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 Commission File December 31, 1998 No. 0-29154 IONA Technologies PLC (Exact name of Registrant as speci®ed 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 of®ces)

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

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

Ordinary Shares, IR£0.002 Par Value (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, 1998:

19,451,723 Ordinary Shares, IR£0.002 Par Value

Indicate by check mark whether the registrant (1) has ®led all reports required to be ®led 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 ®ling requirements for the past 90 days.

Yes X No

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

Item 17 Item 18 X This Annual Report on Form 20-F was not prepared for ®ling in Ireland in compliance with Irish law or the listing rules of the Irish Stock Exchange.

Unless otherwise provided herein, references to ``IONA'' in this annual report shall mean IONA Technologies PLC and its world-wide subsidiaries, collectively.

IONA has a secondary listing on the Irish Stock Exchange. For this reason, IONA is 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 ®nancial advisor.

IONA's ®nancial statements are presented in U.S. dollars and are prepared in accordance with generally accepted accounting principles in the United States. All references in this Annual Report to ``Dollars'' and ``$'' are to U.S. dollars, and all references to ``Pounds'' or ``IR£'' or ``£'' are to Irish pounds. 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 IONA's Consolidated Financial Statements and unless otherwise indicated, all conversions of amounts herein from Pounds to Dollars have been made at an exchange rate of 1.4779 Dollars to one Pound 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, 1998.

The terms Orbix௡ and IONA௡ used in this Annual Report are registered trademarks of IONA. The terms ``Making Software Work Together௣,'' ``OrbixOTM௣,'' ``OrbixCOMet௣,'' ``OrbixWeb௣'' and ``MessageStore௣'' are un-registered trademarks of IONA. CORBA௡ is a registered trademark of the Object Management Group, Inc. in the U.S. and other countries. All other trademarks appearing in this Annual Report are the property of IONA or their respective holders.

-i- TABLE OF CONTENTS

Page Part I ...... 1 Item 1. Description of Business ...... 1 Item 2. Description of Property ...... 11 Item 3. Legal Proceedings ...... 11 Item 4. Control of Registrant ...... 12 Item 5. Nature of the Trading Market ...... 13 Item 6. Exchange Controls and Other Limitations Affecting Security Holders ...... 14 Item 7. Taxation ...... 14 Item 8. Selected Financial Data ...... 18 Item 9. Management's Discussion and Analysis of Financial Condition and Results of Operations ...... 19 Item 9A. Quantitative and Qualitative Disclosure About Market Risks ...... 37 Item 10. Directors and Of®cers of Registrant ...... 37 Item 11. Compensation of Of®cers and Directors ...... 39 Item 12. Options to Purchase Securities from Registrant or Subsidiaries ...... 39 Item 13. Interest of Management in Certain Transactions ...... 41 Part II ...... 41 Item 14. Description of Securities to be Registered ...... 41 Part III ...... 41 Item 15. Defaults on Senior Securities ...... 41 Item 16. Changes in Securities, Changes in Security for Registered Securities and Use of Proceeds ...... 41 Part IV ...... 42 Item 17. Financial Statements ...... 42 Item 18. Financial Statements ...... 42 Item 19. Financial Statements and Exhibits ...... 42

-ii- PART I

Item 1. DESCRIPTION OF BUSINESS This Annual Report, and other reports, proxy statements and other communications to shareholders, as well as oral statements made by the of®cers or agents of IONA Technologies PLC, 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, made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, with respect to, among other things, IONA's future revenues, operating income, net income per ordinary share, products and services, 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 IONA as of the date hereof, and IONA assumes no obligation to update any forward-looking statement. These forward-looking statements involve risks and uncertainties and actual results could differ materially from those discussed in the forward-looking statements. Factors that may cause such variation are discussed in ``Management's Discussion and Analysis of Financial Condition and Results of OperationsÐFactors Affecting Future Results'' and the Company's reports ®led with the Securities and Exchange Commission.

General IONA is a world leader in the business of ``Making Software Work Together.'' IONA creates and delivers middleware products which enable the development, integration and management of network-based applications in multi-platform computing environments. IONA's Orbix family of products can be thought of as ``containers'' which hold the various different software components that make up modern applications. These products are therefore designed to provide the software communications infrastructure to connect applications running on multiple, heterogeneous platforms and to support the rapid development and deployment of network-centric and component-oriented applications. Orbix is the world's leading implementation of the Common Object Request Broker Architecture (``CORBA'') standard, which has been promulgated by the Object Management Group, an independent standards body, to address the problems of application integration by standardizing application-to-application communications. IONA also supports other standards in the middleware market, including Microsoft's Common Object Model and Sun Microsystems' Enterprise Java Beans.

IONA believes that many corporate information technology (``IT'') departments are adopting a component-oriented approach to application development and procurement to • increase the ¯exibility, scalability, agility and feature set of network applications; • decrease development cost; • reduce time-to-market; and • extend the boundaries of their information systems beyond the enterprise to the Internet.

This component-oriented approach has created a demand for an underlying infrastructure, such as Orbix, which can be used by corporate IT departments and complemented by independent software vendors to connect application components.

IONA has pursued a business strategy of developing an extensive customer base by designing its Orbix family of products as a shrink-wrapped, easy-to-use, modular product set for application developers and marketing the Orbix family of products through ®eld sales, direct sales, telesales and indirect channel sales. These channels have been augmented with a growing enterprise sales team focused on delivering larger scale accounts.

The Orbix family of products is available on over 15 leading computing platforms, such as OS/390, various UNIX versions and Windows, and supports a wide range of programming languages, including C++, Java, Visual Basic and COBOL.

-1- IONA also provides enterprise class products and services. For example, OrbixOTM is an integrated suite of middleware products which provides support for enterprise development and represents a complete integrated solution for the implementation of mission-critical middleware architectures. Reinforced by IONA's commitment to quality customer support, training and consulting, IONA has shown that its solutions can enable businesses to deploy and integrate heterogeneous applications throughout the enterprise.

Industry Background Over its more than 40-year history, business computing has evolved from the centralized mainframe paradigm to the distributed client/server and Internet/intranet models. The sophistication of modern information systems and the proliferation of diverse operating systems, programming languages and hardware platforms have resulted in increasingly heterogeneous computing environments distributed throughout the modern enterprise. In addition, with the move to distributed and decentralized computing systems, the number of potentially incompatible applications, or ``islands of automation,'' deployed by enterprises has increased signi®cantly. Meanwhile, new technologies are continually emerging, including the Internet and intranet, Java and a variety of competing development environments.

Building and maintaining applications which can interoperate in this complex environment have created enormous challenges for most corporate IT departments. Faced with managing the technology diversity, organizations are seeking to make software work together through the use of middleware. Corporate IT departments demand software products that integrate these disparate systems and provide for application-to- application communications and coordination. To improve their enterprise information systems and to develop and deploy integrated, enterprise-wide software applications, corporate IT departments are increasingly considering the following criteria when selecting their integration solutions: • Exploitation of Network Technology. Enterprises are continually seeking to exploit network technology because networked computer systems enable improved information ¯ows and can offer lower cost of systems ownership. The implementation of networks, such as client/server or Internet/intranet architectures, can bridge diverse ``islands of automation'' and establish a federated and ordered information system throughout the enterprise. The key to this coordination, however, is application integration across the network to maximize an organization's effectiveness. • Buy Not Build. Corporations are increasingly focusing on purchasing systems and application and integration software from outside vendors, rather than on internal development, because of the high cost of internal development and the ``best-of-breed'' capability offered by independent software vendors. As enterprises continue to purchase and implement various software applications from independent software vendors, demand increases for solutions which enable the integration and coordination of these disparate software systems. • Leveraging Existing Investments. Corporations have made signi®cant investments in their IT systems in a continuing effort to exploit new technologies. The result is a patchwork of mainframe, client/server and Internet-based applications which often do not have the ability to share and exchange information or coordinate business processes. Despite this inability to interoperate, enterprises seek to preserve, leverage and extend current systems, and integrate such systems with new systems and technologies.

In response to the need to make software work together, corporate IT departments historically have taken the following approaches: • Internally Developed Approaches. The most common approach to achieving application integration has been the customized fabrication of in-house integration solutions on a case-by-case basis. Internally developed approaches, however, typically have been expensive, proprietary and system- speci®c and cannot be leveraged to other application integration problems.

-2- • Enterprise-Wide Application Suites. Enterprise-wide application suites, such as those offered by SAP and Baan, have been implemented to achieve interoperability and coordination throughout the enterprise. These suites offer a customized, integrated application suite, but typically do not easily integrate components or applications from other vendors or legacy systems. • Single Database Solutions. Corporate IT departments have often sought full interoperability through a ``single-database'' solution that attempts to run all applications on a single central database in a single operating system environment. Generally, this approach is not scalable for large organizations as a single database can create a computing bottleneck. In addition, this approach does not provide the ¯exibility required by organizations with multiple decision-making units which have diverse computing needs, and does not leverage existing systems investments. • Low-level Communications Solutions. Another approach to the integration problem has been the adoption of low-level communications technology, such as ``Remote Procedure Call'' technology and associated messaging software. These approaches, however, do not exploit the bene®ts of object- or component-based programming and are typically more dif®cult to use.

The inherent limitations of these historical approaches have resulted in a need for an application- integration software solution which allows organizations to exploit network technology and provides the ¯exibility to purchase third-party software solutions while preserving historical investments. Consequently, corporate IT departments increasingly request that integration solutions be standards-based and provide support for object- or component-based computing. According to a report, entitled ``Middleware: 1998 Worldwide Markets and Trends,'' published by International Data Corp., the worldwide middleware software market including CORBA and non-CORBA solutions, is expected to grow to over $7 billion by the year 2002.

In response to this demand for open, standards-based software infrastructure, a variety of component-based approaches to providing application-to-application communications across networks, programming languages and operating systems have been developed. The Object Management Group's CORBA standard, Microsoft's Common Object Model and Sun Microsystems' Enterprise Java Beans are all responses to this demand.

The IONA Solution IONA delivers its vision of ``Making Software Work Together'' by providing standards-based, component-oriented middleware solutions which offer the infrastructure for interoperability of applications and their components across diverse and complex computing systems. By managing the complexities of network communications and interoperability, IONA's Orbix family of products enables developers to focus on application functionality and deployment, without having to construct the communications infrastructure necessary for integration. The IONA solution is designed to provide the following bene®ts: • Application Integration. Users want all applications to communicate in a seamless manner with the simplicity and elegance of a single homogeneous computing environment. Orbix is designed to provide a layer of homogeneity over an underlying heterogeneous environment to provide application-to-application integration, without the costs and in¯exibility associated with proprietary environments. • Open Standards-Based. Most Orbix products are built on the CORBA standard and thereby provide a comprehensive cross-platform software infrastructure. By adopting a standards-based approach, IONA provides interoperability technology on over 15 platforms (including various UNIX versions, Windows and OS/390) and supports a wide range of programming languages (including C++, Java, Visual Basic and COBOL). • Shrink-Wrapped Flexibility. The Orbix family of products is designed to be easy-to-use and ¯exible without compromising the robust and reliable nature of the product. This ease-of-use and ¯exibility signi®cantly shortens the learning curve for programmers. Shrink-wrapped capability represents a lower cost of ownership to purchasers because developers can rapidly become productive and signi®cant customization of the IONA product set is not required.

-3- • Microsoft Integration. In January 1998, IONA signed an agreement with Microsoft to license its Common Object Model technology. This agreement allows IONA to provide a new level of interoperability with Microsoft's various application-to-application communication initiatives, such as Common Object Model, ActiveX and Transaction Server. IONA's support for, and integration with, Microsoft's technology provides increased functionality and ¯exibility to the Orbix family of products which increases purchaser options when implementing an integration solution. • Java Support. IONA is committed to accommodating technology choice. For this reason, we provide support for a wide variety of programming languages. With its intimate association with Internet and intranet development, Java is a key technology in enterprise development. IONA's OrbixWeb provides a compelling solution to making software work together in the Java environment. • Investment Protection. Orbix provides comprehensive support for a wide range of technologies. Due to the modular architecture of Orbix, its ¯exible implementation and the number of platforms supported, Orbix can interoperate and accommodate many widely-used technologies and applications. Such comprehensive support and integration enables users of Orbix to exploit emerging technologies to full advantage while also preserving their historical investments. • Increasing Functionality. IONA has released numerous services derived from Orbix, its core object request broker product, to allow customers to build more powerful and functional systems. OrbixOTM contains many of these services and combines the programming of Orbix with the transactional integrity of a transaction processing monitor.

Strategy Under the aegis of ``Making Software Work Together,'' IONA's objective is to extend its strong position and to be the leading provider of middleware solutions for heterogeneous computing environments. IONA's strategy is based on the following key elements: • Focus on Comprehensive Product Excellence. IONA has delivered the Orbix family of products on a wide range of hardware and software platforms in an easy-to-use manner, enabling its customers to focus on application functionality and not the underlying communications infrastructure. IONA believes that it was the ®rst vendor to develop a fully conformant CORBA solution. IONA intends to continue to innovate and invest in research and development to build technologically-leading, easy-to- use products that run on all major platforms. • Seed the Market with Volume-Based Sales. IONA initially focused its sales and marketing teams on a high volume, lower cost approach to promote the Orbix family of products as the pervasive solution for application-to-application integration. IONA's strategy is to build increasingly more extensive mindshare for the IONA brand name to stimulate demand for the Orbix family of products. • Convert Mindshare into Enterprise Sales Opportunities. IONA is now investing extensively in a senior direct enterprise sales channel to capitalize on the opportunities created by its previous strategy, the volume selling model. Through direct and indirect distribution channels and the Internet, IONA intends to promote sales of its products through both the volume and enterprise channels. • Deliver Enterprise Customer Success. IONA has built sales, service and support offerings to assist IONA's customers in the deployment of the Orbix family of products in mission-critical projects within the enterprise. IONA believes that the successful use of its products by its customers provides a compelling reason to do business with IONA and contributes to increasing sales and market acceptance of the Orbix family of products. • Develop Third Party Relationships. IONA forges relationships with software product and service suppliers to complement the Orbix product family and leverage IONA's sales, marketing and support initiatives, while allowing IONA to focus on its core product competencies. IONA has created the IONA Partner Marketing Program to foster the development and maintenance of these relationships.

-4- Products The Orbix family of products is an integrated set of powerful middleware solutions, used by application developers to integrate applications across diverse and complex computing environments. IONA's product set provides a means of integrating heterogeneous computing environments and adding new technologies, and thereby enables application integration.

IONA currently sells products which provide the ``container'' into which network-based applications can be placed. IONA offers two broad categories of containers: basic, or entry-level container products, such as Orbix and OrbixWeb; and enterprise level container products, such as OrbixOTM, Orbix for MVS and OrbixTalk, which include support for advanced functionality such as transaction management and mainframe connectivity.

The following is a description of IONA's core product set: • Orbix. Orbix is an implementation of the Object Management Group CORBA 2.0 speci®cation. It is a multi-platform product written in C++ and engineered for high performance, ¯exibility and scalability. The key elements of Orbix are: a development tool set that supports the creation of CORBA applications and performs code generation; and a runtime environment that supports deployed client and server applications. Applications can be developed in C++ using Orbix and deployed on Windows and all leading UNIX platforms (Solaris, HP-UX, IBM-AIX, Compaq UNIX and SGI IRIX). Orbix contains a number of features which enhance its ease-of-use and capability to be combined with different technologies, such as security systems, underlying databases and graphical user interfaces. • OrbixWeb. OrbixWeb includes the full feature set of the Orbix core product, written completely in Java. OrbixWeb is deployed to extend information systems beyond the enterprise ®rewall to the customer. OrbixWeb adds application-to-application communications capability to the Java programming language. • Orbix for OS/390. Orbix for OS/390 (and OpenEdition) integrates the IBM mainframe into the wider IT environment. Placing Orbix on the mainframe enables transparent and seamless application integration between mainframe-based and other IT systems, such as those based on Java, C++, Unix or Windows. Clients implemented on other platforms and programming languages can effectively access mainframe transactions, applications and data from anywhere in the network, transparently. Orbix for MVS includes complete support for the COBOL programming language and the DB/2 relational database. Orbix for MVS also includes ``Adapters'' which allow transparent access to existing mainframe applications. The Orbix CICS Adapter allows Orbix servers to be deployed in the customer information control system transaction processing monitor environment. The Orbix IMS Adapter allows Orbix servers to be deployed in the information management system high volume message processing environment. • OrbixOTM. OrbixOTM, the CORBA Object Transaction Monitor, is a suite of powerful middleware products that combines the ease-of-use and programming of Orbix with the transactional integrity guarantees of a traditional transaction processing monitor. It adds the functionality of a rich set of CORBA services and OrbixSSL security to enable a secure, robust, standards-based deployment infrastructure to build enterprise-class CORBA components. Graphical user interface tools, development and deployment aids make it easy to manage, use and program. OrbixOTM is an integrated product suite including Orbix, OrbixOTS (applying transaction processing to distributed objects), OrbixSSL (applying secure socket layer connectivity to CORBA applications), OrbixManager (applying simple network management protocol to manage distributed objects), OrbixEvents (allowing communication with application objects using events) and OrbixNames (allowing programmers to associate human readable names with a software object reference). OrbixOTM also includes OrbixCOMet, which provides a tight integration between Microsoft's Common Object Model and the CORBA object model and further extends IONA's market coverage.

-5- • OrbixTalk. IONA provides a range of messaging solutions designed to bring advanced messaging capability to the Orbix product family. OrbixTalk provides a messaging support service for distributed systems. OrbixTalk supports asynchronous and decoupled messaging models and offers a choice of reliable or guaranteed semantics through its unique MessageStore persistence technology.

Developers use one or more products in the Orbix family at the design, development and deployment stages. IONA charges developers both a development time license fee (on a per developer seat basis) and a deployment license fee (or runtime license typically on a per CPU basis). If developers wish to use Orbix products on additional platforms or to involve more developers, additional development licenses must be purchased.

Professional Services IONA's professional services organization provides training, support and consulting services to aid the successful deployment of IONA's products by its customers. As of December 31, 1998, IONA's professional services organization consisted of 74 full-time employees.

IONA provides training and consulting services to assist customers to effectively use its product sets. Training courses typically last four or ®ve days, enroll up to twelve people, and are delivered by members of IONA's professional services organization and third-party companies. Consultancy contracts are aimed at providing architecture and design assistance to customers in the implementation of full systems over Orbix.

Upon request of its customers, IONA has from time to time undertaken development to tailor its product sets for a particular deployment. Such development has been limited in nature and provided on a time and materials basis.

Customers As of December 31, 1998, IONA had directly or indirectly licensed its products and services to over 3,500 customers worldwide in a range of industries including telecommunications, ®nance, manufacturing, banking, defense, medical, computing, research and independent software vendors. No customer or end-user accounted for more than ten percent of IONA's total revenue in 1998, 1997 or 1996.

Marketing, Sales and Third Party Relationships IONA markets its products and services through its marketing and direct sales organizations and through third-party distributors, original equipment manufacturers, value added resellers and independent software vendors. In pursuit of IONA's business strategy of ``Making Software Work Together,'' IONA's marketing, sales and product development organizations collaborate to increase sales of the Orbix family of products, as well as to develop customer and indirect sales relationships.

Marketing IONA has developed marketing programs to create mindshare for the Orbix family of products, including public relations, customer testimonials, educational seminar series, trade shows, distribution of product literature and third-party relationships. IONA also maintains a World Wide Web site where potential customers may obtain information about IONA. Moreover, IONA provides evaluation copies of its software products to prospective customers. Although such copies are fully functional, a prospective customer is licensed to evaluate the product for a limited period of time, ordinarily 60 days. IONA embeds a mechanism in such evaluation copies that disables the software upon the expiration of such limited time period. By building mindshare, IONA's marketing organization seeks to create demand and awareness in the marketplace for the Orbix family of products. As of December 31, 1998, IONA's marketing organization consisted of 50 full-time employees.

