used in computing basic net income (loss)
    per Ordinary Share and per ADS (in thousands)   |                                                  |                          | 31,890   |         |         |      | 25,556  |         |         |   | 21,177 |        
|                                                                                                     |                                                  |                          |          |         |         |      |         |         |         |   |        |        
|Diluted net income (loss) per Ordinary Share and
    per ADS                                         |                                                  | $                        | (11.58   | )       |         | $    | (3.27   | )       |         | $ | 0.60   |        
|                                                                                                     |                                                  |                          |          |         |         |      |         |         |         |   |        |        
|Shares used in computing diluted net income
    (loss) per Ordinary Share and per ADS (in thousands) |                                                  |                          | 31,890   |         |         |      | 25,556  |         |         |   | 23,520 |        
|                                                                                                     |                                                  |                          |          |         |         |      |         |         |         |   |        |        

The accompanying notes are an integral part of
these statements.

F-3



---



##### Table of Contents



IONA TECHNOLOGIES PLC






CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS EQUITY


(U.S. dollars in thousands, except share
data)


|                                                                                                                                 |  |           |            |         |  |            |    |             |  |              |         |               |  |               |          |   |  |   |         |   |  |   |        |   |  |   |          |  
|-------------------------------------------------------------------------------------------------------------------------------- |  | --------- | ---------- | ------- |  | ---------- | -- | ----------- |  | ------------ | ------- | ------------- |  | ------------- | -------- | - |  | - | ------- | - |  | - | ------ | - |  | - | -------- | -
|                                                                                                                                 |  |           |            |         |  |            |    |             |  |              |         | Accumulated   |  |              
|                                                                                                                                 |  |           |            |         |  | Additional |    | Accumulated |  | Deferred     |         | Other         |  | Total        
|                                                                                                                                 |  | Number of |            | Share   |  | Paid-in    |    | Earnings    |  | Stock-Based  |         | Comprehensive |  | Shareholders
|                                                                                                                                 |  | Shares    |            | Capital |  | Capital    |    | (Deficit)   |  | Compensation |         | Income        |  | Equity       
|                                                                                                                                 |  |           |            |         |  |            |    |             |  |              |         |               |  |              
|Balance at December 31, 1999                                                                                                     |  |           | 20,450,869 |         |  | $          | 63 |             |  | $            | 78,016  |               |  | $             | 22,715   |   |  | $ | (599    | ) |  | $ | 11,526 |   |  | $ | 111,721  |  
|Amortization of deferred stock-based
    compensation(a)                                                                         |  |           |           |         |  |            |   |             |  |              |        |               |  |               |         |   |  |   | 404     |   |  |   |       |   |  |   | 404      |  
|Employee share purchase plan                                                                                                     |  |           | 60,441     |         |  |            |   |             |  |              | 1,452   |               |  |               |         |   |  |   |        |   |  |   |       |   |  |   | 1,452    |  
|Issuance of Ordinary Shares                                                                                                      |  |           | 143,549    |         |  |            |   |             |  |              | 8,199   |               |  |               |         |   |  |   |        |   |  |   |       |   |  |   | 8,199    |  
|Issuance of Ordinary Shares in connection with
    acquisitions                                                                  |  |           | 331,744    |         |  |            | 1  |             |  |              | 8,326   |               |  |               |         |   |  |   |        |   |  |   |       |   |  |   | 8,327    |  
|Intrinsic value of options issued in connection
    with acquisitions                                                            |  |           |           |         |  |            |   |             |  |              | 5,319   |               |  |               |         |   |  |   |        |   |  |   |       |   |  |   | 5,319    |  
|Issuance of Ordinary Shares on exercise of
    options(a)                                                                        |  |           | 1,003,721  |         |  |            | 2  |             |  |              | 12,969  |               |  |               |         |   |  |   |        |   |  |   |       |   |  |   | 12,971   |  
|Net income available to Ordinary Shareholders                                                                                    |  |           |           |         |  |            |   |             |  |              |        |               |  |               | 14,165   |   |  |   |        |   |  |   |       |   |  |   | 14,165   |  
|Unrealized loss on investment                                                                                                    |  |           |           |         |  |            |   |             |  |              |        |               |  |               |         |   |  |   |        |   |  |   | (9,371 | ) |  |   | (9,371   | )
|Reclassification adjustment for gains included in
    net income                                                                 |  |           |           |         |  |            |   |             |  |              |        |               |  |               |         |   |  |   |        |   |  |   | (1,880 | ) |  |   | (1,880   | )
|                                                                                                                                 |  |           |            |         |  |            |    |             |  |              |         |               |  |               |          |   |  |   |         |   |  |   |        |   |  |   |          |  
|Comprehensive income                                                                                                             |  |           |           |         |  |            |   |             |  |              |        |               |  |               |         |   |  |   |        |   |  |   |       |   |  |   | 2,914    |  
|                                                                                                                                 |  |           |            |         |  |            |    |             |  |              |         |               |  |               |          |   |  |   |         |   |  |   |        |   |  |   |          |  
|Balance at December 31, 2000                                                                                                     |  |           | 21,990,324 |         |  | $          | 66 |             |  | $            | 114,281 |               |  | $             | 36,880   |   |  | $ | (195    | ) |  | $ | 275    |   |  | $ | 151,307  |  
|                                                                                                                                 |  |           |            |         |  |            |    |             |  |              |         |               |  |               |          |   |  |   |         |   |  |   |        |   |  |   |          |  
|Amortization of deferred stock-based
    compensation(a)                                                                         |  |           |           |         |  |            |   |             |  |              |        |               |  |               |         |   |  |   | 1,780   |   |  |   |       |   |  |   | 1,780    |  
|Employee share purchase plan                                                                                                     |  |           | 105,756    |         |  |            |   |             |  |              | 2,373   |               |  |               |         |   |  |   |        |   |  |   |       |   |  |   | 2,373    |  
|Issuance of Ordinary Shares                                                                                                      |  |           | 24,375     |         |  |            |   |             |  |              |        |               |  |               |         |   |  |   |        |   |  |   |       |   |  |   |         |  
|Issuance of Ordinary Shares on exercise of
    warrants                                                                          |  |           | 19,018     |         |  |            |   |             |  |              |        |               |  |               |         |   |  |   |        |   |  |   |       |   |  |   |         |  
|Issuance of Ordinary Shares in connection with
    acquisitions                                                                  |  |           | 4,951,669  |         |  |            | 12 |             |  |              | 269,431 |               |  |               |         |   |  |   |        |   |  |   |       |   |  |   | 269,443  |  
|Expense of Ordinary Shares issued in connection
    with acquisitions                                                            |  |           |           |         |  |            |   |             |  |              | (1,563  | )             |  |               |         |   |  |   |        |   |  |   |       |   |  |   | (1,563   | )
|Fair value of options issued in connection with
    acquisitions less amounts allocated to deferred stock-based
    compensation |  |           |           |         |  |            |   |             |  |              | 29,195  |               |  |               |         |   |  |   |        |   |  |   |       |   |  |   | 29,195   |  
|Proportion of intrinsic value of unvested options
    at consummation dates allocated to deferred stock-based
    compensation   |  |           |           |         |  |            |   |             |  |              | 10,380  |               |  |               |         |   |  |   | (10,380 | ) |  |   |       |   |  |   |         |  
|Reversal of deferred stock-based compensation on
    expiry or forfeiture of options                                             |  |           |           |         |  |            |   |             |  |              | (3,973  | )             |  |               |         |   |  |   | 3,973   |   |  |   |       |   |  |   |         |  
|Compensation on acceleration of options as part
    of restructuring                                                             |  |           |           |         |  |            |   |             |  |              | 233     |               |  |               |         |   |  |   |        |   |  |   |       |   |  |   | 233      |  
|Issuance of Ordinary Shares on exercise of
    options, net(a)                                                                   |  |           | 725,569    |         |  |            | 2  |             |  |              | 6,771   |               |  |               |         |   |  |   |        |   |  |   |       |   |  |   | 6,773    |  
|Net loss available to Ordinary Shareholders                                                                                      |  |           |           |         |  |            |   |             |  |              |        |               |  |               | (83,500  | ) |  |   |        |   |  |   |       |   |  |   | (83,500  | )
|Unrealized loss on investment                                                                                                    |  |           |           |         |  |            |   |             |  |              |        |               |  |               |         |   |  |   |        |   |  |   | (111   | ) |  |   | (111     | )
|Reclassification adjustment for gains included in
    net loss                                                                   |  |           |           |         |  |            |   |             |  |              |        |               |  |               |         |   |  |   |        |   |  |   | (164   | ) |  |   | (164     | )
|                                                                                                                                 |  |           |            |         |  |            |    |             |  |              |         |               |  |               |          |   |  |   |         |   |  |   |        |   |  |   |          |  
|Comprehensive loss                                                                                                               |  |           |           |         |  |            |   |             |  |              |        |               |  |               |         |   |  |   |        |   |  |   |       |   |  |   | (83,775  | )
|                                                                                                                                 |  |           |            |         |  |            |    |             |  |              |         |               |  |               |          |   |  |   |         |   |  |   |        |   |  |   |          |  
|Balance at December 31, 2001                                                                                                     |  |           | 27,816,711 |         |  | $          | 80 |             |  | $            | 427,128 |               |  | $             | (46,620  | ) |  | $ | (4,822  | ) |  | $ |       |   |  | $ | 375,766  |  
|                                                                                                                                 |  |           |            |         |  |            |    |             |  |              |         |               |  |               |          |   |  |   |         |   |  |   |        |   |  |   |          |  
|Amortization of deferred stock-based
    compensation(a)                                                                         |  |           |           |         |  |            |   |             |  |              |        |               |  |               |         |   |  |   | 1,230   |   |  |   |       |   |  |   | 1,230    |  
|Employee share purchase plan                                                                                                     |  |           | 331,205    |         |  |            | 1  |             |  |              | 1,985   |               |  |               |         |   |  |   |        |   |  |   |       |   |  |   | 1,986    |  
|Issuance of Ordinary Shares                                                                                                      |  |           |           |         |  |            |   |             |  |              |        |               |  |               |         |   |  |   |        |   |  |   |       |   |  |   |         |  
|Issuance of Ordinary Shares in connection with
    Secondary Offering                                                            |  |           | 4,600,000  |         |  |            | 10 |             |  |              | 65,379  |               |  |               |         |   |  |   |        |   |  |   |       |   |  |   | 65,389   |  
|Expense of Ordinary Shares issued in connection
    with Secondary Offering                                                      |  |           |           |         |  |            |   |             |  |              | (1,997  | )             |  |               |         |   |  |   |        |   |  |   |       |   |  |   | (1,997   | )
|Issuance of Ordinary Shares in connection with
    acquisitions                                                                  |  |           |           |         |  |            |   |             |  |              | 1,219   |               |  |               |         |   |  |   |        |   |  |   |       |   |  |   | 1,219    |  
|Reversal of deferred stock-based compensation on
    expiry or forfeiture of options                                             |  |           |           |         |  |            |   |             |  |              | (3,168  | )             |  |               |         |   |  |   | 3,168   |   |  |   |       |   |  |   |         |  
|Issuance of Ordinary Shares on exercise of
    options, net(a)                                                                   |  |           | 87,052     |         |  |            |   |             |  |              | 619     |               |  |               |         |   |  |   |        |   |  |   |       |   |  |   | 619      |  
|                                                                                                                                 |  |           |            |         |  |            |    |             |  |              |         |               |  |               |          |   |  |   |         |   |  |   |        |   |  |   |          |  
|Net loss available to Ordinary Shareholders                                                                                      |  |           |           |         |  |            |   |             |  |              |        |               |  |               | (369,307 | ) |  |   |        |   |  |   |       |   |  |   | (369,307 | )
|                                                                                                                                 |  |           |            |         |  |            |    |             |  |              |         |               |  |               |          |   |  |   |         |   |  |   |        |   |  |   |          |  
|Balance at December 31, 2002                                                                                                     |  |           | 32,834,968 |         |  | $          | 91 |             |  | $            | 491,165 |               |  | $             | (415,927 | ) |  | $ | (424    | ) |  | $ |       |   |  | $ | 74,905   |  
|                                                                                                                                 |  |           |            |         |  |            |    |             |  |              |         |               |  |               |          |   |  |   |         |   |  |   |        |   |  |   |          |  



|    |                                 
|--- | --------------------------------
|(a) | See Note 14 to these statements.

The accompanying notes are an integral part of
these statements.

F-4



---



##### Table of Contents



IONA TECHNOLOGIES PLC

CONSOLIDATED STATEMENTS OF CASH
FLOWS

(U.S. dollars in thousands)


