Interim Report January 1 to March 31 2000 F-Secure Group reports 102% growth for Q1 2000

Investment phase over - revenues starting to outgrow costs

Espoo, Finland - May 19, 2000

Revenue for the F-Secure Group in Q1 2000 was 8.1m euros, compared to 4.0m euros in Q1 1999. This represents a 102% year-to-year organic growth and 3% growth on the previous quarter. Operating result was 5.1m euros negative (-0.4), of which the business related operating loss was 4.0 million and social costs related to the provisions for the option plan 1.1 million.

Development of revenue and operating income

After better than expected December sales, the Y2K issue affected the Group’s revenue negatively after the turn of the Millennium. As expected, January and February sales were low, and sales got back on track only in March. Still, quarterly revenue grew to 8.1m euros (4.0m).

The negative operating result of -5.1m euros was a result of continuing investment in building the sales and marketing organization as well as establishing new distribution channels. It also includes a 1.1m euro increase in the provision for social security costs to be paid in the future resulting from the Group’s Stock Option Program for all outstanding options on 31st March 2000. The provision for the social security costs of U.S. options, which are now included for the first time, have been listed as extraordinary items because of the change in accounting practice. In the future these costs will be booked as personnel expenses. The options have been valued at the market price prevailing on 31st March 2000.

In addition to the revenue shown, the Group has 8.6m euros (6.3m) of deferred revenue on its balance sheet. The deferred revenue is a result of existing support contracts where the actual support activity will only take place in months to come.

The geographical breakdown of the revenue was as follows: North America 41%, Nordic Countries 26%, Rest of Europe 23%, and Rest of the World 10%. Anti-Virus products represented 53% of the revenue, encryption 46%, and other products 1%.

The Group expects that the next quarters will show decreasing losses, as the increasing revenue stream will outgrow costs.

Security as a Service showing signs of success, first steps in wireless security

The Group’s Security as a Service™ concept has been proven on the market during this spring. The concept was field tested with service provider partners of various types: the ASP (Application Service Provider), the ISP (Internet Service Provider) and the outsourcing company environments. The Group expects to sign 10-20 significant Security as a Service partnerships during the year 2000. The revenue target for this year is set at 3% of the Group’s revenue. In 3-5 years the Security as a Service business should grow to represent more than 40% of the Group’s revenue.

The Group also advanced on the mobile security front and more R&D resources were directed to this area. On January 27, the Group announced a partnership with Hewlett-Packard to provide a WAP (Wireless Application Protocol) Anti-Virus Gateway. The acquisition of Modera Point, a company specializing in the EPOC wireless platform, was under preparation during Q1 and finalized on April 3. The Group expects to announce further major wireless partnerships during this year and new wireless products during the summer.

Personnel and organization

The Group’s personnel grew to 350 (from 302 at the end of 1999). During the first quarter, the Group established new offices in New York, NY, and Chicago, IL, and a Swedish subsidiary was set up in Stockholm. The Canadian office was moved from Calgary to Toronto and the Group launched an R&D unit in Tampere, Finland.

After the reporting period, on 12th April, the Annual General Meeting re-elected the Board of Directors, i.e. Olli-Pekka Kallasvuo, Jari Puhakka, Kaj-Erik Relander, Risto Siilasmaa and Christopher Vargas. Ari Hyppönen continued as a deputy member. Also at the same meeting Tilintarkastajien Oy - Ernst & Young was re-elected the company’s auditor.

Financing

The Group’s financial position remained strong during the quarter. The Group’s equity ratio on March 31 was 69.2 % (compared to 45.1 % at the end of Q1 1999). Interest income was 0.1m euros (0.3). The liquid assets of the Group on March 31, 2000 were 48.5m euros.

Investments

The Group’s investments were 1.1 m euros (0.3). The investments were mainly in IT hardware and software.

Shareholders' equity, convertible loan and option programs

On March 27, a total of 62 700 F-Secure Corporation's shares were subscribed with the A and B warrants attached to the F- Secure 1999 I Warrant Plan. The new total number of shares was 26,867,575.

Shareholders' equity, convertible loan and option programs after the reporting period

On April 6, a directed issue of 141,493 shares started to be traded on the Helsinki Exchanges as old shares. The new total number of shares was 27,009,068.

On April 12, the Annual General Meeting (AGM) accepted the Board's proposal to increase the share capital with a new issue by 810,272.04 euros by transferring the equivalent amount from the share premium fund to the share capital. No new shares were issued in connection with this increase. After the increase, the share capital of the company was 1,350,453.40 euros. The AGM also agreed to the Board's proposal of a 1:5 stock split. After the increase, the number of shares was 135,045,340

Furthermore, AGM accepted the Board proposal to authorize the Board for a period of one year from the general meeting to decide on an increase of the share capital by one or more new issues of shares or by issuing one or more convertible bonds, option loans or option rights. The share capital of the company may, as a result of such share issues, option loans, option rights or convertible bonds, be increased at the most by 105,000 euros. New shares may be issued up to maximum of 10,500,000.

On April 25, a total of 790,150 F-Secure Corporation's shares were entered into the Trade Register. These were subscribed with the A warrants attached to the F-Secure 1998 Warrant Plan and 1999 I Warrant Plan. The new total amount of shares was 135,835,490.

On April 27, an increase in the share capital resulting from the conversion of F-Secure Corporation’s 1999 Preferred Capital Note was entered into the Trade Register. A total of 2,067,440 shares were converted based on the F-Secure Corporation`s convertible capital note issued in 1999. The new total number of shares was 137,902,930.

Other key events after the reporting period

On April 3, F-Secure Corporation agreed to acquire privately-held Modera Point Oy of Oulu, Finland. Modera Point develops solutions on new mobile platforms. The employees of Modera Point formed the core of F-Secure’s new Wireless Security Competence Center.

On April 12, F-Secure Corporation announced a partnership with Cisco Systems and iD2 Technologies to build a European VPN solution.

Insider trading rules

During Q1 the Group implemented its own guideline to govern insider trading based on the Helsinki Exchanges’ recommendations.

Future outlook

The Group expects that the next quarters will show decreasing losses, as the increasing revenue stream will outgrow costs.

The Group expects to sign 10-20 significant Security as a Service partnerships during the year 2000. The revenue target for this year is set at 3% of the Group’s revenue. In 3-5 years the Security as a Service business should grow to represent more than 40% of the Group’s revenue. The Group also expects to announce further major wireless partnerships and new wireless products during this year.

Key figures (unaudited):