-6- Sales IONA employs a combination of direct and indirect distribution channels. The direct sales force consists of account managers and ®eld and telesales personnel who are complemented by a small number of technical pre-sales and high level product specialists available for customer visits. The indirect distribution channels consist of resellers, distributors, systems integrators and third-party product companies.

The IONA sales organization is divided into three geographical regions: the Americas, Asia-Paci®c, and Europe/Middle East/Africa. Within each region, IONA dedicates specialized sales and technical personnel to particular industries and markets, such as telecommunications, ®nance and petrochemical. In addition, IONA dedicates members of the sales force to developing strategic relationships with original equipment manufacturers and value added resellers. As of December 31, 1998, IONA's sales organization consisted of 113 full-time employees.

Third-Party Relationships An integral part of IONA's business strategy is to focus on relationships with third parties. IONA's Partner Marketing Program is a comprehensive marketing and sales support program targeted at third-party software vendors and service providers. In addition to providing considerable leverage to IONA's marketing, sales, service and support efforts, the IONA Partner Marketing Program is designed to enable IONA to focus on its core competencies leveraging on the capabilities of its partners. The Partner Marketing Program has specialized services dealing with the following sectors: system integrators, independent software vendors, value added technology partners, international distributors, value added resellers, user groups and university research awards.

Product Development Since its inception, IONA has made substantial investments in product development. IONA believes that its future performance depends in large part upon its ability to enhance existing products and to develop new, standards-based Orbix products that maintain technological competitiveness and meet the needs of a rapidly changing marketplace. IONA intends to continue to make substantial investments in product and technology development primarily to enhance its core Orbix technology with new functionality and improved performance and to make its distributed component software products available for new programming languages, operating systems, networking and hardware environments. IONA also expects to continue to participate in the development of industry standards, such as CORBA and its underlying network protocol, the internet inter- ORB protocol (``IIOP''), through participation in industry organizations and standards-setting bodies, such as the Object Management Group.

IONA has developed Orbix technology and products primarily through internal development personnel and third-party contractors. As of December 31, 1998, IONA's product development organization consisted of 159 full-time employees. Product development is concentrated at IONA's Dublin, Ireland headquarters. Limited product development is also performed at IONA's subsidiaries. IONA's product development organization collaborates with its marketing and sales organizations to increase sales of the Orbix family of products and to develop customer and indirect sales relationships. In addition, IONA continually reviews opportunities to form marketing or product alliances with third-party vendors of complementary technologies and products. In the third quarter of 1998, IONA acquired from EDS a license to the source code of a component development technology that IONA plans to develop further and incorporate into certain of its products. In the future, IONA may, based on timing and cost considerations, explore opportunities to license or acquire technologies or products from third parties.

IONA has a large staff dedicated to supporting its products. IONA's customer engineering organization performs this role. Customers are encouraged to purchase customer engineering support for an annual fee. Most engineering support is provided by a combination of electronic mail and telephone. Potential customers who are

-7- evaluating IONA's products receive free technical support for a period of time. Support is provided through IONA's Dublin, Ireland, Cambridge, Massachusetts and Perth, Western Australia locations. IONA's original equipment manufacturers, value added resellers and independent software vendors depend on the customer engineering organization to provide backup for the front-line support they themselves provide to their own customers. As of December 31, 1998, IONA's customer engineering organization consisted of 70 full-time employees. IONA has also developed a ``knowledge base'' that contains technical information and advice for use by the customer base as part of the support effort.

Software products as complex as those offered by IONA may contain undetected errors or failures when ®rst introduced or when new versions or enhancements are released. IONA has in the past discovered software errors in certain of its new products and enhancements and has experienced delays or lost revenues during the period required to correct these errors. For a discussion of certain risks associated with product defects, see ``Management's Discussion and Analysis of Financial Condition and Results of OperationsÐFactors Affecting Future ResultsÐRisk of Product Defects'' and ``ÐYear 2000 Risks.''

The market for IONA's products is characterized by rapidly changing technologies, evolving industry standards, frequent new product introductions and rapid changes in customer requirements. For a discussion of the importance of IONA acting to modify and enhance its products to remain competitive, see ``Management's Discussion and Analysis of Financial Condition and Results of OperationsÐFactors Affecting Future ResultsÐ Rapid Technological Change,'' ``ÐDependence on Emerging Markets and Evolving Standards'' and ``ÐHighly Competitive Market.''

Competition The market for distributed component software products and related services is highly competitive, and IONA expects this competition to increase. IONA's products currently compete with the products of other independent providers of CORBA-based solutions, including, without limitation: • BEA Systems' ObjectBroker; • IBM's Component Broker; • INPRISE's VisiBroker products; • Noblenet's Nouveau; and • Expersoft's PowerBroker products.

While IONA is currently a leading provider of distributed component solutions based on CORBA, IONA may not be able to maintain its share of the market for such solutions in the future.

IONA's products also compete with the products of independent providers of other interoperability technologies, including, without limitation:

• Microsoft's ActiveX, Common Object Model and Distributed Component Object Model technologies, • proprietary distributed component technologies; • BEA Systems' Tuxedo, a transaction processing monitor, and MessageQ, a messaging software product; • IBM's MQSeries messaging software; • Sun Microsystems' non-CORBA based application connectivity solutions and Java interoperability model, which include Java RMI, Java IDL, Java Management API and Java Beans; and • certain messaging products from TIBCO.

-8- IONA believes that potential customers may select non-CORBA based interoperability technologies, such as Microsoft's Distributed Component Object Model, because: • such technologies may leverage existing infrastructure, expertise and commercial relationships; • such products may be adopted or promoted by industry leaders; • such products may be bundled with other product and system offerings; or • such products may be offered at lower prices.

In the future, potential customers also may select non-CORBA based interoperability technologies in the event that such solutions gain broader market acceptance, are based on alternative open standards, become available on multiple platforms or incorporate complementary features and functionality. In addition, IONA expects to compete in the future with messaging and transaction technologies from Microsoft, including but not limited to Microsoft's Transaction Server.

Some of IONA's current and future competitors may offer interoperability technologies as part of their broader product and service offerings. IONA believes that the principal competitive factors affecting its market include: • product features and functionality; • ease-of-use; • quality; • performance; • price; • customer service and support; • effectiveness of sales and marketing efforts; and • company reputation and ®nancial viability.

IONA anticipates continued growth and competition in the application-to-application software infrastructure industry and, consequently, the entrance of new competitors into the distributed component software market in the future. Moreover, IONA believes that some of its existing and potential competitors are developing application connectivity solutions entirely in, and interoperability technologies based entirely on, Java. IONA expects that any such development will further increase competition.

IONA believes that its ability to compete depends in part on a number of factors outside its control, including: • the development by others of software that is competitive with IONA's products and services; • the price at which others offer comparable products and services; • the extent of competitors' responsiveness to customer needs; and • the ability of IONA's competitors to hire, retain and motivate key personnel.

In addition, IONA competes with a number of companies that have substantially greater technical, ®nancial, sales, marketing, other resources and name recognition than IONA. As a result, IONA's 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 successfully strategic relationships with industry leaders and other third parties than IONA. These factors may inhibit IONA's ability to compete successfully with its existing competitors or with new competitors. See ``Management's Discussion and Analysis of Financial Condition and Results of OperationsÐFactors Affecting Future ResultsÐHighly Competitive Market.''

-9- Proprietary Technology IONA regards much of its intellectual property as proprietary and relies primarily on a combination of copyright, trademark and trade secret laws, employee and third-party non-disclosure agreements and technical measures to establish and protect its proprietary rights. IONA has registered, or has applications pending for, the trademarks ``ORBIX,'' and ``IONA'' in Argentina, Australia, Brazil, Canada, Chile, China, the European Community, Hong Kong, India, Mexico, New Zealand, Singapore, South Korea, Taiwan and the United States. IONA also registered, or has applications pending, in Japan for the trademarks ``ORBIX'' and ``WONDERWALL,'' in Australia for the trademarks ``ORBIXTALK'' and ``ORBIXWEB,'' in Australia, Canada, China, Hong Kong, India, South Korea, New Zealand, Singapore, Taiwan and the United States for the trademark ``WONDERWALL,'' and in the United States for the trademark ``MAKING SOFTWARE WORK TOGETHER.'' While IONA generally uses negotiated, signed license agreements or shrink-wrap type licenses to restrict copying and use of its software products, IONA does not embed mechanisms in the software to prevent or inhibit unauthorized use or copying and does not possess any patents or other registered intellectual property rights with respect to its software. Shrink-wrap licenses are not signed by licensees and, therefore, may be unenforceable under the laws of certain jurisdictions. In addition, the laws of various countries in which IONA's products may be sold may not protect IONA's proprietary rights to the same extent as the laws of the United States and Ireland.

IONA generally enters into con®dentiality agreements with its employees and consultants, and limits access to, and distribution of, its proprietary information to customers and potential customers. Despite these precautions, it may be possible for a third party to copy or otherwise obtain and use IONA's technology without authorization. The software market has traditionally experienced widespread unauthorized reproduction of products in violation of manufacturers' intellectual property rights. Such activity is dif®cult to detect and legal proceedings to enforce the manufacturers' intellectual property rights are often burdensome and involve a high degree of uncertainty and costs. IONA's software products may experience unauthorized reproduction, IONA's means of protecting its proprietary rights may not be adequate and third parties may independently develop technologies that are substantially similar or superior to IONA's technology, any one of which could have a material adverse effect on IONA's business, ®nancial condition or results of operations. See ``Management's Discussion and Analysis of Financial Condition and Results of OperationsÐFactors Affecting Future ResultsÐLimited Protection of Intellectual Property and Proprietary Rights.''

IONA has entered into license agreements with a limited number of customers and end users that allow these customers and end users access to and end use of Orbix source code for certain purposes. These source code license agreements prohibit release of Orbix source code. The provision of source code may increase the likelihood of misappropriation by third parties. See ``Management's Discussion and Analysis of Financial Condition and Results of OperationsÐFactors Affecting Future ResultsÐLimited Protection of Intellectual Property and Proprietary Rights.''

Employees As of December 31, 1998, IONA had 564 full-time employees, with 344 based in Ireland and Europe, 156 based in the United States and 64 based in Western Australia and Hong Kong. These employees include 159 in product development, 70 in customer engineering, 50 in marketing, 113 in sales, 74 in professional services and 98 in ®nance, legal, administration, IT and manufacturing. IONA's employees are not represented by any collective bargaining organizations and IONA has never experienced any work stoppages. IONA considers its relations with its employees to be good.

-10- Item 2. DESCRIPTION OF PROPERTY IONA's headquarters are currently located in a leased facility located in Dublin, Ireland. This facility consists of approximately 100,550 square feet of of®ce space. These headquarters are held under a lease expiring in August 2023, subject to IONA's right to terminate the lease in August 2013. IONA currently occupies approximately 55,900 square feet of the of®ce space and sublets the remainder. IONA's principal U.S. of®ce is located in a leased facility, in Cambridge, Massachusetts, consisting of approximately 20,000 square feet of of®ce space under a lease expiring in 2011. In February 1999, IONA entered into an agreement for lease for a new principal U.S. of®ce in Waltham, Massachusetts which will replace its current Cambridge facilities. The new Waltham facility will consist of approximately 60,718 square feet of of®ce space under a lease expiring 2006, subject to IONA's right to renew for an additional term of ®ve years expiring in 2011. IONA expects to terminate its lease for the Cambridge facility prior to its move to the Waltham facility and does not believe that its liability for termination of this lease will be material. IONA's Australian of®ce is located in a leased facility, in Perth, Western Australia, consisting of approximately 4,500 square feet of of®ce space under a lease expiring in November 1999, subject to IONA's right to renew such lease for a period of three years. In addition, as of the date of this Annual Report, IONA maintains of®ces in San Mateo, California, London, Paris, Frankfurt, Hong Kong and Sydney. IONA believes that such facilities are adequate for its present operations and additional facilities to support its present and future operations are available on commercially reasonable terms. IONA expects in the future to move to new or expand into additional facilities. Any such move or expansion could have a material adverse effect on its business, ®nancial condition and results of operation or could cause a disruption in the development or marketing of products. See ``Management's Discussion and Analysis of Financial Condition and Results of OperationsÐFactors Affecting Future ResultsÐAbility to Manage Growth.''

Item 3. LEGAL PROCEEDINGS As of the date of this Annual Report, IONA is not a party to any legal proceeding which, if resolved or determined adversely to IONA, would have a material adverse effect on its business, ®nancial condition and results of operations. IONA, however, has 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 IONA, such outcomes or resolutions could have a material adverse effect on its business, ®nancial condition or results of operations.

-11- Item 4. CONTROL OF REGISTRANT The following table sets forth, as of March 31, 1999, the number of Ordinary Shares owned by • all shareholders known by IONA to own bene®cially more than 10% of IONA's Ordinary Shares; • each director and of®cer of IONA individually; and • all directors and of®cers of IONA as a group.

Bene®cial ownership is determined in accordance with the rules of the Securities and Exchange Commission and is based on 19,710,511 Ordinary Shares outstanding as of March 31, 1999. For the purposes of calculating the number of ordinary shares and the percentage bene®cially owned by a person or entity shares of common stock issuable by IONA to that person or entity pursuant to options which may be exercised within 60 days after March 31, 1999 are deemed to be bene®cially owned and outstanding. Except as otherwise indicated, each stockholder named in the following table has sole voting and investment power with respect to the shares set forth opposite that stockholders name.

Number of Percentage of Ordinary Shares Ordinary Shares Name of Bene®cial Owner Bene®cially Owned Bene®cially Owned Guaranty Nominees Limited (1) ...... 11,528,330 58.5% Dr. Christopher J. Horn (2) ...... 2,366,584 12.0 Annrai O'Toole (3) ...... 1,830,239 9.3 Dr. Sean Baker (4) ...... 1,681,555 8.5 Colin Newman (5) ...... 601,689 3.1 E.C. Mick Prokopis (6) ...... 438,900 2.2 David James (7) ...... 20,100 * Lindsey Kiang (8) ...... 75,100 * Barry Morris (9) ...... 97,725 * John J. Cullinane (10) ...... 69,000 * Kevin Melia (11) ...... 63,000 * All directors and of®cers as a group (10 persons) (12)...... 7,243,892 37.6%

* Represents less than one percent of IONA's Ordinary Shares outstanding as of March 31, 1999. (1) Guaranty Nominees Limited is the nominee holder of Morgan Guaranty Trust Company of New York, as depositary (the ``Depositary'') under the Deposit Agreement dated as of February 24, 1997 among IONA, 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 11,528,330 American Depositary Shares representing 11,528,330 Ordinary Shares and evidenced by 11,528,330 American Depositary Receipts. (2) Includes 670 Ordinary Shares subject to outstanding stock options that are exercisable within the 60-day period following March 31, 1999. (3) Includes 350 Ordinary Shares subject to outstanding stock options that are exercisable within the 60-day period following March 31, 1999. (4) Includes 670 Ordinary Shares subject to outstanding stock options that are exercisable within the 60-day period following March 31, 1999. (5) Includes 670 Ordinary Shares subject to outstanding stock options that are exercisable within the 60-day period following March 31, 1999. (6) Includes 100 Ordinary Shares subject to outstanding stock options that are exercisable within the 60-day period following March 31, 1999. (7) Includes 10,100 Ordinary Shares subject to outstanding stock options that are exercisable within the 60-day period following March 31, 1999. (8) Includes 50,100 Ordinary Shares subject to outstanding stock options that are exercisable within the 60-day period following March 31, 1999. (9) Includes 55,425 Ordinary Shares subject to outstanding stock options that are exercisable within the 60-day period following March 31, 1999.

-12- (10) Includes 59,000 Ordinary Shares subject to outstanding stock options that are exercisable within the 60-day period following March 31, 1999. (11) Includes 3,000 Ordinary Shares subject to outstanding stock options that are exercisable within the 60-day period following March 31, 1999. Also includes 60,000 Ordinary Shares held by members of Mr. Melia's immediate family. Mr. Melia disclaims bene®cial ownership of such Ordinary Shares. (12) See notes (2) through (11).

Item 5. NATURE OF THE TRADING MARKET ITEM IONA's Ordinary Shares have been listed as a secondary listing on the Of®cial List of the Irish Stock Exchange since December 19, 1997. For this reason, IONA is 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 ®nancial advisors. The following table sets forth the high and low sales prices of the Ordinary Shares for the ®scal quarters indicated:

Year Ended December 31, 1998 High Low First Quarter ...... £23.820 £14.000 Second Quarter ...... £25.745 £20.105 Third Quarter ...... £28.790 £12.700 Fourth Quarter ...... £22.770 £12.260

IONA's American Depositary Receipts (``ADRs''), evidencing American Depositary Shares (``ADSs''), which represent Ordinary Shares, have been traded in the United States on the Nasdaq National Market since IONA's initial public offering on February 25, 1997. Currently, the ADRs are trading under the symbol ``IONA.'' Morgan Guaranty Trust Company of New York serves as depositary for the ADRs (the ``Depositary''). Each ADR evidences one ADS, which represents one Ordinary Share. The following table sets forth the high and low sales prices of the ADRs for the ®scal quarters indicated:

Year Ended December 31, 1997 High Low Second Quarter ...... $21.875 $12.938 Third Quarter ...... $25.625 $12.625 Fourth Quarter ...... $21.500 $11.750

Year Ended December 31, 1998 High Low First Quarter ...... $33.125 $18.438 Second Quarter ...... $36.875 $28.563 Third Quarter ...... $39.625 $18.750 Fourth Quarter ...... $39.000 $16.000

As of December 31, 1998, there were approximately 98 holders of record of IONA's Ordinary Shares, of which 5 holders of record holding approximately 0.1% of IONA's outstanding Ordinary Shares had a registered address in the United States. Guaranty Nominees Limited, the nominee holder of the Depositary, is the record holder of all Ordinary Shares deposited with the Depositary and in respect of which ADRs have been issued. As of December 31, 1998, Guaranty Nominees Limited was the holder of record of 11,124,751 Ordinary Shares. The registered address of Guaranty Nominees Limited is outside of the United States. As of December 31, 1998, there were approximately 360 holders of record of IONA's ADRs, of which 47 holders of record holding approximately 59.7% of IONA's outstanding ADRs had registered addresses in the United States. Since many of the Ordinary Shares and ADRs (or ADRs evidencing ADSs, representing Ordinary Shares) were held of record by brokers or other nominees, the number of record holders in the United States is not representative of the number of bene®cial holders, nor is it representative of where such bene®cial holders are resident.

-13- Item 6. EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY HOLDERS 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 IONA, and dividends and redemption proceeds are freely transferable to non-resident holders of such securities.

The Financial Transfers Act, 1992 gives power to the Minister for Finance of Ireland to make provision for the restriction of ®nancial transfers between Ireland and other countries. Financial transfers are broadly de®ned and include all transfers which would be movements of capital or payments within the meaning of the treaties governing the European Union. The acquisition or disposal of ADRs representing shares issued by an Irish incorporated company and associated payments may fall within this de®nition. In addition, dividend, redemption and liquidation payments in respect of shares in an Irish incorporated company would fall within this de®nition. Currently, orders under this Act prohibit any ®nancial transfer to or by the order of or on behalf of residents of the Federal Republic of Yugoslavia (Serbia and Montenegro), Iraq and Libya, unless permission for the transfer has been given by the Central Bank of Ireland.

IONA does not anticipate that orders under the Financial Transfers Act, 1992 will have a material effect on its business, results of operations or ®nancial condition.

Item 7. TAXATION The statements of Irish tax laws set out below are based on the Irish tax laws, regulations promulgated thereunder and administrative rulings and practices of the Irish Revenue Commissioners in force and as interpreted by the Irish taxation authorities as of the date of this Annual Report and are subject to any changes in Irish law, or in the interpretation thereof by the Irish taxation authorities, or in the double taxation conventions between Ireland and the United States, occurring after such date.