|                                                          |                                                                                                        |                                                                     |                                                                        |                                                         |         |          |         |         |         |          |         |        |         |          |         |  
|--------------------------------------------------------- | ------------------------------------------------------------------------------------------------------ | ------------------------------------------------------------------- | ---------------------------------------------------------------------- | ------------------------------------------------------- | ------- | -------- | ------- | ------- | ------- | -------- | ------- | ------ | ------- | -------- | ------- | -
|                                                          |                                                                                                        |                                                                    
|                                                          |                                                                                                        | Year Ended December 31,                                            
|                                                          |                                                                                                        |                                                                    
|                                                          |                                                                                                        | 2002                                                                |                                                                        | 2001                                                    |         | 2000    
|                                                          |                                                                                                        |                                                                     |                                                                        |                                                         |         |         
|CASH FLOWS FROM OPERATING ACTIVITIES:                     |                                                                                                        |                                                                     |                                                                        |                                                         |         |          |         |         |         |          |         |       
|                                                          | Net income (loss)                                                                                      |                                                                     | $                                                                      | (369,307                                                | )       |          | $       | (83,500 | )       |          | $       | 14,165 |        
|                                                          | Adjustments to reconcile net income (loss) to net
    cash (used in) provided by operating activities: |                                                                     |                                                                        |                                                         |         |          |         |         |         |          |         |        |        
|                                                          |                                                                                                        | Depreciation and amortization                                       |                                                                        |                                                         | 17,717  |          |         |         | 79,719  |          |         |        | 12,836  |         
|                                                          |                                                                                                        | In-process research and development                                 |                                                                        |                                                         |        |          |         |         | 3,600   |          |         |        |        |         
|                                                          |                                                                                                        | Stock compensation                                                  |                                                                        |                                                         | 1,230   |          |         |         | 2,013   |          |         |        | 404     |         
|                                                          |                                                                                                        | Impairment of intangible assets and fixed assets
    and technology |                                                                        |                                                         | 32,336  |          |         |         | 3,349   |          |         |        |        |         
|                                                          |                                                                                                        | Impairment of goodwill                                              |                                                                        |                                                         | 276,808 |          |         |         |        |          |         |        |        |         
|                                                          |                                                                                                        | Profit on marketable securities                                     |                                                                        |                                                         | (204    | )        |         |         | (1,341  | )        |         |        | (2,064  | )       
|                                                          |                                                                                                        | Profit on sale of investments                                       |                                                                        |                                                         |        |          |         |         | (164    | )        |         |        | (1,880  | )       
|                                                          |                                                                                                        | Loss on disposal of assets                                          |                                                                        |                                                         |        |          |         |         | 154     |          |         |        | 450     |         
|                                                          |                                                                                                        | Changes in operating assets and liabilities:                        |                                                                        |                                                         |         |          |         |         |         |          |         |        |         |         
|                                                          |                                                                                                        |                                                                     | Restricted cash deposits                                               |                                                         |         | (145     | )       |         |         | (128     | )       |        |         |         |        
|                                                          |                                                                                                        |                                                                     | Purchase of marketable securities                                      |                                                         |         | (145,790 | )       |         |         | (218,400 | )       |        |         | (278,583 | )      
|                                                          |                                                                                                        |                                                                     | Sale of marketable securities                                          |                                                         |         | 111,964  |         |         |         | 253,078  |         |        |         | 274,289  |        
|                                                          |                                                                                                        |                                                                     | Accounts receivable                                                    |                                                         |         | 14,474   |         |         |         | 4,901    |         |        |         | (13,761  | )      
|                                                          |                                                                                                        |                                                                     | Prepaid expenses and other assets                                      |                                                         |         | (684     | )       |         |         | (642     | )       |        |         | (481     | )      
|                                                          |                                                                                                        |                                                                     | Accounts payable                                                       |                                                         |         | (982     | )       |         |         | 1,229    |         |        |         | (1,131   | )      
|                                                          |                                                                                                        |                                                                     | Accrued payroll and related expenses and other
    accrued liabilities |                                                         |         | 2,138    |         |         |         | (13,684  | )       |        |         | 12,891   |        
|                                                          |                                                                                                        |                                                                     | Deferred revenue                                                       |                                                         |         | (6,389   | )       |         |         | 7,908    |         |        |         | 6,871    |        
|                                                          |                                                                                                        |                                                                     |                                                                        |                                                         |         |          |         |         |         |          |         |       
|                                                          |                                                                                                        |                                                                     |                                                                        | Net cash (used in) provided by operating
    activities |         | $        | (66,834 | )       |         | $        | 38,092  |        |         | $        | 24,006  |  
|                                                          |                                                                                                        |                                                                     |                                                                        |                                                         |         |          |         |         |         |          |         |       
|CASH FLOWS FROM INVESTING ACTIVITIES:                     |                                                                                                        |                                                                     |                                                                        |                                                         |         |          |         |         |         |          |         |       
|                                                          |                                                                                                        | Purchase of property and equipment                                  |                                                                        | $                                                       | (5,205  | )        |         | $       | (5,408  | )        |         | $      | (8,084  | )       
|                                                          |                                                                                                        | Payments for acquisitions, net of cash received                     |                                                                        |                                                         |        |          |         |         | (33,913 | )        |         |        | (14,938 | )       
|                                                          |                                                                                                        | Purchase of other non-cash assets                                   |                                                                        |                                                         | (180    | )        |         |         | (15,500 | )        |         |        | (8,836  | )       
|                                                          |                                                                                                        | Proceeds from sale of investments                                   |                                                                        |                                                         |        |          |         |         | 400     |          |         |        | 2,644   |         
|                                                          |                                                                                                        | Proceeds from disposal of property and equipment                    |                                                                        |                                                         |        |          |         |         | 12      |          |         |        | 1,684   |         
|                                                          |                                                                                                        |                                                                     |                                                                        |                                                         |         |          |         |         |         |          |         |       
|                                                          |                                                                                                        |                                                                     |                                                                        | Net cash used in investing activities                   |         | $        | (5,385  | )       |         | $        | (54,409 | )      |         | $        | (27,530 | )
|                                                          |                                                                                                        |                                                                     |                                                                        |                                                         |         |          |         |         |         |          |         |       
|CASH FLOWS FROM FINANCING ACTIVITIES:                     |                                                                                                        |                                                                     |                                                                        |                                                         |         |          |         |         |         |          |         |       
|                                                          |                                                                                                        | Issuance of shares, net of issuance costs                           |                                                                        | $                                                       | 65,997  |          |         | $       | 7,583   |          |         | $      | 22,623  |         
|                                                          |                                                                                                        |                                                                     |                                                                        |                                                         |         |          |         |         |         |          |         |       
|                                                          |                                                                                                        |                                                                     |                                                                        | Net cash provided by financing activities               |         | $        | 65,997  |         |         | $        | 7,583   |        |         | $        | 22,623  |  
|                                                          |                                                                                                        |                                                                     |                                                                        |                                                         |         |          |         |         |         |          |         |       
|NET (DECREASE) INCREASE IN CASH AND CASH
    EQUIVALENTS  |                                                                                                        | $                                                                   | (6,222                                                                 | )                                                       |         | $        | (8,734  | )       |         | $        | 19,099  |       
|CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD          |                                                                                                        |                                                                     | 28,509                                                                 |                                                         |         |          | 37,243  |         |         |          | 18,144  |       
|                                                          |                                                                                                        |                                                                     |                                                                        |                                                         |         |          |         |         |         |          |         |       
|CASH AND CASH EQUIVALENTS AT END OF PERIOD                |                                                                                                        | $                                                                   | 22,287                                                                 |                                                         |         | $        | 28,509  |         |         | $        | 37,243  |       
|                                                          |                                                                                                        |                                                                     |                                                                        |                                                         |         |          |         |         |         |          |         |       
|SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:         |                                                                                                        |                                                                     |                                                                        |                                                         |         |          |         |         |         |          |         |       
|                                                          | Interest paid                                                                                          |                                                                     | $                                                                      |                                                        |         |          | $       | 3       |         |          | $       | 5      |        
|                                                          |                                                                                                        |                                                                     |                                                                        |                                                         |         |          |         |         |         |          |         |       
|                                                          | Income taxes paid                                                                                      |                                                                     | $                                                                      | 938                                                     |         |          | $       | 2,291   |         |          | $       | 379    |        
|                                                          |                                                                                                        |                                                                     |                                                                        |                                                         |         |          |         |         |         |          |         |       
|SUPPLEMENTAL DISCLOSURE OF NON-CASH FLOW
    INFORMATION: |                                                                                                        |                                                                     |                                                                        |                                                         |         |          |         |         |         |          |         |       
|                                                          | Shares and options issued in connection with
    acquisitions                                          |                                                                     | $                                                                      | 1,219                                                   |         |          | $       | 309,018 |         |          | $       | 13,645 |        
|                                                          |                                                                                                        |                                                                     |                                                                        |                                                         |         |          |         |         |         |          |         |       

The accompanying notes are an integral part of
these statements.

F-5



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##### Table of Contents



IONA TECHNOLOGIES PLC

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

1.     Organization
and Summary of Significant Accounting Policies



| |             
| | ------------
| | Organization

IONA Technologies PLC (IONA) is
organized as a public limited company under the laws of Ireland.
IONA Technologies PLC and its subsidiaries, all of which are
wholly-owned (collectively, the Company), provide
enterprise infrastructure software. The Company also provides
professional services, consisting of customer consulting and
training and, to a limited extent, product customization and
enhancement, as well as customer technical support. The
Companys major customers, based on revenues earned, are
corporate information technology departments of
U.S. businesses. The Company also earns significant
revenues from similar customers in European countries and the
rest of the world.



| |                                                          
| | ---------------------------------------------------------
| | Basis of Presentation and Principles of
    Consolidation

The accompanying consolidated financial
statements are prepared in accordance with generally accepted
accounting principles in the United States. The preparation of
financial statements requires management to make estimates and
assumptions that affect the amounts reported in the financial
statements and the accompanying footnotes. Actual results could
differ from those estimates.

The accompanying consolidated financial
statements include IONA and its wholly-owned subsidiaries in the
United States, British West Indies, Europe, Australia, Japan,
China, Canada and Korea after eliminating all material
intercompany accounts and transactions.



| |                             
| | ----------------------------
| | Companies Acts, 1963 to 2001

The financial information relating to IONA and
its subsidiaries included in this document does not comprise
full accounts as referred to in Section 19 of the Companies
(Amendment) Act, 1986, copies of which are required by that Act
to be annexed to a Companys annual return. The auditors
have made reports without qualification under Section 193
of the Companies Act, 1990 in respect of the financial
statements for the years ended December 31, 2001 and 2000 .
Copies of full accounts for each of the years ended
December 31, 2001 and 2000 have been so annexed to the
relevant annual returns, and a copy of the full accounts for the
year ended December 31, 2002 together with the report of
the auditors thereon will in due course be annexed to the
relevant annual return, which will be filed after the annual
general meeting of IONA in 2003.



| |                             
| | ----------------------------
| | Foreign Currency Translation

The U.S. dollar is the functional currency
for the Company. In accordance with Statement of Financial
Accounting Standards No. 52, Foreign Currency
Translation (SFAS 52), assets and
liabilities denominated in foreign currencies are translated at
year end exchange rates while revenues and expenses are
translated at rates approximating those ruling at the dates of
the related transactions. Resulting gains and losses are
included in net income (loss) for the year.



| |                    
| | -------------------
| | Revenue Recognition

The Companys revenue is derived from
product license fees and charges for services. For the three
year period ended December 31, 2002, the Company followed
the revenue recognition criteria of Statement of Position 97-2,
Software Revenue Recognition, as amended by
SOP 98-4 and SOP 98-9 issued by the Accounting
Standards Executive Committee of the American Institute of
Certified Public Accountants and related interpretations
(collectively, SOP 97-2). Under the terms of
SOP 97-2 where

F-6



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##### Table of Contents



IONA TECHNOLOGIES PLC


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)

an arrangement to deliver software does not
require significant production, modification or customization,
the Company recognizes software revenues when all of the
following criteria are met:



| |   |                                               
| | - | ----------------------------------------------
| |  | persuasive evidence of an arrangement exists; 
|
| |  | delivery has occurred;                        
|
| |  | vendors fee is fixed or
    determinable; and
|
| |  | collectibility is probable.                   

For arrangements with multiple elements, the
Company allocates revenue to each element of a transaction based
upon its fair value as determined by vendor specific
objective evidence. Vendor specific objective evidence of
fair value for each element of an arrangement is based upon the
normal pricing and discounting practices for each element when
sold separately, including the renewal rate for support
services. If the Company cannot objectively determine the fair
value of any undelivered element included in the multiple
element arrangement, the Company defers revenue until all
elements are delivered, services have been performed, or until
fair value can be objectively determined. When the fair value of
an element cannot be established, the Company uses the residual
method to record license revenue, provided the fair value of all
undelivered elements is determinable. Under the residual method,
the fair value of the undelivered elements is deferred and the
remaining portion of the arrangement fee is allocated to the
delivered elements and is recognized as revenue.

The Company assesses whether fees are fixed or
determinable at the time of sale and recognizes revenue if all
other revenue recognition requirements are met. The
Companys standard payment terms are net 30; however, terms
may vary based on the country in which the agreement is
executed. Payments that extend beyond 30 days from the
contract date but that are due within twelve months are
generally deemed to be fixed or determinable based on the
Companys successful collection history on such
arrangements, and thereby satisfy the required criteria for
revenue recognition.

While most of the Companys arrangements
include payment terms of less than one year, the Company has
provided payment terms of more than one year to credit worthy
customers. The Company has established a history of collection,
without concessions, on these receivables with payment terms
that extend beyond one year. Provided all other revenue
recognition criteria have been met, the Company recognizes
license revenue for these arrangements upon delivery.

Revenue for consulting services is generally
recognized as the services are performed. Revenue from royalty
arrangements in excess of guaranteed amounts are recognized upon
notification of such royalties payable by the customer.



| |                                 
| | --------------------------------
| | Allowances for Doubtful Accounts

The Company makes judgments on its ability to
collect outstanding receivables and provide allowances for the
portion of receivables when collection becomes doubtful.
Provisions are made based upon a specific review of all
significant outstanding receivables. In determining the
provision, the Company analyzes the historical collection
experience and current economic trends. In 2002, the Company
wrote off $189,000 of uncollectible receivables against the
allowance for doubtful accounts.



| |                
| | ---------------
| | Cost of Revenue

Cost of revenue includes the costs of products
and services. Cost of product revenue includes shipping,
handling, materials (such as diskettes, packaging and
documentation) and the portion of development costs associated
with product development arrangements. Cost of service revenue
includes the

F-7



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##### Table of Contents



IONA TECHNOLOGIES PLC


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)

salary costs for personnel engaged in
consultancy, training and customer support, and telephone and
other support costs.



| |                          
| | -------------------------
| | Cash and Cash Equivalents

The Company considers all highly liquid
investments with insignificant interest rate risk and purchased
with a maturity of three months or less to be cash equivalents.



| |                      
| | ---------------------
| | Marketable Securities

Marketable securities consist of commercial paper
and U.S. government agency fixed income securities.
Marketable securities are stated at market value, and by policy,
the Company invests primarily in high grade marketable
securities. All marketable securities are defined as trading
securities under the provisions of Statement of Financial
Accounting Standards No. 115, Accounting for Certain
Investments in Debt and Equity Securities
(SFAS 115), and unrealized holding gains and
losses are reflected in Consolidated Statements of Operations.



| |            
| | -----------
| | Investments

Investments consist of equity securities and are
stated at market value. All investments are defined as
available-for-sale securities under the provisions of Statement
of Financial Accounting Standards No. 115 Accounting
for Certain Investments in Debt and Equity Securities
(SFAS 115), and any unrealized holding gains
and losses are reported as a separate component of
shareholders equity, as accumulated other comprehensive
income (loss). At December 31, 2002, the Company did not
hold any investments.



| |                         
| | ------------------------
| | Research and Development

Research and development expenditures are
generally charged to operations as incurred. Statement of
Financial Accounting Standards No. 86, Accounting for
the Costs of Computer Software to be Sold, Leased or Otherwise
Marketed (SFAS 86), requires
capitalization of certain software development costs subsequent
to the establishment of technological feasibility. Based on the
Companys product development process, technological
feasibility is established upon completion of a working model.
Development costs incurred by the Company between completion of
the working model and the point at which the product is ready
for general release have been insignificant.

The Company expensed $3,600,000 during the year
ended December 31, 2001, representing the full amount of
the cost of acquired in-process research and development for
which technological feasibility had not been established and for
which alternative uses did not exist.



| |         
| | --------
| | Goodwill

Goodwill represents the excess of the purchase
price over the fair value of the net assets acquired in various
business acquisitions as described in Note 4 and
Note 11, and until January 1, 2002 were amortized on a
straight line-basis over four years.

