ESOFT INC, SB-2, 1997-12-24

ESOFT INC
SB-2, 1997-12-24
PREPACKAGED SOFTWARE

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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON , 1997
-------
REGISTRATION NO. 333-

U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------------

FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
---------------------------
ESOFT, INC.
(Exact name of small business issuer as specified in its charter)

[DELAWARE] 7372 84-0938960
(State or jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or Classification Code Number) Identification Number)
organization

5335 STERLING DRIVE, SUITE C PHILIP L. BECKER
BOULDER, CO 80301 CHIEF EXECUTIVE OFFICER
(303) 444-1600 5335 STERLING DRIVE, SUITE C
(Address and telephone number of BOULDER, CO 80301
principal executive offices) (303) 444-1600
(Name, address and telephone
number of agent for service)
---------------------------
COPIES TO:

LESTER R. WOODWARD, ESQ.
DAVIS, GRAHAM & STUBBS LLP
370 SEVENTEENTH STREET, SUITE 4700
DENVER, COLORADO 80202
(303) 892-9400
---------------------------

APPROXIMATE DATE OF PROPOSED SALE TO PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
---------------------------

If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, check the following box. |_|

If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, check the following box. |X|

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration for the same offering. |_|

If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|

If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. |_|
---------------------------

CALCULATION OF REGISTRATION FEE

Proposed
Proposed Maximum Maximum
TITLE OF EACH CLASS OF Amount to be Offering Price Aggregate Amount of
SECURITIES TO BE REGISTERED Registered Per Share(1) Offering Price(1) Registration Fee
<S> <C> <C> <C> <C>

Common Stock, par value $.01 per share 3,351,161 shares $1.00 $3,351,161 $988.60
================================= ============ ================== ============== ================
(1)Estimated solely for the purpose of calculating the registration fee, based
upon the expected price at which the registered securities are to be offered
to the public in a public offering in British Columbia, Canada, which
offering is expected to be completed prior to the effective date of this
registration statement.
</TABLE>

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

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.

<PAGE>

PROSPECTUS

3,351,161 Shares

[LOGO]

ESOFT, INC.

Common Stock
--------------------------

The 3,351,161 shares of Common Stock, $.01 par value (the "Common Stock"),
offered hereby (the "Shares") are being offered by stockholders (the "Selling
Stockholders"). See "Selling Stockholders."

Prior to this Offering (the "Offering"), there has been no public market for
the Common Stock and there can be no assurance that such a market will develop
after the completion of this Offering, or that if developed, it will be
sustained. It is anticipated that the offering price of the Common Stock will be
$1.00 per share (the "Offering Price") see "Determination of Offering Price."
---------------------------

THE SHARES OF COMMON STOCK OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS," LOCATED AT PAGE o THROUGH o.

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

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.

PRICE UNDERWRITING PROCEEDS PROCEEDS
TO DISCOUNTS AND TO THE TO THE SELLING
PUBLIC COMMISSIONS COMPANY STOCKHOLDER
<S> <C> <C> <C> <C>

Per Share............ $1.00 $0 $0 $1.00
Total................ $3,351,161 $0 $0 $3,351,161
===================== =============== =============== =============== ===============
</TABLE>

The date of this Prospectus is , 1998.
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<PAGE>

SUMMARY

The following summary is qualified in its entirety by and should be read
in conjunction with the more detailed information appearing elsewhere in this
Prospectus, including the information set forth under "Risk Factors,"
"Management's Discussion and Analysis of Results and Operations" and the
financial statements (including the notes thereto).

THE COMPANY

eSoft, Inc. (the "Company") was incorporated under the laws of the State
of Colorado on March 3, 1984. The Board of Directors and shareholders of the
Company have approved the merger of the Company into a newly incorporated
Delaware corporation to effect reincorporation in the State of Delaware prior to
the effective date of this registration statement.

In its early years, the focus of the Company was oriented towards the
development and sale of a computer bulletin board software product known as
TBBS. TBBS Software creates a multi-user host for direct dial-in access for
multiple users for on-going messaging, file transfer and data access. Concurrent
with the rapid rise of Internet related communications media, the demand for
TBBS software declined. In response, the Company designed a new product line of
Internet protocol adapters which are now being marketed under the acronym IPAD
(Internet Protocol Adapter Device). The Company launched its first IPAD product
in 1996.

THE INTERNET PROTOCOL ADAPTOR DEVICE

The IPAD is designed to be a total Internet/Intranet connectivity solution
without the complexity and high cost of traditional solutions. It affords to
small businesses, institutions, and educational sites a full connectivity
solution that is economical, easily installed and managed by existing
information systems personnel. To complete the package for the customer, the
Company can provide leased line connectivity options through major national
access providers. The IPAD product line includes all other accessories needed to
complete the connection, such as turnkey web servers, line interface devices,
modems and rack equipment.

There are currently three IPAD models offered by the Company. The IPAD
5000, the most sophisticated of the three models, integrates Internet hardware
and communications software into a user friendly turnkey system, which does not
require extensive technical knowledge to support. Utilizing an Intel Pentium
CPU, the IPAD 5000 is typically configured with 8MB of RAM, a 1.2GB hard drive
and 1.44 MB floppy drive. The hardware also includes five open slots to allow
for greater customized interface configuration. The IPAD 2500, the mid-range
model, is a desktop unit that contains a router with firewall capabilities, a
terminal server offering up to eight serial ports and the same basic Internet
connectivity provided by all of the Company's IPAD units. The IPAD 1200 is also
a desktop unit primarily designed for mass production without significant
customization for specific client needs. The IPAD 1200 utilizes the same
hardware configuration as the IPAD 5000, has two serial ports and a 10 MB
Ethernet card and can connect a business LAN of up to 150 users to the Internet
using a single address.

SEMINARS AND OTHER SERVICES

The Company also offers comprehensive, two day Internet training seminars.
Attendance fees from these seminars supplement revenues from IPAD product sales.

Customers also can purchase a contract through which the Company offers
technical support services to address customers' specific application needs.
More focused than the general seminars, such technical support services are
designed to address concerns of individual clients for applications ranging from
the launching of their web presence, to the reconfiguration of their LAN to
optimize both efficiency and connectivity.

INITIAL PUBLIC OFFERING IN CANADA

The Company expects to make an initial public offering of 1,750,000 shares
of Common Stock, at a price of $1.00 per share in British Columbia, Canada,
prior to the effectiveness of this registration statement (the "Canadian

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Offering"). Upon completion of the Canadian Offering, the Common Stock will be
listed on the Vancouver Stock Exchange. The gross proceeds from the Canadian
Offering will amount to $1,750,000, of which the Company will pay an aggregate
commission of $131,250 and a corporate finance fee of 75,000 shares of the
Company's Common Stock to C. M. Oliver Company Limited (the "Agent") for
underwriting the Offering. After deducting the commission payable to the Agent
and other expenses of the Canadian Offering, net proceeds from the Canadian
Offering are expected to amount to approximately $1,400,000.

THIS OFFERING

The Company is registering an aggregate of 3,351,161 shares of its Common
Stock to be offered for sale by stockholders of the Company. Of these shares,
2,493,158 shares are presently owned by the Selling Stockholders or will be
purchased in private transactions prior to the Canadian Offering. An additional
414,600 shares may be offered by three of the Selling Stockholders which are
consultants to the Company ("Consultants") if they acquire the shares upon
exercise of options to purchase shares of Common Stock of the Company at an
exercise price of $1.00 per share, and 355,903 shares of common stock in this
registration statement may be offered by the Consultants if received as payment
for promissory notes issued by the Company (the "Notes"). Each of the Notes is
payable, on the earlier of January 2, 1999 or thirty days after consummation of
the initial public offering, at the discretion of the Company, in cash or shares
of Common Stock valued at the price at which shares of Common Stock are offered
to the public in the Canadian Offering. An additional 87,500 shares being
registered may be offered by a Selling Stockholder if acquired from the Company
upon exercise of warrants issued to the Selling Stockholder in connection with
its purchase of 350,000 shares in a private transaction. The Company will not
receive any of the proceeds from the sale of Common Stock by the Selling
Stockholders.

Common Stock Outstanding Prior
To This Offering.................. 4,318,158 shares*
Common Stock Offered:
By the Selling Stockholders........ 3,351,161 shares
Common Stock To Be Outstanding
After This Offering............... 4,318,158 shares*
Use of Proceeds........................ The Company will receive no proceeds
from the sale of shares by the Selling
Stockholders.
- ------------
*Assumes the issuance of 1,750,000 shares in the Canadian offering plus 75,000
shares issued to the Agent and the issuance of 350,000 shares and 60,000
shares in two private transactions prior to the Canadian Offering.

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<PAGE>

RISK FACTORS

An investment in the shares of Common Stock offered hereby involves a high
degree of risk relating to the Company, the industries in which the Company
operates and the securities markets, particularly the markets for securities of
small issuers. Prospective purchasers of Common Stock should consider carefully
the information set forth below, as well as the other information in this
Prospectus, in determining whether to purchase the shares of Common Stock
offered hereby. In addition, certain information included in this Prospectus is
forward-looking. Such forward looking information involves significant risks and
uncertainties that could cause actual future results to differ significantly
from those expressed in any forward-looking statements made by, or on behalf of,
the Company. See also Management's Discussion and Analysis of Financial
Condition and Results of Operation - Forward Looking Statements.

The Company operates a growing business in a competitive market. There are
a number of risks inherent to the Company's business. These business risks
should be considered in the context of the Company's business, which is
described under "Description of Business". These business risks include the
following:

LIMITED OPERATING AND SALES HISTORY

While the Company's IPAD 5000 first entered the market in 1996, neither
Models 2500 nor 1200 have gained significant market exposure or demonstrable
market acceptance as yet. Given the absence of clear market acceptance with
respect to these two newly introduced products, which in turn are projected to
be responsible for approximately half of the Company's system sales in the next
year, there can be no assurances as to the achievability of expected market
penetration rates, and associated sales revenues.

ANTICIPATED MARKET GROWTH

The Company's anticipated growth in sales revenue is predicated upon
assumptions with respect to the rate of growth of the market for its IPAD
systems. Should these assumptions fail to be realized, the Company may be unable
to attain its expected revenue and income.

RELIANCE UPON THE INTERNET

The Company's future sales, in part, will be dependent upon both the rate
of growth of the Internet, and its reputation as a secure, architecturally
stable, and reliable communications medium. Should these conditions erode, the
Company's sales prospects may be adversely affected.

SUFFICIENCY OF WORKING CAPITAL

The Company intends during the next year to expand its sales and marketing
expenditures, including developing a wholesale distribution network and
increasing internal projections for selling, general and administrative expenses
together with capital purchases in the year subsequent to this Offering that
will substantially exceed the net proceeds of the Canadian Offering. There can
be no assurances that cash flow contributions from operations, coupled with
proceeds of the Canadian Offering and available working capital will be
sufficient to fully fund the planned expansion of sales and marketing activities
and other increased expenditures.

TECHNOLOGICAL OBSOLESCENCE

The Company operates within an industry subject to a rapid pace of
technological obsolescence. There can be no assurances as to the ability of the
Company to establish and maintain a position at the leading edge of
technological trends within its industry, and thereby maintain or improve its
competitive position in relation to other market participants.

NEW SOFTWARE DEVELOPMENTS

In future reporting periods, the Company expects to enhance its sales
prospects following the completion of encryption software to facilitate IPAD
supported virtual private networks. There can be no assurances as to the ability

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<PAGE>

of the Company to successfully complete this development program in the next
year as currently planned or to successfully complete other product development
programs it may undertake.