On July 28, 1997, the governments of the United States and Ireland signed a Convention for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and Capital Gains (the ``1997 Convention''). The 1997 Convention has been rati®ed by both governments, and is generally effective January 1, 1998, except that where the provisions of the Convention for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income, signed September 13, 1949 (the ``1949 Convention'' and, together with the 1997 Convention, the ``Conventions'') would have afforded any greater relief from tax to a person entitled to its bene®ts than is afforded under the 1997 Convention, such provisions of the 1949 Convention will continue to have effect for a period of 12 calendar months from January 1, 1998. Except as set forth in the preceding sentence, the provisions of the 1949 Convention ceased to have effect as of January 1, 1998. The following discussion does not address the rules applicable to holders who elect to apply the 1949 Convention during the transition period.

The following is a general summary of certain Irish tax consequences of the purchase, ownership and disposition of ADSs evidenced by ADRs applying to U.S. Holders. For purposes of this discussion, a ``U.S. Holder'' means an individual citizen or resident of the United States, a corporation or partnership created or organized under the laws of the United States or any state thereof or the District of Columbia, or an estate or trust the income of which is subject to U.S. Federal income taxation regardless of its source; provided, however, that for taxable years beginning after December 31, 1996, a trust will be a U.S. Holder if a court within the United States is able to exercise primary supervision over the administration of such trust and one or more U.S. ®duciaries have the authority to control all substantial decisions of the trust; and provided, further, that in each case, a U.S. Holder includes only a holder who (i) is not also a resident of, or ordinarily resident in, Ireland for Irish tax purposes, (ii) is not engaged in trade or business in Ireland through a permanent establishment and (iii) does not own, directly, indirectly or by attribution, ten percent or more of the shares of IONA (by vote or value).

-14- This summary is of a general nature only and does not discuss all aspects of Irish taxation that may be relevant to a particular investor. The summary deals only with ADRs held as capital assets and does not address special classes of purchasers, such as dealers in securities, U.S. Holders whose functional currency is not the dollar and certain U.S. Holders (including, but not limited to, insurance companies, tax-exempt organizations, ®nancial institutions and persons subject to the alternative minimum tax) who may be subject to special rules not discussed below.

HOLDERS OF THE AMERICAN DEPOSITARY RECEIPTS ARE ADVISED TO CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THE U.S. FEDERAL, STATE AND LOCAL TAX CONSEQUENCES, AS WELL AS WITH RESPECT TO THE TAX CONSEQUENCES IN IRELAND AND OTHER JURISDICTIONS, OF THE OWNERSHIP OF THE AMERICAN DEPOSITARY RECEIPTS AND THE ORDINARY SHARES EVIDENCED THEREBY APPLICABLE IN THEIR PARTICULAR TAX SITUATIONS.

For purposes of the Conventions and the Internal Revenue Code of 1986, as amended (the ``Code''), U.S. Holders will be treated as the owners of the Ordinary Shares represented by ADSs evidenced by ADRs.

Taxation of IONA For Irish tax purposes, the residence of a company is in the jurisdiction where the central management and control of the company is located. On March 25, 1999, the Irish Government passed into law the Finance Act, 1999, which, subject to exceptions, deems all Irish incorporated companies to be Irish tax resident. Companies which are resident in Ireland are subject to Irish corporation tax on their total pro®ts (wherever arising and, generally, whether or not remitted to Ireland). The question of residence is essentially one of fact. It is the present intention of IONA's management to manage and control IONA from Ireland, so that IONA will be resident in Ireland notwithstanding the Finance Act, 1999.

The standard rate of Irish corporation tax on both trading and non-trading income is currently 28%. However, in 1980, the Irish government enacted legislation, with the approval of the European Union, enabling companies to pay a reduced 10% rate of tax on pro®ts from the manufacture of goods in Ireland and certain other activities deemed to be the manufacture of goods in Ireland. Current legislation provides that the reduced rate will be available until 2010. The Irish Government has introduced legislation in the Finance Act, 1999 providing that a single rate of corporation tax of 121¤2% will apply to all trading income from 2003 (with limited speci®c exceptions). Income qualifying for manufacturing relief prior to the effective date of the Finance Act, 1999 will continue to be eligible for the 10% effective rate until the end of 2010. Pursuant to the Finance Act, 1999, non-trading income will be taxed a rate of 25%. The Finance Act, 1999 also provides that the standard Irish corporation tax rate on trading income will be 24% for the year 2000, 20% for the year 2001, 16% for the year 2002 falling to 121¤2% in 2003. Certain activities of IONA, principally the licensing of software on which development was carried out in Ireland and the provision of certain related technical or consultancy services, qualify for the 10% rate. See ``Management's Discussion and Analysis of Financial Condition and Results of OperationsÐFactors Affecting Future ResultsÐRisk of Increasing Taxes.''

Irish capital duty, which is a tax on the issuance of capital shares by companies, is payable at the rate of one percent of proceeds received by IONA in exchange for such issuance.

Taxation of Dividends IONA does not expect to pay cash dividends for the foreseeable future. If IONA should in the future begin paying dividends, dividend payments made on or after April 6, 1999 will be subject to 24% withholding tax pursuant to legislation introduced in the Finance Act, 1999. There is an exemption from withholding tax for certain shareholders including Irish resident companies, certain charities and pension funds, certain residents of EU Member States or other countries with which Ireland has concluded a Convention for the Avoidance of Double Taxation, certain companies controlled by residents of EU Members States or other countries with

-15- which Ireland has concluded a Convention for the Avoidance of Double Taxation, and companies whose principal class of shares are substantially and regularly traded on the recognized stock exchange of an EU Member State or other country which Ireland has concluded a Convention for the Avoidance of Double Taxation. Entitlement to exemption from withholding tax will require the shareholder to make a declaration, subject to transitional exceptions, which may require support with other documentary evidence. The rate of withholding tax may also be reduced by virtue of the application of the provisions of a Convention for the Avoidance of Double Taxation concluded by Ireland.

Persons who are neither resident nor ordinarily resident in Ireland and who are entitled to exemption from withholding tax as discussed above, other than solely by virtue of the transitional provisions, are effectively exempt from Irish income tax. Other individuals who are neither resident nor ordinarily resident in Ireland are technically subject to Irish income tax at the higher 46% rate if the amount of the dividend exceeds IR£14,000 (approximately $20,690) or IR£28,000 (approximately $41,380) for a married couple jointly assessed.

Taxation of Capital Gains A U.S. Holder is not subject to Irish capital gains tax on the disposal of shares held in an Irish company which are quoted on a stock exchange. A stock exchange for this purpose includes the Nasdaq National Market. It is the intention of IONA's management to continue IONA's quotation on the Nasdaq National Market.

Irish Capital Acquisitions Tax Irish capital acquisitions tax (``CAT'') applies to gifts and inheritances (i) where the person making the gift or inheritance is domiciled in Ireland at the date of the gift or inheritance or (ii) to the extent that the property of which the gift or inheritance consists is situated in Ireland at the date of the gift or inheritance. The person by whom CAT is primarily payable is the person who receives the gift or inheritance. Persons who are secondarily liable include the donor, his personal representative and an agent, trustee or other person in whose care the property constituting the gift or inheritance or the income therefrom is placed. All taxable gifts and inheritances received by an individual since June 2, 1982 are aggregated and only the excess over a certain tax- free threshold is taxed. The tax-free threshold is dependent on the relationship between the donor and donee and the aggregation of all previous gifts and inheritances. The tax-free threshold amounts currently in force are: (a) IR£12,860 (approximately $19,005) in the case of persons who are not related to one another, (b) IR£25,720 (approximately $38,011) in the case of gifts and inheritances received from a brother, sister or from a brother or sister of a parent or from a grandparent, and (c) IR£192,900 (approximately $285,087) in the case of gifts and inheritances received from a parent. Gifts and inheritances passing between spouses are exempt from CAT. CAT is charged at progressive rates ranging in the case of gifts from 15% to 30% and in the case of inheritances from 20% to 40%.

Although ADRs may be held by persons who are neither domiciled nor resident in Ireland, ADRs may be regarded as located in Ireland because the underlying Ordinary Shares are situated in Ireland (because IONA is required to maintain its Ordinary Share register in Ireland). Accordingly, ADRs may be subject to CAT notwithstanding the fact that the holder may be domiciled and/or resident outside of Ireland. The Convention relating to estate tax (the ``Estate Tax Convention'') provides for CAT paid on inheritances in Ireland to be credited against tax payable in the United States and for tax paid on inheritances in the United States to be credited against tax payable in Ireland, based on priority rules set forth in that Convention, in a case where an ADR is subject to both Irish CAT with respect to inheritance and U.S. Federal estate tax. The Estate Tax Convention does not apply to gifts.

Irish Probate Tax In addition to gift and inheritance taxes, a probate tax of 2% applies to the value of all assets passing under the will or intestacy of an Irish-domiciled person. Where the deceased was not domiciled in Ireland, only assets situated in Ireland are liable for this tax. No probate tax applies on an inheritance from a spouse.

-16- Irish Stamp Duty Irish stamp duty, which is a tax on certain documents, is payable on transfers of the Ordinary Shares (other than between spouses) wherever the document of transfer is executed. Where the transfer is attributable to a sale, stamp duty will be charged at the rate of IR£1.00 for every IR£100.00, or part thereof (the ad valorem rate), of the amount or value of the consideration (i.e. purchase price). Where the consideration for the sale is expressed in a currency other than pounds, the duty will be charged on the pound equivalent calculated at the rate of exchange prevailing at the date of the transfer. In the case of a transfer by way of gift (subject to certain exceptions) or for a consideration less than the market value of the Ordinary Shares transferred, stamp duty will be charged at the ad valorem rate on such market value.

In the case of transfers of Ordinary Shares where no bene®cial interest passes (e.g. a transfer of shares from a bene®cial owner to his nominee), a rate of £10.00 (the nominal rate) will apply.

A transfer by a shareholder to the Depositary or custodian of Ordinary Shares for deposit under the Deposit Agreement in return for ADRs and a transfer of Ordinary Shares from the Depositary or the custodian upon surrender of an ADR for the purposes of withdrawal of the underlying Ordinary Shares in accordance with the terms of the Deposit Agreement will be stampable at the ad valorem rate if the transfer relates to a sale or contemplated sale or any other change in the bene®cial ownership of such Ordinary Shares and at the nominal rate where the transfer merely relates to a transfer where no change in the bene®cial ownership in the underlying Ordinary Shares is effected.

The person accountable for payment of stamp duty is the transferee or, in the case of a transfer by way of gift or for a consideration less than the market value, the 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 ®nes.

Transfers of ADRs are exempt from Irish stamp duty as long as the ADRs are quoted on the Nasdaq National Market or any recognized stock exchange in the United States.

-17- Item 8. SELECTED FINANCIAL DATA The following selected consolidated ®nancial data as of December 31, 1998 and 1997, and for each of the years ended December 31, 1998, 1997 and 1996, have been derived from, and should be read in conjunction with, IONA's audited Consolidated Financial Statements and Notes thereto set forth in Item 19 of this Annual Report. These ®nancial statements have been prepared in accordance with generally accepted accounting principles in the United States (``U.S. GAAP'') and audited by Ernst & Young. The selected ®nancial data as of December 31, 1996, 1995 and 1994 and for each of the years ended December 31, 1995 and 1994 have been derived from IONA's audited consolidated ®nancial statements not appearing in this Annual Report, which have also been prepared in accordance with U.S. GAAP. The ®nancial information set forth below is quali®ed by and should be read in conjunction with the Consolidated Financial Statements of IONA and the Notes thereto included in Item 19 of this Annual Report and ``Management's Discussion and Analysis of Financial Condition and Results of Operations.''

Year Ended December 31, 1998 1997 1996 1995 1994 (U.S. Dollars in thousands, except per share data) Consolidated Statement of Income Data: Revenue: Product revenue ...... $58,900 $31,843 $15,277 $6,104 $ 1,877 Service revenue ...... 24,727 16,741 5,914 2,532 535 Total revenue ...... $83,627 $48,584 $21,191 $8,636 $ 2,412 Cost of revenue: Cost of product revenue ...... $ 1,409 $ 2,824 $ 1,607 $ 618 $ 93 Cost of service revenue ...... 15,568 10,456 3,587 1,412 284 Total cost of revenue ...... $16,977 $13,280 $ 5,194 $2,030 $ 377 Gross pro®t ...... $66,650 $35,304 $15,997 $6,606 $ 2,035 Operating expenses: In-process research and development ...... $ 5,000 $ 2,900 $ Ð $ Ð $ Ð Research and development ...... 14,849 8,299 2,970 1,018 459 Sales and marketing ...... 28,136 13,989 5,435 1,937 532 General and administrative ...... 9,755 7,041 3,315 889 450 Write-off of assets and related costs* ...... 1,658 18 Ð Ð Ð Stock compensation ...... 176 175 2,044 205 Ð Total operating expenses ...... $59,574 $32,422 $13,764 $4,049 $ 1,441 Income from operations ...... $ 7,076 $ 2,882 $ 2,233 $2,557 $ 594 Interest income, net ...... 2,552 2,501 79 39 6 Net exchange gain (loss) ...... (541) 240 5 26 (63) Income before provision for income taxes ...... $ 9,087 $ 5,623 $ 2,317 $2,622 $ 537 Provision for income taxes ...... 1,409 872 769 398 75 Net income ...... $ 7,678 $ 4,751 $ 1,548 $2,224 $ 462 Dividend on 6% Redeemable Preference Shares ...... Ð Ð (19) (19) (18) Net income available to Ordinary Shareholders ...... $ 7,678 $ 4,751 $ 1,529 $2,205 $ 444 Basic net income per Ordinary Share(1)(2) ...... $ 0.40 $ 0.26 $ 0.10 $ 0.15 $ 0.03 Shares used in computing basic net income per Ordinary Share (in thousands) ...... 19,268 18,428 15,264 15,106 15,006 Diluted net income per Ordinary Share(1)(2) ...... $ 0.37 $ 0.25 $ 0.10 $ 0.14 $ 0.03 Shares used in computing diluted net income per Ordinary Share (in thousands)...... 20,893 19,275 15,643 15,270 15,006 (footnotes appear on following page)

-18- At December 31, 1998 1997 1996 1995 1994 (U.S. Dollars in thousands) Consolidated Balance Sheet Data: Cash and marketable securities ...... $ 60,549 $53,319 $ 2,860 $1,510 $ 752 Working capital ...... 61,802 62,229 4,723 3,059 1,295 Total assets ...... 108,881 86,514 14,953 5,598 2,179 Capital lease due after more than one year ...... 3 94 359 69 58 Redeemable Preference Shares ...... Ð Ð 339 324 313 Total shareholders' equity ...... 81,978 71,624 7,123 3,550 1,139 * Certain amounts reported in 1997 have been reclassi®ed to conform with the 1998 presentation. (1) Represents net income per share available to holders of Ordinary Shares after accretion of dividends on the Redeemable Preference Shares (when such Redeemable Preference Shares were outstanding). (2) Per share amounts represent net income per share. The net income per share amounts have been restated to comply with Statement of Financial Accounting Standards No. 128, Earnings Per Share, as more fully described in Note 1 to the Consolidated Financial Statements.

Item 9. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The discussion in ``Management's Discussion and Analysis of Financial Condition and Results of Operations'' 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, made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, with respect to, among other things, IONA's future revenues, operating income, net income per ordinary share, products and services, 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 IONA as of the date hereof, and IONA assumes no obligation to update any forward-looking statement. These forward-looking statements involve risks and uncertainties and actual results could differ materially from those discussed in the forward-looking statements. These risks and uncertainties include, but are not limited to, those described under the heading ``ÐFactors Affecting Future Results.''

Overview IONA develops, markets and supports distributed component software that enables the development, integration and management of network-based applications in multi-platform network environments. IONA 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. IONA was incorporated in March 1991 and was principally engaged in research and development and software consultancy until the commercial release of its ®rst product, Orbix 1.1, in July 1993. IONA has been pro®table in each successive year since 1993.

IONA's revenue is derived from product license fees and charges for support and professional services. Prior to 1998, IONA generally recognized software license revenue upon shipment, provided that IONA had no signi®cant related obligations or collection uncertainties remaining. Since 1998, in accordance with U.S. GAAP, IONA generally recognizes software license revenue when persuasive evidence of an arrangement exists, delivery has occurred, IONA's fee is ®xed or determinable and collectibility is probable. IONA recognizes professional service revenue when earned. IONA recognizes technical support revenue over the term of the support agreement, generally 12 months. IONA's product license agreements generally provide a right of return for unused and unopened software within 14 days of purchase. IONA maintains reserves for potential returns and credit losses, which returns and losses to date have been immaterial. See Note 1 of Notes to Consolidated Financial Statements.

IONA's total revenue grew by 129.2% from $21.2 million in 1996 to $48.6 million in 1997 and 72.0% from $48.6 million in 1997 to $83.6 million in 1998. Total revenue from customers located outside the United States was $24.2 million in 1998, $13.6 million in 1997 and $6.8 million in 1996. Total revenue from

-19- customers located outside the United States accounted for approximately 29.0% of total revenue in 1998, approximately 28.0% of total revenue in 1997 and approximately 32.1% of total revenue in 1996. IONA expects that the historical growth rates of its total revenue will not be sustainable. In addition, IONA's ability to achieve revenue growth in the future will depend on, among other things, the successful management of its expanding operations. See ``ÐFactors Affecting Future ResultsÐAbility to Manage Growth.'' IONA's products have been adopted by a broad range of software developers and corporate IT departments, and no single customer has accounted for more than ten percent of total revenue in 1998, 1997 or 1996. Changes in the list prices of products and services have not contributed signi®cantly to revenue increases during the periods presented.

IONA's product revenue is derived from development licenses and run-time licenses for its Orbix family of products. To date, revenue from development licenses has constituted the majority of IONA's product revenue. IONA does not expect that revenue from run-time licenses will represent a signi®cant percentage of product revenue for the foreseeable future. IONA markets its products through its direct sales and telesales organizations and through original equipment manufacturers, value added resellers and independent software vendors. IONA's total revenue is dependent on the growth in demand for distributed component software products, growth in acceptance of the CORBA standard and its underlying network protocol IIOP by software industry leaders and the market generally, and continued acceptance of the Orbix product set. Any reduction in demand or increase in competition for these products, or a decline in sales of such products, would have a material adverse effect on IONA's business, ®nancial condition and results of operations. See ``ÐFactors Affecting Future ResultsÐDependence on Emerging Markets and Evolving Standards'' and ``ÐProduct Concentration.''

IONA's gross margins (total revenue less cost of total revenue as a percentage of total revenue) are affected by the mix of product and service revenue, the mix of distribution channels used by IONA and the mix of non-U.S. and U.S. revenue. IONA typically realizes signi®cantly higher gross margins on product revenue than on service revenue and higher gross margins on direct sales than on sales through indirect channels.

IONA's operating expenses, excluding stock compensation, in-process research and development and the write-off of assets, have increased in absolute dollar amounts in each consecutive year from 1994 through 1998. This trend re¯ects IONA's rapid transition from concentrating primarily on product development to marketing and licensing products, offering services and developing IONA's infrastructure. IONA intends to continue to increase expenditures in all operating areas. If total revenue does not increase at a rate greater than the rate of increase in operating expenses, IONA's business, ®nancial condition and results of operations would be materially adversely affected. See ``ÐFactors Affecting Future ResultsÐRapid Technological Change,'' ``ÐPotential Fluctuations in Operating Results,'' ``ÐRisks Associated with Expanding Distribution'' and ``ÐAbility to Manage Growth.''

In 1998, for IONA acquired for $5.0 million from EDS Corp. a license to the source code of a component development technology that IONA plans to develop further and incorporate into certain of its products. IONA accounted for this purchase as an acquisition of in-process research and development, and accordingly, expensed the full amount of the purchase price during 1998.

In 1997, IONA acquired for $2.9 million from Transarc, a wholly-owned subsidiary of IBM, a non- exclusive license to the source code of an OTS technology that IONA has developed further and incorporated into certain of its products. IONA accounted for this purchase as an acquisition of in-process research and development, and accordingly, expensed the full amount of the purchase price during 1997.

IONA recorded a one-time, non-cash compensation charge of $1.9 million in 1996 in connection with the transfer by certain existing shareholders of fully-vested Ordinary Shares to a new executive of®cer of IONA. In addition, IONA has recorded and in future periods will record non-cash charges related to the grants in May 1995, June 1995 and May 1996 of stock options to employees.