The Financial Accounting Standards Board issued
Statements No. 141, Business Combinations,
(SFAS 141), and No. 142, Goodwill
and Other Intangible Assets, (SFAS 142)
in June 2001. Under the new rules, goodwill and intangible
assets deemed to have indefinite lives are no longer amortized
but are subject to annual impairment tests in accordance with
these Statements. Other intangible assets will continue to be
amortized over their useful economic lives. The Statements are
effective for fiscal years beginning after December 15,
2001.

F-8



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##### Table of Contents



IONA TECHNOLOGIES PLC


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)

The Company adopted the new rules on accounting
for goodwill and other intangible assets on January 1,
2002. On adoption, the Company reclassified the net carrying
amount of assembled workforce of $6,872,000 from other
non-current assets to goodwill. There was no impairment of
goodwill upon adoption of SFAS 142.

In October 2002, and as described in
Note 11, the Company completed its annual impairment test
and assessment of the carrying value of goodwill as required by
SFAS 142. As a result of unfavorable market conditions and
a decline in IONAs market capitalization, this assessment
resulted in a non-cash impairment charge of $276,808,000,
equivalent to the carrying value of goodwill at October 1,
2002.



| |                         
| | ------------------------
| | Other Non-Current Assets

Other non-current assets represent costs of
technology purchased or acquired on acquisitions, which have
reached technological feasibility. The costs of technology have
been capitalized and will be written off over their useful
economic life of four years in accordance with SFAS 86.

The Financial Accounting Standards Board issued
Statement No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets (SFAS 144),
in August 2001. SFAS 144 addresses financial accounting and
reporting for the impairment or disposal of long-lived assets
and supersedes SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of, and the accounting and reporting provisions
of APB Opinion No. 30, Reporting the Results of
Operations for a disposal of a segment of a business.
SFAS 144 is effective for fiscal years beginning after
December 15, 2001, with earlier application encouraged. The
Company adopted SFAS 144 as of January 1, 2002. In
October 2002, the Company completed its assessment of the
carrying value of purchased technologies and the relevant
impairment tests as required by SFAS 144. This assessment
resulted in a non-cash impairment charge of $28,586,000,
representing the amount by which the carrying value exceeded the
fair value of purchased technologies.

Amortization expense for intangible assets which
are amortizable in accordance with SFAS 142, was $10,115
000, $14,151,000 and $2,858,000 in 2002, 2001 and 2000,
respectively.



| |                       
| | ----------------------
| | Property and Equipment

Property and equipment is stated at cost.
Depreciation is computed using the straight-line method over the
estimated useful lives of the assets as follows:

|                       |  |  |               | 
|---------------------- |  |  | ------------- | 
|Motor vehicles         |  |  | 5 years       | 
|Computer equipment     |  |  | 3 years       | 
|Office equipment       |  |  | 5 years       | 
|Furniture and fixtures |  |  | 3 to 10 years | 

During the year ended December 31, 2002, the
Company recorded a $3,750,000 charge for the impairment of fixed
assets and related costs, of which $1,600,000 was primarily
attributable to the implementation of a new sales force
automation system that replaced an existing system. The
remainder of $2,150,000 relates to fixed assets no longer in use
in 2002, resulting in a reduction of their net book value to
nil. There was no impairment of fixed assets in 2001.



| |                           
| | --------------------------
| | Software Development Costs

The Company capitalizes certain software
development costs associated with the development of the
Companys website and other internal financial software.
These costs incurred are accounted for in accordance with
Statement of Position 98-1, Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use
(SOP 98-1). In accordance with SOP 98-1,
internal and external costs

F-9



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##### Table of Contents



IONA TECHNOLOGIES PLC


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)

incurred to develop internal-use computer
software during the application development stage are
capitalized. Application development stage costs generally
include software configuration, coding, installation and
testing. Costs incurred for maintenance, testing minor upgrades
and enhancements are expensed as incurred. Capitalized
internal-use software development costs are included in fixed
assets, and are amortized on a straight-line basis over their
estimated useful lives of the related software, typically
3 years.

The Company capitalized approximately $1,417,000
and $340,000 of software development costs during 2002 and 2001,
respectively. Amortization associated with the capitalized
software development costs totaled approximately $1,123,000 and
$1,260,000 during 2002 and 2001, respectively.



| |                             
| | ----------------------------
| | Concentration of Credit Risk

The Company sells its products to companies in
various industries throughout the world and maintains reserves
for potential credit losses. To date such losses have been
within managements expectations. The Company had an
allowance for doubtful accounts of approximately $1,132,000 and
$1,321,000 at December 31, 2002 and 2001, respectively. The
Company generally requires no collateral from its customers.

The Company invests its excess cash in low-risk,
short-term deposit accounts with high credit-quality banks in
the United States, British West Indies and Ireland. At
December 31, 2002, $58,140,000 was invested in marketable
securities held for trading purposes, comprised of $54,049,000
in commercial paper and $4,091,000 in U.S. government
agency securities, under the management of one financial
institution. The Company performs periodic evaluations of the
relative credit standing of all of the financial institutions
with which it deals and considers the related credit risk to be
minimal.



| |                  
| | -----------------
| | Employment Grants

Employment grants are credited to the income
statement and offset against the related payroll expense in two
equal installments, the first on the creation of the job and the
second on the first anniversary thereof.



| |                     
| | --------------------
| | Compensated Absences

The Company does not accrue for the liability
associated with employees absences from employment because
of illness, holiday, vacation or other reasons as the amount of
compensation is not reasonably estimable.



| |                            
| | ---------------------------
| | Accounting for Income Taxes

The Company uses the asset and liability method
in accounting for income taxes in accordance with Financial
Accounting Standards No. 109 Accounting for Income
Taxes (SFAS 109). Under this method,
deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets
and liabilities and are measured using the enacted tax rates and
laws which will be in effect when the differences are expected
to reverse.



| |                                           
| | ------------------------------------------
| | Accumulated Other Comprehensive
    Income

Financial Accounting Standards No. 130,
Reporting Comprehensive Income
(SFAS 130) establishes guidelines for the
reporting and display of comprehensive income and its components
in financial statements. Comprehensive income includes
unrealized gain or loss on equity securities classified as
available-for-sale in accordance with SFAS 115, and is
included as a component of shareholders equity. At
December 31, 2002, the Company did not hold any such
investments.

F-10



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##### Table of Contents



IONA TECHNOLOGIES PLC


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)



| |                   
| | ------------------
| | Stock Compensation

At December, 31, 2002, the Company has five
stock-based employee compensation plans, which are more fully
described in Note 14.

The Company has elected to follow Accounting
Principles Board Opinion No. 25 Accounting for Stock
Issued to Employees (APB 25) and related
interpretations in accounting for its employee stock options.
Accordingly, compensation cost for stock options is measured as
the excess, if any, of the fair market value of IONAs
shares at the date of the grant over the amount an employee must
pay to acquire the shares. This cost is deferred and charged to
expense ratably over the vesting period (generally four years).

Where shares are issued at less than fair market
value, the excess of the fair market value over the amount the
employee must pay to acquire the shares is charged to expense as
stock compensation and credited to additional paid-in capital in
the period of transfer.

In December 2002, the Financial Accounting
Standards Board issued Statement No. 148, Accounting
for Stock-Based Compensation-Transition and Disclosure
(SFAS 148). SFAS 148 amends FASB Statement
No. 123, Accounting for Stock-Based Compensation,
(SFAS 123) to provide alternate methods of
transition for a voluntary change to the fair value based method
of accounting for stock-based employee compensation. While the
statement does not amend SFAS 123 to require companies to
account for employee stock options, using the fair value method,
the disclosure requirements of SFAS 148 in annual and
interim financial statements are applicable to all companies
with stock based compensation, regardless of whether they
account for that compensation using the fair value method of
SFAS 123 or the intrinsic value method of APB 25.
SFAS 148 is effective for fiscal years ending after
December 15, 2002.

Pro forma information regarding net (loss) income
and loss per share is required by SFAS 123 and has been
determined as if the Company had accounted for its stock options
under the fair value method of SFAS 123. The fair value for
these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following
weighted-average assumptions for 2002, 2001 and 2000,
respectively: risk-free interest rates of 4%, 5% and 5%;
dividend yields of 0%; volatility factors of the expected market
price of IONAs Ordinary Shares of 1.15, 1.10, and 1.13;
and a weighted-average expected life of the option of five years.

The following table illustrates the effect on net
(loss) income and loss per share if the Company had applied the
fair value recognition provisions of SFAS 123 to
stock-based employee compensation:

|                                                                                                                                                    |                     |                         |          |        |   |      |          |       |   |   |         |       |  
|--------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------- | ----------------------- | -------- | ------ | - | ---- | -------- | ----- | - | - | ------- | ----- | -
|                                                                                                                                                    |                     |                        
|                                                                                                                                                    |                     | Year Ended December 31,
|                                                                                                                                                    |                     |                        
|                                                                                                                                                    |                     | 2002                    |          | 2001   |   | 2000
|                                                                                                                                                    |                     |                         |          |        |   |     
|Net (loss) income, as reported                                                                                                                      |                     | $                       | (369,307 | )      |   | $    | (83,500  | )     |   | $ | 14,165  |      
|Deduct: Total stock-based employee compensation
    expense determined under fair value based method for all awards,
    net of related tax effects |                     |                         | (43,036  | )      |   |      | (36,280  | )     |   |   | (19,241 | )    
|                                                                                                                                                    |                     |                         |          |        |   |      |          |       |   |   |         |      
|Pro forma net loss                                                                                                                                  |                     | $                       | (412,343 | )      |   | $    | (119,780 | )     |   | $ | (5,076  | )    
|                                                                                                                                                    |                     |                         |          |        |   |      |          |       |   |   |         |      
|Gain (loss) per share:                                                                                                                              |                     |                         |          |        |   |      |          |       |   |   |         |      
|                                                                                                                                                    | Basicas reported   |                         | $        | (11.58 | ) |      | $        | (3.27 | ) |   | $       | 0.67  |  
|                                                                                                                                                    |                     |                         |          |        |   |      |          |       |   |   |         |      
|                                                                                                                                                    | Basicpro forma     |                         | $        | (12.93 | ) |      | $        | (4.69 | ) |   | $       | (0.24 | )
|                                                                                                                                                    |                     |                         |          |        |   |      |          |       |   |   |         |      
|                                                                                                                                                    | Dilutedas reported |                         | $        | (11.58 | ) |      | $        | (3.27 | ) |   | $       | 0.60  |  
|                                                                                                                                                    |                     |                         |          |        |   |      |          |       |   |   |         |      
|                                                                                                                                                    | Dilutedpro forma   |                         | $        | (12.93 | ) |      | $        | (4.69 | ) |   | $       | (0.22 | )
|                                                                                                                                                    |                     |                         |          |        |   |      |          |       |   |   |         |      

F-11



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##### Table of Contents



IONA TECHNOLOGIES PLC


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)

The fair value of employee stock options for the
years ended December 31, 2001 and 2000 have been restated
to include the effects of certain shares designated for issuance
under the Employee Share Purchase Plan. The designated shares
are those with variable exercise prices and as such are subject
to the fair value disclosures of SFAS 123. Pro forma stock
compensation expense determined under the fair value based
method of SFAS 123 for 2001 and 2000 has been increased by
$1,299,000 and $1,012,000, respectively. Pro forma basic and
diluted earnings per share for 2001 and 2000 have been decreased
by $0.05 and $0.05, respectively.

On May 8, 2001, a wholly-owned subsidiary of
IONA merged with and into Netfish Technologies, Inc.
(Netfish), for total consideration of 5,036,318
newly-issued Ordinary Shares and replacement options, and
$30,885,000 of closing costs incurred in connection with the
merger. The portion of the total intrinsic value, measured at
the consummation date, of replacement unvested options granted
by IONA in exchange for outstanding unvested options held by
Netfish employees, that the future vesting period bears to the
total vesting period ($10,380,000) was, in accordance with the
requirements of FASB Interpretation No. 44 Accounting
for Certain Transactions Involving Stock Compensation,
accounted for as deferred stock-based compensation and is
charged to expense as stock compensation ratably over the
remaining vesting period of each tranche of unvested options.
During the years ended December 31, 2002 and 2001, the
Company reversed $3,168,000 and $3,973,000, respectively, of
deferred stock-based compensation related to the unvested
replacement options of terminated Netfish employees and unvested
replacement options accepted for exchange under the Exchange
Offer, as described in Note 14. Stock compensation expense
recognized for vested options of Netfish Employees was
$1,230,000 and $1,584,000 for the years ended December 31,
2002 and 2001, respectively.

On July 1, 1999, IONA acquired the
outstanding shares of Aurora Technologies, Inc.
(Aurora) for consideration of $520,000 payable in
cash and the issuance of 48,750 shares to certain
individuals in two equal installments on the first and second
anniversary of the acquisition, provided they remain employees
of the Company at the anniversary dates. The value of these
shares, $780,000, was accounted for as deferred stock-based
compensation and was credited to additional paid-in capital and
charged to expense as stock compensation on a straight-line
basis over the 2 year period in which the stock was issued.
At December 31, 2001, deferred stock-based compensation for
Aurora was fully amortized.

During 2001, the Company accelerated the vesting
of stock options granted to certain employees whose employment
was terminated. The Company recognized compensation expense of
$233,000 in accordance with the requirements of FASB
Interpretation No. 44 Accounting for Certain
Transactions Involving Stock Compensation.

Stock compensation expense of $1,230,000,
$2,013,000, and $404,000 for the periods ended December 31,
2002, 2001 and 2000, respectively can be attributed to personnel
in the following departments: professional services $283,000,
$406,000 and nil; research and development $803,000, $849,000
and nil; sales and marketing $122,000, $283,000 and nil;
restructuring nil, $233,000 and nil; and general and
administrative $22,000, $242,000, and $404,000, respectively.



| |                          
| | -------------------------
| | Defined Contribution Plan

The Company sponsors and contributes to a defined
contribution plan for certain employees and directors.
Contribution amounts by the Company are determined by management
and allocated to employees on a pro rata basis based on
employees contributions. The Company contributed
approximately $1,888,000, $1,916,000 and $1,411,000 to the plan
in the years ended December 31, 2002, 2001 and 2000,
respectively.

F-12



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##### Table of Contents



IONA TECHNOLOGIES PLC


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)



| |                                  
| | ---------------------------------
| | Advertising and Promotion Expense

All costs associated with advertising and
promoting products are expensed as incurred. Advertising and
promotion expense was $6,272,000, $10,077,000 and $3,801,000 for
the years ended December 31, 2002, 2001 and 2000,
respectively.



| |                          
| | -------------------------
| | Accounting Pronouncements

The Financial Accounting Standards Board issued
Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities
(SFAS 133) in June 1998. SFAS 133, which
requires all derivative instruments to be recognized as either
assets or liabilities on the balance sheet at their fair value,
provides a comprehensive and consistent standard for the
recognition and measurement of derivatives and hedging
activities. As amended, this statement is effective for fiscal
years beginning after June 15, 2000 and therefore applied
to the Company from the first quarter of 2001. Application of
SFAS 133 had no material impact on the consolidated
financial statements of the Company as it had no derivative or
hedging transactions in 2002 or 2001.