COMPETITION

A number of the Company's competitors are very well established in the
marketplace, with larger sales volumes, broader brand name recognition and a
wider base of technical resources. There can be no assurances as to the ability
of the Company to effectively compete against such competitors given their
entrenched market presence.

BARRIERS TO ENTRY

As the market expands for products which perform in a manner similar to
that of the IPAD product line, it is expected that a broader range of both small
and large industry participants will enter the marketplace with competing
products. Additionally, there are comparatively few barriers to entry. As such
competition increases, industry margins on system sales may diminish.
Consequently, the ability of the Company to attain and maintain anticipated
gross margins per unit over time, cannot be assured.

PROPRIETARY PROTECTION

The Company has no registered trademarks nor has it filed any patent or
design utility applications in any jurisdiction. The absence of such proprietary
protection may diminish the ability of the Company to distinguish itself from
other industry competitors. In addition, while the Company licenses its software
to purchasers and restricts unauthorized use under its licensing provisions,
this does not protect the Company from an erosion of potential revenue as a
consequence of illicit software use and piracy.

CONFIDENTIALITY

Not all of the Company's employees have entered into confidentiality
agreements designed to protect the Company's trade secrets and know-how. This
may unduly expose the Company to risks relating to breaches of security.

RELIANCE UPON THIRD PARTIES

The Company is reliant upon third parties for the supply of computers,
computer sub-assemblies, and certain software elements. The Company is also
reliant upon third parties to assist it in its marketing and sales activities.
Accordingly, the Company will be subject to risks associated with third party
quality assurance standards, timeliness, reputation, financial stability, labor
relations, regulatory compliance and warranty provisions over which the Company
has little if any control.

NO PRODUCT LIABILITY INSURANCE

The Company does not carry product liability insurance. To the extent that
the Company becomes subject to third party liability claims, its ability to
adequately protect its assets and operations against potential liability
exposure is uncertain.

RELIANCE ON KEY PERSONNEL; NO KEY MAN INSURANCE

The Company's founder, Chairman, Chief Technology Officer and Chief
Executive Officer, Philip Becker is a key individual upon whom the Company is
likely to be reliant to attain its commercial objectives. The loss of his
services may impair the ability of the Company to attain its corporate
objectives; however, the Company has taken steps to ensure that information
which was previously known only to Mr. Becker now also is known by other members
of the senior management. An employment agreement has been entered into between
the Company and Mr. Becker, but the Company does not presently carry key man
insurance on Mr. Becker's life.

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<PAGE>

ACQUISITIONS OF NEW PERSONNEL

The Company expects to hire approximately twenty new personnel in the next
year to facilitate the achievement of its corporate objectives. As most of these
proposed new employees have not yet been identified, their skills, experience,
and their ability to work together as an integrated team is untested. Should the
Company be unable to hire the persons with the desired skills, or if certain of
the new employees fail to perform as anticipated, the ability of the Company to
fully implement its business plan may be adversely affected.

REGULATORY APPROVALS

The Company has not acquired requisite product approvals and certification
from appropriate agencies which would permit the marketing of IPAD products in
the European Union. Its ability to secure such approvals in a timely period
cannot be assured.

POSSIBLE REGULATORY REQUIREMENTS

While the Internet is largely unregulated, there is a substantial body of
regulation governing the telecommunication market and its industry players.
Changes in the regulatory regime may impact the commercial prospects of Internet
related vendors such as the Company.

RECENT OPERATING LOSSES

In the nine month period ended September 30, 1997, the Company recorded a
net loss of ($186,585). The loss occurred because of a one-time charge of
$241,042 for deferred taxes resulting from the change in the Company's tax
status from an S-corporation to a C-corporation. However, the Company's ability
to restore profitability in future reporting periods is uncertain.

CONTINGENCIES

Although the proceeds of the Canadian Offering, together with anticipated
operating revenues, are expected to be sufficient to meet the Company's needs
for the next year, the Company's budgets make little provision for unexpected
contingencies. In the event that unforeseen costs or delays are incurred, the
ability of the Company to allocate sufficient resources to remedy such events
cannot be assured.

ABILITY TO RETIRE OUTSTANDING DEBT

The Company has issued convertible promissory notes in the amount of
$355,903 and, at September 30, 1997, had an outstanding bank loan of
approximately $81,000. These debts, in the aggregate, exceed $436,000, a
majority of which is expected to be converted to shares of the Company
subsequent to this Offering. The ability of the Company to retire or convert
much of its indebtedness in an orderly manner cannot be assured.

NO PUBLIC MARKET

There has, to date, been no public market for the Company's Common Shares,
and there can be no assurance that an active public market on the Vancouver
Stock Exchange will develop or be sustained after the Canadian Offering, or that
a market for the stock will develop in the U.S.

DILUTION

The Company may issue additional Common Shares pursuant to outstanding
stock options, warrants and convertible promissory notes. The Company may also
raise additional capital by undertaking a private placement of Common Stock if
additional capital is needed. These issuances may result in dilution to the
Company's shareholders.

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NO DIVIDENDS

The Company has not paid dividends in the past and does not anticipate
paying dividends in the near future. The Company expects to retain its earnings
to finance further growth and, when appropriate, retire existing debt.

USE OF PROCEEDS

The Company will receive no proceeds from the sale of Common Stock by the
Selling Stockholders pursuant to this Prospectus.

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the financial
statements and accompanying notes included elsewhere in the Registration
Statement.

INTRODUCTION

The Company is a technology firm which develops and markets communication
products which integrate and simplify PC server connectivity to the Internet
market. In recent years, the Company has developed and brought to production the
IPAD.

The Company was incorporated in 1984 to develop and market its original
product, a computer bulletin board product, TBBS. TBBS integrated formerly
complex technology into products which were relatively simple for the consumer
to use. Through 1995, the Company generated substantially all of its revenues
through sales of TBBS.

In 1995, the Company foresaw the Internet becoming the technology of
choice for the next level of network access connectivity. The Company began
refocusing its efforts on making communications technology simple to use and
began its design of IPAD. The IPAD product line was test marketed in 1995 as a
response to the anticipated demand of the Internet market. The Company's
dependence upon the TBBS product line decreased during and after 1995 as the
Company increased its dependency upon sales of IPAD.

RESULTS OF OPERATIONS

REVENUES

The Company's revenues declined from the fiscal year ended December 31,
1995 through the fiscal year ended December 31, 1996, and the nine months ended
September 30, 1997. This decline was primarily a result of the decline in
revenue from sales of the Company's TBBS product, which accounted for $1,046,000
in revenue in 1995 (52% of total revenues) to $239,000 in 1996 (17% of
revenues). In the nine months ended September 30, 1997, total revenues were
$788,000 as compared with $1,136,000 in the comparable nine months of 1996. TBBS
products revenue in the nine months of 1996 amounted to $232,000, while there
was only $81,000 of TBBS revenue in the nine months of 1997. Offsetting the
decline in the TBBS sales was an increase from 1995 to 1996 in the revenue from
IPAD sale from $972,000 in 1995 to $1,167,000 in 1996. IPAD sales declined
somewhat in the first nine months of 1997 to $655,000, from $984,000 in the
comparable 1996 period, however, as marketing and sales activity were curtailed
in 1997 as a result of the Company's shortage of working capital.

The Company's gross profit margins declined from approximately 65% in 1995
to 57% in 1996 as start-up costs related to the production of the IPAD product
affected the margins. This trend was reversed in the first nine months of 1997
as margins expanded to nearly 70% from approximately 57% in the first nine
months of 1996. The margin increase results primarily from producing the IPAD
product internally instead of being outsourced to contract manufacturers.

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Research and Development Expenditures

Research and development expenditures in 1995 were nearly $384,000, of
which approximately $130,000 was capitalized as software development costs while
the remaining $254,000 was expensed. In 1996, the software development
expenditures increased to approximately $440,000, all of which were capitalized.
The software development expenditures of $197,000 in the first nine months of
1997 were less than the $355,015 expended in the comparable period of 1996, but
were also capitalized.

Other Expenses

Selling, general and administrative costs ("SG&A") declined throughout the
period from the beginning of fiscal 1995 to September 30, 1997. SG&A expenses in
the fiscal year ended December 31, 1996, were approximately $631,000, nearly 35%
lower than comparable expenses in fiscal 1995. The SG&A expenses in the first
nine months of 1997 of approximately $471,000 were 8% lower than the comparable
expenses in the year earlier. These expense savings reflected both lower costs
of selling a reduced volume of products, as well as cutbacks in administrative
personnel which were primarily effected from 1995 to 1996.

Net Income (Loss)

The Company realized net income in both the fiscal years ended December
31, 1995 and December 31, 1996, as well as for the nine months ended September
30, 1996. A loss of approximately $187,000 was reflected for the nine months
ended September 30, 1997, however, as a result of recording deferred taxes of
approximately $241,000, because the Company changed its federal income tax
status from an S Corporation to a C Corporation during that period.

CAPITAL RESOURCES AND LIQUIDITY

Historically the Company had funded its working capital requirements from
internal operations. During 1995, however, Philip Becker, the Chief Executive
Officer, loaned the Company approximately $112,000 to supplement the $49,701 of
cash provided by operating activities and assist it in funding the completion of
the IPAD product development and the related growth of its accounts receivable
caused by the introduction of the IPAD product line. During 1996, the Company
continued to fund a majority of its internal working capital needs from $260,000
of cash flow from operating activities, but it also received additional advances
from Mr. Becker, thus increasing the Company's indebtedness to him to $239,903
at December 31, 1996. This indebtedness is payable by the Company, at its
option, in shares of Common Stock of the Company valued at the public offering
price per share of the Canadian Offering. It is anticipated that the Company
will elect to pay that obligation, as well as $116,000 of notes payable to
consultants by the issuance of shares, thus improving the Company's financial
position by reducing its long term debt.

As of December 31, 1996, the Company received a binding commitment ,for a
$100,000 loan facility from the First National Bank of Arvada, Colorado to
support IPAD sales growth and the increase in capitalized software until longer
term financing could be arranged. During the first quarter of 1997, the Company
borrowed $100,000 under the interim loan facility from the First National Bank
of Arvada, Colorado, the proceeds of which were used to expand to a limited
degree, the Company's marketing activities and sales programs.

The completion in September of 1997 of the placement of $347,354 (net of
$62,646 of offering costs) of outside equity has permitted the Company to
significantly advance its marketing efforts and to attract additional management
personnel. Working capital at September 30, 1997 had increased to approximately
$400,000 from less than $23,000 at December 31, 1996. Operating activities also
continued to contribute cash ($100,000 for the first nine months of 1997) since
the loss recorded for this period was a result of the recording of deferred
taxes, which did not affect current cash flow. Additionally, in December 1997,
the Company issued 350,000 shares of Common Stock which were purchased by Opus
Capital Fund, LLC for $1.00 per share to provide additional working capital
pending completion of the Canadian Offering.

In the fourth quarter of fiscal 1997, the Company has undertaken
preparations for its initial public offering, scheduled for the first quarter of
1998, through which it is anticipated that approximately $1,400,00 of working
capital will be generated, after payment of expenses and commissions. This
equity infusion, together with working capital

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generated from the Company's internal operations, should advance the Company
substantially towards establishing and fortifying channels of distribution for
its IPAD product line, and is expected to be sufficient to meet the capital
requirements of the Company through 1998.