-20- IONA earns signi®cant taxable income in Ireland, a considerable portion of which is taxed at rates substantially lower than tax rates in the United States under a tax regime that is scheduled to continue until 2010. Such lower tax rates are applicable to certain product licensing and related technical or consultancy services. Therefore, IONA's effective tax rate is affected by the percentage of revenue that quali®es for such favorable tax treatment. See ``Taxation.'' IONA anticipates that it will continue to bene®t from this tax treatment, although the extent of the bene®t could vary from period to period, and IONA's tax treatment may change in the future. Any variation in the amount of IONA's bene®t from this tax treatment could have a material adverse effect on IONA's business, ®nancial condition and results of operations. See ``ÐFactors Affecting Future ResultsÐRisk of Increasing Taxes.''

Results of Operations The following table sets forth certain operating data as a percentage of total revenue for the periods indicated (subtotals not adjusted for rounding):

Year Ended December 31, 1998 1997 1996 Revenue: Product revenue ...... 70.4% 65.5% 72.1% Service revenue ...... 29.6 34.5 27.9 Total revenue ...... 100.0% 100.0% 100.0% Cost of revenue: Cost of product revenue ...... 1.7% 5.8% 7.6% Cost of service revenue ...... 18.6 21.5 16.9 Total cost of revenue ...... 20.3% 27.3% 24.5% Gross pro®t ...... 79.7% 72.7% 75.5% Operating expenses: In-process research and development ...... 6.0% 6.0% 0.0% Research and development ...... 17.8 17.1 14.0 Sales and marketing ...... 33.6 28.8 25.6 General and administrative ...... 11.7 14.5 15.6 Write-off of assets and related costs ...... 2.0 0.0 0.0 Stock compensation ...... 0.2 0.4 9.6 Total operating expenses ...... 71.2% 66.7% 65.0% Income from operations ...... 8.5% 5.9% 10.5% Interest income, net ...... 3.0 5.1 0.4 Net exchange gain (loss) ...... (0.6) 0.5 0.0 Income before provision for income taxes ...... 10.9% 11.6% 10.9% Provision for income taxes ...... 1.7 1.8 3.6 Net income ...... 9.2% 9.8% 7.3% Dividend on 6% Redeemable Preference Shares ...... 0.0 0.0 (0.1) Net income available to Ordinary Shareholders ...... 9.2% 9.8% 7.2% Gross pro®t: Product ...... 97.6% 91.1% 89.5% Service ...... 37.0% 37.5% 39.3%

-21- Year Ended December 31, 1998 Compared to Year Ended December 31, 1997 Total Revenue Total revenue was $83.6 million in 1998 compared to $48.6 million in 1997. The increase in total revenue was attributable to continued growth in sales of IONA's products and services. Total revenue from customers located in the United States represented 71.0% of total revenue in 1998 and 72.0% of total revenue in 1997, or $59.4 million in 1998 and $35.0 million in 1997. Total revenue from customers located outside the United States represented 29.0% of total revenue in 1998 and 28.0% of total revenue in 1997, or $24.2 million in 1998 and $13.6 million in 1997. Product revenue was $58.9 million, or 70.4% of total revenue, in 1998 compared to $31.9 million, or 65.5% of total revenue, in 1997. Service revenue was $24.7 million, or 29.6% of total revenue, in 1998 compared to $16.7 million, or 34.5% of total revenue in 1997. Service revenue decreased as a percentage of total revenue in 1998 compared to 1997 due to IONA's larger investment in increasing product sales capacity relative to increasing service sales capacity as well as the timing of the performance of large customer consulting projects. In any particular period, service revenue may represent a different percentage of total revenue due to the timing of the award and performance of such projects.

Product Revenue. IONA's product revenue is based on the licensing of the Orbix family of products. Product revenue was $58.9 million in 1998 compared to $31.8 million in 1997. The increase in product revenue was primarily attributable to increasing market awareness and acceptance of CORBA-based technology, IONA's continued efforts to develop and market world class products built around the CORBA standard and the sale of several large scale, high-end applications.

Service Revenue. IONA provides professional services, consisting of consulting and training and, to a limited extent, product customization and enhancement, as well as technical support to its customers for all its products. Technical support generally includes support by means of telephone, e-mail and facsimile as well as access to certain product upgrades. Consulting services provided by IONA include training and assisting customers with the effective use and deployment of IONA's products. Service revenue was $24.7 million in 1998 compared to $16.7 million in 1997. The increase is principally due to increased market demand for training in CORBA-based products and consultancy contracts for large scale, high-end, mission-critical implementations.

Cost of Revenue Cost of Product Revenue. Cost of product revenue consists primarily of product media and duplication, manuals, packaging materials and shipping expenses and, to a lesser extent, the salaries and bene®ts of certain personnel and related operating costs of computer equipment. Cost of product licenses was $1.4 million in 1998 and $2.8 million in 1997, resulting in a product gross margin of 97.6% for 1998 and 91.1% for 1997. The increase in product gross margin was attributable to the realization of further economies of scale from the outsourcing of IONA's manufacturing and shipping operations, which was completed in 1997.

Cost of Service Revenue. Cost of service revenue consists primarily of personnel costs for consultancy, training, technical support, product customization and enhancement, and related operating costs of computer equipment and unreimbursed travel expenses. Cost of service revenue was $15.6 million in 1998 and $10.5 million in 1997, resulting in a service gross margin of 37.0% for 1998 and 37.5% for 1997. This decrease was primarily due to increased costs related to internal and external consultants used to meet service demand. Use of external consultants, while more costly than internal consultants, allows IONA to effectively meet customer demand for services while providing ¯exibility for IONA to respond to changes in service demand.

Overall gross margins increased to 79.7% of total revenue in 1998 from 72.7% of total revenue in 1997 due primarily to the increase of product revenue as a percentage of total revenue and improved product gross margins.

-22- Operating Expenses In-process Research and Development. In 1998, IONA acquired for $5.0 million from EDS Corp. a license to the source code of a component development technology that IONA plans to develop further and incorporate into certain of its products. IONA accounted for this purchase as an acquisition of in-process research and development, and accordingly, expensed the full amount of the purchase price during 1998 as the technology had not reached technological feasibility and had no alternative uses.

In 1997, IONA acquired for $2.9 million from Transarc, a wholly-owned subsidiary of IBM, the non- exclusive license to the source code of an object transaction service technology that IONA will develop further and incorporate into certain of its products. IONA accounted for this purchase as an acquisition of in-process research and development and accordingly expensed the full amount of the purchase price during 1997 as IONA developed further this technology before incorporating it into certain of its products.

Research and Development. Research and development expenses consist primarily of salaries and bene®ts of research and development personnel, cost of third party contractors, personnel-related overhead allocation, depreciation expenses arising from the acquisition of computer equipment, software license fees and related indirect costs. In previous years and in accordance with Statement of Financial Accounting Standards No. 86, IONA charged all software development costs to research and development expense as incurred because expenditures eligible for capitalization were insigni®cant. In 1998, IONA purchased technology which had reached technological feasibility. These software costs have been capitalized and will be written off over their expected useful economic life. Research and development expenses were $14.8 million, or 17.8% of total revenue, in 1998 compared to $8.3 million, or 17.1% of total revenue, in 1997. The increase in research and development expenses in dollar amount and as a percentage of total revenue in 1998 compared with 1997 was primarily the result of an increase in personnel, an increase in the use of external contractors and depreciation expenses arising from the acquisition of computer equipment. IONA expects research and development expenses to increase substantially in dollar amount in future periods.

Sales and Marketing. Sales and marketing expenses consist primarily of salaries, sales commissions and bene®ts 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 $28.1 million, or 33.6% of total revenue, in 1998 compared to $14.0 million, or 28.8% of total revenue, in 1997. The increase in sales and marketing expenses in both dollar amount and as a percentage of total revenue in 1998 compared with 1997 was due to continuing investments in senior direct enterprise sales capabilities and associated marketing activities. IONA expects that sales and marketing expenses will continue to increase substantially in dollar amount in future periods as IONA continues to expand its enterprise sales and marketing capacities.

General and Administrative. General and administrative expenses consist primarily of salaries and bene®ts of ®nancial, administrative and management personnel, general of®ce administration expenses (rent and occupancy, telephone and other of®ce supply costs) and related indirect costs. General and administrative expenses also include professional fees and depreciation. General and administrative expenses were $9.8 million, or 11.7% of total revenue, in 1998 compared to $7.0 million, or 14.5% of total revenue, in 1997. General and administrative expenses increased in dollar amount primarily due to an increase in personnel and, to a lesser extent, the depreciation of infrastructure investments. IONA expects that general and administrative expenses may continue to increase in dollar amount in future periods due to the installation of enhanced management information system capabilities and other associated infrastructure costs to support IONA's increased scale of operations.

Write-off of Assets and Related Costs. On August 1, 1998, IONA relocated its principal executive of®ces in Dublin, Ireland. As a result of this relocation, IONA wrote off $1.7 million relating to the net book value of abandoned furniture, ®xtures and equipment in the previous of®ces and related costs.

-23- Stock Compensation. IONA incurred stock compensation expense of $176,000 in 1998, as compared to $175,000 in 1997 related to the amortization of deferred compensation. Such deferred compensation consists of the difference between the grant price and the deemed fair value of IONA's Ordinary Shares for 581,943 shares subject to options granted in May 1995, June 1995 and May 1996. Such deferred compensation is amortized to operating expenses over the related vesting period of the options, generally four years, and will continue to have an adverse effect on IONA's operating margins.

Operating Income

IONA generated an operating pro®t of $7.1 million, or 8.5% of total revenue, in 1998 compared to an operating pro®t of $2.9 million, or 5.9% of total revenue, in 1997. Operating pro®t, as adjusted to eliminate in- process research and development and the write off of assets, would have been $13.8 million, or 16.5% of total revenue, in 1998 and $5.8 million, or 11.9% of total revenue, in 1997. The increased operating margin in 1998 (eliminating in-process research and development and the write-off of assets) re¯ects the increased gross margin partially offset by the increased investments in enterprise sales and marketing capabilities and research and development. IONA intends to continue to increase expenditures in all operating areas. If total revenue does not increase substantially in future periods, particularly in light of planned increased operating expenditures, IONA's business, results of operations and ®nancial condition would be materially adversely affected.

Other Income, Net

Interest income, net was $2.6 million in 1998 compared to $2.5 million in 1997. Interest income, net represents interest earned on cash and investment balances, net of interest expense on capital leases. The increase in interest income, net was due primarily to a higher average balance of cash and marketable securities on hand.

Net exchange loss was $541,000 in 1998 compared to a net exchange gain of $240,000 in 1997. The net exchange loss for 1998 was primarily due to the weakening of the Dollar to the Pound and an increase in net liabilities denominated in Pounds.

Income Taxes

Income taxes were $1.4 million in 1998 compared to $872,000 in 1997, representing an effective tax rate of 15.5% for 1998 and 1997. Deferred tax assets were not recognized in respect of the net operating loss carryforwards in either year because realization was not suf®ciently assured. The effective tax rate remained the same due to offsetting factors. In 1997, IONA made allowance for foreign tax credits in respect of which a full tax credit from the Irish tax authorities was in doubt. In 1998, income exempt from tax was a lower percentage of pre-tax income thereby increasing the effective tax rate.

If tax authorities in jurisdictions other than Ireland were to challenge successfully the manner in which pro®ts are recognized within IONA or, more generally, the jurisdiction in which income in subject to taxation, IONA's prevailing effective tax rate will increase and its cash ¯ows and results of operations could be materially adversely affected. See ``ÐFactors Affecting Future ResultsÐRisk of Increasing Taxes.''

At December 31, 1998, IONA had a net operating loss carryforward of approximately $3.5 million for U.S. Federal income tax purposes, which will expire in 2011 through 2013 if not utilized before such date. At December 31, 1998, IONA also had net operating loss carryforwards of approximately $789,000 for Australian, German and United Kingdom tax purposes, which carryforward inde®nitely, and approximately $891,000 for China which expire in 2003. See Note 12 of Notes to Consolidated Financial Statements.

-24- Year Ended December 31, 1997 Compared to Year Ended December 31, 1996

Total Revenue

Total revenue was $48.6 million in 1997 compared to $21.2 million in 1996. The increase in total revenue was attributable to continued growth in sales of IONA's products and services. Total revenue from customers located in the United States represented 72.0% of total revenue in 1997 and 67.9% of total revenue in 1996 or $35.0 million in 1997 and $14.4 million in 1996. Total revenue from customers located outside the United States represented 28.0% of total revenue in 1997 and 32.1% of total revenue in 1996 or $13.6 million in 1997 and $6.8 million in 1996. Product revenue was $31.9 million, or 65.5% of total revenue, in 1997 compared to $15.3 million, or 72.1% of total revenue, in 1996. Service revenue was $16.7 million, or 34.5% of total revenue, in 1997 compared to $5.9 million, or 27.9% of total revenue, in 1996. Service revenue increased as a percentage of total revenue in 1997 compared to 1996 due primarily to increased demand and the timing of large customer consulting projects. In any particular period service revenue may represent a different percentage of total revenue due to the timing of the award and performance of such projects.

Product Revenue. Product revenue was $31.8 million in 1997 compared to $15.3 million in 1996. The increase in product revenue was primarily attributable to increasing market awareness and acceptance of CORBA-based technology, IONA's continued efforts to develop and market world class products built around the CORBA standard and the sale of several large scale, high-end applications.

Service Revenue. Service revenue was $16.7 million in 1997 compared to $5.9 million in 1996. The increase is principally due to increased market demand for training in CORBA-based products and consultancy contracts for large scale, high-end, mission-critical implementations.

Cost of Revenue

Cost of Product Revenue. Cost of product licenses was $2.8 million in 1997 and $1.6 million in 1996, resulting in a product gross margin of 91.1% for 1997 and 89.5% for 1996. The increase in product gross margin was attributable to savings realized with respect to the outsourcing of IONA's manufacturing and shipping operations.

Cost of Service Revenue. Cost of service revenue was $10.5 million in 1997 and $3.6 million in 1996, resulting in a service gross margin of 37.5% for 1997 and 39.3% for 1996. This decrease was primarily due to increased costs related to internal and external consultants used to meet service demand.

Overall gross margins decreased to 72.7% of total revenue in 1997 from 75.5% of total revenue in 1996 due primarily to the increase of service revenue as a percentage of total revenue.

Operating Expenses

In-process Research and Development. In 1997, IONA acquired for $2.9 million from Transarc, a wholly-owned subsidiary of IBM, the non-exclusive license to the source code of an object transaction service technology that IONA will develop further and incorporate into certain of its products. IONA accounted for this purchase as an acquisition of in-process research and development and accordingly expensed the full amount of the purchase price during 1997 as IONA developed further this technology before incorporating it into certain of its products.

Research and Development. Research and development expenses were $8.3 million, or 17.1% of total revenue, in 1997 compared to $3.0 million, or 14.0% of total revenue, in 1996. The increase in research

-25- and development expenses in dollar amount and as a percentage of total revenue in 1997 compared with 1996 was primarily the result of an increase in personnel and depreciation expenses arising from the acquisition of computer equipment.

Sales and Marketing. Sales and marketing expenses were $14.0 million, or 28.8% of total revenue, in 1997 compared to $5.4 million, or 25.6% of total revenue, in 1996. The increase in sales and marketing expenses in both dollar amount and as a percentage of total revenue in 1997 compared with 1996 was due to the addition of sales and marketing personnel and increased marketing activities, including trade shows, web sites, marketing materials, advertising and other promotional expenses.

General and Administrative. General and administrative expenses were $7.1 million, or 14.5% of total revenue, in 1997 compared to $3.3 million, or 15.6% of total revenue, in 1996. General and administrative expenses increased in dollar amount primarily due to an increase in personnel and, to a lesser extent, the depreciation of infrastructure investments.

Stock Compensation. IONA incurred stock compensation expense of $175,000 in 1997, as compared to $2.0 million in 1996. Stock compensation expense for 1996 included a one-time, non-cash charge of $1.9 million related to the transfer of fully-vested Ordinary Shares by certain existing shareholders to an executive of®cer of IONA. In addition, stock compensation expense included non-cash charges of $175,000 in 1997 and $130,000 in 1996, related to the amortization of deferred compensation. Such deferred compensation consists of the difference between the grant price and the deemed fair value of IONA's Ordinary Shares for 581,943 shares subject to options granted in May 1995, June 1995 and May 1996. Such deferred compensation is amortized to operating expenses over the related vesting period of the options, generally four years.

Operating Income IONA generated an operating pro®t of $2.9 million, or 5.9% of total revenue, in 1997 compared to an operating pro®t of $2.2 million, or 10.5% of total revenue, in 1996. Operating pro®t, as adjusted to eliminate stock compensation expense and in-process research and development, would have been $6.0 million, or 12.3% of total revenue, in 1997 and $4.3 million, or 20.2% of total revenue, in 1996. The lower operating margin in 1997 (eliminating stock compensation and in-process research and development expenses) re¯ected the decrease in gross margin (discussed above) and increases in research and development and sales and marketing expenses without an increase at a similar rate in revenue.

Other Income, Net Interest income, net was $2.5 million in 1997 compared to $79,000 in 1996. The increase in interest income, net was due primarily to interest earned on marketable securities purchased with the net proceeds of approximately $60 million from IONA's initial public offering completed in February 1997.

Net exchange gain was $240,000 in 1997 compared to a net exchange gain of $5,000 in 1996. The net exchange gain during 1997 was primarily due to the strength of the Dollar relative to the Pound.

Income Taxes Income taxes were $872,000 in 1997 compared to $769,000 in 1996, representing an effective tax rate of 15.5% for 1997 compared with 33.2% for 1996. The decrease in the effective tax rate for 1997 compared to 1996 was due to a decrease in net income in 1996 as a result of a stock compensation expense of $1.9 million recorded in connection with the transfer of Ordinary Shares to an executive of®cer of IONA. In addition, in 1997 and 1996, deferred tax assets were not recognized in respect of the net operating loss carryforwards because realization was not suf®ciently assured. See Notes 1 and 12 of Notes to Consolidated Financial Statements. Excluding the effect of such stock compensation expense, the effective tax rate for 1996 would have been 18.2%. The decrease from 18.2% (excluding stock compensation expense) to 15.5% in effective tax rate was primarily due to a signi®cant increase in income not subject to tax.

-26- Liquidity and Capital Resources

Net cash provided by (used in) operating activities was $18.2 million in 1998, ($44.9) million in 1997 and $3.8 million in 1996 which includes the investment in high quality, short-term investments (net of sales and maturities) of $1.5 million in 1998, $43.8 million in 1997 and $0 in 1996. At December 31, 1998, IONA had cash and cash equivalents and marketable securities of $60.5 million and working capital of $61.8 million.

During 1998, IONA invested $14.8 million for the purchase of furniture, ®xtures and equipment related to the build-out of IONA's new executive of®ces in Dublin, Ireland, further investment in IONA's management information systems and capital expenditures relating to increased employee headcount.

During 1998, IONA also invested $1.0 million in certain technology which had reached technological feasibility but was not put into use before December 31, 1998.

IONA is obligated to make lease payments of approximately $2.9 million per year through 2023 (subject to an option to exit in 2013) with respect to the Dublin, Ireland facility, approximately $311,000 per year through 2011 (subject to a rent review in 2006 and an option to exit in 2003 and annually thereafter (assuming no termination of this lease in connection with the move to the Waltham facility) with respect to its Cambridge, Massachusetts facility, approximately $221,000 per year through 2004 with respect to its San Mateo, California facility, approximately $88,000 per year through 1999 with respect to its Hong Kong facility, approximately $62,000 per year through 1999 with respect to its Perth, Australia facility and approximately $50,000 per year through 2000 with respect to its Sydney, Australia facility. IONA expects to terminate its lease for the Cambridge, Massachusetts facility and move into its Waltham, Massachusetts facility in July 1999. IONA will be obligated to make lease payments of approximately $2.0 million per year through 2005 with respect to its Waltham, Massachusetts facility. See Note 6 of Notes to Consolidated Financial Statements. See ``Description of Property.''