The Financial Accounting Standards Board issued
Statement No. 143, Accounting for Asset Retirement
Obligations (SFAS 143) in June 2001.
SFAS 143 requires entities to record the fair value of a
liability for an asset retirement obligation in the period in
which it is incurred. When the liability is initially recorded,
the entity capitalizes a cost by increasing the carrying amount
of the related long-lived asset. Over time, the liability is
accreted to its present value each period, and the capitalized
cost is depreciated over the useful life of the related asset.
Upon settlement of the liability, an entity either settles the
obligation for its recorded amount or incurs a gain or loss upon
settlement. SFAS 143 is effective for fiscal years
beginning after June 15, 2002, with earlier application
encouraged. Based on current circumstances, the Company believes
the application of SFAS 143 will not have a material impact
on the consolidated financial statements of the Company.

The Financial Accounting Standards Board issued
Statement No. 146, Accounting for Costs Associated
with Exit or Disposal Activities
(SFAS 146) in July 2002. SFAS 146 provides
guidance on the recognition and measurement of liabilities
associated with exit or disposal activities and requires that
such liabilities be recognized when incurred. In many cases,
those costs will be recognized as liabilities in periods
following a commitment to a plan, not at the date of commitment.
SFAS 146 also changes the recognition of one-time
termination benefits, such as severance pay or other termination
indemnities, whenever the benefit arrangement requires employees
to render future service beyond a minimum retention
period. SFAS 146 also addresses the accounting for
other costs associated with an exit or disposal activity, such
as costs to consolidate or close facilities and relocate
employees. A liability for such costs has to be recognized and
measured at its fair value in the period in which it is
incurred. SFAS 146 is effective for exit or disposal
activities that are initiated after December 31, 2002 and
does not impact the recognition of costs under the
Companys existing restructuring plans. Adoption of this
standard is expected to impact the timing of recognition of
costs if any further restructuring plans are initiated and
implemented.

In November 2002, the Financial Accounting
Standards Board issued Interpretation No. 45
Guarantors Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness of
Others, (FIN 45). FIN 45 requires a
guarantor to recognize, at the inception of a guarantee, a
liability for the fair value of the obligation undertaken by it
in issuing the guarantee. It also expands the disclosure
requirements in the financial statements of the guarantor with
respect to its obligations under certain guarantees that it has
issued. The Company is required to adopt the initial recognition
and initial measurement accounting provisions of this
interpretation on a prospective basis to guarantees issued or
modified after December 31, 2002. The Company does not
anticipate that the adoption will have a material effect on the
Companys financial position, results of operations or cash

F-13



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##### Table of Contents



IONA TECHNOLOGIES PLC


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)

flows. The disclosure requirements are required
to and have been adopted by the Company as of December 31,
2002.

In January 2003, the Financial Accounting
Standards Board issued Interpretations No. 46,
Consolidation of Variable Interest Entities,
(FIN 46). This interpretation clarifies the
application of Accounting Research Bulletin No. 51,
Consolidated Financial Statements, to certain
entities in which equity investors do not have the
characteristics of a controlling financial interest or do not
have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support
from other parties. FIN 46 is effective February 1,
2003 for variable interest entities created after
January 31, 2003, and July 31, 2003 for variable
interest entities created prior to February 1, 2003. The
Company does not anticipate that the adoption of FIN 46
will have a material impact on its financial position, results
of operations or cash flows.



| |                  
| | -----------------
| | Reclassifications

As of December 31, 2002 and 2001, the
Company separately presented goodwill (net) and other
non-current assets (net) in the Consolidated Balance Sheets. In
accordance with SFAS 142, the Company is required to
present amortization of goodwill and amortization of other
non-current assets separately in the Consolidated Statements of
Operations for the year ended December 31, 2002. The
amounts reported in the fiscal years 2000 and 2001 financial
statements have been reclassified to conform to the fiscal year
2002 financial statement presentation.

2.     Marketable
Securities

Marketable securities are considered to be
trading securities per SFAS 115 and are carried on the
balance sheet at their market value.

|                                  |                             |                             |        |            |  |              |    |    |  |   |        |        | 
|--------------------------------- | --------------------------- | --------------------------- | ------ | ---------- |  | ------------ | -- | -- |  | - | ------ | ------ | 
|                                  |                             |                            
|                                  |                             | As of December 31, 2002    
|                                  |                             |                            
|                                  |                             |                             |        | Unrealized |  |             
|                                  |                             | Cost                        |        | Gain       |  | Market Value
|                                  |                             |                             |        |            |  |             
|                                  |                             |                            
|                                  |                             | (U.S. dollars in thousands)
|Commercial paper                  |                             | $                           | 54,049 |            |  | $            |   |    |  | $ | 54,049 |       
|U.S. government agency securities |                             |                             | 4,029  |            |  |              | 62 |    |  |   | 4,091  |       
|                                  |                             |                             |        |            |  |              |    |    |  |   |        |       
|                                  | Total marketable securities |                             | $      | 58,078     |  |              | $  | 62 |  |   | $      | 58,140 | 
|                                  |                             |                             |        |            |  |              |    |    |  |   |        |       

|                                  |                             |                             |        |            |  |              |    |     |  |   |        |        | 
|--------------------------------- | --------------------------- | --------------------------- | ------ | ---------- |  | ------------ | -- | --- |  | - | ------ | ------ | 
|                                  |                             |                            
|                                  |                             | As of December 31, 2001    
|                                  |                             |                            
|                                  |                             |                             |        | Unrealized |  |             
|                                  |                             | Cost                        |        | Gain       |  | Market Value
|                                  |                             |                             |        |            |  |             
|                                  |                             |                            
|                                  |                             | (U.S. dollars in thousands)
|Commercial paper                  |                             | $                           | 10,977 |            |  | $            | 4  |     |  | $ | 10,981 |       
|U.S. government agency securities |                             |                             | 13,031 |            |  |              | 98 |     |  |   | 13,129 |       
|                                  |                             |                             |        |            |  |              |    |     |  |   |        |       
|                                  | Total marketable securities |                             | $      | 24,008     |  |              | $  | 102 |  |   | $      | 24,110 | 
|                                  |                             |                             |        |            |  |              |    |     |  |   |        |       

F-14



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##### Table of Contents



IONA TECHNOLOGIES PLC


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)

The change in unrealized gain (loss) included in
net income (loss) is as follows:

|                                            |  |                             |     |      |  |      |      |   |  |   |     |  
|------------------------------------------- |  | --------------------------- | --- | ---- |  | ---- | ---- | - |  | - | --- | -
|                                            |  | 2002                        |     | 2001 |  | 2000
|                                            |  |                             |     |      |  |     
|                                            |  |                            
|                                            |  | (U.S. dollars in thousands)
|Unrealized gain (loss) at beginning of year |  | $                           | 102 |      |  | $    | 353  |   |  | $ | (68 | )
|Included in net income (loss) for the year  |  |                             | (40 | )    |  |      | (251 | ) |  |   | 421 |  
|                                            |  |                             |     |      |  |      |      |   |  |   |     |  
|Unrealized gain at end of year              |  | $                           | 62  |      |  | $    | 102  |   |  | $ | 353 |  
|                                            |  |                             |     |      |  |      |      |   |  |   |     |  

3.     Investments

Investments consist of equity securities and are
stated at market value. All investments are defined as
available-for-sale securities under the provisions of Statement
of Financial Accounting Standards No. 115, Accounting
for Certain Investments in Debt and Equity Securities
(SFAS 115), and any unrealized holding gains or
losses are reported as a separate component of
shareholders equity, as accumulated other comprehensive
income (loss). During 2000, the Company sold over 75% of the
investment made in 1999 and realized gains of $1,880,000 on
these sales. The Company sold the remaining investment in 2001
and realized gains of $164,000. There were no purchases or sales
of available-for-sale securities in 2002.

The change in unrealized gain on investments is
as follows:

|                                            |  |                             |   |      |  |      |      |   |  |   |         |  
|------------------------------------------- |  | --------------------------- | - | ---- |  | ---- | ---- | - |  | - | ------- | -
|                                            |  | 2002                        |   | 2001 |  | 2000
|                                            |  |                             |   |      |  |     
|                                            |  |                            
|                                            |  | (U.S. dollars in thousands)
|Unrealized gain at beginning of year        |  | $                           |  |      |  | $    | 275  |   |  | $ | 11,526  |  
|Included in comprehensive loss for the year |  |                             |  |      |  |      | (275 | ) |  |   | (11,251 | )
|                                            |  |                             |   |      |  |      |      |   |  |   |         |  
|Unrealized gain at end of year              |  | $                           |  |      |  | $    |     |   |  | $ | 275     |  
|                                            |  |                             |   |      |  |      |      |   |  |   |         |  

4.     Acquisitions



| |                           
| | --------------------------
| | Netfish Technologies, Inc.

In May 2001, a wholly-owned subsidiary of IONA
merged with and into Netfish, for a total consideration of
5,036,318 newly-issued Ordinary Shares and replacement options,
and $30,885,000 of closing costs incurred in connection with the
merger. Of the 4,221,216 newly-issued Ordinary Shares, 504,598
were held back by the Company in 2001 as a source of
indemnification payments that may become due to the Company. If
the Company made no claims for indemnification, 75% of the
504,598 Ordinary Shares, or 378,448 shares, would have been
distributed to the former holders of Netfish shares in May 2002
and 25% of the 504,598 Ordinary Shares, or 126,150 shares,
would be distributed in May 2003. In May 2002, the Company held
back 142,045 Ordinary Shares to cover indemnification claims
made by the Company. If the Company makes no new claims, 126,150
Ordinary Shares will be distributed in May 2003. The 142,045
Ordinary Shares held back by the Company could be distributed
upon resolution of pending indemnification claims in an
unfavorable manner to the Company. The aggregate purchase price
plus related expenses have been allocated to the acquired assets
and liabilities at their estimated fair values at the date of
acquisition based primarily on an independent valuation.

The acquisition was accounted for using the
purchase method of accounting, and accordingly, the assets,
liabilities, and operating results have been included in the
accompanying consolidated financial statements from the date of
acquisition.

F-15



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##### Table of Contents



IONA TECHNOLOGIES PLC


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)

The total purchase price for Netfish consisted of
4,221,216 newly-issued Ordinary Shares at a fair market value of
$55.00 per share, the fair value of 815,102 replacement
options of IONA shares, and $30,885,000 in cash to pay
Netfishs related disposal expenses. The aggregate purchase
price plus related direct acquisition costs and net liabilities
assumed, less the amount allocated to deferred stock-based
compensation expense, totaling $294,001,000 was allocated to the
acquired assets and liabilities as follows:

|                                    |  |               |         | 
|----------------------------------- |  | ------------- | ------- | 
|                                    |  | (U.S. dollars
|                                    |  | in thousands)
|                                    |  |              
|Goodwill                            |  | $             | 265,701 | 
|In-process research and development |  |               | 3,600   | 
|Completed technology                |  |               | 17,800  | 
|Assembled workforce                 |  |               | 6,900   | 
|                                    |  |               |         | 
|                                    |  | $             | 294,001 | 
|                                    |  |               |         | 

In 2001, the Company expensed $3,600,000 in
respect of acquired in-process research and development, based
upon an independent valuation of the current fair value of
specifically identified Netfish research and development
projects for which technological feasibility had not been
established and for which alternative future uses did not exist.
In estimating such current fair value, the estimated future
after-tax cash flows attributable to the identified projects
were considered, and were then discounted to present value
utilizing discount rates commensurate with the risks of reaching
technological feasibility, completing the in-process projects,
and achieving estimated cash flows (the discount rate averaged
25%).

The fair value of Netfishs tangible assets
at acquisition date was approximately $4,797,000 and its
liabilities assumed totaled approximately $15,428,000. Until
January 1, 2002, both other non-current assets and goodwill
recorded in connection with the Netfish acquisition were
amortized on a straight-line basis over their useful economic
lives of four years. Upon adoption of SFAS 142 on
January 1, 2002, goodwill are no longer amortized, as
described in Note 1. On adoption, the Company reclassified
the net carrying value of assembled workforce of $5,750,000 from
other non-current assets to goodwill.



| |                               
| | ------------------------------
| | Object-Oriented Concepts, Inc.

In February 2001, a wholly-owned subsidiary of
IONA merged with and into Object-Oriented Concepts, Inc., a
Delaware corporation (OOC), pursuant to which OOC
became a wholly-owned subsidiary of IONA resulting in the
issuance of 908,584 newly-issued Ordinary Shares and replacement
options. Of the 730,453 newly issued Ordinary Shares, 262,129
were subject to return to the Company as a purchase price
adjustment upon the failure to achieve certain performance
targets. In 2001, 174,735 ordinary shares no longer subject to
return were recorded as additional purchase price based on fair
market value at the time the performance targets were achieved.
In 2002, the remaining 87,394 ordinary shares were no longer
subject to return to us and were recorded as additional purchase
price. The aggregate purchase price plus related expenses have
been allocated to the acquired assets and liabilities at their
estimated fair values at the date of acquisition based primarily
on an independent valuation.

The acquisition was accounted for using the
purchase method of accounting, and accordingly, the assets,
liabilities, and operating results have been included in the
accompanying consolidated financial statements from the date of
acquisition.

F-16



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##### Table of Contents



IONA TECHNOLOGIES PLC


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)

The total purchase price for OOC consisted of
730,453 newly-issued Ordinary Shares at a fair market value of
$59.68, the fair value of 178,131 replacement options and
$3,000,000 in cash. The aggregate purchase price plus related
direct acquisition costs of $40,258,000, net of tangible assets
acquired of $719,000 has been allocated to the acquired assets
and liabilities as follows:

|                     |  |               |        | 
|-------------------- |  | ------------- | ------ | 
|                     |  | (U.S. dollars
|                     |  | in thousands)
|                     |  |              
|Goodwill             |  | $             | 30,488 | 
|Completed technology |  |               | 9,250  | 
|Assembled workforce  |  |               | 520    | 
|                     |  |               |        | 
|                     |  | $             | 40,258 | 
|                     |  |               |        | 

Certain of the performance targets applicable to
the 262,129 newly issued Ordinary Shares subject to return were
achieved in August 2001. Accordingly, the Company allocated
$2,810,000 of additional purchase price to goodwill,
representing the fair market value of 174,735 Ordinary Shares no
longer subject to return, at the time these performance targets
were achieved.

In February 2002, the performance targets
applicable to the remaining 87,394 newly-issued Ordinary Shares
issued in connection with the acquisition of OOC and subject to
return were achieved. Accordingly, the Company allocated
$1,219,000 of additional purchase price to goodwill,
representing the fair market value of 87,394 Ordinary Shares no
longer subject to return, at the time these performance targets
were achieved.