NEW ACCOUNTING PRONOUNCEMENTS

The Financial Accounting Standards Board has recently issued Statements of
Financial Accounting Standards that may affect the Company's financial
statements as follows:

The Financial Accounting Standards Board (FASB) has issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS No. 128).
This pronouncement provides a different method of calculating earnings per share
than is currently used in accordance with Accounting Board Opinion No. 15,
"Earnings Per Share". SFAS No. 128 provides for the calculation of "Basic" and
"Dilutive" earnings per share. Basic earnings per share includes no dilution and
is computed by dividing income available to common shareholders by the weighted
average number of common shares outstanding for the period. Diluted earnings per
share reflects the potential dilution of securities that could share in the
earnings of an entity, similar to fully diluted earnings per share. The Company
will adopt SFAS No. 128 in 1998 and its implementation is not expected to have a
material effect on the consolidated financial statements.

In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, Reporting Comprehensive Income (SFAS
130), which establishes standards for reporting and display of comprehensive
income, its components and accumulated balances. Comprehensive income is defined
to include all changes in equity except those resulting from investments by
owners and distributions to owners. Among other disclosures, SFAS 130 requires
that all items that are required to be recognized under current accounting
standards as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements.

Also, in June 1997, FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information" which supersedes SFAS No. 14,
"Financial Reporting for Segments of a Business Enterprise." SFAS No. 131
establishes standards for the way that public companies report information about
operating segments in annual financial statements and requires reporting of
selected information about operating segments in interim financial statements
issued to the public. It also establishes standards for disclosures regarding
products and services, geographic areas and major customers. SFAS No. 131
defines operating segments as components of a company about which separate
financial information is available that is evaluated regularly by the chief
operating decision maker in deciding how to allocate resources and in assessing
performance.

SFAS 130 and 131 are effective for financial statements for periods
beginning after December 15, 1997 and requires comparative information for
earlier years to be restated. Because of the recent issuance of the standards,
management has been unable to fully evaluate the impact, if any, the standards
may have on future financial statement disclosures. Results of operations and
financial position, however, will be unaffected by implementation of these
standards.

In October 1997, Statement of Position 97-2, Software Revenue Recognition
(SOP 97-2) was issued. The SOP provides guidance on when revenue should be
recognized and in what amounts licensing, selling, leasing, or otherwise
marketing computer software. SOP 97-2 is effective for transactions entered into
in fiscal years after December 15, 1997. Because of the recent issuance of the
SOP, management has been unable to fully evaluate the impact, if any, the SOP
may have on future financial statement disclosure.

* * *

FORWARD-LOOKING STATEMENTS

The Registration Statement contains certain forward-looking statements
within the meaning of Section 27A of the Securities Act and Section 21E of the
Securities Exchange Act of 1934 and the Company intends that such
forward-looking statements be subject to the safe harbors for such statements
under such sections. The forward-looking statements herein are based on current
expectations that involve a number of risks and uncertainties. Such forward-

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<PAGE>

looking statements are based on numerous assumptions, including, but not
limited to, the following: that significant increases in sales and marketing
personnel and expenditures will result in increased sales; that the recently
introduced IPAD 2500 and IPAD 1200 models will be readily accepted in the
market; that the industry trends perceived by the Company as described in Item 1
will continue to exist; that market segments targeted by the Company will
continue to grow and that the Company can successfully compete with larger, more
established competitors.

The foregoing assumptions are based on judgments with respect to, among
other things, future economic, competitive and market conditions, and future
business decisions, all of which are difficult or impossible to predict
accurately and many of which are beyond the Company's control. Accordingly,
although the Company believes that the assumptions underlying the
forward-looking statements are reasonable, any such assumption could prove to be
inaccurate and therefore there can be no assurance that the results contemplated
in forward-looking statements will be realized. The forward-looking statements
are subject to risks and uncertainties that could cause actual results to differ
materially from those set forth in or implied by the forward-looking statements.

-10-

<PAGE>

BUSINESS

GLOSSARY

The following is a glossary of technical terms that appear in the
discussion of the Company's business in this prospectus:

"TBBS" means The Bulletin Board Software, a PC server software which
creates a multi-user host for direct dial-in access for multiple users for
ongoing messaging, file transfer and data access.

"CLOSED, PROPRIETARY OPERATING SYSTEM" means an operating system which is
not made available for open use and serves a specific purpose. A closed
proprietary operating system has an advantage in security.

"DNS (DOMAIN NAME SERVER)" is a server function on the Internet which acts
as a "Directory Assistance" service.

"FIREWALL" means a security function to prevent unauthorized access to a
network. Firewalls can be very simple allowing for basic security, or very
complex and involved for more advanced security needs.

"FTP SERVER" means a File Transfer Protocol server which is a server
function that allows you to offer access to files for transfer over the
Internet. They are normally linked to web servers to provide a graphical
interface.

"POP3 (POST OFFICE PROTOCOL 3) SERVER" is a server which stores local mail
to be accessed by the end users E- mail package e.g.; Eudora, Microsoft
Exchange, Netscape.

"ROUTER" means a device which acts as a "gateway" between network
segments. A router in its simplest form will examine the address of each
"information packet", determine its destination and send it down the appropriate
wire.

"SMTP (SIMPLE MAIL TRANSPORT PROTOCOL)" is a server that acts as the
sending and receiving server. It looks at the address and sends it on its way or
transfers it to the POP3 (Post Officer Protocol 3) server.

"TELNET" is the Internet protocol used to simulate a point to modem
(serial line) connection between two computers over the Internet.

"TERMINAL SERVER" means a device which allows for remote dial-up access to
a network.

CORPORATE HISTORY

eSoft, Inc. (the "Company") was incorporated under the laws of the State
of Colorado on March 3, 1984. The Board of Directors and shareholders of the
Company have approved the merger of the Company into a newly incorporated
Delaware corporation, to effect its reincorporation in the State of Delaware
prior to the effective date of this registration statement.

The Company is located at 5335 Sterling Drive, Suite C, Boulder, Colorado,
80301.

Through September 4, 1997, the Company had elected to be taxed as an
"S-corporation" for U.S. income tax purposes. Under this election the Company
was essentially taxed as a partnership. Accordingly, in lieu of corporate income
taxes, the shareholders were taxed on their proportional share of the Company's
taxable income individually. The Company withdrew the S-corporation election
after September 4, 1997 and is now subject to U.S. corporate income taxes.

On August 27, 1997 the Company's board of directors authorized a stock
split of 63.1579 to 1. The Company has no subsidiaries.

-11-

<PAGE>

BUSINESS HISTORY

The IPAD is designed to be a total Internet/Intranet connectivity solution
without the complexity and high cost of traditional solutions. It affords the
medium to small businesses, institutions, or educational sites a full
connectivity solution that is economical and easily installed and managed by
existing information systems' personnel. To complete the package for the
customer, the Company can provide leased line connectivity options through major
national access providers. The IPAD product line includes all other accessories
needed to complete the connection, such as turnkey web servers, line interface
devices, modems and rack equipment.

PRODUCT LINE AND SERVICES

THE IPAD 5000

The IPAD 5000 integrates Internet hardware and communications software
into a user friendly turnkey system, which does not require extensive technical
knowledge to support. Utilizing an Intel Pentium CPU, the device is typically
configured with 8 MB of RAM; a 1.2 GB hard drive; and a 1.44 MB floppy drive.
The hardware includes five open slots, and hence is designed to allow for
customized interface configuration. These interfaces may include an Ethernet
card, an ISDN terminal adapter, a V.35 leased line or Token Ring or extra serial
interfaces if desired. The software includes a basic Web Server, Telnet, an FTP
Server, an E-mail Server, a Finger Server, a DNS, and a Packet-Routing Firewall.
Unlike certain competing products in the marketplace, IPAD does not operate on a
UNIX platform but rather is a purpose built component, real time operating
system, which allows for a high degree of individual customization to better
address the needs of individual customers.

THE IPAD 2500

The IPAD 2500 was introduced to the marketplace in the second quarter of
1997. The IPAD 2500 is a desktop unit which contains a router with firewall
capabilities, a terminal server offering up to 8 serial ports, and the same
basic Internet connectivity provided by all of the Company's IPADs. Server
functions include a DNS, a POP3, E-mail, FTP, a SMTP, Telnet, a Finger Server,
and a basic WWW server. While less powerful than the Model 5000, it nonetheless
allows for more than one IP address and routing for up to two networks as well
as multiple web and FTP servers.

THE IPAD 1200

The IPAD 1200 was introduced to the marketplace in October 1997. This
system is also a desktop unit which can connect a business LAN of up to 150
users to the Internet using a single address. The hardware is an Intel Pentium
CPU with 8 MB of RAM, a 1.2 GB hard drive, a 1.44MB floppy drive, 2 serial ports
and a 10 MB Ethernet card. The IPAD 1200 comes standard with either a 56 KB
modem, ISDN terminal adaptor or integral 56 KB leased line CSU/DSU or its
Internet feed. The product is designed for mass production without significant
customization for specific client needs.

ACCESSORIES

In the case of the Model 5000 (and to a lesser degree with the IPAD 2500),
customers can order additional cards and accessories to more effectively
configure a device to suit their needs. Aside from an Ethernet card, users have
the option, with certain models, of purchasing an ISDN terminal adapter,
interfaces for T1 and fractional T1 leased lines, as well as extra serial
interfaces. As many as 96 serial ports can be accommodated within a Model 5000
with each card being capable of connecting up to 16 modems or terminals.

-12-

<PAGE>

SEMINARS

The Company also offers Internet training seminars. These comprehensive,
two day programs are offered in Colorado. They address issues related to end
user client set-up and trouble shooting; advanced Internet operations including
routing and domain name server operations; Internet service provider management
techniques, including guidance with respect to systems performance and
networking issues including questions relating to growth planning, multiple
networking interfacing, and connections with other routers; and specific
training with respect to IPAD applications and management techniques. The
Company expects to offer these seminars with greater frequency to supplement
revenues from IPAD product sales.

TECHNICAL SUPPORT SERVICES

Customers can also purchase a contract through which the Company offers
technical support services to address customers' specific application needs.
More focused than the general seminars, such technical support services are
designed to address concerns of individual clients for applications ranging from
the launching of their web presence, to the reconfiguration of their LAN to
optimize both efficiency and connectivity.

TBBS SOFTWARE

Until the mid-1990s, most of the Company's revenues were generated from
the sale of TBBS, its bulletin board system software package. As the life cycle
of this product aged, the Company found it essential to expand and diversify its
range of product offerings which in turn led to the development of the IPAD. The
Company expects to continue to generate residual revenues from the sale of TBBS
software at least through the 1998 fiscal year. However, no further development
or upgrading of the software is expected to be pursued by the Company, as TBBS
is progressively phased out of the market in favor of more sophisticated
communications products.

OPERATIONS

Currently, with respect to all models, the Company purchases
sub-assemblies from a variety of manufacturers and wholesalers, and undertakes
final assembly and software integration at its production facility in Colorado.
In the future, with respect to Models 1200 and 2500, the Company intends to
purchase the computers in essentially complete and finished form. Upon shipment
to its production facility, the Company would install an extra card in the case
of the Model 1200 and load its software. With respect to the somewhat higher
performing Model 2500, the modifications and degree of the Company's
customization which is undertaken, is less than that applicable to the Model
5000, but more vigorous than that carried out in the context of a typical Model
1200.

In all cases, the loading of the Company's IPAD software is what serves to
distinguish the Company's product line from competing products, and what
provides it with its key performance capabilities. Upon the insertion of the
additional boards and loading of the software, each unit is tested, certain
other quality assurance checks are undertaken, and the devices are packaged.