IONA has an unsecured $5.0 million working capital line of credit which bears interest at the lending bank's Cost of Funds Rate plus 1.00% and is repayable on demand. There were no borrowings outstanding under the line of credit at December 31, 1998.

IONA believes that its capital resources are suf®cient to ®nance IONA's operations for at least the next twelve months. The foregoing estimate of the period of time through which IONA's capital resources will be suf®cient to ®nance its operations is a forward-looking statement that involves risks and uncertainties, and actual results could vary as a result of a number of factors including:

• IONA's operating results;

• the results and timing of IONA's launch of new and enhanced products and services;

• the success of IONA's marketing efforts, technological advances and competition;

• working capital requirements; and

• acquisitions of complementary businesses, technologies or products.

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

-27- Exposure to Currency Fluctuations IONA's consolidated ®nancial statements are prepared in U.S. dollars, IONA's functional currency. A percentage of the revenues, expenses, assets and liabilities of IONA and its subsidiaries are denominated in currencies other than their respective functional currency. Fluctuations in exchange rates may have a material adverse effect on IONA's results of operations, particularly its operating margins, and could also result in exchange gains and losses. As a result of currency ¯uctuations, IONA recognized exchange gains (losses) of ($541,000) in 1998, $240,000 in 1997 and $5,000 in 1996. IONA cannot accurately predict the impact of future exchange rate ¯uctuations on IONA's results of operations. IONA has in the past sought to hedge the risks associated with ¯uctuations in exchange rates of the Pound to the Dollar. In the future, IONA may undertake transactions to hedge the risks associated with ¯uctuations in exchange rates of the Pound and other currencies to the Dollar. Such hedging techniques implemented by IONA may not be successful and exchange rate ¯uctuations may materially adversely affect IONA's business, ®nancial condition and results of operations. See ``Quantitative and Qualitative Disclosure About Market Risks.'' See also Note 5 of Notes to Consolidated Financial Statements.

Year 2000 Compliance IONA has appointed a committee, consisting of representatives from senior management, product development, information systems, corporate ®nance and administration as part of its efforts to perform a comprehensive and coordinated audit of IONA's products and the computer systems and applications upon which it relies for internal operations, to assess whether such products and systems will function properly beyond December 31, 1999. Based on the results to date of this in-progress assessment, IONA does not expect that the Year 2000 issue will materially affect its business, ®nancial condition or results of operations.

IONA Products IONA has tested all of its currently shipping products and several prior generations of its products. As a result of this testing, IONA believes that its currently shipping software products are Year 2000 compliant. For the purposes of clari®cation, it is noted that IONA's products do not process dates as part of their core functionality. Many of IONA's products do, however, have an algorithm which, prior to program loading, checks an end-user entered license key supplied by IONA containing an embedded date, against the then- current date to ensure that the copy of the product is properly licensed (i.e. the license has not expired). IONA has tested this key checking algorithm and has determined it to be Year 2000 compliant. IONA is aware, however, that the license key checking algorithm contained in certain early versions of its products (all of which were released in or prior to 1995) and certain of the license keys IONA supplied will not function beyond December 31, 1999. IONA is in the process of determining which of its customers may still be utilizing these early product versions, license keys or both by reviewing internal sales, shipping, upgrade, billing and technical support records. IONA may be unable to identify all customers still utilizing non-compliant products, license keys or both prior to January 1, 2000, possibly subjecting IONA to claims or complaints from such customers. After IONA has determined the population of customers utilizing these products or keys, it will assess the commercial necessity and feasibility of addressing identi®ed customer issues. Once a transition plan has been formulated, IONA will notify affected customers by means of its world wide web site and, if appropriate, direct communications. IONA expects this assessment and noti®cation process to be completed by the end of ®rst half of 1999. The scope and cost of this transition plan cannot be determined until IONA has de®ned the population of customers with non-compliant products, license keys or both and has evaluated the most cost-effective method of assisting such customers. Given that IONA has released several generations of Year 2000 compliant products and the sales of its non-compliant products were small compared to the sales of its currently shipping products, IONA does not expect to incur signi®cant costs in either identifying or accommodating such customers. If IONA does identify all such customers, however, it is possible that after assessing each customer's situation, IONA's efforts to modify or replace these products, license keys or both may be costly or may otherwise divert IONA's resources. See ``ÐFactors Affecting Future ResultsÐYear 2000 Risks.''

-28- Third Party Products Because IONA's products are also embedded in software independently developed by other third-party software vendors, IONA may become involved in investigations or allegations regarding Year 2000 issues related to products developed or distributed by third parties. While IONA does not anticipate any material exposure arising from Year 2000 issues relating to its own products and services, IONA has no knowledge of the Year 2000 readiness of such third parties' software and ®rmware. Therefore, IONA cannot anticipate the degree to which it could be the subject of claims or complaints regarding Year 2000 issues for such third-party products. In addition, some of IONA's products run on platforms, or may work with peripheral devices, that are currently not Year 2000 compliant. Accordingly, it is expected that some of IONA's customers may experience dif®culties related to third-party products, which may affect the performance of IONA's products and may lead to adverse results such as an unusually high number of calls to IONA's technical support department or other unusual requests for information or assistance. IONA anticipates that the costs related to responding to any increased volume of support or other calls will not be material to its business, ®nancial condition or results of operations.

Internal Systems IONA is in the process of identifying and evaluating the Year 2000 compliance of systems upon which it relies for internal operations such as IONA's computer hardware, software and other related equipment and systems, such as phone systems and security systems. IONA is presently unable to estimate the costs involved in making its internal systems Year 2000 compliant, although IONA does not expect such costs to have a material adverse effect on its business, ®nancial condition or results of operations. Generally, IONA uses recently released, off-the-shelf, PC-based software for its internal accounting and other applications. IONA has completed preliminary testing of its more signi®cant applications and found no Year 2000 problems which cannot be quickly corrected. The majority of non-information technology systems on which IONA relies for internal operations are owned and managed by the lessors of the buildings in which IONA's of®ces are located. The Year 2000 compliance committee is in the process of developing further check lists of systems upon which it relies and, as IONA deems appropriate, IONA will seek certi®cation documents from its lessors and other appropriate providers regarding Year 2000 compliance of their systems. The Year 2000 compliance committee will develop contingency plans based on the responses regarding its critical systems that it receives, or does not receive, from its lessors and other providers. IONA presently expects that it will complete this effort in the ®rst half of 1999.

To date, IONA has not expended a material amount of capital resources on Year 2000 compliance and does not anticipate future expenditures to be material to its business, ®nancial condition or results of operations in any given year. IONA has not hired additional personnel or made material purchases of products to address speci®cally its Year 2000 compliance issues, and presently IONA does not expect it will be necessary to do so. The expenditures to date relate primarily to on-going salary costs of personnel, including Committee members participating at various levels in IONA's compliance efforts. All costs related to achieving Year 2000 compliance are being expensed as incurred.

-29- Factors Affecting Future Results The discussion in ``Management's Discussion and Analysis of Financial Condition and Results of Operations'' and in ``Business'' 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, made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, with respect to, among other things, IONA's future revenues, operating income, net income per ordinary share, products and services, 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 IONA as of the date hereof, and IONA assumes no obligation to update any forward-looking statement. These forward-looking statements involve risks and uncertainties and actual results could differ materially from those discussed in the forward-looking statements. These risks and uncertainties include, but are not limited to, those discussed below.

Potential Fluctuations in Operating Results IONA's revenue and results of operations have varied signi®cantly on a quarterly basis in the past and could vary signi®cantly on a quarterly or annual basis in the future. IONA's revenue and results of operations are dif®cult to forecast and the following factors could adversely affect such revenues and results of operations, including, among others: • the demand for application integration solutions; • the acceptance of open, standards-based distributed component software over alternative technologies for application integration; • the acceptance of products based on CORBA and IIOP; • changes in interoperability software, CORBA technology and industry standards; • the sales and relatively long implementation cycles for certain of IONA's major customers; • the size, timing and terms of individual license transactions and service contracts; • seasonality; • IONA's ability to expand its sales force, indirect distribution channels and customer support capabilities; • changes in IONA's operating expenses; • IONA's ability to develop and market new products and control costs; • market acceptance of new products; • the level of product and price competition; • activities of and acquisitions by competitors; • changes in the mix of products and services sold; • changes in the mix of channels through which products and services are sold; • levels of international sales; • personnel changes and dif®culties in attracting and retaining quali®ed sales, marketing and technical personnel; • changes in customers' budgeting cycles; • foreign currency exchange rates; • quality control of products sold; and • general economic conditions.

-30- In addition, IONA typically does not have a material backlog of un®lled software license orders, and product revenue in any quarter substantially depends on orders received in that quarter. Further, the sales cycle for IONA's products is lengthy. The Orbix family of products are frequently used to integrate large-scale, sophisticated applications that are critical to a customer's IT systems or part of a customer's implementation of distributed computing products. Therefore, prior to purchase, prospective customers investigate alternative approaches to the integration of enterprise applications, competitive product offerings and rapidly changing software technologies. Any signi®cant change in IONA's sales cycle could have a material adverse effect on IONA's business, results of operations and ®nancial condition and could cause material ¯uctuations in quarterly and annual results of operations.

Moreover, IONA typically receives and ful®lls a signi®cant portion of customers' orders in the same quarter with a substantial percentage of orders in any quarter being received in the last month of the quarter. As a result, IONA may not learn of revenue shortfalls for any quarter until late in that quarter. IONA's expense levels are based, in part, on its expectations as to future revenue and are ®xed, to a large extent, in the short term. Accordingly, IONA may be unable to adjust spending in a timely manner to compensate for any unexpected revenue shortfall. Any signi®cant shortfall of revenue in relation to IONA's expectations could have a material adverse effect on IONA's business, results of operations and ®nancial condition and could cause material ¯uctuations in IONA's quarterly results of operations. Furthermore, IONA plans to increase operating expenses to expand its product development teams, customer support and professional services organizations, marketing and sales forces and administrative infrastructure. The timing of such expansion and the rate at which new product development, customer support and services, marketing and sales personnel become productive could also cause material ¯uctuations in quarterly and annual results of operations.

In addition, shortfalls in revenues and earnings from levels expected of IONA by securities analysts could have an immediate and signi®cant adverse effect on the trading price of IONA's ADRs and Ordinary Shares. Moreover, the trading price of IONA's ADRs and Ordinary Shares is subject to the volatility generally associated with software and technology stocks and may also be affected by broader market trends unrelated to IONA's performance.

Lengthy Sales Cycles IONA derives an increasing and signi®cant portion of its revenue from larger and higher unit price orders. Customers frequently use the Orbix family of products to integrate large-scale, sophisticated applications that are critical to such customers' IT systems or part of such customers' implementation of distributed computing products. These customers face complex decisions regarding approaches to the integration of enterprise applications, competitive product offerings, rapidly changing software technologies and limited internal resources due to other information systems requirements. Consequently, the sales cycle for IONA's products is often lengthy. Prospective sales are subject to delays or cancellation over which IONA has little or no control. Any inability of IONA to generate large customer orders, or any delay or loss of such orders in a particular quarter, would cause material ¯uctuations in IONA's quarterly results of operations, could cause material ¯uctuations in IONA's annual results of operations and could have a material adverse effect on IONA's business, results of operations and ®nancial condition.

Although IONA utilizes licensing practices which intend to satisfy the revenue recognition criteria under current generally accepted accounting principles, IONA must often negotiate terms and conditions in larger sales transactions. These terms and conditions can extend the sales cycle and, in certain situations, result in deferred recognition of revenue from the sale. Any signi®cant deferral of revenue recognition could have a material adverse effect on IONA's results of operations.

Rapid Technological Change The market for IONA's products and services is characterized by rapidly changing technology, evolving industry standards and changing customer needs. Therefore, IONA's success will depend upon its ability to enhance its existing products and to introduce new products to meet changing customer requirements on a

-31- timely and cost-effective basis. If IONA were to experience delays in the introduction of new or enhanced products, or if IONA were unable to anticipate or respond adequately to such changes, IONA's business, ®nancial condition and results of operations would be materially adversely affected.

Dependence on Emerging Markets and Evolving Standards IONA's future ®nancial performance will depend on the growth in demand for distributed component software products. These markets are: • new and emerging; • rapidly evolving; • characterized by few proven products, evolving industry standards and an increasing number of market entrants; and • expected to be subject to frequent and continuing changes in customers' preferences and technology.

In addition, IONA plans to continue to develop products based on the CORBA standard and its underlying network protocol, IIOP. This standard has not yet gained widespread acceptance and competes with alternative technologies for application integration. As a result, it is dif®cult to assess or predict with any certainty the demand for and market acceptance of IONA's products, or the size or growth rate, if any, of these markets. It is possible that markets for IONA's products may not develop, or that current and potential customers may not adopt IONA's products. If these markets fail to develop, develop more slowly than expected or attract new competitors, or if IONA's products do not achieve market acceptance, IONA's business, ®nancial condition and results of operations would be materially adversely affected.

Ability to Manage Growth IONA's continuing rapid growth could place a signi®cant strain on IONA's management, operating procedures, ®nancial resources, information systems, employees and facilities. To manage its expanded operations, IONA will need to upgrade continuously its operating, accounting, reporting and information systems. If IONA experiences delays or dif®culties in upgrading its systems, its business, ®nancial condition and results of operations would be materially adversely affected. IONA's future operating results will depend substantially upon the ability of its of®cers and key employees to manage changing business conditions and expanded operations and to implement and improve its operational, ®nancial control, reporting and information systems.

IONA faces additional risks in managing geographically dispersed operations. A substantial number of IONA's key executives and managers are based in IONA's Dublin, Ireland headquarters and in Cambridge, Massachusetts. Accordingly, IONA's ability to compete successfully will depend in part on the ability of a limited number of key executives located in geographically dispersed of®ces to integrate Company management, to address the needs of IONA's worldwide customer base and to respond to changes in IONA's market.

Highly Competitive Market The market for distributed component software products and related services is highly competitive, and IONA expects this competition to increase. IONA competes with independent providers of distributed component software products and services, independent providers of other interoperability technologies, such as data connectivity and messaging, and large information technology vendors which offer interoperability technologies as part of their broader product and service offerings. IONA anticipates continued competition in the market for distributed component software solutions based on CORBA as well as increased competition from application connectivity solutions based on proprietary technologies or on standards other than CORBA.

-32- IONA believes that its ability to compete depends in part on a number of factors outside its control, including: • the development by others of software that is competitive with IONA's products and services; • the price at which others offer comparable products and services; • the extent of competitors' responsiveness to customer needs; and • the ability of IONA's competitors to hire, retain and motivate key personnel. In addition, IONA competes with a number of companies that have substantially greater technical, ®nancial, sales, marketing, customer support and other resources, as well as greater name recognition, than IONA. As a result, IONA's 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 successfully strategic relationships with industry leaders and other third parties than IONA. Further, certain of IONA's 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 IONA's current and prospective customers. Accordingly, it is possible that new competitors or alliances among current and new competitors may emerge and rapidly gain signi®cant market share. Such competition could materially adversely affect IONA's ability to sell additional software licenses and maintenance, consulting and support services on terms favorable to IONA. Moreover, competitive pressures could require IONA to reduce the price of its products and related services, which could materially adversely affect IONA's business, operating results and ®nancial condition. IONA, therefore, may be unable to compete successfully against current and future competitors, which would have a material adverse effect upon IONA's business, operating results and ®nancial condition. IONA currently competes with other independent providers of CORBA-based solutions, including, without limitation: • BEA Systems; • IBM; • Sun Microsystems; • INPRISE Corporation; and • Expersoft. IONA's products also compete with those of independent providers of other interoperability technologies, including, without limitation: • Microsoft's ActiveX, Common Object Model and Distributed Component Object Model technologies, proprietary distributed component technologies, and Microsoft's Transaction Server and message queuing system technologies, messaging and transaction technologies; • Sun Microsystems' non-CORBA based application connectivity solutions and Java interoperability model; • other transaction processing monitors; and • other messaging software products. IONA believes that potential customers may select non-CORBA based interoperability technologies, such as Microsoft's Distributed Component Object Model, because • such technologies may leverage existing infrastructure, expertise and commercial relationships; • such products may be adopted or promoted by industry leaders; • such products may be bundled with other product and system offerings; or • such products may be offered at lower prices.

-33- Product Concentration IONA derives all of its revenue from the licensing of its Orbix family of products and fees from related services. IONA expects the Orbix family of products to continue to account for a substantial majority of IONA's revenue for the foreseeable future. As a result, a reduction in demand or increase in competition for these products, or a decline in sales of such products, would have a material adverse effect on IONA's business, ®nancial condition and results of operations. In addition, IONA's future ®nancial performance will depend, in signi®cant part, on the successful development, introduction and customer acceptance of new and enhanced versions of the Orbix family of products. IONA may not continue to ®nd success in marketing, developing and introducing enhancements or additions to the Orbix family of products. Any such failure would materially adversely effect IONA's business, ®nancial condition and results of operations.

Risks Associated with Expanding Distribution To date, IONA has sold its products primarily through its direct sales force and distributors and, to a lesser extent, through original equipment manufacturers, value added resellers and independent software vendors. IONA plans to continue to invest in and rely on sales through third-party distribution channels. IONA has in the past experienced and expects to continue to experience lower pro®t margins on the distribution of its products through third party distribution channels. IONA may not be able to successfully expand its direct sales force or other distribution channels. Further, any such expansion may not result in an increase in revenue or operating income. If IONA fails to expand its direct sales force or other distribution channels, IONA's business, ®nancial condition and results of operations would be materially adversely affected.

Dependence on Key Personnel IONA depends to a signi®cant extent upon a limited number of senior executives. Currently, none of IONA's senior management is a party to a long-term employment contract or a non-competition agreement with IONA. IONA's future success will also depend upon its continuing ability to recruit, retain and assimilate technical, sales, marketing, ®nance and administrative employees. There is intense competition for highly quali®ed personnel. Failure to attract, retain or assimilate key personnel would have a material adverse affect on IONA's business, ®nancial condition and results of operations.

Risk of Product Defects Software products as complex as those offered by IONA frequently contain undetected errors or failures that may be detected at any point in the product's life cycle. IONA has in the past discovered software errors in certain of its new products and enhancements and has experienced delays in shipment of products during the period required to correct these errors. Despite testing by IONA and potential customers, errors may occur, resulting in loss or delay in market acceptance and sales, diversion of development resources, injury to IONA's reputation or increased service and warranty costs, any of which could have a material adverse effect on IONA's business, ®nancial condition or results of operations.

IONA also provides services to its customers, and IONA may from time to time be subject to claims for failure to perform in connection with the provision of such services. The adverse resolution of any such claims may have a material adverse effect on IONA's business, ®nancial condition or results of operations.

Year 2000 Risks IONA believes and represents to its customers that its currently shipping products are Year 2000 compliant, meaning that the use or occurrence of dates on or after January 1, 2000 will not materially affect the performance of IONA's software products with respect to four digit date dependent data or the ability of such products to correctly create, store, process and output information related to such date data. IONA has discovered, however, that the license key checking algorithms contained in certain early versions of its products (all of which were released in or prior to 1995) and certain license keys supplied by IONA will not function beyond December 31, 1999. Although IONA is attempting to identify customers with non-compliant products,

-34- license keys or both and modify and replace such products and/or license keys, IONA may be subject to claims or complaints from customers not identi®ed prior to January 1, 2000. In addition, in the near term, IONA's efforts to modify or replace these products and/or license keys may be costly or may otherwise divert IONA's resources. IONA's products also may be integrated, or otherwise interact with, non-Year 2000-compliant software. Any such non-compliance or integration or interaction with non-Year 2000-compliant software could • expose IONA to customer complaints or claims for compensatory or other damages from its customers; • result in the loss of or delay in market acceptance of IONA's products; and • increase service and warranty costs to IONA.