The fair value of OOCs tangible assets at
acquisition date was approximately $1,400,000 and its
liabilities assumed totaled approximately $700,000. Until
January 1, 2002, both other non-current assets and goodwill
recorded in connection with the OOC acquisition were initially
being amortized on a straight-line basis over their useful
economic lives of four years. Upon adoption of SFAS 142 on
January 1, 2002, goodwill is no longer amortized as
described in Note 1. On adoption, the Company reclassified
the net carrying value of assembled workforce of $361,000 from
other non-current assets to goodwill.



| |                  
| | -----------------
| | Software AG, Inc.

In February 2001, IONA acquired the non-exclusive
license rights to certain portions of Software AG, Inc.s
enterprise application integration technology for $10,000,000.
The software had reached technological feasibility, and
accordingly the cost had been capitalized and was being written
off over its useful economic life of four years, in accordance
with SFAS 86. As of January 1, 2002, the Company
adopted the provisions of SFAS 142, which requires
purchased technology to be measured for impairment in accordance
with SFAS 144 as described in Note 1.



| |                                
| | -------------------------------
| | Genesis Development Corporation

In June 2000, a wholly-owned subsidiary of IONA
merged with and into Genesis Development Corporation, a
Pennsylvania corporation (Genesis), pursuant to
which Genesis became a wholly-owned subsidiary of IONA,
resulting in the issuance of 331,744 newly-issued Ordinary
Shares and 126,423 Ordinary Shares issuable upon assumed Genesis
stock options. Of the 331,744 newly-issued Ordinary Shares,
176,156 Ordinary Shares were subject to return to IONA as a
purchase price adjustment upon the failure to achieve certain
performance targets. The contingency was resolved in May 2001.
Accordingly, the Company allocated $6,518,000 of additional
purchase price to goodwill, representing the fair market value
of these 176,156 Ordinary Shares no longer subject to return, at
the time the contingency was resolved.

F-17



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##### Table of Contents



IONA TECHNOLOGIES PLC


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)

The acquisition was accounted for under the
purchase method of accounting, and accordingly, the assets,
liabilities, and operating results have been included in the
accompanying consolidated financial statements from the date of
acquisition.

The initial total purchase costs of $16,195,000,
comprising the fair value of the shares issued not subject to
relinquishment, the intrinsic value of the options issued and
related costs, was allocated, based on their respective fair
values, to other non-current assets (assembled workforce) of
$1,238,000, goodwill of $14,026,000 and net assets acquired of
$930,000. The fair value of Genesis assets at acquisition
date was approximately $2,109,000 and its liabilities assumed
totaled approximately $1,179,000. Until January 1, 2002,
both other non-current assets and goodwill were being amortized
on a straight-line basis over their useful economic lives of
four years. Upon adoption of SFAS 142 on January 1,
2002 goodwill is no longer amortized, as described in
Note 1. On adoption, the Company reclassified the net
carrying value of assembled workforce of $791,000 from other
non-current assets to goodwill.



| |                             
| | ----------------------------
| | Watershed Technologies, Inc.

In February 2000, IONA purchased substantially
all the assets of Watershed Technologies, Inc., a provider of
XML based tools and services for building standards-based
business-to-business and business-to-consumer portals, for
$13,318,000 . The costs have all been allocated to goodwill as
the fair value of net assets acquired was approximately nil.



| |                          
| | -------------------------
| | Aurora Technologies, Inc.

On July 1, 1999, IONA acquired the
outstanding shares of Aurora Technologies, Inc. for a
consideration of $520,000 payable in cash and the issuance of
48,750 shares to certain individuals in two equal
installments on the first and second anniversary of the
acquisition, provided they remain employees of the Company at
the anniversary dates. The value of these shares, $780,000, was
accounted for as deferred stock-based compensation and was
credited to additional paid in capital and charged to expense as
stock compensation on a straight-line basis over the two year
period in which the stock was issued. Stock compensation expense
amounted to $194,000, $390,000 and $196,000 in 2001, 2000 and
1999, respectively. The acquisition was accounted for using the
purchase method of accounting. Cash consideration of $510,000
has been allocated to goodwill as the fair value of the net
assets acquired was approximately nil.



| |                      
| | ---------------------
| | Pro Forma Disclosures

The following unaudited pro forma summary
presents the consolidated results of operations of the Company
as if the foregoing acquisitions had occurred on January 1,
2001 and January 1, 2000 and does not purport to be
indicative of what would have occurred had the acquisition been
made as of the beginning of 2001 and 2000 or of results which
may occur in the future. The pro forma results give effect to
certain purchase accounting adjustments, including additional
amortization expense from goodwill and other non-current assets,
additional compensation expense on deferred stock-based
compensation arising on

F-18



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##### Table of Contents



IONA TECHNOLOGIES PLC


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)

the exchange of unvested options held by Netfish
employees in exchange for unvested options granted by IONA, and
the issuance of additional Ordinary Shares in connection with
the acquisitions.

|                                                              |  |                             |          |      |  |   |          |  
|------------------------------------------------------------- |  | --------------------------- | -------- | ---- |  | - | -------- | -
|                                                              |  |                            
|                                                              |  | Year Ended December 31,    
|                                                              |  |                            
|                                                              |  | 2001                        |          | 2000
|                                                              |  |                             |          |     
|                                                              |  |                            
|                                                              |  | (U.S. dollars in thousands,
|                                                              |  | except for loss            
|                                                              |  | per share information)     
|Revenue                                                       |  | $                           | 184,471  |      |  | $ | 163,338  |  
|Loss before provision for income taxes*                       |  |                             | (136,244 | )    |  |   | (112,238 | )
|Net loss                                                      |  |                             | (135,804 | )    |  |   | (115,408 | )
|Basic and diluted net loss per Ordinary Share and
    per ADS |  |                             | (5.31    | )    |  |   | (4.46    | )



---



|  |                                                                                                                                                                               
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|* | Acquired in-process research &
    development amounting to $3,600,000 is not included in the 2000
    pro forma disclosures stated above due to its non-recurring
    nature.

5.     Restructuring

During 2002, the Companys management and
board of directors approved restructuring plans, which included
consolidation of excess facilities, a reduction in workforce and
other related costs. Total accrued restructuring costs of
$20,763,000 were recorded related to these initiatives.

Accrued restructuring charges included
approximately $12,251,000 representing the cost of involuntary
employee separation and related costs for approximately 300
employees worldwide. Employee separation benefits included
severance, medical and other benefits. Employee separations
affected the majority of business functions, job classes and
geographies, with most of the reductions in sales and marketing,
engineering and professional services functions in the United
States and Europe. In addition, the restructuring plans included
costs totaling approximately $8,153,000 associated with the
closure and consolidation of office space, principally in the
United States and approximately $359,000 of other related costs.
Cash outlays associated with restructuring plans initiated in
the years ended December 31, 2002 and 2001 totaled
approximately $11,933,000 during 2002, including approximately
$9,280,000 in severance and related benefits paid to employees
worldwide, $2,294,000 in facility closure costs of which
approximately $744,000 related to restructuring plans initiated
in 2001, and $359,000 in other costs.

During 2001, the Companys management and
board of directors approved restructuring plans, which included
initiatives to integrate the operations of recently acquired
companies, consolidate duplicative facilities and reduce
overhead. Total accrued restructuring costs of approximately
$5,705,000 were recorded related to these initiatives and were
comprised of approximately $3,700,000 representing the cost of
involuntary employee separation benefits related to
approximately 195 employees worldwide and $2,000,000 associated
with the closure and consolidation of office space, principally
in the United States.

Amounts of restructuring costs remaining at
December 31, 2002 of $10,196,000 (primarily amounts
remaining in respect of accrued restructuring costs recorded in
2002) relate to remaining separation and facility closure and
consolidation costs with all cash outlays expected to be
completed by the end of 2006.

6.     Restricted
Cash

The Company has approximately $1,223,000 in
restricted cash deposits, which relate primarily to annual
renewable letter of credit facilities with Citizens Bank for the
Waltham, Massachusetts, Santa Clara, California, and New
York, New York leased facilities. Should the Company not renew
these letter of credit facilities or default on its rental
obligations, the identified amounts will be payable to the
lessors.

F-19



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##### Table of Contents



IONA TECHNOLOGIES PLC


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)

7.     Other Accrued
Liabilities

Other accrued liabilities consist of the
following:

|                                |  |                    |        |      |  |   |        | 
|------------------------------- |  | ------------------ | ------ | ---- |  | - | ------ | 
|                                |  |                   
|                                |  | As of December 31,
|                                |  |                   
|                                |  | 2002               |        | 2001
|                                |  |                    |        |     
|                                |  |                   
|                                |  | (U.S. dollars in  
|                                |  | thousands)        
|Restructuring (Note 5)          |  | $                  | 10,196 |      |  | $ | 1,366  | 
|Income and other taxes payable  |  |                    | 2,181  |      |  |   | 1,709  | 
|Other                           |  |                    | 7,809  |      |  |   | 10,942 | 
|                                |  |                    |        |      |  |   |        | 
|Total other accrued liabilities |  | $                  | 20,186 |      |  | $ | 14,017 | 
|                                |  |                    |        |      |  |   |        | 

8.     Fair Value of
Financial Instruments

The carrying amount of cash and cash equivalents
approximates fair value due to the short term maturities of
these investments. The fair value of trading securities are
based on quoted market prices at year end.

The estimated fair value of the Companys
financial instruments are as follows:

|                              |  |                             |        |       |  |          |        |       |  |   |        |  |  |   |        | 
|----------------------------- |  | --------------------------- | ------ | ----- |  | -------- | ------ | ----- |  | - | ------ |  |  | - | ------ | 
|                              |  |                            
|                              |  | As of December 31,         
|                              |  |                            
|                              |  |                             |        |      
|                              |  | 2002                        |        | 2001 
|                              |  |                             |        |      
|                              |  |                            
|                              |  | (U.S. dollars in thousands)
|                              |  | Carrying                    |        | Fair  |  | Carrying |        | Fair 
|                              |  | Amount                      |        | Value |  | Amount   |        | Value
|                              |  |                             |        |       |  |          |        |      
|Non Derivatives               |  |                             |        |       |  |          |        |       |  |   |        |  |  |   |        | 
|Cash and cash equivalents     |  | $                           | 22,287 |       |  | $        | 22,287 |       |  | $ | 28,509 |  |  | $ | 28,509 | 
|Restricted cash               |  |                             | 1,223  |       |  |          | 1,223  |       |  |   | 1,078  |  |  |   | 1,078  | 
|Marketable securitiestrading |  |                             | 58,140 |       |  |          | 58,140 |       |  |   | 24,110 |  |  |   | 24,110 | 

The carrying amounts in the table are included in
the statements of financial position under the indicated
captions.

9.     Operating
Lease Commitments

The Company leases office space under
non-cancelable operating leases with various expiration dates
through 2013. Rent expense under all operating leases was
approximately $8,716,000, $10,190,000 and $6,251,000 in 2002,
2001 and 2000, respectively. Rental income under all operating
subleases was approximately $1,088,000, $726,000 and $810,000 in
2002, 2001 and 2000, respectively. Future minimum lease payments
under all operating leases as of December 31, 2002 are as
follows (U.S. dollars in thousands):

|                         |                              |   |       |        | 
|------------------------ | ---------------------------- | - | ----- | ------ | 
|Year ending December 31, |                              |  
|2003                     |                              | $ | 8,579 |       
|2004                     |                              |   | 7,523 |       
|2005                     |                              |   | 5,481 |       
|2006                     |                              |   | 2,992 |       
|2007                     |                              |   | 1,553 |       
|Thereafter               |                              |   | 8,118 |       
|                         |                              |   |       |       
|                         | Total minimum lease payments |   | $     | 34,246 | 
|                         |                              |   |       |       

F-20



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##### Table of Contents



IONA TECHNOLOGIES PLC


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)

Total minimum lease rental income to be received
under the operating sub-leases as of December 31, 2002 is
approximately $895,000.

The Company renewed its lease guarantee facility
with the Bank of Ireland in 2002 for an additional year in the
amount of
2,450,600
(approximately $2,569,000 at December 31, 2002), with an
annual fee of 1.25%. This renewed facility has a stated
termination date of one year from the date of issuance unless
otherwise renewed; however, the guarantee may be renewed
annually at the discretion of the Bank of Ireland.

10.     Other
Non-Current Assets

Other non-current assets consist of the following:

|                                   |                                     |                    |        |       |  |   |         |        | 
|---------------------------------- | ----------------------------------- | ------------------ | ------ | ----- |  | - | ------- | ------ | 
|                                   |                                     |                   
|                                   |                                     | As of December 31,
|                                   |                                     |                   
|                                   |                                     | 2002               |        | 2001 
|                                   |                                     |                    |        |      
|                                   |                                     |                   
|                                   |                                     | (U.S. dollars in  
|                                   |                                     | thousands)        
|Purchased technology               |                                     | $                  | 3,263  |       |  | $ | 53,764  |       
|Assembled workforce                |                                     |                    |       |       |  |   | 8,658   |       
|Security deposits and other assets |                                     |                    | 1,289  |       |  |   | 853     |       
|                                   |                                     |                    |        |       |  |   |         |       
|                                   | Total other non-current assets      |                    | $      | 4,552 |  |   | $       | 63,275 | 
|Accumulated amortization           |                                     |                    | (1,855 | )     |  |   | (15,277 | )     
|                                   |                                     |                    |        |       |  |   |         |       
|                                   | Total other non-current assets, net |                    | $      | 2,697 |  |   | $       | 47,998 | 
|                                   |                                     |                    |        |       |  |   |         |       

Upon the adoption of SFAS 142 on
January 1, 2002, the Company reclassified the net carrying
amount of assembled workforce of $6,872,000 from other
non-current assets to goodwill.

In October 2002, in accordance with
SFAS 142, the Company completed its assessment of the
carrying value of purchased technologies and completed the
relevant impairment tests as required by SFAS 144. The
Company compared the estimated undiscounted cash flows for its
purchased technology to the carrying value of the purchased
technology. As a result of unfavorable market conditions, and
changes in the Companys product strategy, the Company
recorded a non-cash impairment charge of $28,586,000,
representing the amount by which the carrying value exceeded the
fair value of purchased technologies, estimated by calculating
its discounted cash flows.