It is the intention of the Company to sell product both directly to
end-use purchasers, as well as to utilize Value Added Resellers ("VAR"s) and
distributors to assist in product dissemination.

INTELLECTUAL PROPERTY

The Company has no patents, but regards its software as proprietary and
attempts to protect it by relying upon copyrights, trade secret laws, internal
nondisclosure agreements and transferability restrictions incorporated into its
software license agreements. The Company provides its software products under a
perpetual paid-up license agreement. Title does not transfer to the customer.
Program source listings are not released, which the Company believes further
protects unauthorized transfers of the Company's proprietary information, as
well as the confidentiality of the Company's trade secrets. The Company also
uses a combination of software programming and hardware devices to protect its
products from unauthorized use or duplication.

-13-

<PAGE>

HISTORY AND COST OF PRODUCT DEVELOPMENT

Up until and including 1994, substantially all of the Company's revenues
were generated from the sale of TBBS software. IPAD product sales commenced in
1995 and the product was released to the general public with the introduction of
the IPAD 5000 in 1996. The precursors to the IPAD 5000 (the IPAD 4000 and IPAD
4500) had identical software as the IPAD 5000 but were installed on 66 MHZ Intel
486 CPUs. In 1996, when the 133 MHZ Intel Pentium CPU became available, all
installed units of Model 4000 and Model 4500 were replaced with Model 5000. The
IPAD 2500 was introduced to the marketplace in mid-1997. The IPAD 1200 was
introduced and was available for purchase in October 1997. Seminars,
accessories, and services are an ongoing activity designed to supplement and
enhance the Company's product offerings, reputation, reliability and industry
stature.

Research and development expenditures in 1995 totaled $384,000 of which
$130,481 were capitalized software development costs, while expenses amounted to
$253,290. All expenditures for research and development in the year ended
December 31, 1996 and the nine month period ended September 30, 1997 were
capitalized software development costs and amounted to approximately $440,000
and $197,000, respectively. As of September 30, 1997 the value of capitalized
software less accumulated amortization amounted to $646,227.

From time to time, the Company has entered into software development
consulting agreements. One such agreement is currently in force and provides for
the payment to John Patrick McMillan, a consultant, of a fee equal to 2.5
percent of gross licensing fees for software licenses to a maximum of $100 per
license, in consideration for the activities provided by the consultant with
respect to the development of IPAD software.

THE MARKET FOR THE PRODUCTS

The primary market being pursued by the Company consists of small to
medium size businesses which
increasingly find it beneficial to host their own Internet infrastructure rather
than rely upon an Internet service provider for all of their Internet access and
connectivity needs. A secondary market consists of Internet service providers
which can benefit from the Company's IPAD integrated software and hardware
product line.

Most of these small to medium size businesses would continue to rely upon
an Internet service provider in order to gain high speed large diameter pipeline
access to the Internet. But with new advancements in Internet software,
individual companies, without a great deal of software expertise, can now assume
many of the responsibilities and functions which heretofore have been carried
out by Internet service providers on their behalf. This includes control over a
router, firewall, remote access server, a web server, and mail server. Most
importantly, rather than paying an Internet service provider substantial fees in
order to offer individual e-mail addresses plus Internet access to each of many
employees, the IPAD products can provide such services to a growing company and
their employees in a much more cost effective manner.

Because the Company purchases its computer hardware in the United States,
and because of requirements for FCC approval and UL certification, the Company
has historically limited most of its sales to the United States. Within the
United States, the market and the rate of market growth are both considered to
be sufficiently large as to be able to absorb all of the Company's projected
output through at least the next two years. Although the Company has not
acquired requisite product approvals and certification from appropriate agencies
that would permit marketing of its IPAD products in the European Union, it is
the intention of the Company to begin the process of obtaining such approvals
and certification and to promote sales in the European Union as well as Canada
in 1999. Failure to obtain requisite approval and certification to sell IPAD
units in the European Union and Canada will limit the Company's ability to
increase its market share.

The Company has sold more than 400 IPAD units since the introduction of
its product line in 1995. In the first nine months of 1997, the Company
estimates that it sold approximately 50 IPAD units. No one customer has
accounted for as much as 10% of the Company's revenue in 1995, 1996 or the first
9 months of 1997.

Market analysts indicate that in 1997, fewer than 6,000 units of IPAD like
products are expected to be sold into the market. If one were to assume that the
average sale ranges from $3,000 - $5,000, this would place the total market
dimensions at $18 - $30 million excluding follow on accessories and services.

-14-

<PAGE>

INDUSTRY TRENDS

At one time, the combination of hardware and software that are currently
incorporated within an IPAD device required several pieces of stand alone
equipment, and complex software skills. This in turn created barriers to market
entry among small to medium sized companies, seeking to host many of their own
Internet functions. Unless they maintained the requisite technical skills, it
was more cost effective for these companies to allow an Internet service
provider to host these services on their behalf.

Two trends within the marketplace are eroding this historical condition.
First, the burgeoning demand for e-mail and Internet access has had the effect
of increasing the costs borne by companies to provide widespread access to such
services among their employees, (notwithstanding general reductions in the unit
costs of Internet access as a whole). Second, the Company and its market
competitors have been able to take advantage of increasingly powerful and
flexible computer systems. Today, these flexible computer systems are readily
available at comparatively modest cost and with the integration of appropriate
software, they can provide an all in one solution to many of the software and
hardware requirements that had previously demanded a variety of pieces of
equipment and considerable software integration skills.

As a consequence, the current industry trend is to increasingly allow
companies to take control of certain key Internet management tools that have
previously been hosted by Internet service providers and to progressively limit
the role of the Internet service providers to that of offering high capacity
access to the Internet itself.

MARKETING PLAN

It is the intention of the Company to rely upon both direct sales and
distributors in order to disseminate its product line through the market. During
1998 and the first quarter of 1999, the Company plans to add regional sales
managers including a European Sales Director, Customer Service Representatives
and a Director of Marketing.

To assist in creating more customer awareness of the Company, the Company
has made provision for an advertising budget of over $100,000 in the forthcoming
year, with a further $80,000 for participation in trade shows. Through a
combination of reliance upon third party distributors as well as upon direct
sales, the Company believes that it can progressively establish a profile as a
major industry participant.

COMPETITION

The Company's competitors are comprised of both well-established and
recognized industry participants (such as Sun Microsystems, Inc.) and smaller
corporations in some respects similar to the Company. Both groups produce
products which in terms of fundamental connectivity attributes are similar to
those currently offered by the Company. Among the more prominent industry
participants at present are companies such as Whistle Communications, Inc. of
Foster City, California; Apexx Technologies, Corp. of Boise, Idaho; FreeGate
Corporation of Sunnyvale, California; and iPlanet, Inc. of Sunnyvale,
California.

iPlanet, Inc. is a private corporation reportedly established in January
1996. As is the case with the Company, iPlanet provides fully-integrated
turn-key Internet connectivity solutions. iPlanet has developed the IPS series
of products which provide small to medium sized businesses access to the
Internet and Web hosting capabilities.

The IP-168 is available in a variety of models to accommodate speeds
ranging from 28.8K dial-up to T1 dedicated lines. It incorporates router
capabilities, and supports a LAN print server. It includes a Web server, an
e-mail server (compatible with popular mail packages such as Eudora, and
Microsoft Mail), and standard mail protocols (POP2/3, IMAP3 and SMTP). The
product is compatible with both Microsoft's Windows and Unix operating systems.
The IPS-PRO is a rack mounted version of the IPS 168 which is designed for
larger organizations of about 200 people. The IPS PRO operates with a Pentium
133 MHZ microprocessor, and offers 32 MB RAM and a dual Ethernet connection. In
addition to the standard e-mail and web servers, the IPS PRO supports a Domain
Name Service Protocol, and can also support remote access users and file
sharing. It also includes a firewall (and related software elements known as
"proxies"). To complement the IPS-168, iPlanet offers a variety of add-on
modules to provide fax, virtual private networking, and e-mail enhancing
capabilities.

-15-

<PAGE>

Sun Microsystems, Inc. offers Internet servers referred to as "Netra i" which
accommodates high-volume Web site management. Netra i software comes with Web
server (Netscape Enterprise) and Web authoring software. Electronic mail, a
Domain Name Server and FTP functions are also fully integrated, as is firewall
security. Netra Internet servers operate in conjunction with Solaris and Unix
operating systems. Until recently, Netra i was classified as a fully integrated
series of Internet servers. However, software and hardware components are now
sold separately.

As is the case with the Company, most industry competitors produce an
array of products. Some are relatively inexpensive entry level devices, which in
some respects can be compared to the IPAD 1200. Typically, these are designed
with no significant degree of individual customization. Some products are
similar to the IPAD 5000 in that they provide for a substantial degree of
customization, and can accommodate multiple interfaces, and more than one
hundred individual users on a LAN with little difficulty.

Cross-comparisons indicate that several competing products incorporate
features similar to those offered by IPAD products (in terms of hardware and
software components), although they may provide varying degrees of
functionality, which in turn accounts for pricing variances. For example, the
InterJet product series offered by Whistle Communications, Inc. ranges in price
from $1,995 to $3,495 depending upon product features and capability. Products
which would likely compete with either the IPAD or the IPAD 5000 can either cost
more or less in relation to the IPAD depending upon their technical
specifications.

Some competitors already possess well-established distribution networks or
have formed strategic collaborations with key industry players. Others such as
Sun Microsystems, Inc. have much greater technical and financial resources
compared to the Company. The ability of the Company to effectively compete
against such firms cannot be assured, as they are already well entrenched.

While many Internet connectivity devices are Unix-based systems designed
to support more complex operations generally required by larger corporations,
the Company's products emphasize use of a DOS based system which is thought by
management to be more user friendly as compared to those operating on Unix
platforms.

AVAILABILITY OF RAW MATERIALS AND SEMI-FINISHED GOODS

The computers which the Company utilizes to operate its software, whether
purchased in finished form, or as sub-assemblies, computer boards, software
programs and accessories which are assembled at the Company's production
facility from semi-finished goods, all represent widely available materials and
components in the marketplace. The Company has the ability to source such goods
from a wide range of prospective suppliers, depending upon pricing, delivery,
quality assurance and related considerations. In combination, the Company's IPAD
software represent a combination of "off the shelf" operating systems and
related software licensed from third parties, working in concert with what the
Company considers to be its own proprietary software, developed in-house. The
Company does not anticipate that the sourcing of such materials is likely to
become an impediment to its growth and expansion.

GOVERNMENT REGULATIONS

As the Company's products require access to telecommunications carriers, the
products are subject to regulation by the Federal Communications Commission
("FCC"). Since the components of the Company's products which are required by
FCC regulation to be tested and certified are purchased from other
manufacturers, however, the Company relies upon the certification of compliance
furnished by those manufacturers and no testing or certification of the final
assembled products offered by the Company is required.

Since the Company's products rely upon electrical power, certain standards
with respect to electrical safety must also be met. The manufacturers of
purchased components obtain the certification of testing laboratories such as
Underwriters Laboratories ("UL") and the Canadian Standards Association and the
Company again relies upon those certifications without the necessity for
certification of the final assembled products. In order for the IPAD products to
be marketed in the European Union, similar testing and product approvals are
required to be obtained from appropriate agencies. Although such approvals have
not yet been sought or obtained, the Company intends to use components in
markets other than the U.S. and Canada which have such approvals, and
anticipates that it may rely upon such approvals as it does in the U.S. without
being required to obtain separate approval or certification of the final
assembled products.