Any of the foregoing could have a material adverse effect on IONA's business, ®nancial condition and results of operations. Although IONA believes that its internal systems are Year 2000 compliant, the failure of any third-party systems to be free from Year 2000 defects could have a material adverse effect on IONA's business, ®nancial condition and results of operations. In addition, if current and potential customers dedicate increasing proportions of their resources to make their internal systems Year 2000 compliant, demand for IONA's Orbix family of products may be adversely affected. Any adverse affect on the demand for IONA's products would materially adversely affect IONA's business, ®nancial condition and results of operations.

Risks Associated with International Operations IONA is incorporated in Ireland and substantial portions of its product development, marketing, sales and administrative functions are located in Ireland. IONA expects that operations outside of the United States will continue to account for a signi®cant portion of its business and intends to continue to expand its operations outside of the United States. Because of the international character of its business, IONA is subject to risks such as • ¯uctuations in exchange rates; • dif®culties or delays in developing and supporting non-English language versions of IONA's products; • political and economic conditions in various jurisdictions; • unexpected changes in regulatory requirements, tariffs and other trade barriers; • dif®culties in staf®ng and managing foreign operations; and • longer accounts receivable payment cycles.

Such factors, either individually or taken as a whole, may have a material adverse effect on IONA's revenue derived from customers outside the United States or its overall business, ®nancial condition and results of operations.

Risks Associated with Possible Acquisitions IONA may pursue potential acquisitions of businesses, products and technologies that could complement or expand IONA's business. IONA may be unable to identify any appropriate acquisition candidates or may be unable to successfully negotiate the terms of any such acquisition, ®nance such acquisition or integrate such acquired business, products or technologies into IONA's existing business and products. Furthermore, the negotiation of potential acquisitions as well as the integration of an acquired business could cause diversion of management's time and resources, and require IONA to use its ®nancial resources to consummate a potential acquisition. Each acquisition would have risks speci®c to such acquisition, and any given acquisition, whether or not consummated, may have a material adverse effect on IONA's business, ®nancial condition and results of operations.

-35- Risk of Increasing Taxes IONA has signi®cant operations and generates a substantial portion of its taxable income in Ireland, and certain of IONA's Irish taxable income, derived from software development, is taxed at rates substantially lower than U.S. tax rates under a tax regime which is scheduled to continue until 2010. If such operations no longer quali®ed for such tax rates or if the tax laws were rescinded or changed, IONA's business, ®nancial 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 pro®ts are recognized within IONA or, more generally, the jurisdiction in which income is subject to taxation, IONA's effective tax rate could increase, and its cash ¯ow and results of operations could be materially adversely affected.

Limited Protection of Intellectual Property and Proprietary Rights IONA regards certain of its technologies as proprietary and relies primarily on a combination of copyright, trademark and trade secret laws, employee and third-party non-disclosure agreements and technical measures to establish and protect its proprietary rights. The laws of various countries in which IONA's products may be sold may not protect IONA's proprietary rights to the same extent as the laws of the United States and Ireland. While IONA generally enters into con®dentiality agreements and limits access to, and distribution of, its proprietary information, it is possible for a third party to copy or otherwise obtain and use IONA's technology without authorization. Third parties may reproduce IONA's software products without IONA's consent and it is possible that IONA's means of protecting its proprietary rights will not be adequate, either of which could have a material adverse effect on IONA's business, ®nancial condition or results of operations. Moreover, third parties may independently develop technologies that are substantially similar or superior to IONA's technology. While IONA does not believe that its products, copyrights, trademarks or other proprietary rights infringe upon the proprietary rights of third parties, third parties may notify IONA, from time to time, that IONA is 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 IONA, IONA could be required to • discontinue the use of certain processes; • cease the use and sale of infringing products and services; • expend signi®cant resources to develop non-infringing technology; or • obtain licenses to competing technology. IONA may be unable to obtain licenses on acceptable terms or at all. IONA may become a party to litigation and the court may assess damages. If IONA fails to obtain licenses or adverse or protracted litigation arises out of any such assertion, IONA's business, ®nancial condition or results of operations could be materially adversely affected.

Discretion as to Use of Net Proceeds of Initial Public Offering IONA has broad discretion over the use of substantially all of the net proceeds to IONA of its initial public offering consummated in February 1997 (approximately $60 million), except for • the use of approximately $380,000 which IONA used to redeem its outstanding preference shares and pay accrued and unpaid dividends thereon; ••the use of approximately $10.9 million which IONA utilized for the purchase and installation of furniture and ®xtures; and

••the use of approximately $10.4 million IONA utilized for the purchase and installation of machinery and equipment. IONA expects to use any unallocated proceeds for working capital and other general corporate purposes, including potential acquisitions.

-36- Item 9A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS The following discussion regarding IONA's 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, made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, These forward-looking statements involve risks and uncertainties including risks of exchange rate ¯uctuations, interest rate ¯uctuations and general market volatility, and actual results could differ materially from those discussed in the forward-looking statements. IONA enters into foreign exchange contracts as a hedge against accounts payable in currencies other than the U.S. dollar and as a hedge against ®rm commitments in foreign currencies. Market value gains and losses are recognized on hedges of payables, and the resulting credit or debit offsets foreign exchange gains or losses on those payables. The gain or loss and premium or discount on forward contracts designated as hedges of ®rm commitments are deferred until the hedged transaction is completed and are then included in the measurement of the value of the hedged transaction. At December 31, 1998, IONA had contracts maturing on or before December 31, 1999 to purchase $25.8 million in Pounds foreign currency (IR£17.0 million). The fair value of these contracts at December 31, 1998 was approximately $25.4 million.

IONA's 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.

Item 10. DIRECTORS AND OFFICERS OF REGISTRANT The directors and executive of®cers of IONA as of March 31, 1999 are as follows:

Name Age Position Dr. Christopher J. Horn . . 42 President, Chief Executive Of®cer and Chairman of the Board E.C. Mick Prokopis .... 56 Chief Operating Of®cer Dr. Sean Baker ...... 40 Executive Vice President, Customer Services and Director Barry Morris ...... 35 Executive Vice President, Operations Colin Newman ...... 34 Executive Vice President, Direct Business Unit and Director Annrai O'Toole ...... 33 Executive Vice President, Chief Technical Of®cer and Director David James ...... 46 Senior Vice President and Chief Financial Of®cer Lindsey C.Y. Kiang .... 58 Senior Vice President, General Counsel and Secretary John J. Cullinane(1)(2) . . 64 Director Kevin Melia(1)(2) ...... 51 Director

(1) Member of Compensation Committee. (2) Member of Audit Committee. Dr. Christopher J. Horn co-founded IONA in 1991 with Annrai O'Toole and Dr. Sean Baker. He was the initial developer of Orbix and has served as IONA's President, Chief Executive Of®cer and Chairman of the Board since its inception. From 1984 until 1994, Dr. Horn was a Lecturer in the Computer Science Department at Trinity College, Dublin, where he was involved in many pan-European IT research projects involving distributed computing. He also worked in Brussels, Belgium for the European Commission, and was part of the ten-year ``Esprit'' program designed to improve the continent's technology industry. Dr. Horn received his doctorate in computer science from Trinity College, Dublin. He chairs the new ``Expert Group on Future Skills,'' part of Ireland's Educational Technology Investment Fund. E. C. Mick Prokopis has served as IONA's Chief Operating Of®cer since July 1996. As of April 1, 1999, Mr. Prokopis will step down from this position and make his planned transition into an advisory capacity for IONA. From June 1996 until July 1997 Mr. Prokopis served as IONA's Chief Financial Of®cer and Treasurer. Mr. Prokopis served Digital Equipment Corporation as Vice President and Corporate Controller from June 1994 through June 1996. Mr. Prokopis was self employed from November 1993 to June 1994; from July 1992

-37- to November 1993, he served as Executive Vice President of Ziff Communications Corp., a publisher of computer-related magazines; from March 1992 to July 1992, he was Executive Vice President and Chief Financial Of®cer of MAST Industries, a subsidiary of The Limited, Inc.; and from 1987 to 1992 he was Digital Equipment Corporation 's Finance Manager, Manufacturing, Engineering and Marketing and Vice President, Budgeting. Prior to 1987, Mr. Prokopis was Senior Vice President, Finance and Operations and Chief Financial Of®cer of Lotus Development Corporation, a software development company. Dr. Sean Baker co-founded IONA, serving as Senior Vice President from March 1991 until September 1996 and as Executive Vice President, Customer Services since September 1996. Dr. Baker is responsible for product and service quality. He has been a director of IONA since its inception. From 1981 until 1994, Dr. Baker was a lecturer in the Computer Science Department at Trinity College, Dublin. Since founding IONA, he authored the book, CORBA Distributed Objects: Using Orbix. Dr. Baker received his doctorate in computer science from Trinity College, Dublin. Barry Morris has served as IONA's Executive Vice President, Operations since July 1998. As of April 1, 1999, Mr. Morris will become Chief Operating Of®cer of IONA. Prior to his assumption of his position as IONA's Executive Vice President, Operations, he served as Senior Vice President, Product Development for IONA since September 1996. Prior to that time, he served IONA as Vice President, Business Development from December 1995 until September 1996 and Vice President, Product Management from April 1995 until December 1995. From November 1994 to April 1995, he served IONA as Channel Manager and Business Development Manager. Before joining IONA, he was a self-employed technical consultant from February 1994 until November 1994. Prior to that time he served as Principal Engineer in Technical Leadership and in Team Management for Lotus Development Corporation in Ireland from July 1992 until February 1994. Before July 1992, he worked in Hardware Product Development, Marketing, Sales and Channel Management for Protek Electronics Ltd., a developer and reseller of hardware and software, and Leading Technology Inc., a software developer. Mr. Morris received his Bachelor of Arts from New College, Oxford University. Colin Newman has served as Executive Vice President, Direct Business Unit, IONA's internet group, since June 1998. Previously, Mr. Newman served as Executive Vice President, Marketing from April 1993. He has served as a director of IONA since December 1993. Prior to joining IONA, Mr. Newman served as a Systems Programmer for Lehman Brothers Inc., an investment banking ®rm in New York City. Mr. Newman holds an engineering degree and a Masters in Computer Science from Trinity College, Dublin. From 1991 until 1993, Mr. Newman earned a Masters of Business Administration from Bocconi University in Italy. Annrai O'Toole co-founded IONA and has served as a director since its inception. Mr. O'Toole became a full-time employee of IONA in, and has served as Executive Vice President and Chief Technical Of®cer since, April 1992. Mr. O'Toole holds a Bachelor of Arts, Bacelarius Articus Ingenericus in Computer Engineering from Trinity College, Dublin. From 1987 to April 1992, Mr. O'Toole was a Research Assistant in the department of computer science, Trinity College, Dublin. In 1991, Mr. O'Toole completed a masters program in the ``distributed systems group'' within the computer science department of Trinity, and was awarded a Masters of Science in Computer Science. David James has served as Senior Vice President and Chief Financial Of®cer of IONA since July 1997. He also held the position of Treasurer from July 1997 to March 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 ®nancial analyst, manager and controller for Digital Equipment Corporation from 1981 to 1995. Mr. James received his Bachelor of Arts from the University of Pennsylvania and holds a Masters of Business Administration from the Colgate Darden School at the University of Virginia. Lindsey C.Y. Kiang has served as Senior Vice President, General Counsel and Secretary for IONA since May 1997. Before joining IONA, Mr. Kiang was Senior Corporate Counsel at Digital Equipment Corporation from May 1987 until May 1997. Prior to that he was Vice President and General Counsel of Lotus Development Corporation. Mr. Kiang received his Bachelor of Arts degree, with honors, and his Juris Doctorate from Yale University. Mr. Kiang has served in the United States Marine Corps.

-38- John J. Cullinane has served as a non-executive director of IONA since February 1997. Mr. Cullinane has been President of The Cullinane Group, Inc., a ®rm specializing in investments in high technology ventures, since September 1989. Prior to September 1989, Mr. Cullinane served as Chairman of the Board, President, Chief Executive Of®cer and founder of Cullinet Software, Inc., a developer of database software. Mr. Cullinane was the founding chairman of the Massachusetts Software Council.

Kevin Melia has served as a non-executive director of IONA since May 1994. Since June 1994, Mr. Melia has served as Chairman and Chief Executive Of®cer of Manufacturers Services, an electronics manufacturing outsourcing company. From January 1992 to June 1994, he was Chief Financial Of®cer of Sun Microsystems, a workstation manufacturer. Also, from January 1993 until February 1994, Mr. Melia was President of Sun Microsystems Computer Co., a division of Sun Microsystems.

Item 11. COMPENSATION OF OFFICERS AND DIRECTORS

The following table sets forth the aggregate compensation paid to or accrued on behalf of all directors and executive of®cers of IONA as a group for the year ended December 31, 1998:

Long-Term Compensation Pension, Retirement Securities and Annual Compensation Underlying Similar Salary($) Bonus($) Options(#)(1) Bene®ts($) All directors and executive of®cers as a group (10 persons)...... 1,266,258 0 155,400 90,363

(1) Includes 24,000 Ordinary Shares issuable upon exercise of options granted to members of the Compensation Committee during the year ended December 31, 1998, of which 21,000 Ordinary Shares are issuable upon the exercise of options granted to John J. Cullinane and 3,000 Ordinary Shares are issuable upon the exercise of options granted to Kevin Melia.

Item 12. OPTIONS TO PURCHASE SECURITIES FROM REGISTRANT OR SUBSIDIARIES As of March 31, 1999, options to purchase an aggregate of 2,752,980 Ordinary Shares were outstanding, of which 435,036 were granted pursuant to the 1995 Executive Share Option Scheme and 2,317,944 were granted pursuant to the 1997 Share Option Scheme. As of March 31, 1998, there were no options outstanding under the 1997 Director Share Option Scheme.

Of the 2,752,980 options outstanding, 108,000 were granted at an exercise price of $0.0032 and expire on June 9, 2002; 136,067 were granted at an exercise price of $0.80 and expire on May 29, 2003; 124,314 were granted at an exercise price of $2.96 and expire on August 30, 2003; 66,655 were granted at an exercise price of $4.93 and expire on November 15, 2003; 1,235,875 were granted at an exercise price of $12.50 and expire on October 17, 2007; 5,900 were granted at an exercise price of $17.00 and expire on November 4, 2007; 11,250 were granted at an exercise price of $17.00 and expire on November 25, 2007; 98,500 were granted at an exercise price of $17.56 and expire on December 9, 2007; 10,000 were granted at an exercise price of $19.75 and expire on January 27, 2008; 111,629 were granted at an exercise price of $18.50 and expire on February 2, 2008; 24,000 were granted at an exercise price of $32.25 and expire on July 24, 2008; 130,000 were grantd at an exercise price of $30.00 and expire on July 28, 2008; 629,790 were granted at a price of $18.75 and expire on October 1, 2008; 3,000 were granted at a price of $26.50 and expire on November 2, 2008; 30,000 were granted at a price of $29.00 and expire on November 9, 2008; 3,000 were granted at a price of $26.94 and expire on November 23, 2008; 15,000 were granted at a price of $26.44 and expire on December 4, 2008; 5,000 were granted at a price of $31.63 and expire on December 16, 2008; and 5,000 were granted at a price of $37.50 and expire on December 21, 2008. Of the 2,752,980 options outstanding, options to purchase 642,978 Ordinary Shares have been granted to executive of®cers and directors as a group (10 persons).

-39- The following is a brief description of each of IONA's share option schemes pursuant to which the foregoing options were granted:

Executive Share Option Scheme In May 1995, IONA adopted the Executive Share Option Scheme, under which it reserved 1,125,500 Ordinary Shares for issuance. Options under the Executive Share Option Scheme may only be granted to directors of IONA and full-time employees of IONA or of a subsidiary of IONA and must have an exercise price 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 optionee's employment for any reason, although the Board of Directors has discretion to delay lapse in individual cases.

1997 Share Option Scheme IONA's Board of Directors and shareholders approved the 1997 Share Option Scheme in January 1997 and February 1997, respectively, and amended it in July 1998 to increase the number of Ordinary Shares reserved for grant under such Scheme. The 1997 Share Option Scheme, as amended, provides for the grant of share options to employees, consultants, directors and of®cers of IONA. The 1997 Share Option Scheme provides for the issuance of up to 4,750,000 of IONA's Ordinary Shares. Generally, under the 1997 Share Option Scheme, an award is not transferable by the award 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 ®ve years from the date of grant in the case of incentive stock options issued to employees holding more than 10% of the total combined voting power of IONA.

The 1997 Share Option Scheme is administered by the Compensation Committee of the Board of Directors. 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;

• when 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 employees 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.

1997 Director Share Option Scheme IONA's Board of Directors and shareholders approved the 1997 Director Share Option Scheme in January 1997 and February 1997, respectively. The 1997 Director Share Option Scheme provides for the grant of options to purchase a maximum of 250,000 Ordinary Shares of IONA to non-employee directors of IONA. The 1997 Director Share Option Scheme is administered by the Compensation Committee of the Board of Directors.

Under the 1997 Director Share Option Scheme, each director of IONA who is not also an employee or of®cer of IONA will automatically receive an option to purchase 30,000 Ordinary Shares on the date such person is ®rst elected to the Board of Directors. In addition, each such director, as well as any other director on

-40- the date of the Offering who is not also an employee or of®cer of IONA, will automatically receive (i) 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 for a three-year term and (ii) an option to purchase an additional 3,000 Ordinary Shares at the time of each other annual meeting of shareholders after the ®rst anniversary of such director's initial award, provided, however, that such person has continuously served as a non-employee director during such period. 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, assuming such director satis®es certain requirements. The term of each option will be for a period of ten years from the date of grant. Options under the 1997 Director Share Option Scheme may not be assigned or transferred except by will or by the laws of descent and distribution and are exercisable to the extent vested only while the optionee is serving as a director of IONA or within 90 days after the optionee ceases to serve as a director of IONA. However, if a director dies or becomes disabled while he or she is serving as a director of IONA, all options held by the director at his or her death immediately vest and are fully exercisable until the scheduled expiration date of the options; and under certain circumstances following an acquisition of IONA, the options may be exercisable as well.

The Board of Directors is satis®ed that the executive of®cers of IONA are dedicated to achieving signi®cant improvements in the long-term ®nancial performance of IONA and that the compensation policies and programs implemented and administered have contributed and will continue to contribute towards achieving this goal.

Item 13. INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS In December 1997, IONA's U.S. subsidiary loaned to Mr. Prokopis $164,068 pursuant to the terms of a promissory note bearing interest at the annual applicable U.S. Federal rate, which in December 1997 was 5.60%. The principal amount of such promissory note, and accrued interest, was payable in full on demand. The promissory note and accrued interest was settled in full in October 1998 for $171,502.

Pursuant to an action of the Board of Directors taken on May 28, 1997, IONA pays each of Messrs. Cullinane and Melia $3,000 per month for additional advisory services rendered by them to IONA. Messrs. Cullinane and Melia abstained from voting on such matter.

PART II

Item 14. DESCRIPTION OF SECURITIES TO BE REGISTERED Not Applicable.

PART III

Item 15. DEFAULTS ON SENIOR SECURITIES None.

Item 16. CHANGES IN SECURITIES,CHANGES IN SECURITY FOR REGISTERED SECURITIES AND USE OF PROCEEDS During the ®scal quarter ended June 29, 1997, IONA paid $380,000 to redeem all of its outstanding redeemable Preference Shares, IR£0.002 par value per share, and paid all accrued and unpaid dividends payable thereon to the date of redemption.

-41- Use of Proceeds from Initial Public Offering On February 24, 1997, IONA's Registration Statement on Form F-1 (File No. 333-6396) became effective. The net proceeds to IONA from the related offering were $59,574,654. IONA has ®led 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, 1998:

Purchase and installation of furniture and ®xtures ...... $10,873,000 Purchase and installation of machinery and equipment...... 10,370,000 Short-term debt instruments ...... 37,951,654 Redemption of outstanding Preference Shares and payment of accrued and unpaid dividends thereon...... 380,000

PART IV

Item 17. FINANCIAL STATEMENTS Not Applicable. Please see Item 18.

Item 18. FINANCIAL STATEMENTS The Financial Statements included under Item 19(a) are incorporated herein by reference.