F-21



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##### Table of Contents



IONA TECHNOLOGIES PLC


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)

11.     Goodwill,
Indefinite Lived Intangible, and Other Non-Current
Assets

Net income (loss) and net income (loss) per share
for the years ended December 31, 2002, 2001 and 2000,
adjusted to exclude amortization of goodwill, is as follows:

|                                                                      |  |                             |          |      |  |      |         |   |  |   |        | 
|--------------------------------------------------------------------- |  | --------------------------- | -------- | ---- |  | ---- | ------- | - |  | - | ------ | 
|                                                                      |  |                            
|                                                                      |  | Years Ended December 31,   
|                                                                      |  |                            
|                                                                      |  | 2002                        |          | 2001 |  | 2000
|                                                                      |  |                             |          |      |  |     
|                                                                      |  |                            
|                                                                      |  | (U.S. dollars in thousands,
|                                                                      |  | except per share data)     
|Reported net income (loss)                                            |  | $                           | (369,307 | )    |  | $    | (83,500 | ) |  | $ | 14,165 | 
|SFAS No. 142 effectGoodwill                                          |  |                             |         |      |  |      | 61,403  |   |  |   | 4,973  | 
|                                                                      |  |                             |          |      |  |      |         |   |  |   |        | 
|Adjusted net income (loss)                                            |  | $                           | (369,307 | )    |  | $    | (22,097 | ) |  | $ | 19,138 | 
|Reported basic net income (loss) per Ordinary
    Share and per ADS   |  | $                           | (11.58   | )    |  | $    | (3.27   | ) |  | $ | 0.67   | 
|SFAS No. 142 effectGoodwill                                          |  |                             |         |      |  |      | 2.40    |   |  |   | 0.23   | 
|                                                                      |  |                             |          |      |  |      |         |   |  |   |        | 
|Adjusted basic net income (loss) per Ordinary
    Share and per ADS   |  | $                           | (11.58   | )    |  | $    | (0.87   | ) |  | $ | 0.90   | 
|Reported diluted net income (loss) per Ordinary
    Share and per ADS |  | $                           | (11.58   | )    |  | $    | (3.27   | ) |  | $ | 0.60   | 
|SFAS No. 142 effectGoodwill                                          |  |                             |         |      |  |      | 2.40    |   |  |   | 0.21   | 
|                                                                      |  |                             |          |      |  |      |         |   |  |   |        | 
|Adjusted diluted net income (loss) per Ordinary
    Share and per ADS |  | $                           | (11.58   | )    |  | $    | (0.87   | ) |  | $ | 0.81   | 

Identifiable intangible assets comprise goodwill,
which is not amortizable, and certain intangible other
non-current assets, which are amortizable. Other non-current
asset amortization for the years ended December 31, 2002,
2001 and 2000 was $10,115,000, $14,151,000 and $2,858,000,
respectively. Other non-current asset amortization is estimated
to be approximately $647,000 in 2003, $529,000 in 2004, $212,000
in 2005, $20,000 in 2006 and nil in 2007.

Intangible assets are analyzed as follows:

|                                      |  |                             |         |                             |  |              |         |     |  |                |        |              |  |     |       |  |  |   |         |  |  |   |        |  |  |   |         | 
|------------------------------------- |  | --------------------------- | ------- | --------------------------- |  | ------------ | ------- | --- |  | -------------- | ------ | ------------ |  | --- | ----- |  |  | - | ------- |  |  | - | ------ |  |  | - | ------- | 
|                                      |  |                             |         |                            
|                                      |  | As of December 31, 2002     |         | As of December 31, 2001    
|                                      |  |                             |         |                            
|                                      |  | Gross Carrying              |         | Impairment                  |  | Accumulated  |         |     |  | Gross Carrying |        | Accumulated  |  |    
|                                      |  | Amount                      |         | Loss                        |  | Amortization |         | Net |  | Amount         |        | Amortization |  | Net
|                                      |  |                             |         |                             |  |              |         |     |  |                |        |              |  |    
|                                      |  |                             |         |                            
|                                      |  | (U.S. dollars in thousands) |         | (U.S. dollars in thousands)
|Goodwillnon amortizable:             |  |                             |         |                             |  |              |         |     |  |                |        |              |  |     |       |  |  |   |         |  |  |   |        |  |  |   |         | 
|Goodwill                              |  | $                           | 343,248 |                             |  | $            | 276,808 |     |  | $              | 66,440 |              |  |     |      |  |  | $ | 333,371 |  |  | $ | 64,654 |  |  | $ | 268,717 | 
|Other non-current assetsamortizable: |  |                             |         |                             |  |              |         |     |  |                |        |              |  |     |       |  |  |   |         |  |  |   |        |  |  |   |         | 
|Purchased technology                  |  |                             | 53,944  |                             |  |              | 28,586  |     |  |                | 23,950 |              |  |     | 1,408 |  |  |   | 53,764  |  |  |   | 13,491 |  |  |   | 40,273  | 
|Assembled workforce                   |  |                             |        |                             |  |              |        |     |  |                |       |              |  |     |      |  |  |   | 8,658   |  |  |   | 1,786  |  |  |   | 6,872   | 
|                                      |  |                             |         |                             |  |              |         |     |  |                |        |              |  |     |       |  |  |   |         |  |  |   |        |  |  |   |         | 
|                                      |  |                             | 53,944  |                             |  |              | 28,586  |     |  |                | 23,950 |              |  |     | 1,408 |  |  |   | 62,422  |  |  |   | 15,277 |  |  |   | 47,145  | 
|                                      |  |                             |         |                             |  |              |         |     |  |                |        |              |  |     |       |  |  |   |         |  |  |   |        |  |  |   |         | 
|Total identifiable intangible assets  |  | $                           | 397,192 |                             |  | $            | 305,394 |     |  | $              | 90,390 |              |  | $   | 1,408 |  |  | $ | 395,793 |  |  | $ | 79,931 |  |  | $ | 315,862 | 
|                                      |  |                             |         |                             |  |              |         |     |  |                |        |              |  |     |       |  |  |   |         |  |  |   |        |  |  |   |         | 

Upon the adoption of SFAS 142 on
January 1, 2002, the Company reclassified the net carrying
amount of assembled workforce of $6,872,000 from other
non-current assets to goodwill.

In 2002, the Company allocated approximately
$1,219,000 of additional purchase price to goodwill in
connection with the acquisition of Object Oriented Concepts,
Inc. (OOC) upon the achievement of certain
performance targets by OOC in accordance with the terms of the
acquisition.

In October 2002, the Company completed its annual
impairment test and assessment of the carrying value of goodwill
as required by SFAS 142. Goodwill was tested for
impairment, by comparing the fair value of the Company, as
calculated based on IONAs market capitalization as of
October 1, 2002, to the carrying value of the Company, and
then comparing the implied fair value of goodwill to the carrying

F-22



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##### Table of Contents



IONA TECHNOLOGIES PLC


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)

value at that date. As a result of unfavorable
market conditions and a decline in IONAs market
capitalization, the Company recorded a non-cash impairment
charge of $276,808,000, equivalent to the carrying value of
goodwill, which reduced the carrying value of goodwill to nil.

In October 2002, in accordance with
SFAS 142, the Company completed its assessment of the
carrying value of purchased technologies and completed the
relevant impairment tests as required by SFAS 144. Due to
unfavorable market conditions and changes in the Companys
product strategy, it was determined that the carrying values of
purchased technologies exceeded their fair value resulting in
the Company recording a non-cash impairment charge of
$28,586,000.

The Companys assessment included an
independent analysis of the carrying values of purchased
technologies, recorded in connection with the acquisitions of
Object Oriented Concepts, Inc., Netfish Technologies, Inc. and
Software AG, including an initial comparison of the carrying
value for each purchased technology to the future undiscounted
cash flows associated with the technology. As a result of this
analysis, it was determined due to the excess carrying value
associated with each purchased technology that further
impairment testing was required. The Company recorded non-cash
impairment losses in October 2002, for the purchased
technologies recorded in connection with the acquisitions of
Object Oriented Concepts, Inc., Netfish Technologies, Inc., and
Software AG of approximately $4,461,000, $11,496,000 and
$6,250,000 respectively. These impairment losses (reflected in
the consolidated statements of operations as impairment of
intangible assets and fixed assets) represent the amount by
which the carrying value of each purchased technology exceeded
its estimated fair value, calculated by discounting future cash
flows for each purchased technology to a present value using a
rate of return which reflected the relative risk of the
investment and the time value of money. In addition in 2002, as
a result of changes in product strategy, in reaction to market
conditions, which resulted in changes to the Company product
suite and the elimination of certain other purchased
technologies from the Company product suite, an impairment loss
of approximately $6,379,000 was recorded, equivalent to the
carrying values of these purchased technologies.

12.     Property and
Equipment

Property and equipment consists of the following:

|                         |                                   |                    |         |        |  |   |         |        | 
|------------------------ | --------------------------------- | ------------------ | ------- | ------ |  | - | ------- | ------ | 
|                         |                                   |                   
|                         |                                   | As of December 31,
|                         |                                   |                   
|                         |                                   | 2002               |         | 2001  
|                         |                                   |                    |         |       
|                         |                                   |                   
|                         |                                   | (U.S. dollars in  
|                         |                                   | thousands)        
|Motor vehicles           |                                   | $                  |        |        |  | $ | 20      |       
|Computer equipment       |                                   |                    | 17,879  |        |  |   | 25,480  |       
|Office equipment         |                                   |                    | 3,149   |        |  |   | 4,145   |       
|Furniture and fixtures   |                                   |                    | 11,207  |        |  |   | 11,701  |       
|                         |                                   |                    |         |        |  |   |         |       
|                         | Total property and equipment      |                    | $       | 32,235 |  |   | $       | 41,346 | 
|Accumulated depreciation |                                   |                    | (19,248 | )      |  |   | (22,557 | )     
|                         |                                   |                    |         |        |  |   |         |       
|                         | Total property and equipment, net |                    | $       | 12,987 |  |   | $       | 18,789 | 
|                         |                                   |                    |         |        |  |   |         |       

During the year ended December 31, 2002, the
Company recorded a $3,750,000 charge for the impairment of fixed
assets and related costs, of which $1,600,000 was primarily
attributable to the implementation of a new sales force
automation system that replaced an existing system. The
remainder of $2,150,000 relates to fixed assets no longer in use
in 2002, resulting in the reduction of their net book value to
nil. There was no impairment of fixed assets in 2001.

F-23



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##### Table of Contents



IONA TECHNOLOGIES PLC


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)

13.     Redeemable
Preference Shares and Shareholders Equity

IONAs authorized share capital is divided
into Redeemable Preference Shares (Preference
Shares) of
0.0025 par
value per share and Ordinary Shares of
0.0025 par
value per share.

The Preference Shares confer on the holders
thereof the right to receive notice of and to attend all general
meetings of IONA but not the right to vote on any resolution
proposed therefor. They confer on the holders thereof the right
to be paid out of the profits available for distribution, in
priority to any payment of dividend on any other class of shares
in IONA, a fixed cumulative preference dividend at a rate of
6% per annum on the amount paid up on the Preference
Shares. Upon winding up of IONA, the Preference Shares confer
upon the holders thereof the right to repayment of the capital
paid thereon, together with payment of all arrears of
preferential dividend, whether declared or not, to the date of
redemption of the Preference Shares in priority to payment of
any dividend or repayment of capital to the holders of the
Ordinary Shares in the capital of IONA. Such Preference Shares
do not, however, confer upon the holders thereof any further
rights to participate in the assets of IONA.

Dividends may only be declared and paid out of
profits available for distribution determined in accordance with
accounting principles generally accepted in Ireland and
applicable Irish Company Law. Any dividends on the Ordinary
Shares, if and when declared, will be declared and paid in
U.S. dollars. The amount of retained earnings available for
distribution as dividends at December 31, 2002, 2001 and
2000, at the exchange rates in effect on those dates, were
approximately nil, nil, and $28,000,000, respectively.

14.     Share Option
Scheme

The Company has elected to follow Accounting
Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees (APB 25) and related
interpretations in accounting for its stock options. Under
APB 25, the Company has recognized compensation expense of
$1,230,000, $1,780,000, and $404,000 during 2002, 2001 and 2000,
respectively, for those instances in which the exercise prices
of IONAs stock options were less than the estimated market
price of the underlying shares on the date of grant and for the
stock compensation arising on the Aurora and Netfish
acquisitions (Note 4).

During 2001, IONA accelerated the vesting of
stock options granted to certain employees whose employment was
terminated. The Company recognized compensation expense of
$233,000 in 2001 in accordance with the requirements of FASB
Interpretation No. 44 Accounting for Certain
Transactions Involving Stock Compensation.

IONAs Executive Share Option Scheme has
authorized the grant of options to purchase up to an aggregate
of 1,125,500 Ordinary Shares to personnel. All options granted
have seven year terms and generally vest in equal installments
on each of the first, second, third and fourth anniversaries of
the date of grant.

During 1997, IONAs Board of Directors and
shareholders approved the 1997 Share Option Scheme which
provides for the grant of share options to employees,
consultants, directors and officers of the Company. The
1997 Share Option Scheme initially provided for the
issuance of up to 2,250,000 of IONAs Ordinary Shares. In
1998, IONAs Board of Directors and shareholders approved
an amendment to the 1997 Share Option Scheme, providing for
an increase in the number of Ordinary Shares that may be issued
under the 1997 Share Option Scheme to an aggregate of
4,750,000. In 2000, IONAs Board of Directors and
shareholders approved an amendment to the 1997 Share Option
Scheme, providing for an increase in the number of Ordinary
Shares that may be issued under the 1997 Share Option
Scheme to an aggregate of 8,900,000.

F-24



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##### Table of Contents



IONA TECHNOLOGIES PLC


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)

In 2001, IONAs Board of Directors and
shareholders approved an amendment to the 1997 Share Option
Scheme, providing for an increase in the number of shares that
may be issued under the 1997 Share Option Scheme to an
aggregate of 12,900,000. Options granted under the
1997 Share Option Scheme expire ten years from the date of
grant or five years from the date of grant in the case of an
incentive stock option granted to an employee holding more than
10% of the total combined voting power of IONA.

During 1997, IONAs Board of Directors and
shareholders also approved the 1997 Director Share Option Scheme
which provides for the grant of options to purchase a maximum of
250,000 Ordinary Shares of IONA to non-employee directors of
IONA. In July 2002, the Board of Directors and shareholders
approved an amendment to the 1997 Director Share Option Scheme
to increase the number of Ordinary Shares issuable under that
scheme from 250,000 to 500,000 shares.

In the fourth quarter of 2002, the Company made
an offer to its employees, including executive officers other
than the Chief Executive Officer and Chief Operating Officer, to
exchange their outstanding options to purchase IONAs
ordinary shares that had an exercise price of more than
$3.00 per share. Eligible options included options granted
under the 1997 Share Option Scheme, the Genesis Development
Corporation 1997 Stock Option Plan, the Object-Oriented
Concepts, Inc. Stock Option Plan and the Netfish Technologies,
Inc. 1999 Stock Option Plan. In exchange for eligible options,
employees received a commitment for new stock options to be
granted under the 1997 Share Option Scheme on or after
May 15, 2003. Only those participants in the option
exchange who are employees of the Company on the date the new
options are granted will be eligible to receive the new grant.
Participating executive officers were required to forfeit,
without exchange, all options granted on or after April 16,
2002. A total of 4,815,444 options were accepted for exchange
under the offer and accordingly were canceled in November 2002.
An additional 869,150 options were canceled without exchange.
The Company intends to grant the new options, to purchase
approximately 3,156,807 shares, on or after May 15,
2003. The new options will have an exercise price equal to the
fair market value of IONAs ordinary shares on the date of
grant, as determined by the last reported sale price of
IONAs ordinary shares on the Nasdaq National Market on the
trading day immediately prior to the grant date.