-16-

<PAGE>

EMPLOYEES

At December 1, 1997, ten people were employed by the Company, all on a
full-time basis.

INITIAL PUBLIC OFFERING IN CANADA

The Company expects to make an initial public offering of 1,750,000 shares
of its Common Stock, at a price of $1.00 per share in British Columbia, Canada,
prior the effectiveness of this registration statement (the "Canadian
Offering"). Upon completion of the Canadian Offering, the Common Stock will be
listed on the Vancouver Stock Exchange. The gross proceeds from the Canadian
Offering will amount to $1,750,000, of which the Company will pay an aggregate
commission of $131,250 and a corporate finance fee of 75,000 shares of the
Company's Common Stock to C. M. Oliver Company Limited (the "Agent") for
underwriting the Offering. After deducting the commission payable to the Agent
and other expenses of the Canadian Offering, net proceeds from the Canadian
Offering are expected to amount to approximately $1,400,000. The Company has
also granted the Agent an option (the "Over-Allotment Option"), exercisable for
a period of 60 days from the date of the Closing of the Offering to solicit and
accept additional subscriptions of the Company for Common Stock up to an
aggregate of 262,500 shares. If the Agent exercises this Over-Allotment Option
in full, the total price to the public and Agent commission will be $2,012,500
and $150,937.50, respectively, and net proceeds to the Company are expected to
amount to approximately $1,600,000.

DESCRIPTION OF PROPERTY

The Company's office, production and warehouse facilities are located at
5335 Sterling Drive, Suite C, Boulder, Colorado 80301. The Company leases
approximately 5,300 square feet of space at this location pursuant to a lease
entered into in November 1997, which expires October 31, 2000, at a rent of
approximately $58,000 per year. The Company believes that this space will be
sufficient for the Company's operations for the foreseeable future.

The Company also remains obligated until November 1997 on a lease covering
1,300 out of 7,500 square feet of lease space that the Company formerly occupied
in Aurora, Colorado. Rental on that remaining 1,300 square feet is approximately
$13,347 per year. The Company does not occupy this space and it hopes to sublet
this space in the near future.

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<PAGE>

DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS

DIRECTORS AND EXECUTIVE OFFICERS

The following is a list of the current directors and senior officers of
the Company, their addresses, current positions with the Company and principal
occupations during the past five years:

NAME AND ADDRESS PRINCIPAL OCCUPATION FOR PREVIOUS FIVE YEARS
- ---------------------------------- --------------------------------------------

<S> <C>
PHILIP L. BECKER(1) Mr. Becker, age 51, Chairman, Chief Technology Officer and
Chairman, Chief Executive Officer Chief Executive Officer of the Company since September 1997;
and Chief Technology Officer and President of the Company from July 1985 to September, 1997;
Director Director of the Company from 1984 to present.

GENE R. COPELAND(1) Mr. Copeland, age 54; Managing Director of Transition Partners,
Director Ltd. from August 1996 to present; President of Copeland
Consulting Group, Inc. from January 1990 to August 1996;
President of InfoNow Corp. from October 1994 to June 1995;
Chief Operating Officer of Amrion Corporation from February
1992 to September 1993; Director of InfoNow Corp. from
September 1994 to present.

KENT NUZUM(1) Mr. Nuzum, age 31, Associate with Opus Capital, Inc. from
Secretary, Acting Chief Financial January 1997 to present; Assistant Vice-President, Commercial
Officer and Director Loans for Bank One, Colorado from August 1990 to January
1997.
JASON ROLLINGS(1) Mr. Rollings, age 36, was employed with Hi-Tech
Vice President - Operations Manufacturing as Director of Manufacturing from April 1995 to
November 1997; Director of Technology Inc. from September
1988 to March 1995; and Manufacturing Operations Manager for
Century Data Inc. from September 1983 to August 1988.

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

(1) Address: 5335 Sterling Drive, Suite C, Boulder, Colorado 80301.
</TABLE>

ELECTION OF DIRECTORS

The directors of the Company were elected by the shareholders at a special
meeting on September 2, 1997 and will hold office until the next annual meeting
at which time they may be re-elected or replaced.

The Articles of Incorporation of the Company permit the directors to
appoint new directors to fill any vacancies that may occur on the board.
Individuals appointed as directors to fill vacancies on the board or added as
additional directors hold office like any other director until the next annual
shareholder meeting at which time they may be re-elected or replaced. The
directors may also add additional directors to the board between successive
annual meetings.

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<PAGE>

EXECUTIVE COMPENSATION

PHILIP L. BECKER EMPLOYMENT AGREEMENT

On September 2, 1997 the Company and Philip L. Becker, the founder,
Chairman, Chief Technology Officer, Chief Executive Officer and a director of
the Company, entered into an employment agreement (the "Becker Agreement") which
extends for a thirty six month period commencing on September 1, 1997. Under the
terms of the Becker Agreement the Company will pay to Mr. Becker the sum of
$8,333 per month until the completion of the Offering and thereafter the sum of
$10,000 per month plus incentive stock options to acquire 200,000 Common Shares
at a price of $1.00 for a period of five years from the date of the Canadian
Offering. The option will vest over a 36 month period. No options will be
exercisable initially, but 7/36 of the options will vest seven months after the
date of the Canadian Offering and 1/36 of the options will vest on the first day
of each month thereafter.

The Becker Agreement also provides that Philip Becker shall be eligible to
receive a quarterly performance bonus equal to 10% of the Company's earnings net
of adjustments for interest and taxes. In the event that the bonus exceeds 50%
of Mr. Becker's gross annual salary, the bonus will be capped at the amount of
Mr. Becker's salary for the quarter.

The Becker Agreement incorporates a non-competition agreement which
extends for 12 months after the termination of Philip Becker's employment with
the Company and confidentiality provisions which extend for five years following
the termination of Becker's employment with the Company. The Becker Agreement
may be terminated by either the Company or Mr. Becker on 30 days notice without
cause. If Mr. Becker's employment is terminated by the Company without cause,
the Company must pay Mr. Becker one month's salary for each year of employment
since 1992.

<TABLE>
<CAPTION>
EXECUTIVE COMPENSATION TABLE

LONG TERM COMPENSATION
-------------------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
------------------------------------- ---------------------------- --------------
SECURITIES
NAME AND YEAR ENDED RESTRICTED UNDERLYING
PRINCIPAL DECEMBER OTHER ANNUAL STOCK OPTIONS/ LTIP ALL OTHER
POSITION 31, SALARY($) BONUS($) COMPENSATION($) AWARDS(S)($) SARS(#) PAYMENTS($) COMPENSATION($)
<S> <C> <C> <C> <C> <C> <C> <C> <C>

PHILIP L. BECKER, 1996 60,000 -- -- -- -- -- --
Chief Executive 1995 45,000 -- -- -- -- -- --
Officer 1994 100,000 -- -- -- -- -- --
</TABLE>

SEVERANCE AGREEMENT

Wayne Farlow was Chief Executive Officer of the Company from September 2,
1997 to November 11, 1997. On December 19, 1997 the Company and Wayne Farlow
entered into a Severance Agreement and a Mutual Release (the "Severance
Agreement") pursuant to which the Company and Mr. Farlow agreed to Mr. Farlow's
resignation as an officer and director effective November 7, 1997 and that the
Company would pay to Mr. Farlow $10,000 per month through March 7, 1998, payable
in equal semi-monthly instalments, together with the sum of $1,875 upon
execution of the Severance Agreement in lieu of accrued vacation.

The Company also agreed to allow Wayne Farlow to continue to participate
in the Company's health insurance program, with premiums paid by the Company,
until March 1998. The Company has also agreed to sell and Mr. Farlow has agreed
to purchase 60,000 shares of Common Stock of the Company at a price of $0.50 per
share, to be paid by cash ($600) with the balance secured by a non-recourse
promissory note, payable to the Company and due September 5, 1999.

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<PAGE>

OPTIONS/SAR GRANTS IN LAST FISCAL YEAR

Prior to the adoption of the Equity Compensation Plan described below, no
stock options were ever granted to or exercised by executive officers of the
Company.

In August 1997, the Board of Directors and shareholder of the Company
adopted an Equity Compensation Plan (the "Plan") which provides for incentive
stock options and non-statutory options to be granted to officers, employees,
directors and consultants to the Company. Options, to purchase up to 860,000
shares of the Company's Common Stock may be granted under the Plan. Terms of
exercise and expiration of Options granted under the Plan may be established in
the discretion of an Administrative Committee appointed to administer the Plan
or by the Board of Directors if no Committee is appointed, but no option may be
exercisable for more than ten (10) years. Grants of restricted stock and
supplemental bonuses may also be granted under the Plan.

In the fiscal year ending December 31, 1997, stock options to purchase
200,000 shares of the Company's Common Stock were issued to Philip Becker
pursuant to the Becker Agreement. In addition, options to purchase 60,000 shares
of the Company were granted to Wayne Farlow, and pursuant to the Severance
Agreement, he has agreed to purchase such shares.

DIRECTOR COMPENSATION

The directors of the Company are not currently compensated for serving as
directors. As set forth above, Mr. Becker receives compensation as an officer
and Kent Nuzum and Gene Copeland have each received compensation for services as
consultants to the Company.

-20-

<PAGE>

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The Company has a total of 4,318,158 shares of Common Stock issued and
outstanding after the issuance of 1,750,000 shares in the Canadian Offering,
75,000 shares to the Agent in that Offering, and 350,000 shares and 60,000
shares issued in two private transactions. The following table sets forth
information regarding beneficial ownership of Common Stock of the Company and
options to purchase Common Stock that are currently exercisable or exercisable
within sixty days of the date of this Registration Statement held by (i) each
person or group of persons known by the Company to own beneficially five percent
(5%) or more of the outstanding shares of the Company's Common Stock, (ii) each
director of the Company, (iii) each executive officer named in the Executive
Compensation Table and (iv) all executive officers and directors of the Company
as a group. Unless otherwise indicated, the shareholders listed below have sole
voting and investment power with respect to the shares reported as beneficially
owned.

AMOUNT AND NATURE OF
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP PERCENT OF CLASS
- ---------------------------------- ------------------- ----------------
Philip L. Becker.................. 950,000 22.00%
5335 Sterling Drive, Suite C
Boulder, CO 80301

Daryl Yurek(1)(5)................. 851,379 19.32%
1113 Spruce Street
Boulder, CO 80302

Opus Capital Fund, LLC(2)......... 437,500 9.93%
1113 Spruce Street
Boulder, CO 80302

W. Terrance Schreier(3)(5)........ 216,939 5.02%
1942 Broadway, Suite 303
Boulder, CO 80302

Gene R. Copeland(4)(5)............ 196,940 4.56%
1942 Broadway, Suite 303
Boulder, CO 80302

Directors and Executive Officers.. 1,146,940 26.56%
as a group

(1)Includes 106,579 shares of Common Stock and options to purchase up to 207,300
shares of Common Stock of the Company within 60 days held by Pantheon Capital
Ltd. The options expire on the earlier of February 1, 1999 or one year and 15
days after the date of the Canadian Offering. Excludes 177,951 shares that
may be issued to Pantheon Capital Ltd., at the discretion of the Company, as
payment for amounts outstanding under three promissory notes issued by the
Company, each of which notes is payable on the earlier of January 2, 1999 or
30 days after the date of the Canadian Offering. Pantheon Capital Ltd. is
controlled by Mr. Yurek and he may be deemed to be the beneficial owner of
all shares and options held in the name of Pantheon Capital Ltd. Includes
100,000 shares beneficially owned by Mr. Yurek and held in the name of the
Daryl F. Yurek Self Employed Pension of which Smith Barney Inc. is custodian.
Also includes 350,000 shares owned by Opus Capital Fund, LLC, of which Mr.
Yurek and Deiter Heidrich are Managing Partners with power to vote securities
held by the Fund and 87,500 warrants to purchase shares of Common Stock also
owned by the Fund.