Item 19. FINANCIAL STATEMENTS AND EXHIBITS (a) Index to Financial Statements Report of Independent Public Accountants ...... F-1 Consolidated Financial Statements: Consolidated Balance Sheets at December 31, 1998 and 1997 ...... F-2 Consolidated Statements of Income for each of the three years in the period ended December 31, 1998 ...... F-3 Consolidated Statements of Shareholders' Equity for each of the three years in the period ended December 31, 1998 ...... F-4 Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 1998 ...... F-5 Notes to Consolidated Financial Statements ...... F-6

(b) List of Exhibits 1. Consent of Ernst & Young

-42- SIGNATURES

Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the registrant certi®es that it meets all of the requirements for ®ling on Form 20-F and has duly caused this annual report to be signed on its behalf by the undersigned, thereunto duly authorized.

IONA TECHNOLOGIES PLC

By: /S/CHRISTOPHER J. HORN Christopher J. Horn President, Chief Executive Of®cer and Chairman

Date: April 20, 1999

-43- REPORT OF INDEPENDENT AUDITORS

To the Board of Directors of IONA Technologies PLC We have audited the accompanying consolidated balance sheets of IONA Technologies PLC and its subsidiaries as of December 31, 1998 and 1997 and the related consolidated statements of income, changes in shareholders' equity and cash ¯ows for each of the three years in the period ended December 31, 1998. These ®nancial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these ®nancial 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 ®nancial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the ®nancial statements. An audit also includes assessing the accounting principles used and signi®cant estimates made by management, as well as evaluating the overall ®nancial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated ®nancial statements referred to above present fairly, in all material respects, the consolidated ®nancial position of IONA Technologies PLC and its subsidiaries at December 31, 1998 and 1997, and the consolidated results of their operations and their cash ¯ows for each of the three years in the period ended December 31, 1998, in conformity with accounting principles generally accepted in the United States.

/s/ ERNST &YOUNG

Dublin, Ireland January 20, 1999

F-1 IONA TECHNOLOGIES PLC CONSOLIDATED BALANCE SHEETS (U.S. dollars in thousands, except share and per share data)

Year Ended December 31, 1998 1997 ASSETS Current assets: Cash and cash equivalents ...... $ 13,484 $ 8,647 Marketable securities ...... 47,065 44,672 Accounts receivable, net of allowance for doubtful accounts of $312 and $316 at December 31, 1998 and 1997, respectively ...... 24,951 19,074 Prepaid expenses and other assets ...... 3,202 4,632 Total current assets ...... $ 88,702 $77,025 Property and equipment, net (Notes 7 and 8) ...... 19,179 9,489 Other non-current assets (Note 1) ...... 1,000 Ð Total assets ...... $108,881 $86,514

LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable ...... $ 6,617 $ 8,248 Accrued payroll and related expenses...... 2,472 562 Other accrued liabilities (Note 4) ...... 7,288 2,351 Deferred revenue ...... 10,523 3,635 Total current liabilities ...... $ 26,900 $14,796 Capital lease due after more than one year (Note 7) ...... 3 94 Redeemable Preference Shares, IR£0.002 par value, 101,250,000 shares authorized, None issued and outstanding (Note 9) ...... Ð Ð

Shareholders' equity: Ordinary Shares, IR£0.002 par value, 150,000,000 shares authorized; 19,451,723 and 19,070,770 shares issued and outstanding at December 31, 1998 and 1997, respectively (Note 9) ...... 61 59 Additional paid-in capital ...... 64,852 62,354 Retained earnings ...... 17,256 9,578 Deferred stock compensation ...... (191) (367) Total shareholders' equity ...... $ 81,978 $71,624 Total liabilities and shareholders' equity...... $108,881 $86,514

The accompanying notes are an integral part of these statements.

F-2 IONA TECHNOLOGIES PLC CONSOLIDATED STATEMENTS OF INCOME (U.S. dollars in thousands, except per share data)

Year Ended December 31, 1998 1997 1996 Revenue: Product revenue ...... $58,900 $31,843 $15,277 Service revenue ...... 24,727 16,741 5,914 Total revenue (Note 13) ...... $83,627 $48,584 $21,191 Cost of product revenue ...... $ 1,409 $ 2,824 $ 1,607 Cost of service revenue ...... 15,568 10,456 3,587 Total cost of revenue ...... $16,977 $13,280 $ 5,194 Gross pro®t ...... $66,650 $35,304 $15,997 Operating expenses: In-process research and development ...... $ 5,000 $ 2,900 $ Ð Research and development ...... 14,849 8,299 2,970 Sales and marketing ...... 28,136 13,989 5,435 General and administrative ...... 9,755 7,041 3,315 Write-off of assets and related costs ...... 1,658 18 Ð Stock compensation ...... 176 175 2,044 Total operating expenses ...... $59,574 $32,422 $13,764 Income from operations ...... $ 7,076 $ 2,882 $ 2,233 Interest income, net ...... 2,552 2,501 79 Net exchange gain (loss) ...... (541) 240 5 Income before provision for income taxes (Note 12) ...... $ 9,087 $ 5,623 $ 2,317 Provision for income taxes (Note 12) ...... 1,409 872 769 Net income ...... $ 7,678 $ 4,751 $ 1,548 Dividend on 6% Redeemable Preference Shares ...... Ð Ð (19) Net income available to Ordinary Shareholders ...... $ 7,678 $ 4,751 $ 1,529 Basic net income per Ordinary Share ...... $ 0.40 $ 0.26 $ 0.10 Shares used in computing basic net income per Ordinary Share ...... 19,268 18,428 15,264 Diluted net income per Ordinary Share ...... $ 0.37 $ 0.25 $ 0.10 Shares used in computing diluted net income per Ordinary Share ...... 20,893 19,275 15,643

Certain amounts reported in 1997 have been reclassi®ed to conform with the 1998 presentation. The accompanying notes are an integral part of these statements.

F-3 IONA TECHNOLOGIES PLC CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (U.S. dollars in thousands)

Additional Deferred Total Number of Share Paid-in Retained Stock Shareholders' Shares Capital Capital Earnings Compensation Equity Balance at December 31, 1995 ...... 15,231,000 $ 47 344 $ 3,298 $ (139) $ 3,550 Stock compensation(a) ...... Ð Ð 1,914 Ð Ð 1,914 Deferred compensation on issuance of options(a) ...... Ð Ð 533 Ð (533) Ð Issuance of Ordinary Shares on exercise of options(a) ...... 59,375 Ð Ð Ð Ð Ð Amortization of deferred compensation(a) ...... Ð Ð Ð Ð 130 130 Net income available to Ordinary Shareholders ...... Ð Ð Ð 1,529 Ð 1,529 Balance at December 31, 1996 ...... 15,290,375 $47 $ 2,791 $ 4,827 $ (542) $ 7,123 Amortization of deferred compensation(a) ...... Ð $ Ð $ Ð $Ð $175 $175 Issuance of Ordinary Shares ...... 3,701,550 12 59,563 Ð Ð 59,575 Issuance of Ordinary Shares on exercise of options(a) ...... 78,845 Ð Ð Ð Ð Ð Net income available to Ordinary Shareholders ...... Ð Ð Ð 4,751 Ð 4,751 Balance at December 31, 1997 ...... 19,070,770 $59 $62,354 $ 9,578 $ (367) $71,624 Amortization of deferred compensation(a) ...... Ð Ð $ Ð $ Ð $ 176 $176 Issuance of Ordinary Shares on exercise of options(a) ...... 380,953 2 2,498 Ð Ð 2,500 Net income available to Ordinary Shareholders ...... Ð Ð Ð 7,678 Ð 7,678 Balance at December 31, 1998 ...... 19,451,723 $61 $64,852 $17,256 $ (191) $81,978

(a) See Note 9 to these statements.

The accompanying notes are an integral part of these statements.

F-4 IONA TECHNOLOGIES PLC CONSOLIDATED STATEMENTS OF CASH FLOWS (U.S. dollars in thousands)

Year Ended December 31, 1998 1997 1996 CASH FLOWS FROM OPERATING ACTIVITIES: Net income ...... $ 7,678 $ 4,751 $ 1,548 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization ...... 3,418 1,877 627 Stock compensation ...... 176 175 2,044 (Pro®t) on marketable securities ...... (848) (936) Ð Loss on disposal of assets ...... 1,470 18 Ð Other non-cash items ...... Ð 3 15 Purchase of marketable securities ...... (170,349) (333,991) Ð Sale of marketable securities ...... 168,804 290,256 Ð Changes in operating assets and liabilities: Accounts receivable ...... (5,877) (11,983) (4,277) Prepaid expenses and other assets ...... 1,430 (2,728) (1,515) Accounts payable ...... (1,631) 6,070 1,791 Accrued payroll and related expenses and other accrued liabilities ...... 6,992 470 1,335 Deferred revenues ...... 6,888 1,111 2,193 Net cash provided by (used in) operating activities ...... $18,151 $(44,907) $ 3,761 CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment ...... $(14,571) $ (8,220) $(2,316) Disposal of property and equipment ...... (1,000) 32 Ð Net cash used in investing activities ...... $(15,571) $ (8,188) $(2,316) CASH FLOWS FROM FINANCING ACTIVITIES: Principal payments on capital leases ...... $ (243) $ (281) $ (95) Issuance of shares, net of issuance costs ...... 2,500 59,575 Ð Redemption of and dividends paid on Redeemable Preference Shares . . Ð (380) Ð Net cash provided by (used in) ®nancing activities ...... $ 2,257 $ 58,914 $ (95) NET INCREASE IN CASH AND CASH EQUIVALENTS ...... $ 4,837 $ 5,787 $ 1,350 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD . . . 8,647 2,860 1,510 CASH AND CASH EQUIVALENTS AT END OF PERIOD ...... $13,484 $ 8,647 $ 2,860 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Interest paid ...... $ 300 $ 164 $ 21 Income Taxes paid ...... $ 853 $ 474 $ 275 SUPPLEMENTAL DISCLOSURE OF NON-CASH INFORMATION: Acquisition of property and equipment under capital leases...... $ 6 $ 93 $ 525

Certain amounts reported in 1997 have been reclassi®ed to conform with the 1998 presentation. The accompanying notes are an integral part of these statements.

F-5 IONA TECHNOLOGIES PLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Organization and Summary of Signi®cant 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''), operate in one market segment: distributed component software products that enable the development, integration and management of network-based applications in multi-platform network environments. 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 signi®cant revenues from similar customers in the United Kingdom, other European countries and the rest of the world.

In February 1997, 7,646,900 American Depositary Shares (``ADSs'') representing 7,646,900 Ordinary Shares were sold in an initial public offering (the ``IPO''). Simultaneous with that sale, the underwriters elected to exercise their over-allotment option to purchase an additional 1,147,035 ADSs representing 1,147,035 Ordinary Shares. Of 8,793,935 shares sold in the IPO, 5,092,385 were sold by existing shareholders and 3,701,550 were issued and sold by IONA.

As described in Note 9, IONA was re-registered as a public limited company in connection with its IPO and converted all its ``A,'' ``B'' and ``C'' Ordinary Shares, IR£0.002 par value per share, into Ordinary Shares, IR£0.002 par value per share, on a one-for-one basis. The accompanying ®nancial statements have given effect to the reorganization of share capital for all years presented.

Basis of Presentation and Principles of Consolidation

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

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

Companies Acts, 1963 to 1990

The ®nancial information relating to IONA Technologies PLC 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. Copies of full accounts for each of the years ended December 31, 1997 and 1996 have been so annexed to the relevant annual returns, and a copy of the full accounts for the year ended December 31, 1998 will be annexed to the relevant annual return, which will be ®led after the annual general meeting of IONA in 1999. The auditors have made reports without quali®cation under Section 193 of the Companies Act, 1990 in respect all of such accounts.

F-6 IONA TECHNOLOGIES PLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTSÐ(Continued)

Foreign Currency Translation The U.S. dollar is the functional currency for IONA and its subsidiaries in the United States, British West Indies, Europe, Australia and China. Assets and liabilities denominated in foreign currencies are translated at year end exchange rates while revenues and expenses are translated at rates approximating to those ruling at the dates of the related transactions. Resulting gains and losses are included in net income for the period.

Revenue Recognition The Company's revenue is derived from product license fees and charges for services. For 1998, the Company followed the revenue recognition criteria of Statement of Position 97-2 (``SOP 97-2'') issued by the Accounting Standards Executive Committee of the American Institute of Certi®ed Public Accountants. Under the terms of SOP 97-2 where an arrangement to deliver software does not require signi®cant production, modi®cation 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 ®xed or determinable; and • collectibility is probable.

Where the Company enters into a multiple element arrangement consisting of both products and services, revenue is allocated between the elements based on vendor-speci®c objective evidence of fair values. The portion of the fee allocated to an element is recognized when the four criteria for revenue recognition stated above have been met.

Professional services are provided primarily on a time and materials basis for which revenue is recognized in the period that the services are provided. Where the professional services relate to arrangements requiring signi®cant production, modi®cation or customization of software, and the service element does not meet the criteria for separate accounting, the entire arrangement, including the software element, is accounted for in conformity with the percentage-of-completion contract accounting method. Percentage-of-completion is generally measured using output measures, primarily arrangement milestones where such milestones indicate progress to completion.

For 1997, the Company followed revenue recognition criteria set out in SOP 91-1. Accordingly, the Company recognized software revenue upon shipment, provided that the group had no signi®cant related obligations or collection uncertainties remaining. the Company recognized professional service revenue when earned and recognized technical support revenue rateably over the term of the maintenance agreement, generally twelve months.

Cost of Revenue Cost of revenue include the costs of products and services. Costs of product revenue include materials (such as diskettes, packaging and documentation) and the portion of development costs associated with product development arrangements. Cost of service revenue include the salary costs for personnel engaged in consultancy, training and technical support, and telephone and other support costs.

F-7 IONA TECHNOLOGIES PLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTSÐ(Continued)

Cash and Cash Equivalents IONA considers all highly liquid investments with insigni®cant 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, corporate bonds and U.S. government agency ®xed income securities. Marketable securities are stated at market value, and by policy, IONA invests primarily in high grade marketable securities. All marketable securities are de®ned as trading securities under the provisions of Statement of Financial Account Standards No. 115, ``Accounting for Certain Investments in Debt and Equity Securities'' (``SFAS 115''), and unrealized holding gains and losses are re¯ected in earnings.

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 IONA's product development process, technological feasibility is established upon completion of a working model. Development costs incurred by IONA between completion of the working model and the point at which the product is ready for general release have been insigni®cant until 1998. In September 1998, IONA acquired for $5.0 million from EDS Corp. a license to the source code of a component development technology that IONA plans to develop further and incorporate into certain of its products. The purchase price is payable in three installments of $1.5 million over a 120-day period and a ®nal installment of $500,000 in April 1999. The ®rst installment of the purchase price was due and paid by IONA on the date the agreement was executed. As the technology has not reached technological feasibility and has no alternative uses, IONA has expensed the full amount of the cost of the acquired in-process research and development during the year ended December 31, 1998. In September, 1997, IONA agreed to purchase for $2.9 million from Transarc, a wholly-owned subsidiary of IBM, a non-exclusive license to the source code of an OTS technology that IONA has developed further and incorporated into certain of its products. As the technology has no alternative uses, IONA has expensed the full amount of the cost of the acquired in-process research and development during the year ended December 31, 1997.

Other Non-current Assets Other non-current assets represents costs of technology, purchased on September 30, 1998 for $1 million which had reached technological feasibility. These software costs have been capitalized and will be written off over their useful economic life in accordance with SFAS 86. No amortization has been charged to the income statement during the year as the technology was not in use by December 31, 1998. IONA will commence to amortize this asset using the revenue curve or straight line basis over three years methods, whichever gives the greater amortization commencing on January 1, 1999.

Property and Equipment Property and equipment is stated at cost. Depreciation and amortization are computed using the straight- line method over the estimated useful lives of the assets as follows: Motor vehicles ...... 5years Computer and of®ce equipment, furniture and ®xtures ...... 3to10years

F-8 IONA TECHNOLOGIES PLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTSÐ(Continued)

Net Income per Ordinary Share Basic and diluted earnings per share is calculated in accordance with Financial Accounting Standards Board No. 128 ``Earnings per Share'' (``Statement 128''). All earnings per share amounts for all periods have been presented in conformity with the requirements of Statement 128.

Concentration of Credit Risk IONA sells its products to companies in various industries throughout the world. IONA maintains reserves for potential credit losses. To date such losses have been within management's expectations. IONA had an allowance for doubtful accounts of approximately $312,000 and $316,000 at December 31, 1998 and 1997, respectively. IONA generally requires no collateral from its customers.

IONA 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, 1998, $47,065,000 was invested in marketable securities held for trading purposes, comprised of $17,747,000 in commercial paper, $20,814,000 in corporate bonds and $8,504,000 in U.S. government agency securities, under the management of two ®nancial institutions. IONA performs periodic evaluations of the relative credit standing of all of the ®nancial institutions dealt with by IONA, 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 ®rst on the creation of the job and the second on the ®rst anniversary thereof.

Accounting for Income Taxes IONA uses the liability method in accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between ®nancial 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.

Foreign Exchange Contracts IONA enters into foreign currency forward contracts as a hedge against accounts payable in currencies other than the dollar and as a hedge against ®rm commitments in foreign currencies. Market value gains and losses are recognized on hedges of payables, and the resulting credit or debit offsets foreign exchange gains or losses on those payables. The gain or loss and premium or discount on forward contracts designated as hedges of ®rm commitments are deferred until the hedged transaction is completed and then included in the measurement of the hedged transaction.

Stock Compensation IONA 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 because the alternative fair value accounting provided for under FASB Statement No. 123, ``Accounting for Stock-Based Compensation,'' requires use of option valuation models that were not developed for use in valuing 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).

F-9 IONA TECHNOLOGIES PLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTSÐ(Continued)

Where shares are issued at less than fair market value or where transfers of shares between principal shareholders and employees occur 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. IONA has recognized compensation expense of $0, $0, and $1,914,000 during 1998, 1997 and 1996, respectively, in respect of such issues and transfers.

De®ned Contribution Plan IONA sponsors and contributes to a de®ned contribution plan for certain employees and directors. Contribution amounts by IONA are determined by management and allocated to employees on a pro rata basis based on employees' contributions. IONA contributed approximately $810,000, $244,000 and $103,000 to the plan in the years ended December 31, 1998, 1997 and 1996, respectively.

Advertising and Promotion Expense All costs associated with advertising and promoting products are expensed as incurred. Advertising and promotion expense was $2,828,000, $2,321,000 and $1,083,000 for the years ended December 31, 1998, 1997 and 1996, respectively.

Accounting Pronouncements In 1998, the Financial Accounting Standards Board issued SFAS No. 133, ``Accounting for Derivative Instruments and Hedging Activities'' (``SFAS 133'') which is required to be adopted for ®scal years commencing after June 15, 1999. SFAS 133, requires all derivatives to be recorded in the balance sheet at fair value and establishes ``special accounting'' for the following three different types of hedges: hedges of changes in the fair value of assets, liabilities or ®rm commitments (referred to as fair value hedges), hedges of the variable cash ¯ows of forecasted transactions (cash ¯ow hedges) and hedges of foreign currency exposures of net investments in foreign operations. To date the only derivatives used by the company have been foreign currency forward contracts (``forwards''). Forwards that are not hedges must be adjusted to fair value through income. If the forwards are hedges, depending on the nature of the hedges, changes in their fair values will either be offset against the change in fair value of the hedged assets, liabilities, or ®rm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The Company has not yet determined what the effect of SFAS 133 will be on the earnings and ®nancial position of the Company. Because SFAS 133 allows certain foreign currency transactions to be accounted for as hedges, the Company may change its policies towards the management of certain foreign currency exposures. Any changes that may occur would be to reduce the Company's exposure to foreign currency risks.

In 1998, the AICPA issued Statement of Position 98-1, ``Accounting for the Costs of Computer Software Developed or Obtained for Internal Use'' (``SOP 98-1''). IONA plans to adopt SOP 98-1 on January 1, 1999. The SOP will require the capitalization of certain costs incurred after the date of adoption in connection with developing or obtaining software for internal use. IONA has generally capitalized all costs relating to such projects to date. IONA has not yet determined the impact of adopting this SOP.