A summary of IONAs stock option activity,
and related information for the years ended December 31,
2002, 2001 and 2000 follows:

|                                |  |                               |            |                |  |         |       |                |  |         |            |                |  |   |       |  |  |  |            |   |  |   |       | 
|------------------------------- |  | ----------------------------- | ---------- | -------------- |  | ------- | ----- | -------------- |  | ------- | ---------- | -------------- |  | - | ----- |  |  |  | ---------- | - |  | - | ----- | 
|                                |  |                              
|                                |  | As of Year Ended December 31,
|                                |  |                              
|                                |  |                               |            |                |  |        
|                                |  | 2002                          |            | 2001           |  | 2000   
|                                |  |                               |            |                |  |        
|                                |  |                               |            | Weighted-      |  |         |       | Weighted-      |  |         |            | Weighted-     
|                                |  |                               |            | Average        |  |         |       | Average        |  |         |            | Average       
|                                |  | Options                       |            | Exercise Price |  | Options |       | Exercise Price |  | Options |            | Exercise Price
|                                |  |                               |            |                |  |         |       |                |  |         |            |               
|Outstandingbeginning of period |  |                               | 7,465,061  |                |  | $       | 28.33 |                |  |         | 4,712,476  |                |  | $ | 34.16 |  |  |  | 3,311,966  |   |  | $ | 14.25 | 
|Granted                         |  |                               | 2,875,950  |                |  |         | 8.01  |                |  |         | 5,006,333  |                |  |   | 22.43 |  |  |  | 2,779,100  |   |  |   | 49.23 | 
|Forfeitures                     |  |                               | (9,432,965 | )              |  |         | 23.58 |                |  |         | (1,528,179 | )              |  |   | 35.19 |  |  |  | (374,869   | ) |  |   | 19.94 | 
|Exercised                       |  |                               | (87,052    | )              |  |         | 7.11  |                |  |         | (725,569   | )              |  |   | 9.36  |  |  |  | (1,003,721 | ) |  |   | 13.86 | 
|                                |  |                               |            |                |  |         |       |                |  |         |            |                |  |   |       |  |  |  |            |   |  |   |       | 
|Outstandingend of period       |  |                               | 820,994    |                |  | $       | 14.57 |                |  |         | 7,465,061  |                |  | $ | 28.33 |  |  |  | 4,712,476  |   |  | $ | 34.16 | 
|                                |  |                               |            |                |  |         |       |                |  |         |            |                |  |   |       |  |  |  |            |   |  |   |       | 
|Exercisable at end of period    |  |                               | 339,889    |                |  |         | 20.55 |                |  |         | 1,926,650  |                |  | $ | 27.79 |  |  |  | 715,353    |   |  | $ | 17.77 | 
|                                |  |                               |            |                |  |         |       |                |  |         |            |                |  |   |       |  |  |  |            |   |  |   |       | 

F-25



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##### Table of Contents



IONA TECHNOLOGIES PLC


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)

|                                                                                                                                                                                  |  |                               |      |                |  |       |      |                |  |       |       |                |  |   |       |  |  |   |       |  |  |   |       | 
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------------- | ---- | -------------- |  | ----- | ---- | -------------- |  | ----- | ----- | -------------- |  | - | ----- |  |  | - | ----- |  |  | - | ----- | 
|                                                                                                                                                                                  |  |                              
|                                                                                                                                                                                  |  | As of Year Ended December 31,
|                                                                                                                                                                                  |  |                              
|                                                                                                                                                                                  |  |                               |      |                |  |      
|                                                                                                                                                                                  |  | 2002                          |      | 2001           |  | 2000 
|                                                                                                                                                                                  |  |                               |      |                |  |      
|                                                                                                                                                                                  |  |                               |      | Weighted-      |  |       |      | Weighted-      |  |       |       | Weighted-     
|                                                                                                                                                                                  |  | Fair                          |      | Average        |  | Fair  |      | Average        |  | Fair  |       | Average       
|                                                                                                                                                                                  |  | Value                         |      | Exercise Price |  | Value |      | Exercise Price |  | Value |       | Exercise Price
|                                                                                                                                                                                  |  |                               |      |                |  |       |      |                |  |       |       |               
|Weighted-average fair value of options granted
    during the year for options whose exercise price equals the
    market price of the Ordinary Shares on the date of grant       |  | $                             | 6.58 |                |  | $     | 8.01 |                |  | $     | 21.12 |                |  | $ | 26.16 |  |  | $ | 40.31 |  |  | $ | 49.23 | 
|Weighted-average fair value of options granted
    during the year for options whose exercise price is less than
    the market price of the Ordinary Shares on the date of grant |  |                               |     |                |  |       |     |                |  | $     | 41.62 |                |  | $ | 7.92  |  |  |   |      |  |  |   |      | 

Exercise prices for options outstanding as of
December 31, 2002 ranged from $0.32 to $79.88 per
share. An analysis of options outstanding at December 31,
2002 is as follows.

|                                                                 |       |             |         |                  |  |             |     |  |  |  |         |         | 
|---------------------------------------------------------------- | ----- | ----------- | ------- | ---------------- |  | ----------- | --- |  |  |  | ------- | ------- | 
|                                                                 |       |             |         | Weighted         |  |            
|                                                                 |       |             |         | Average          |  |            
|                                                                 |       | Number of   |         | Remaining        |  | Options    
|                                                                 |       | Options     |         | Contractual Life |  | Currently  
|Exercise Price                                                   |       | Outstanding |         | (in years)       |  | Exercisable
|                                                                 |       |             |         |                  |  |            
|Less than $5.00 per share                                        |       |             | 300,117 |                  |  |             | 9.2 |  |  |  | 39,825  |        
|Greater than $5.00 per share and less than
    $15.00 per share  |       |             | 331,069 |                  |  |             | 7.8 |  |  |  | 174,808 |        
|Greater than $15.00 per share and less than
    $25.00 per share |       |             | 17,229  |                  |  |             | 7.4 |  |  |  | 13,536  |        
|Greater than $25.00 per share and less than
    $37.50 per share |       |             | 70,825  |                  |  |             | 8.3 |  |  |  | 46,087  |        
|Greater than $37.50 per share and less than
    $50.00 per share |       |             | 80,954  |                  |  |             | 8.2 |  |  |  | 51,983  |        
|Greater than $50.00 per share and less than
    $62.50 per share |       |             | 10,800  |                  |  |             | 7.7 |  |  |  | 5,400   |        
|Greater than $62.50 per share                                    |       |             | 10,000  |                  |  |             | 7.6 |  |  |  | 8,250   |        
|                                                                 |       |             |         |                  |  |             |     |  |  |  |         |        
|                                                                 | Total |             |         | 820,994          |  |             |     |  |  |  |         | 339,889 | 
|                                                                 |       |             |         |                  |  |             |     |  |  |  |         |        

15.     1999 Employee
Share Purchase Plan

In August 1999, the Company established a
qualified Employee Share Purchase Plan, the terms of which allow
for qualified employees (as defined) to participate in the
purchase of designated shares of the Companys Ordinary
Shares at a price equal to the lower of 85% of the closing price
at the beginning or end of each semi-annual stock purchase
period. At December 31, 2002, 2001, and 2000, 497,402,
166,197, and 60,441 shares have been issued under the plan,
respectively.

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IONA TECHNOLOGIES PLC


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)

16.     Net Income
(Loss) Per Ordinary Share And ADS

The following sets forth the computation of basic
and diluted net income (loss) per Ordinary Share and ADS:

|             |                                                                                                                                       |                                        |   |          |   |      |   |         |   |  |   |        | 
|------------ | ------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------- | - | -------- | - | ---- | - | ------- | - |  | - | ------ | 
|             |                                                                                                                                       |                                       
|             |                                                                                                                                       | Year Ended December 31,               
|             |                                                                                                                                       |                                       
|             |                                                                                                                                       | 2002                                   |   | 2001     |   | 2000
|             |                                                                                                                                       |                                        |   |          |   |     
|             |                                                                                                                                       |                                       
|             |                                                                                                                                       | (U.S. dollars in thousands, except per
|             |                                                                                                                                       | share data)                           
|Numerator:   |                                                                                                                                       |                                        |   |          |   |      |   |         |   |  |   |       
|             | Numerator for basic and diluted net income (loss)
    per Ordinary Share and ADSincome (loss) available to
    Ordinary Shareholders |                                        | $ | (369,307 | ) |      | $ | (83,500 | ) |  | $ | 14,165 | 
|             |                                                                                                                                       |                                        |   |          |   |      |   |         |   |  |   |       
|Denominator: |                                                                                                                                       |                                        |   |          |   |      |   |         |   |  |   |       
|             | Denominator for basic earnings per
    shareweighted average Ordinary Shares and ADS                                                 |                                        |   | 31,890   |   |      |   | 25,556  |   |  |   | 21,177 | 
|             | Effect of employee stock options                                                                                                      |                                        |   |         |   |      |   |        |   |  |   | 2,343  | 
|             |                                                                                                                                       |                                        |   |          |   |      |   |         |   |  |   |       
|             | Denominator for diluted net income (loss) per
    Ordinary Share and ADS                                                              |                                        |   | 31,890   |   |      |   | 25,556  |   |  |   | 23,520 | 
|             |                                                                                                                                       |                                        |   |          |   |      |   |         |   |  |   |       
|             | Basic net income (loss) per Ordinary Share and ADS                                                                                    |                                        | $ | (11.58   | ) |      | $ | (3.27   | ) |  | $ | 0.67   | 
|             |                                                                                                                                       |                                        |   |          |   |      |   |         |   |  |   |       
|             | Diluted net income (loss) per Ordinary Share and
    ADS                                                                              |                                        | $ | (11.58   | ) |      | $ | (3.27   | ) |  | $ | 0.60   | 
|             |                                                                                                                                       |                                        |   |          |   |      |   |         |   |  |   |       

17.     Income
Taxes

Income (loss) before provision for (benefit of)
income taxes consists of the following:

|              |       |                             |          |          |   |      |         |         |   |   |       |        | 
|------------- | ----- | --------------------------- | -------- | -------- | - | ---- | ------- | ------- | - | - | ----- | ------ | 
|              |       |                            
|              |       | Year Ended December 31,    
|              |       |                            
|              |       | 2002                        |          | 2001     |   | 2000
|              |       |                             |          |          |   |     
|              |       |                            
|              |       | (U.S. dollars in thousands)
|Ireland       |       | $                           | (361,284 | )        |   | $    | (69,452 | )       |   | $ | 7,973 |       
|Rest of World |       |                             | (6,480   | )        |   |      | (14,616 | )       |   |   | 8,991 |       
|              |       |                             |          |          |   |      |         |         |   |   |       |       
|              | Total |                             | $        | (367,764 | ) |      | $       | (84,068 | ) |   | $     | 16,964 | 
|              |       |                             |          |          |   |      |         |         |   |   |       |       

The provision for (benefit of) income taxes
consists of the following:

|          |               |                                               |   |       |       |      |   |        |      |   |   |       |       | 
|--------- | ------------- | --------------------------------------------- | - | ----- | ----- | ---- | - | ------ | ---- | - | - | ----- | ----- | 
|          |               |                                              
|          |               | Year Ended December 31,                      
|          |               |                                              
|          |               | 2002                                          |   | 2001  |       | 2000
|          |               |                                               |   |       |       |     
|          |               |                                              
|          |               | (U.S. dollars in thousands)                  
|Current:  |               |                                               |   |       |       |      |   |        |      |   |   |      
|          | Ireland       |                                               | $ | 126   |       |      | $ | (1,195 | )    |   | $ | 2,097 |      
|          | Rest of World |                                               |   | 1,417 |       |      |   | 627    |      |   |   | 702   |      
|          |               |                                               |   |       |       |      |   |        |      |   |   |      
|          |               | Total current                                 |   |       | 1,543 |      |   |        | (568 | ) |   |       | 2,799 | 
|Deferred: |               |                                               |   |       |       |      |   |        |      |   |   |      
|          | Ireland       |                                               |   |      |       |      |   |       |      |   |   |      |      
|          | Rest of World |                                               |   |      |       |      |   |       |      |   |   |      |      
|          |               |                                               |   |       |       |      |   |        |      |   |   |      
|          |               | Total deferred                                |   |       |      |      |   |        |     |   |   |       |      | 
|          |               |                                               |   |       |       |      |   |        |      |   |   |      
|          |               | Total provision for (benefit of) income taxes |   | $     | 1,543 |      |   | $      | (568 | ) |   | $     | 2,799 | 
|          |               |                                               |   |       |       |      |   |        |      |   |   |      

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##### Table of Contents



IONA TECHNOLOGIES PLC


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)

The provision for (benefit of) income taxes
differs from the amount computed by applying the statutory
income tax rate to income (loss) before taxes. The sources and
tax effects of the differences are as follows:

|                                                                                                                              |                                               |                             |         |       |  |      |         |      |   |   |        |       | 
|----------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------- | --------------------------- | ------- | ----- |  | ---- | ------- | ---- | - | - | ------ | ----- | 
|                                                                                                                              |                                               |                            
|                                                                                                                              |                                               | Year Ended December 31,    
|                                                                                                                              |                                               |                            
|                                                                                                                              |                                               | 2002                        |         | 2001  |  | 2000
|                                                                                                                              |                                               |                             |         |       |  |     
|                                                                                                                              |                                               |                            
|                                                                                                                              |                                               | (U.S. dollars in thousands)
|Income taxes (benefit) computed at the Irish
    statutory income tax rate of 16% for 2002, 20% for 2001 and 24%
    for 2000 |                                               | $                           | (58,842 | )     |  | $    | (16,813 | )    |   | $ | 4,071  |      
|Income (loss) from Irish manufacturing operations
    (taxed at) benefited at lower rates                                     |                                               |                             | 2,649   |       |  |      | 585     |      |   |   | (982   | )    
|Operating losses not utilized                                                                                                 |                                               |                             | 7,759   |       |  |      | 7,012   |      |   |   | 247    |      
|Income (loss) subject to different rates of tax                                                                               |                                               |                             | (1,803  | )     |  |      | (3,467  | )    |   |   | 391    |      
|Income (loss) not subject to tax                                                                                              |                                               |                             | (163    | )     |  |      | (450    | )    |   |   | (1,261 | )    
|Non-deductible expenses                                                                                                       |                                               |                             | 51,920  |       |  |      | 12,540  |      |   |   | 1,351  |      
|Other individually immaterial items                                                                                           |                                               |                             | 23      |       |  |      | 25      |      |   |   | 32     |      
|Operating losses utilized                                                                                                     |                                               |                             |        |       |  |      |        |      |   |   | (1,050 | )    
|                                                                                                                              |                                               |                             |         |       |  |      |         |      |   |   |        |      
|                                                                                                                              | Total provision for (benefit of) income taxes |                             | $       | 1,543 |  |      | $       | (568 | ) |   | $      | 2,799 | 
|                                                                                                                              |                                               |                             |         |       |  |      |         |      |   |   |        |      