(2)Includes warrants to purchase 87,500 shares of Common Stock at $1.00 per
share for one year after the Canadian Offering and $1.15 per share for the
second year, purchased by Opus Capital Fund at the same time that it
purchased 350,000 shares for $1.00 per share in a private transaction.

(3)Includes 113,289 shares of Common Stock and options to purchase up to 103,650
shares of Common Stock of the Company within 60 days held by Transition
Partners, Ltd. The options expire on the earlier of February 1, 1999

-21-

<PAGE>

or one year and 15 days after the date of the Canadian Offering. Excludes
88,976 shares of Common stock that may be issued to Transition Partners,
Ltd., at the discretion of the Company, as payment for amounts outstanding
under three promissory notes issued by the Company, each of which notes is
payable on the earlier of January 2, 1999 or 30 days after the date of the
Offering. Transition Partners, Ltd. is controlled by Mr. Schreier and he may
be deemed to be the beneficial owner of all shares and options held in the
name of Transition Partners, Ltd.

(4)Includes 93,290 shares of Common Stock and options to purchase 103,650 shares
of Common Stock of the Company within 60 days held by the Copeland Consulting
Group, Inc. The options expire on the earlier of February 1, 1999 or one year
and 15 days after the date of the Canadian Offering. Excludes 88,976 shares
of Common Stock that may be issued to Copeland Consulting Group, Inc. at the
discretion of the Company, as payment for amounts outstanding under three
promissory notes issued by the Company, each of which notes is payable on the
earlier of January 2, 1999 or 30 days after the date of the Offering.
Copeland Consulting Group, Inc. is controlled by Mr. Copeland and he may be
deemed to be the beneficial owner of all shares and options held in the name
of Copeland Consulting Group, Inc.

(5)Pursuant to an agreement among Pantheon Capital, Ltd., Transition Partners
Ltd. and Copeland Consulting Group, Inc., those three consultants to the
Company share in all compensation or rights, including promissory notes and
options, as follows: 50% to Pantheon Capital and 25% to each of Transition
Partners and to Copeland Consulting. The promissory notes referenced above
are for an aggregate principal amount of $355,903 of which two notes for an
aggregate of $116,000 were issued by the Company as compensation for services
and the remaining $239,903 was originally issued to Philip L. Becker to
represent cash loaned to the Company. The latter note was sold by Mr. Becker
to Pantheon Capital.

SELLING STOCKHOLDERS

The following table sets forth certain information regarding beneficial
ownership of Common Stock as of the date of December 31, 1997, after giving
effect to the Canadian Offering and the sale of 350,000 shares to Opus Capital
and 60,000 shares to Wayne Farlow in private transactions by (i) each person
known to the Company to own beneficially more than 5% of the Common Stock, (ii)
by each of the Company's directors, director nominees and Named Executive
Officers, (iii) all executive officers, directors and director nominees as a
group and (iv) the stockholders selling shares in this offering.

<TABLE>
<CAPTION>
G
SHARES SHARES SHARES
BENEFICIALLY PRE-OFFERING OFFERED BENEFICIALLY POST-OFFERING
OWNED PRE- PERCENTAGE IN THE OWNED POST- %
NAME AND ADDRESS OFFERING OWNERSHIP(1) OFFERING OFFERING OWNERSHIP
---------------- -------- --------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>

Philip L. Becker 950,000 22.00% 950,000 -0- 0%
5335 Sterling Drive, Suite C
Boulder, CO 80301

Pantheon Capital Ltd.(2)............. 491,830 10.94% 491,830 -0- 0%
2100-1111 West Georgia Street
Vancouver, B.C. Canada V7X1K9

Opus Capital Fund, LLC(3)............ 437,500 8.11% 437,500 -0- 0%
1113 Spruce Street
Boulder, CO 80302

Transition Partners, Ltd.(4)......... 305,915 6.94% 305,915 -0- 0%
1942 Broadway, Suite 303
Boulder, CO 80302

-22-

<PAGE>

SHARES SHARES SHARES
BENEFICIALLY PRE-OFFERING OFFERED BENEFICIALLY POST-OFFERING
OWNED PRE- PERCENTAGE IN THE OWNED POST- %
NAME AND ADDRESS OFFERING OWNERSHIP(1) OFFERING OFFERING OWNERSHIP
---------------- -------- --------- -------- -------- ---------
Copeland Consulting Group, Inc.(5)... 285,916 6.71% 285,916 -0- 0%
1942 Broadway, Suite 303
Boulder, CO 80302

Wayne Farlow(6)...................... 180,000 3.70% 180,000 -0- 0%
4020 Pinon Drive
Boulder, CO 80303

Daryl Yurek(7)....................... 100,000 2.32% 100,000 -0- 0%
1113 Spruce Street
Boulder, CO 80302

Marion Jack Rickard.................. 100,000 2.17% 100,000 -0- 0%
8500 W. Bowles Ave, #210
Littleton, CO 80123

Robert C. Hartman.................... 30,000 0.69% 30,000 -0- 0%
3837 S. Olathe Circle
Aurora, CO 80013

Joe W. Green......................... 30,000 0.69% 30,000 -0- 0%
2182 S. Grant St.
Denver, CO 80210

William G. Witmore................... 20,000 0.46% 20,000 -0- 0%
3905 Promontory Court
Boulder, CO 80304

Terrance W. Hefty.................... 20,000 0.46% 20,000 -0- 0%
8558 Baseline Road
Lafayette, CO 80026

James Oleynick....................... 40,000 0.93% 40,000 -0- 0%
1749 McSpadden Ave
Van Couver, British Columbia
V5N1L3

Adrian Swanton....................... 20,000 0.46% 20,000 -0- 0%
4336 Prospect Road
North Vancouver, British Columbia
V7N3L7

Equity Ventures Ltd.................. 20,000 0.46% 20,000 -0- 0%
44 Church Street
Hamilton HM12, Bermuda

The Goleen Corp. Ltd................. 40,000 0.93% 40,000 -0- 0%
94 Dowdeswell St.
Box N7521
Nassau, Bahamas

William E. Hodal..................... 10,000 0.22% 10,000 -0- 0%
2200 - 609 Granville Street
P.O. Box 10337, Pacific Centre
Vancouver, BC V7Y 1H2

-23-

<PAGE>

SHARES SHARES SHARES
BENEFICIALLY PRE-OFFERING OFFERED BENEFICIALLY POST-OFFERING
OWNED PRE- PERCENTAGE IN THE OWNED POST- %
NAME AND ADDRESS OFFERING OWNERSHIP(1) OFFERING OFFERING OWNERSHIP
---------------- -------- --------- -------- -------- ---------
Jeana Traviss........................ 50,000 1.16% 50,000 -0- 0%
2200 - 609 Granville Street
P.O. Box 10337, Pacific Centre
Vancouver, BC V7Y 1H2

Henry Ewanchuk....................... 80,000 1.85% 80,000 -0- 0%
4116 West 8th Avenue
Vancouver, BC V6R 1Z6

Mike Meyers.......................... 20,000 0.46% 20,000 -0- 0%
826 West 48th Avenue
Vancouver, BC V5Z 2R9

Chelsea Capital Corporation.......... 40,000 0.93% 40,000 -0- 0%
1600 - 750 W. Pender Street
Vancouver, BC V6C 2T8

Michael Thomson...................... 20,000 0.46% 20,000 -0- 0%
1600 - 750 W. Pender Street
Vancouver, BC V6C 2T8

C.M. Oliver Capital Corporation...... 20,000 0.46% 20,000 -0- 0%
1600 - 750 W. Pender Street
Vancouver, BC V6C 2T8

Garrow Bay Holdings Ltd.............. 8,000 0.19% 8,000 -0- 0%
6175 Nelson Avenue
West Vancouver, BC V7W 2A1

Bruce Buckland....................... 8,000 0.19% 8,000 -0- 0%
2200-609 Granville Street
P.O. Box 10337, Pacific Centre
Vancouver, BC V7Y 1H2

Randy Ayers.......................... 8,000 0.19% 8,000 -0- 0%
2200 - 609 Granville Street
P.O. Box 10337, Pacific Centre
Vancouver, BC V7Y 1H2

Glenn Butterworth.................... 8,000 0.19% 8,000 -0- 0%
2200 - 609 Granville Street
P.O. Box 10337, Pacific Centre
Vancouver, BC V7Y 1H2

Dale Eckert.......................... 8,000 0.19% 8,000 -0- 0%
2200 - 609 Granville Street
P.O. Box 10337, Pacific Centre
Vancouver, BC V7Y 1H2

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

(1) The percentages assume 1,750,000 shares of Common Stock are sold in the
Canadian Offering, 75,000 shares are issued to C.M. Oliver & Company Limited
as a corporate finance fee relating to the Canadian Offering and 350,000
shares and 60,000 shares are sold in private transactions.
</TABLE>

-24-

<PAGE>
(2) Includes 106,579 shares of Common Stock, options to purchase up to 207,300
shares of Common Stock of the Company and 177,961 shares that may be issued
to Pantheon Capital Ltd., at the discretion of the Company, as payment for
amounts outstanding under three promissory notes issued by the Company, each
of which notes is payable on the earlier of January 2, 1999 or 30 days after
the date of the Canadian Offering. The options expire on the earlier of
February 1, 1999 or one year and 15 days after the date of the Canadian
Offering. Pantheon Capital Ltd. is controlled by Daryl Yurek and he may be
deemed to be the beneficial owner of all shares and options held in the name
of Pantheon Capital Ltd.

(3) Includes warrants to purchase 87,500 shares of Common Stock at $1.00 per
share for one year after the Canadian Offering and $1.15 per share for the
second year, purchased by Opus Capital Fund at the same time that it
purchased 350,000 shares for $1.00 per share in a private transaction.

(4) Includes 113,289 shares of Common Stock, options to purchase up to 103,650
shares of Common Stock of the Company and 88,976 shares of Common stock that
may be issued to Transition Partners, Ltd., at the discretion of the
Company, as payment for amounts outstanding under three promissory notes
issued by the Company, each of which notes is payable on the earlier of
January 2, 1999 or 30 days after the date of the Offering. The options
expire on the earlier of February 1, 1999 or one year and 15 days after the
date of the Canadian Offering. Transition Partners, Ltd. is controlled by
Mr. Schreier and he may be deemed to be the beneficial owner of all shares
and options held in the name of Transition Partners, Ltd.

(5) Includes 93,290 shares of Common Stock and options to purchase 103,650
shares of Common Stock of the Company and 88,976 shares of Common Stock
that may be issued to Copeland Consulting Group, Inc. at the discretion of
the Company, as payment for amounts outstanding under three promissory
notes issued by the Company, each of which notes is payable on the earlier
of January 2, 1999 or 30 days after the date of the Offering. The options
expire on the earlier of February 1, 1999 or one year and 15 days after the
date of the Canadian Offering. Copeland Consulting Group, Inc. is
controlled by Gene R. Copeland and he may be deemed to be the beneficial
owner of all shares and options held in the name of Copeland Consulting
Group, Inc.