In 1998, the AICPA issued Statement of Position 98-9, ``Modi®cation of SOP 97-2 Software Revenue Recognition', with respect to Certain Transactions.'' The SOP requires recognition of revenue using the residual method' if evidence of vendor-speci®c objective evidence of fair value is not available. SOP 98-9 is effective on December 15, 1998 and amends SOP 98-4 ``Deferral of the Effective Date of a Provision of SOP 97-2, Software Revenue Recognition,'' to extend the deferral of the application of certain requirements of SOP 97-2 provided by SOP 98-4 through ®scal years beginning on or before March 15, 1999. IONA believes that

F-10 IONA TECHNOLOGIES PLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTSÐ(Continued) the adoption of this amended accounting standard will not have a material impact on IONA's ®nancial statements. All other provisions of this SOP are effective for transactions entered into in ®scal years beginning on after March 15, 1999.

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, 1998 Unrealized Cost Gain/(loss) Market Value (U.S. dollars in thousands) Commercial Paper...... $17,103 $644 $17,747 Corporate Bonds ...... 20,877 (63) 20,814 U.S. Government Agency Securities ...... 8,503 1 8,504 Total...... $46,483 $582 $47,065

As of December 31, 1997 Unrealized Cost Gain/(loss) Market Value (U.S. dollars in thousands)

Commercial Paper...... $18,270 $ 342 $18,612 Corporate Bonds ...... 19,065 (9) 19,056 U.S. Government Agency Securities ...... 7,001 3 7,004 Total...... $44,336 $ 336 $44,672

The change in unrealized gains included in net income is as follows: 1998 1997 1996 (US dollars in thousands) Unrealized gain at beginning of year ...... $ 336 $ Ð $ Ð Included in income for the year ...... 246 336 Ð Unrealized gain at end of year ...... $ 582 $ 336 $ Ð

3. Revolving Credit Facility; Bank Overdraft Facility and Overdrafts IONA has an unsecured $5.0 million working capital line of credit (``Line of Credit'') with Bank of Ireland. Advances under the Line of Credit bear interest at Bank of Ireland's Cost of Funds Rate (the Dublin Inter-bank Offered Rate (DIBOR) or LIBOR as determined by Bank of Ireland) plus 1.00% plus any Reserve Asset Cost (cost to Bank of Ireland of maintaining any reserve ratio, special deposit, liquidity or similar requirement of any regulatory authority), if applicable. There are currently no borrowings outstanding under the Line of Credit. The Line of Credit contains covenants which, among other things, restrict IONA's ability to incur additional indebtedness and require IONA to obtain Bank of Ireland's consent to amend its organizational documents. Terms of the Line of Credit include an annual fee of $30,000. IONA has a bank overdraft facility with the Bank of Ireland. This facility does not have a stated expiration date, but all amounts drawn thereunder are repayable on demand. In the event of such demand, the facility expires. Under the facility IONA may incur overdrafts with the bank up to IR£100,000 (approximately $147,800 at December 31, 1998), with a variable interest rate based on prime plus one half percent (6.50 percent at December 31, 1998).

F-11 IONA TECHNOLOGIES PLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTSÐ(Continued)

4. Other Accrued Liabilities Other accrued liabilities consist of the following:

Year Ended December 31, 1998 1997 (U.S. dollars in thousands) Income and other taxes payable ...... $1,811 $1,426 Other ...... 5,477 925 Total...... $7,288 $2,351

5. Foreign Exchange Contracts and Fair Value of Financial Instruments At December 31, 1998, IONA had contracts maturing on or before December 31, 1999 to purchase $25.8 million in pounds foreign currency (IR£17.0 million). The fair value of these contracts at December 31, 1998 was approximately $25.4 million.

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 marketable securities and foreign currency forward contracts are based on quoted market prices at year end.

The estimated fair value of IONA's ®nancial instruments are as follows:

Year Ended December 31, 1998 1997 (U.S. dollars in thousands) Carrying Fair Carrying Fair Amount Value Amount Value

Non Derivatives Cash and cash equivalents ...... $13,484 $13,484 $ 8,647 $ 8,647 Marketable Securities trading ...... 47,065 47,065 44,672 44,672 Derivatives Foreign Currency Forward Contracts ...... $ Ð $ (400) $ Ð $ (500)

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

6. Operating Lease Commitments IONA's only signi®cant operating leases are for the premises for the Perth, Australia, Dublin, Ireland, Cambridge, Massachusetts and San Mateo, California operations. The Perth lease expires in November 1999, subject to IONA's right to renew such lease for a period of three years. In December 1997, IONA entered into an agreement to lease a new corporate headquarters in Dublin which replaced its previous facilities. The new facility is held under a lease expiring in 2023 with an option to exit the lease in 2013. IONA currently occupies approximately 55,900 square feet of the of®ce space and sublets the remainder over periods of one to three years. The Cambridge lease expires in 2011 and provides for a rent review in 2006 and an option to exit the lease agreement in 2003 and annually thereafter. In February 1999, IONA entered into an agreement for lease

F-12 IONA TECHNOLOGIES PLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTSÐ(Continued) for a new principal U.S. of®ce in Waltham, Massachusetts which will replace its current Cambridge facilities. The new Waltham lease expires in 2006, subject to IONA's right to renew for an additional term of ®ve years expiring in 2011. The San Mateo, California lease expires in 2004. Rent expenses under all operating leases were approximately $2,535,000, $1,027,000 and $540,000 in 1998, 1997 and 1996, respectively. Future minimum lease payments under all operating leases as of December 31, 1998 are as follows (U.S. dollars in thousands):

Year ending December 31, 1999 ...... $ 3,814 2000 ...... 3,464 2001 ...... 3,396 2002 ...... 3,384 2003 ...... 3,383 Thereafter ...... 28,640 Total minimum lease payments ...... $46,081

Total minimum lease rental income to be received under the operating sub-leases for the Dublin, Ireland premises as of December 31, 1998 are $2,136,000.

7. Capital Leases The following is an analysis of the property acquired under capital leases, and included in property and equipment, by major classes: Asset balances at December 31, 1998 1997 (U.S. dollars in thousands) Computer equipment ...... $852 $852 Of®ce equipment ...... 48 42 Total cost ...... $900 $894 Less: Accumulated amortization ...... (682) (404) Total Net ...... $218 $490

The following is a schedule by years of future minimum lease payments under capital leases together with the present value of the net minimum lease payments as of December 31, 1998 (U.S. dollars in thousands):

Year ending December 31, 1999 ...... $148 2000 ...... 3 Total minimum lease payments ...... $151 Less: Amount representing interest ...... (8) Present value of net minimum lease payments ...... $143

The current portion and non-current portion of present value of net minimum lease payments as of December 31, 1998 (in thousands) was $140 and $3, respectively.

F-13 IONA TECHNOLOGIES PLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTSÐ(Continued)

8. Property and Equipment Property and equipment consists of the following:

Year Ended December 31, 1998 1997 (U.S. dollars in thousands) Motor vehicles ...... $ 20 $ 20 Computer equipment ...... 13,949 8,166 Of®ce equipment ...... 1,209 1,186 Furniture and ®xtures ...... 9,702 2,927 Total property and equipment ...... $24,880 $12,299 Accumulated depreciation ...... (5,701) (2,810) Property and equipment, net ...... $19,179 $ 9,489

9. Redeemable Preference Shares and Shareholders Equity IONA's authorized share capital is divided into Redeemable Preference Shares (``Preference Shares'') of IR£0.002 par value per share and Ordinary Shares of IR£0.002 par value per share.

IONA previously had three classes of Ordinary Shares, designated as ``A,'' ``B'' and ``C'' each with a par value of IR£0.002 per share. On February 6, 1997 in connection with the re-registration of IONA as a public limited company (plc), IONA reorganized its share capital into one class of Ordinary Shares and the accompanying ®nancial statements have given effect to this reorganization.

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 pro®ts available for distribution, in priority to any payment of dividend on any other class of shares in IONA, a ®xed 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.

IONA is entitled at any time, out of pro®ts or monies which may lawfully be applied for that purpose, to redeem all or any of the Preference Shares. At any time after January 1, 2000, the holders of any Preference Shares shall be entitled, on giving two months written notice, to require IONA to redeem all or any part of the Preference Shares not by then redeemed. The redemption price to be paid by IONA on any redemption of Preference Shares is a sum equal to the aggregate of the amount paid up on the shares to be redeemed and the amount of all arrears of preferential dividend thereon whether declared or not to the date of redemption. During 1997, IONA paid $380,000 to redeem all of its outstanding Preference Shares and pay all accrued and unpaid dividends payable thereon to the date of redemption.

All Ordinary Shares and per share amounts in these consolidated ®nancial statements have been retroactively adjusted to re¯ect a 500-for-one share split of all classes of shares. The share split was approved by the shareholders on June 5, 1996.

F-14 IONA TECHNOLOGIES PLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTSÐ(Continued)

Dividends may only be declared and paid out of pro®ts 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, 1998, 1997 and 1996, at the exchange rates in effect on those dates, were approximately $17,179,000, $10,256,000 and $6,077,000, respectively.

10. Share Option Scheme

IONA 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 because, as discussed below, the alternative fair value accounting provided for under FASB Statement No. 123, ``Accounting for Stock-Based Compensation'' (``Statement 123''), requires use of option valuation models that were not developed for use in valuing stock options. Under APB 25, IONA has recognized compensation expense of $176,000, $175,000 and $130,000 during 1998, 1997 and 1996, respectively, for those instances in which the exercise price of IONA's stock options were less than the estimated market price of the underlying shares on the date of grant.

IONA's Executive Share Option Scheme has authorized the grant of options to management personnel for up to 1,125,500 shares of IONA's A Ordinary Shares. All options granted have seven year terms and generally vest in equal installments on each of the ®rst, 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 of®cers of IONA. 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 the number of Ordinary Shares that may be issued under the 1997 Share Option Scheme to an aggregate of 4,750,000. Options granted under the 1997 Share Option Scheme expire ten years from the date of grant or ®ve years from the date of grant in the case of incentive stock options issued to employees 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.

Pro forma information regarding net income and earnings per share is required by Statement 123, and has been determined as if IONA had accounted for its stock options under the fair value method of that Statement. 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 1998, 1997 and 1996, respectively: risk-free interest rates of 6%; dividend yields of 0%; volatility factors of the expected market price of IONA's ordinary shares of 0.49, 0.77 and 0.50; and a weighted-average expected life of the option of ®ve years.

The Black-Scholes option model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because IONA's stock options have characteristics signi®cantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its stock options.

F-15 IONA TECHNOLOGIES PLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTSÐ(Continued)

For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. IONA's pro forma information follows for the years ended December 31, 1998, 1997 and 1996 (in thousands except for earnings per share information): Year Ended December 31, 1998 1997 1996 Pro forma net income ...... $758 $2,826 $1,495 Pro forma earnings per share: Basic ...... $0.04 $ 0.15 $ 0.10 Diluted ...... $0.04 $ 0.15 $ 0.10 A summary of IONA's stock option activity, and related information for the years ended December 31, 1998, 1997 and 1996 follows: Year Ended December 31, 1998 1997 1996 Weighted - Weighted- Weighted- Average Average Average Exercise Exercise Exercise Options Price Options Price Options Price Outstanding-beginning of period . . . 2,517,783 $ 9.56 820,403 $1.60 291,000 $ 0.003 Granted ...... 1,033,553 19.32 1,776,225 12.84 588,778 2.230 Exercised ...... (380,953) 7.04 (78,845) 0.64 (59,375) 0.003 Outstanding end of period ...... 3,170,383 $13.04 2,517,783 $9.56 820,403 $ 1.600 Exercisable at end of period ...... 738,715 $12.50 213,850 $1.30 13,375 $ 0.003

Year Ended December 31, 1998 1997 1996 Weighted- Weighted- Weighted- Average Average Average Fair Exercise Fair Exercise Fair Exercise Value Price Value Price Value 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 . . $ 9.64 $ 19.32 $ 8.47 $ 12.84 $ 1.84 $ 3.63 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 ...... $ Ð $ Ð $ Ð $ Ð $2.10 $ 0.80 Exercise prices for options outstanding as of December 31, 1998 ranged from $0.003 to $37.50 per share. 318,216 options with an exercise price less than $1.00 per share have a weighted-average remaining contractual life of 4.0 years. 99,995 of these options are currently exercisable. 213,679 options with an exercise price greater than $1.00 per share and less than $5.00 per share have a weighted-average remaining contractual life of 4.8 years. 64,762 of these options are currently exercisable. 1,517,229 options with an exercise price greater than $5.00 per share and less than $15.00 per share have a weighted-average remaining contractual life of 8.4 years. 275,810 of these options are currently exercisable. 1,060,259 options with an exercise price greater than $15.00 per share and less than $25.00 per share have a weighted-average remaining contractual life of 9.4 years. 298,149 of these options are currently exercisable. 61,000 options with an exercise price greater than $25.00 per share and less than $40.00 per share have a weighted-average remaining contractual life of 9.9 years. None of these options are currently exercisable.

F-16 IONA TECHNOLOGIES PLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTSÐ(Continued)

11. Net Income Per Ordinary Share

The following sets forth the computation of basic and diluted net income per ordinary share:

Year Ended December 31, 1998 1997 1996 Numerator: Numerator for basic and diluted net income per ordinary shareÐ income available to ordinary shareholders ...... $ 7,678 $ 4,751 $ 1,529 Denominator: Denominator for basic earnings per shareÐweighted average ordinary shares 19,268 18,428 15,264 Effect of employee stock options ...... 1,625 847 379 Denominator for diluted net income per ordinary share ...... 20,893 19,275 15,643 Basic net income per ordinary share ...... $ 0.40 $ 0.26 $ 0.10 Diluted net income per ordinary share ...... $ 0.37 $ 0.25 $ 0.10

12. Income Taxes

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

Year Ended December 31, 1998 1997 1996 (U.S. dollars in thousands) Ireland ...... $8,802 $5,176 $ 3,956 Rest of World ...... 285 447 (1,639) Total ...... $9,087 $5,623 $ 2,317

The provision for income taxes consists of the following:

Year Ended December 31, 1998 1997 1996 (U.S. dollars in thousands) Current: Ireland ...... $1,409 $872 $727 Rest of World ...... Ð Ð 42 Total current ...... 1,409 872 769 Deferred: Ireland ...... Ð Ð Ð Rest of World ...... Ð Ð Ð Total deferred ...... Ð Ð Ð Total provision for income taxes...... $1,409 $872 $769

F-17 IONA TECHNOLOGIES PLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTSÐ(Continued)

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

Year Ended December 31, 1998 1997 1996 (U.S. dollars in thousands) Income taxes computed at the Irish statutory income tax rate of 32% for 1998, 36.5% for 1997 and 38% for 1996 ...... $2,908 $ 2,052 $ 886 Income from Irish manufacturing operations taxed at lower rates ...... (1,445) (1,075) (924) Operating losses not utilized ...... 638 697 697 Operating losses subject to different rates of tax ...... 56 (78) Ð Income not subject to tax ...... (786) (891) (14) Non-deductible expenses in Ireland, principally stock compensation expense ..... 28 28 22 Reserve for foreign withholding tax not credited ...... Ð 138 100 Other individually immaterial items ...... 10 1 2 Total provision for income taxes ...... $1,409 $ 872 $ 769

The effect on both basic and diluted net income per ordinary share of the Irish manufacturing operations being taxed at a lower rate than the Irish Statutory income tax rate was $0.07 per share for the year ended December 31, 1998, $0.06 per share for the year ended December 31, 1997 and $0.06 per share for the year ended December 31, 1996.

Year Ended December 31, 1998 1997 1996 (U.S. dollars in thousands) Deferred tax assets: Net operating loss carryforwards ...... $2,032 $ 1,518 $ 697 Total deferred tax assets ...... 2,032 1,518 697 Valuation allowance ...... (2,032) (1,518) (697) Net deferred tax assets ...... $ Ð $ Ð $Ð

At December 31, 1998, IONA had a net operating loss carryforward of approximately $3.5 million for U.S. federal income tax purposes which will expire in 2011 through 2013 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. subsidiary.

At December 31, 1998, IONA also had net operating loss carryforwards totaling approximately $789,000 for Australian, German and United Kingdom income tax purposes which carry forward inde®nitely and $891,000 for China tax purposes which expire in 2003. The utilization of these net operating loss carryforwards is limited to the future pro®table operation of IONA in the related tax jurisdictions in which such carryforwards arose.

100% valuation allowances have been provided against the net operating loss carryforwards because of the history of operating losses in the related tax jurisdictions.

F-18 IONA TECHNOLOGIES PLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTSÐ(Continued)

13. Industry and Geographic Information The Company has one reportable segment: distributed components software products that enable the development, integration and management of network-based applications in multi-platform network environments. The Company also provides professional services, consisting of customer consulting and training and, to a limited extent, product customization and enhancements as well as customer technical support.

The accounting policies of the reportable segment are the same as those described in the summary of signi®cant 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, 1998 1997 1996 United States ...... 58,878 35,007 14,357 Other European Countries ...... 20,717 9,954 4,050 Rest of World ...... 4,032 3,623 2,784 Consolidated Total ...... 83,627 48,584 21,191

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

Long Lived Assets: Year Ended December 31, 1998 1997 1996 Country of Domicile Ireland ...... 16,245 6,997 2,564 Foreign Countries United States ...... 3,134 1,806 269 Rest of World ...... 800 686 265 Consolidated Total ...... 20,179 9,489 3,098

14. Government Grants Under agreements between IONA and the Industrial Development Authority, IONA has offset against related payroll expense amounts of $0, $0 and $125,000 in the years ending December 31, 1998, 1997 and 1996, respectively. Under the terms of the agreement between IONA and the Industrial Development Authority, these grants may be revoked in certain circumstances, principally the failure to maintain the related jobs for a period of ®ve years from the payment of the ®rst installment of the related employment grant. IONA has complied with the terms of the grant agreements through December 31, 1998.

F-19 EXHIBIT 1

CONSENT OF ERNST & YOUNG, INDEPENDENT AUDITORS

We consent to the incorporation by reference in the Registration Statement (Form S-8, SEC File No. 333-06850) pertaining to the Executive Share Option Scheme, the 1997 Share Option Scheme, as amended, and the 1997 Director Share Option Scheme of IONA Technologies PLC of our report dated January 20, 1999, with respect to the consolidated ®nancial statements of IONA Technologies PLC included in this Annual Report (Form 20-F) for the year ended December 31, 1998.

/S/ERNST &YOUNG

Dublin, Ireland April 14, 1999 IONA directors & officers (as of March 31, 1999) directors and executive of®cers

Dr. Christopher J. Horn ± President, Chief Executive Of®cer and Chairman of the Board E.C. Mick Prokopis ± Chief Operating Of®cer Dr. Sean Baker ± Executive Vice President, Customer Services and Director Barry Morris ± Executive Vice President, Operations Colin Newman ± Executive Vice President, Direct Business Unit and Director Annrai O'Toole ± Executive Vice President, Chief Technical Of®cer and Director David R. James ± Senior Vice President and Chief Financial Of®cer Lindsey Kiang ± Senior Vice President, General Counsel John J. Cullinane ± Non-Executive Director, Member Compensation Committee and Audit Committee Kevin Melia ± Non-Executive Director, Member Compensation Committee and Audit Committee independent auditors U.S. counsel Irish counsel

Ernst & Young Testa, Hurwitz & Thibeault, LLP William Fry, Solicitors Harcourt Street High Street Tower Fitzwilton House Dublin 2, Ireland 125 High Street Wilton Place Boston, MA 02110 Dublin 2, Ireland shareholder information

Stock Trading Information Nasdaq National Market Symbol: IONA Irish Stock Exchange transfer agents and registrars

Ordinary Shares American Depositary Receipts Bank of Ireland evidencing American Depositary Shares Registration Department Morgan Guaranty Trust Company of New York Hume House 60 Wall Street Ballsbridge New York, New York 10260 Dublin 4, Ireland