The effect on basic and diluted net income (loss)
per Ordinary Share and per ADS of the Irish manufacturing
operations being taxed at (benefited at) a lower rate than the
Irish Statutory income tax rate was an increase in loss per
share of $0.08 and $0.08 respectively for the year ended
December 31, 2002 and an increase in net income per share
of $0.02 and $0.02 respectively for the year ended
December 31, 2001, and an increase in net income per share
of $0.05 and $0.04 respectively for the year ended
December 31, 2000.

|                          |                                  |                             |         |        |  |      |         |        |  |   |      |     | 
|------------------------- | -------------------------------- | --------------------------- | ------- | ------ |  | ---- | ------- | ------ |  | - | ---- | --- | 
|                          |                                  |                            
|                          |                                  | Year Ended December 31,    
|                          |                                  |                            
|                          |                                  | 2002                        |         | 2001   |  | 2000
|                          |                                  |                             |         |        |  |     
|                          |                                  |                            
|                          |                                  | (U.S. dollars in thousands)
|Deferred tax assets:      |                                  |                             |         |        |  |      |         |        |  |   |      |    
|                          | Net operating loss carryforwards |                             | $       | 41,690 |  |      | $       | 17,500 |  |   | $    | 685 | 
|Total deferred tax assets |                                  |                             | 41,690  |        |  |      | 17,500  |        |  |   | 685  |    
|Valuation allowance       |                                  |                             | (41,690 | )      |  |      | (17,500 | )      |  |   | (685 | )  
|                          |                                  |                             |         |        |  |      |         |        |  |   |      |    
|Net deferred tax assets   |                                  | $                           |        |        |  | $    |        |        |  | $ |     |    
|                          |                                  |                             |         |        |  |      |         |        |  |   |      |    

The movement on the valuation allowance is as
follows:

|                                |                                                                 |                             |        |        |  |      |        |       |  |   |       |   | 
|------------------------------- | --------------------------------------------------------------- | --------------------------- | ------ | ------ |  | ---- | ------ | ----- |  | - | ----- | - | 
|                                |                                                                 |                            
|                                |                                                                 | Year Ended December 31,    
|                                |                                                                 |                            
|                                |                                                                 | 2002                        |        | 2001   |  | 2000
|                                |                                                                 |                             |        |        |  |     
|                                |                                                                 |                            
|                                |                                                                 | (U.S. dollars in thousands)
|Balance at beginning of year    |                                                                 | $                           | 17,500 |        |  | $    | 685    |       |  | $ | 1,735 |  
|Additions:                      |                                                                 |                             |        |        |  |      |        |       |  |   |       |  
|                                | Charged to expense                                              |                             |        | 7,759  |  |      |        | 7,012 |  |   |       |  | 
|                                | Matching increase in tax value of disqualifying
    disposition |                             |        | 1,877  |  |      |        | 9,803 |  |   |       |  | 
|                                | Related to preacquisition losses of Netfish                     |                             |        | 14,554 |  |      |        |      |  |   |       |  | 
|Deductions credited to expense |                                                                 |                             |       |        |  |      |       |       |  |   | 1,050 |  
|                                |                                                                 |                             |        |        |  |      |        |       |  |   |       |  
|Balance at end of year          |                                                                 | $                           | 41,690 |        |  | $    | 17,500 |       |  | $ | 685   |  
|                                |                                                                 |                             |        |        |  |      |        |       |  |   |       |  

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IONA TECHNOLOGIES PLC


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)

At December 31, 2002, the Company has a net
operating loss carryforward of approximately
$103.6 million, including approximately $65.0 million
pre-acquisition losses from the Netfish acquisition, for
U.S. federal income tax purposes which will expire in the
tax years 2011 through 2022 if not previously utilized.
Utilization of the U.S. net operating loss carryforward may
be subject to an annual limitation due to the change in
ownership rules provided by the Internal Revenue Code of 1986.
This limitation and other restrictions provided by the Internal
Revenue Code of 1986 may reduce the net operating loss
carryforward such that it would not be available to offset
future taxable income of the U.S. subsidiaries.

At December 31, 2002, approximately
$29.2 million of the net operating loss carryforwards in
the United States result from disqualifying dispositions. The
tax value of the disqualifying dispositions has not been
recognized in the tax reconciliation note as it is not expected
that it will reverse. At December 31, 2002,
$11.7 million of the valuation allowance related to
disqualifying dispositions.

At December 31, 2002, the Company also had
net operating loss carryforwards totaling approximately
$4.5 million for Irish income tax purposes which carry
forward indefinitely.

At December 31, 2002, the Company also had
net operating loss carryforwards totaling approximately
$2.0 million for Australian income tax purposes which carry
forward indefinitely.

The utilization of these net operating loss
carryforwards is limited to the future profitable operation of
the Company in the related tax jurisdictions in which such
carryforwards arose. Valuation allowances of 100% have been
provided against the net operating loss carryforwards because of
the history of operating losses in the related tax jurisdictions.

18.     Industry and
Geographic Information

Statement of Financial Accounting Standards
No. 131, Disclosures about Segments of an Enterprise
and Related Information (SFAS 131),
established standards for reporting information about operating
segments. Operating segments are defined as components of an
enterprise about which separate financial information is
available that is evaluated regularly by the chief operating
decision maker in deciding how to allocate resources and in
assessing performance. The Company has one reportable segment:
enterprise infrastructure software. The Company also provides
professional services, consisting of consulting and training,
customer support of all its products, and, to a limited extent,
product customization and enhancements.

The accounting policies of the reportable segment
are the same as those described in the summary of significant
accounting policies.

The following is a summary of enterprise-wide
geographic areas information:

Revenues from external customers, all
attributable to foreign countries:

|                         |                    |                             |        |         |  |      |         |         |  |   |         |         | 
|------------------------ | ------------------ | --------------------------- | ------ | ------- |  | ---- | ------- | ------- |  | - | ------- | ------- | 
|                         |                    |                            
|                         |                    | Year Ended December 31,    
|                         |                    |                            
|                         |                    | 2002                        |        | 2001    |  | 2000
|                         |                    |                             |        |         |  |     
|                         |                    |                            
|                         |                    | (U.S. dollars in thousands)
|United States            |                    | $                           | 75,472 |         |  | $    | 119,698 |         |  | $ | 103,107 |        
|Other European Countries |                    |                             | 33,696 |         |  |      | 42,357  |         |  |   | 39,552  |        
|Rest of World            |                    |                             | 14,062 |         |  |      | 18,649  |         |  |   | 10,404  |        
|                         |                    |                             |        |         |  |      |         |         |  |   |         |        
|                         | Consolidated total |                             | $      | 123,230 |  |      | $       | 180,704 |  |   | $       | 153,063 | 
|                         |                    |                             |        |         |  |      |         |         |  |   |         |        

Revenues are attributed to countries based on the
location of customers.

F-29



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IONA TECHNOLOGIES PLC


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)

Long Lived Assets:

|                    |                |                    |   |       |        |      |   |         |         |  |   |        |        | 
|------------------- | -------------- | ------------------ | - | ----- | ------ | ---- | - | ------- | ------- |  | - | ------ | ------ | 
|                    |                |                   
|                    |                | As of December 31,
|                    |                |                   
|                    |                | 2002               |   | 2001  |        | 2000
|                    |                |                    |   |       |        |     
|Country of Domicile |                |                    |   |       |        |      |   |         |         |  |   |       
|                    | Ireland        |                    | $ | 8,213 |        |      | $ | 325,465 |         |  | $ | 42,628 |       
|Foreign Countries   |                |                    |   |       |        |      |   |         |         |  |   |       
|                    | United States  |                    |   | 6,540 |        |      |   | 8,779   |         |  |   | 7,598  |       
|                    | Cayman Islands |                    |   |      |        |      |   |        |         |  |   | 511    |       
|                    | Rest of World  |                    |   | 931   |        |      |   | 1,260   |         |  |   | 1,336  |       
|                    |                |                    |   |       |        |      |   |         |         |  |   |       
|                    |                | Consolidated total |   | $     | 15,684 |      |   | $       | 335,504 |  |   | $      | 52,073 | 
|                    |                |                    |   |       |        |      |   |         |         |  |   |       

19.     Settlement of
Litigation

In March 2000, RSA Securities, Inc.
(RSA) and the Massachusetts Institute of Technology
filed suit against the Company alleging that the Company
breached the terms of a patent license agreement between RSA and
the Company. In June 2000, the Company and RSA entered into a
confidential settlement agreement to settle all outstanding
claims among the parties. Costs associated with the settlement
of this litigation amounted to $1,350,000.

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##### Table of Contents






Exhibit Index

|            |       |                        |  |                                                                                                                                                                                                                                                                                                                                                                                                 
|----------- | ----- | ---------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |       | Description of Exhibit
|            |       |                       
|            | 1.1   |                        |  | Restated Articles of Association, as amended, of
    IONA Technologies PLC (filed as Exhibit 4.2 to IONAs
    Registration Statement on Form S-8 (File
    No. 333-11384) and incorporated herein by reference)                                                                                                                                                                                
|            | 1.2   |                        |  | Memorandum of Association, as amended, of IONA
    Technologies PLC (filed as Exhibit 3.3 to IONAs
    Registration Statement on Form F-1 (File No. 333-6396)
    and incorporated herein by reference)                                                                                                                                                                                        
|            | 2.1   |                        |  | Specimen Certificate representing Ordinary Shares
    (filed as Exhibit 4.1 to IONAs Registration Statement
    on Form F-1 (File No. 333-6396) and incorporated
    herein by reference)                                                                                                                                                                                                      
|            | 2.2   |                        |  | Deposit Agreement dated as of February 24,
    1997, by and among IONA Technologies PLC, JPMorgan Chase Bank
    (as successor to Morgan Guaranty Trust Company of New York) and
    the holders from time to time of IONAs American Depositary
    Shares (filed as Exhibit 4.2 to IONAs Registration
    Statement on Form F-1 (File No. 333-6396) and
    incorporated herein by reference)
|            | 4.1   |                        |  | Agreement and Plan of Reorganization dated as of
    February 14, 2001, by and among IONA Technologies PLC, NV
    Acquisition Corp. and Netfish Technologies, Inc. (filed as
    Exhibit 4.4 to IONAs annual report on Form 20-F
    for the year ending December 31, 2000 and incorporated
    herein by reference)                                                                          
|            | 4.2   |                        |  | Lease dated July 31, 1998, by and between
    AIB Custodial Nominees Limited and IONA Technologies PLC (filed
    as Exhibit 4.5 to IONAs annual report on Form 20-F
    for the year ending December 31, 2000 and incorporated
    herein by reference)                                                                                                                                       
|            | 4.3   |                        |  | Lease dated March 2, 1999, by and between
    Boston Properties Limited Partnership and IONA Technologies,
    Inc. (filed as Exhibit 4.6 to IONAs annual report on
    Form 20-F for the year ending December 31, 2000 and
    incorporated herein by reference)                                                                                                                              
|            | 4.4  |                        |  | Executive Share Option Scheme (filed as
    Exhibit 10.1 to IONAs Registration Statement on
    Form F-1 (File No. 333-6396) and incorporated herein
    by reference)                                                                                                                                                                                                                         
|            | 4.5  |                        |  | 1997 Share Option Scheme, as amended (filed
    as Exhibit 4.4 to IONAs Registration Statement on
    Form S-8 (File No. 333-12326) and incorporated herein
    by reference)                                                                                                                                                                                                                  
|            | 4.6  |                        |  | 1997 Director Share Option Scheme (filed as
    Exhibit 10.3 to IONAs Registration Statement on
    Form F-1 (File No. 333-6396) and incorporated herein
    by reference)                                                                                                                                                                                                                     
|            | 4.7  |                        |  | 1999 Employee Share Purchase Plan, as amended
    (filed as Exhibit 4.5 to IONAs Registration Statement
    on Form S-8 (File No. 333-11384) and incorporated
    herein by reference)                                                                                                                                                                                                         
|            | 4.8  |                        |  | Genesis Development Corporation 1997 Stock Option
    Plan (filed as Exhibit 4.5 to IONAs Registration
    Statement on Form S-8 (File No. 333-12326) and
    incorporated herein by reference)                                                                                                                                                                                                
|            | 4.9  |                        |  | Object-Oriented Concepts, Inc. Stock Option Plan
    (filed as Exhibit 4.4 to IONAs Registration Statement
    on Form S-8 (File No. 333-13224) and incorporated
    herein by reference)                                                                                                                                                                                                      
|            | 4.10 |                        |  | Netfish Technologies, Inc. 1999 Stock Option Plan
    (filed as Exhibit 4.5 to IONAs Registration Statement
    on Form S-8 (File No. 333-13494) and incorporated
    herein by reference)                                                                                                                                                                                                     
|            | 4.11 |                        |  | Letter agreement regarding severance payments
    dated August 8, 2002 by and between Steven Fisch and IONA
    Technologies, Inc.                                                                                                                                                                                                                                                              
|            | 4.12 |                        |  | Non-Executive Directors Change in Control Plan                                                                                                                                                                                                                                                                                                                                                  



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|            |       |                        |  |                                                                                                                                                                                                          
|----------- | ----- | ---------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |       | Description of Exhibit
|            |       |                       
|            | 4.13 |                        |  | Form of Change of Control Agreement by and among
    IONA Technologies, Inc., IONA Technologies PLC and each of Barry
    S. Morris, Daniel Demmer, Eric Newcomer, David James and Susan
    H. Alexander
|            | 4.14 |                        |  | Change of Control Agreement dated March 17,
    2003 by and among IONA Technologies, Inc., IONA Technologies PLC
    and Steven Fisch                                                                    
|            | 8.1   |                        |  | Active Subsidiaries of IONA Technologies PLC                                                                                                                                                             
|            | 10.1  |                        |  | Consent of Ernst & Young                                                                                                                                                                                 
|            | 10.2  |                        |  | Certification of Chief Executive Officer pursuant
    to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                   
|            | 10.3  |                        |  | Certification of Chief Financial Officer pursuant
    to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                   



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| | Indicates a management contract or any
    compensatory plan, contract or arrangement.