(6) Includes 60,000 shares agreed to be purchased prior to the Canadian
Offering.

(7) Shares are held in the name of the Daryl F. Yurek Self Employed Pension of
which Smith Barney Inc. is custodian.

MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

COMMON STOCK

Prior to the effective time of this Registration Statement, there has been
no established public market for the Company's Common Stock. Soon after the
effectiveness of this Registration Statement, the Company expects to complete
its initial public offering of Common Stock in British Columbia, Canada. The
price to the public in the Offering is expected to be $1.00 per share. Upon
completion of the Offering, the Common Stock of the Company will be listed on
the Vancouver Stock Exchange and such exchange will be the primary market for
the Common Stock.

Currently, the Company has 2,083,158 shares of Common Stock issued and
outstanding, all of which are "restricted securities" under Rule 144 of the
Securities Act of 1933, as amended (the "Act"). As of the date of this
Registration Statement, only the 950,000 shares held by Philip Becker have been
held for the two-year period under Rule 144. The remaining shares will satisfy
the Rule 144 one-year and two year (as the case may be) holding periods on
September 4, 1998 and 1999, respectively.

If all 1,750,000 shares of Common Stock are sold in the Canadian Offering,
75,000 shares of Common Stock are issued to the Agent as compensation for
underwriting the Offering, 60,000 shares are sold to Wayne Farlow pursuant to
the Severance Agreement, 350,000 shares are sold to Opus Capital Fund and 87,500
warrants issued to Opus are exercised, and 355,903 shares are issued upon
conversion of promissory notes issued by the Company, there will be 4,674,061
shares issued and outstanding. Of such shares, 1,825,000 shares sold in the
Offering will be freely tradable in Canada and such shares will be subject to
Regulation S under the Act.

-25-

<PAGE>

STOCK OPTIONS AND WARRANTS

As of the date of this Registration Statement, options to purchase 200,000
shares have been granted under the Company's Equity Compensation Plan (the
"Option Plan"), none of which are currently exercisable. In addition, the
Company has granted options to consultants to purchase an aggregate of 355,903
shares of Common Stock. All such options are exercisable at a stated price of
$1.00 per share at the price at which shares are offered to the public in the
Canadian Offering which is expected to be $1.00 per share.

The Company has granted to the Agent an option exercisable for a period of
60 days from the date of the Canadian Offering to solicit and accept additional
subscriptions up to an aggregate of 262,500 shares of Common Stock to cover
over-allotments, if any, in the Offering.

The Company has agreed to grant the Agent for the Offering a
non-transferable warrant (the "Agent's Warrant") to acquire up to 250,000 shares
of Common Stock. The Agent's Warrant will be exercisable at the price to the
public in the Offering, expected to be $1.00 per share, provided that it is
exercised within one year, and thereafter will be exercisable at an expected
price of $1.15 per share.

HOLDERS

There are approximately 27 holders of Common Stock of the Company.

DIVIDENDS

The Company intends, for the foreseeable future to retain all earnings, if
any, for the development of its business opportunities. The payment of future
dividends will be at the discretion of the Company's board of directors and will
depend upon , among other things, future earnings, capital requirements, the
Company's financial condition and general business conditions.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The Company has entered into transactions with its officers and directors,
and with principal shareholders listed in Item 4 or affiliated entities as
described below.

EMPLOYMENT AGREEMENT - PHILIP BECKER

On September 2, 1997 the Company and Philip Becker ("Becker"), the Chairman,
Chief Technical Officer, Chief Executive Officer and a director of the Company,
entered into an employment agreement (the "Becker Agreement") which extends for
a thirty six month period commencing on September 1, 1997. Under the terms of
the Becker Agreement the Company will pay to Becker the sum of $8,333 per month
until the completion of the Canadian Offering and thereafter the sum of $10,000
per month plus incentive stock options to acquire 200,000 shares of Common Stock
at a price of $1.00 per share for a period of five years from the date of the
Canadian Offering. The option will vest over a 36 month period. No options will
be exercisable initially, but 7/36 of the options will vest seven months after
the date of the Canadian Offering and 1/36 of the options will vest on the first
day of each month thereafter.

The Becker Agreement also provides that Becker shall be eligible to receive
a quarterly performance bonus equal to 10% of the Company's earnings net of
adjustments for interest and taxes. In the event that the bonus exceeds 50% of
Becker's gross annual salary, the bonus will be capped at the amount of Mr.
Becker's salary for the quarter.

The Becker Agreement includes non-competition and confidentiality provisions
which extend for 12 months and five years following the termination of Becker's
employment with the Company, respectively. The Becker Agreement may be
terminated by either the Company or Becker on 30 days notice without cause. If
his employment is terminated by the Company without cause, the Company must pay
Becker one month's salary for each year of employment since 1992.

-26-

<PAGE>

CONSULTING AGREEMENTS

On September 2, 1997, the Company and Kent Nuzum ("Nuzum"), the Secretary,
Interim Chief Financial Officer and a director of the Company, entered into a
consulting and non-competition agreement (the "Nuzum Agreement") which extends
for an eleven month period ending July 31, 1998. Under the terms of the Nuzum
Agreement, Nuzum will provide certain consulting services related to the
management of the regulatory issues associated with the listing of the Company's
common shares with various stock exchanges in Canada and the United Sates. As
payment for his consulting services Nuzum shall receive the sum of $3,500 per
month (the "Consulting Fee") plus Nuzum's reasonable out-of-pocket expenses. In
consideration of the Consulting Fee Nuzum agrees not to disclose any
confidential information relating to the Company for a period of twelve months
following termination of the Nuzum Agreement.

The Company and Transition Partners, Ltd. ("TPL"), a Colorado corporation
with its principal place of business at 1942 Broadway, Suite 303, Boulder,
Colorado, U.S.A. 80302, entered into a letter consulting agreement (the "TPL
Agreement") on October 14, 1996, which was subsequently modified and extended on
May 6, 1997 and August 22, 1997. Under the terms of the TPL Agreement, as
amended, TPL provides certain consulting and advisory services related to
general corporate development, strategic planning and capital formation of the
Company. As payment for its consulting services TPL received a lump-sum payment
of $20,500, in addition to the $36,000 in fees received during the period
October 1996 to March 1997, and two promissory notes in the amounts of $41,000
and $75,000 respectively. Each of the promissory notes bears no interest until
due, and thereafter bears interest at the rate of 12% per annum, is due the
later of March 31, 1998 or the date of the Canadian Offering and may, at the
option of the Company, be satisfied by issuance of common shares of the Company
valued at the price of common shares issued under the Canadian Offering. The TPL
Agreement will terminate on May 21, 1998. [Copeland Consulting Group, Inc. is a
participant in TPL, and pursuant to an agreement is entitled to one-half of all
compensation secured from the Company.]

On August 22 ,1997 the Company and Pantheon Capital Ltd. ("Pantheon")
entered into a consulting and non-competition agreement (the "Pantheon
Agreement") which extends until May 21, 1998. Under the terms of the Pantheon
Agreement, as amended November 11, 1997, Pantheon provides certain consulting
services relating to a proposed interim private financing of up to $410,000 and
to the Canadian Offering. In consideration of its consulting services Pantheon
shall be entitled to options to acquire 264,600 shares of Common Stock of the
Company at $1.00 per share, expiring on the later of February 1, 1997 and the
day which is one year and fifteen days after the date of the Canadian Offering.
Pantheon is entitled to pay for the Common Shares on the exercise of the option
by granting a non-interest bearing 12-month promissory note to the Company.
Pantheon has agreed not to disclose confidential information of the Company for
a period of five years following the termination of the agreement.

Pantheon and TPL are acting jointly in providing consulting services to the
Company, and have agreed to share equally in all compensation or value received
from eSoft.

SEVERANCE AGREEMENT

On December 19, 1997 the Company and Wayne Farlow, the President of the
Company from September 2 to November 11, 1997 entered into the Severance
Agreement discussed in Item 6.

SALE OF SHARES

The sale of Shares by the Selling Stockholders may be effected from time to
time in transactions (which may include block transactions) on any stock
exchange or trading market, if any, on which the Company's Common Stock is
listed or traded, in negotiated transactions, or a combination of such methods
of sale at fixed prices which may be changed, at market prices prevailing at the
time of sale, at prices related to such prevailing market prices, or at
negotiated prices. The Selling Stockholders may effect such transactions by
selling shares to or through broker-dealers, and such broker-dealers may receive
compensation in the form of discounts, concessions or commissions from the
Selling Stockholders and/or the purchasers of Stockholder Securities for whom
such broker-dealers may act as agent or to whom they sell as principal or both
(which compensation as to a particular broker-dealer might be in excess of
customary commissions). The Selling Stockholders and any broker-dealers that act
in connection with the sale of the Stockholder Securities hereunder might be
deemed to be "underwriters" within the meaning of Section 2(11) of the Act and
any

-27-

<PAGE>

commissions received by them and any profit on the resale of the Shares as
principals might be deemed to be underwriting discounts and commissions under
the Act.

The Company has paid substantially all of the expenses incident to the
offering of the Shares, other than the fees and expenses of counsel to the
Selling Stockholder.

LEGAL PROCEEDINGS

The Company is not involved in any material legal proceedings.

DESCRIPTION OF SECURITIES

The Company is authorized to issue 50,000,000 shares of Common Stock, $.01
par value, and up to 3,000,000 shares of Preferred Stock, $.01 par value. The
holders of Common Stock are entitled to vote at all meeting of shareholders, to
receive dividends if, as and when declared by the board of directors, and to
participate ratably in any distribution of property or assets on the
liquidation, winding up or other dissolution of the Company. The shares have no
preemptive or conversion rights. As of the date of this Registration Statement,
2,083,158 shares have been issued and outstanding. As of the date of this
Registration Statement, no shares of Preferred Stock have been issued.

INTEREST OF NAMED EXPERTS AND COUNSEL

The financial statements of the Company included in this Prospectus and in
the Registration Statement have been audited by BDO Seidman, LLP, independent
certified public accountants, to the extent and for the periods set forth in
their reports appearing elsewhere herein and in the Registration Statement and
are included in reliance upon such reports given upon the authority of said
firms as experts in auditing and accounting. BDO Seidman, LLP was first engaged
by the Company as its independent public accountants on September 15, 1997. The
Company had not previously engaged independent public accountants to audit the
Company's financial statements.

AVAILABLE INFORMATION

The Company has filed with the Commission, a Registration Statement on
Form 10-SB pursuant to the Securities Exchange Act of 1934, as amended and a
Registration Statement on Form SB-2 pursuant to the Securities Act of 1933, as
amended (collectively referred to as the "Registration Statements") with respect
to the Shares being offered hereby. This Prospectus does not contain all the
information set forth in the Registration Statements, certain parts of which are
omitted in accordance with the rules and regulations of the Commission, and to
which reference is hereby made. Statements contained in this Prospectus as to
the contents of any contract or any other document are not necessarily complete,
and , in each instance, reference is made to the copy of such contract or
document filed as an exhibit to the Registration Statements, each such statement
being qualified in its entirety by such reference. The Registration Statements
may be inspected and copied at the offices of the Commission at Judiciary Plaza
Building, 450 Fifth Street, N.W., Washington, D.C. 20549; and its regional
offices located at Suite 1400, Northwestern Atrium Center, 500 West Madison
Street, Chicago, Illinois 60661, and Seven World Trade Center, 13th Floor, New
York, New York 10048. Copies of such material, or any portion thereof, may be
obtained from the Public Reference Section of the Commission, Judiciary Place,
450 Fifth Street, N.W. , Washington, D.C. 20549, at prescribed rates. The
Commission maintains a Web site that contains information regarding registrants'
electronic filings with the Commission. The address of the Commission's Web site
is http://www.sec.gov.

The Company does not presently file reports and other financial
information with the Commission. However, following completion of this Offering,
the Company expects to make such filings and intends to furnish its stockholders
with annual reports containing audited financial statements examined and
reported upon by its independent certified public accountants and such interim
reports, in each case, as it may determine to furnish or as may be required by
law.

-28-

<PAGE>
FINANCIAL STATEMENTS

eSOFT, INCORPORATED
CONTENTS

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS F-2

BALANCE SHEETS AT SEPTEMBER 30, 1997 (UNAUDITED)
AND DECEMBER 31, 1996 F-3 - F-4

STATEMENTS OF OPERATIONS FOR THE NINE MONTH PERIODS ENDED
SEPTEMBER 30, 1997 (UNAUDITED) AND 1996 (UNAUDITED)
AND FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 F-5

STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE NINE MONTH
PERIOD ENDED SEPTEMBER 30, 1997 (UNAUDITED),
AND THE YEARS ENDED DECEMBER 31, 1996 AND 1995 F-6

STATEMENTS OF CASH FLOWS FOR THE NINE MONTH PERIODS
ENDED SEPTEMBER 30, 1997 (UNAUDITED), AND 1996
(UNAUDITED), AND FOR THE YEARS
ENDED DECEMBER 31, 1996 AND 1995 F-7 - F-8

SUMMARY OF ACCOUNTING POLICIES F-9 - F-13

NOTES TO FINANCIAL STATEMENTS F-14 - F-19

F-1

<PAGE>

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

To the Board of Directors
eSoft, Incorporated
Aurora, Colorado

We have audited the accompanying balance sheet of eSoft, Incorporated as of
December 31, 1996 and the related statements of operations, stockholders' equity
and cash flows for each of the two years in the period ended December 31, 1996.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of eSoft, Incorporated at December
31, 1996 and the results of its operations and its cash flows for each of the
two years ended December 31, 1996 in conformity with generally accepted
accounting principles.

/s/BDO Seidman, LLP
Denver, Colorado --------------------------------------
November 26, 1997

F-2

<PAGE>

eSOFT, INCORPORATED
BALANCE SHEETS

SEPTEMBER 30, December 31,
1997 1996
- --------------------------------------------------------------------------------
(unaudited)

ASSETS

CURRENT:
Cash and cash equivalents $ 374,398 $ 20,750

Accounts receivable 71,120 34,665

Inventories 75,973 58,659

Prepaid expenses and other 127,595 2,561
- --------------------------------------------------------------------------------

Total current assets 649,086 116,635
- --------------------------------------------------------------------------------

PROPERTY AND EQUIPMENT:
Computer equipment 126,275 125,025
Furniture and equipment 137,848 135,821
- --------------------------------------------------------------------------------
264,123 260,846

Less accumulated depreciation 150,570 122,895
- --------------------------------------------------------------------------------
Net property and equipment 113,553 137,951

OTHER ASSETS:
Capitalized software development costs
net of accumulated amortization of
$121,369 and $35,761 646,227 534,957
Deferred offering costs 45,484 -
- --------------------------------------------------------------------------------

Total other assets 691,711 534,957
- --------------------------------------------------------------------------------

$ 1,454,350 $ 789,543
================================================================================

See accompanying summary of accounting policies and notes to financial
statements.

F-3

<PAGE>

eSOFT, INCORPORATED
BALANCE SHEETS

SEPTEMBER 30, December 31,
1997 1996
- --------------------------------------------------------------------------------
(unaudited)

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
Notes payable to a bank $ 80,826 $ -
Accounts payable and accrued expenses 83,878 29,728

Deferred revenue 13,236 57,970
Customer deposits 42,788 6,034
Notes payable, related party - current 20,000 -
- --------------------------------------------------------------------------------

Total current liabilities 240,728 93,732

Deferred tax liability 241,042 -
Convertible notes payable -
related parties 355,903 239,903
- --------------------------------------------------------------------------------

Total liabilities 837,673 333,635
- --------------------------------------------------------------------------------

COMMITMENTS

STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, 3,000,000 shares
authorized, no shares issued and outstanding - -
Common stock, no par value, 50,000,000 shares
authorized, 2,083,158, 1,263,158
shares issued and outstanding 827,959 480,605
Accumulated deficit (211,282) (24,697)
- --------------------------------------------------------------------------------

Total stockholders' equity 616,677 455,908
- --------------------------------------------------------------------------------

$ 1,454,350 $ 789,543
================================================================================

See accompanying summary of accounting policies and notes to financial
statements.

F-4

<PAGE>

eSOFT, INCORPORATED
STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
Nine month
periods ended Years ended
September 30, December 31,
1997 1996 1996 1995
- -------------------------------------------------------------------------------------------
(unaudited) (unaudited)

<S> <C> <C> <C> <C>
REVENUES $ 787,794 $ 1,136,003 $ 1,405,761 $ 2,017,252
- -------------------------------------------------------------------------------------------

COSTS AND EXPENSES:
Cost of revenue 240,083 489,823 598,736 700,219

Research and development -- -- -- 253,290

Selling, general and
administrative 471,247 514,635 631,124 970,779
Interest expense 23,922 17,297 23,914 14,967

Loss on disposal of assets -- -- 27,739 383
Other (1,915) -- 4,899 (2,758)
- -------------------------------------------------------------------------------------------

Total costs and expenses 733,337 1,021,755 1,286,412 1,936,880
- -------------------------------------------------------------------------------------------

Income before income taxes 54,457 114,248 119,349 80,372
- -------------------------------------------------------------------------------------------

Income tax expense (241,042) -- -- --
- -------------------------------------------------------------------------------------------

NET INCOME (LOSS) $ (186,585) $ 114,248 $ 119,349 $ 80,372
===========================================================================================

Income (loss) per common share $ (.14) $ .12 $ .11 $ .09
===========================================================================================

Weighted-average number of
common shares outstanding 1,338,250 921,704 1,102,253 921,704
===========================================================================================
</TABLE>

See accompanying summary of accounting policies and notes to financial
statements.

F-5

<PAGE>

eSOFT, INCORPORATED
STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
Common Stock Total
------------------ Accumulated Stockholders'
Shares Amount Deficit Equity
- ----------------------------------------------------------------------------------------------

<S> <C> <C> <C> <C>
BALANCE, January 1, 1995 921,704 $350,050 $(224,418) $125,632

Net income for the year -- -- 80,372 80,372
- ----------------------------------------------------------------------------------------------

BALANCE, December 31, 1995 921,704 350,050 (144,046) 206,004
Debt exchange for
common stock 341,454 130,555 -- 130,555

Net income for the year -- -- 119,349 119,349
- ----------------------------------------------------------------------------------------------

BALANCE, December 31, 1996 1,263,158 480,605 (24,697) 455,908

Issuance of common stock
pursuant to private place-
ment, net of issuance costs
of $62,646 (unaudited) 820,000 347,354 -- 347,354

Net loss for the period (unaudited) -- -- (186,585) (186,585)
- ----------------------------------------------------------------------------------------------

BALANCE, September 30, 1997 (unaudited) 2,083,158 $ 827,959 $(211,282) $ 616,677
==============================================================================================
</TABLE>

See accompanying summary of accounting policies and notes to financial
statements.

F-6

<PAGE>

eSOFT, INCORPORATED
STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
Nine month
periods ended Years ended
September 30, December 31,
---------------------- ----------------------
1997 1996 1996 1995
- -------------------------------------------------------------------------------------------------
(unaudited) (unaudited)

<S> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $(186,585) $ 114,248 $ 119,349 $ 80,372
Adjustments to reconcile net
income (loss) to net cash provided by
operating activities:
Depreciation and amortization 113,283 54,034 79,637 40,796
Loss on disposal of capital
assets -- -- 27,739 383
Deferred tax expense 241,042 -- -- --
Changes in operating assets
and liabilities:
Accounts receivable (36,455) (11,879) 12,173 (7,650)
Inventories (17,314) 28,273 37,734 (24,764)
Other current assets (54,518) 18,749 18,949 1,451
Accounts payable and accrued
expenses 54,150 (60,633) (58,667) 37,652
Customer deposits 7,202 (24,392) (35,122) (79,539)
Deferred revenue (15,182) 56,106 57,970 --
- -------------------------------------------------------------------------------------------------

Net cash provided by operating
activities 105,623 174,506 259,762 48,701
- -------------------------------------------------------------------------------------------------

INVESTING ACTIVITIES:
Purchase of property and
equipment (3,277) (17,542) (19,041) (36,522)
Additions to capitalized
software (196,878) (355,015) (440,237) (130,481)
- -------------------------------------------------------------------------------------------------

Net cash used in investing
activities (200,155) (372,557) (459,278) (167,003)
- -------------------------------------------------------------------------------------------------
</TABLE>

F-7

<PAGE>

eSOFT, INCORPORATED
STATEMENTS OF CASH FLOWS
(CONTINUED)

<TABLE>
<CAPTION>
Nine month
periods ended Years ended
September 30, December 31,
----------------------- -------------------
1997 1996 1996 1995
- --------------------------------------------------------------------------------------------
(unaudited) (unaudited)

<S> <C> <C> <C> <C>
FINANCING ACTIVITIES:
Proceeds from issuance
of common stock - net 347,354 -- -- --
Proceeds from borrowings 100,000 -- -- --
Payments on debt (19,174) -- -- --
Proceeds from related
party borrowings 20,000 208,042 208,550 111,598
Payments on related party
notes payable -- (36,386) (36,386) (38,304)
- --------------------------------------------------------------------------------------------

Net cash provided by financing activities 448,180 171,656 172,164 73,294
- --------------------------------------------------------------------------------------------

INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 353,648 (26,395) (27,352) (45,008)

CASH AND CASH EQUIVALENTS,
beginning of period 20,750 48,102 48,102 93,110
- --------------------------------------------------------------------------------------------

CASH AND CASH EQUIVALENTS,
end of period $ 374,398 $ 21,707 $ 20,750 $ 48,102
============================================================================================
</TABLE>

See accompanying summary of accounting policies and notes to financial
statements.

F-8

<PAGE>

eSOFT, INCORPORATED
SUMMARY OF ACCOUNTING POLICIES

BUSINESS eSoft, Incorporated (the "Company" or "eSoft"), a Colorado
corporation, develops and markets internet connectivity
solutions. The Company has developed software, which is
integrated with a hardware component, that allows local
area networks to connect with the internet. The software
also contains full access control for its remote access
features. The Company also resells related connectivity
accessories. The Company previously had developed and sold
software for the bulletin board market.

Prior to June 30, 1996, eSoft and Philip L. Becker, Ltd.
("PLB") operated as a combined entity due to common
ownership. eSoft, an S-corporation, acted as the general
partner of PLB, a limited partnership. eSoft, as general
partner, owned 10% of the partnership while the sole
stockholder of eSoft owned the other 90% individually. PLB
was dissolved on June 30, 1996 and the assets were
contributed to the Company in exchange for common stock.

The contribution of assets was accounted for in a manner
similar to a pooling-of-interests (the assets, liabilities
and partnership capital were contributed at book values)
and, accordingly, the Company's financial statements have
been presented to include the results of operations as
though the contribution of assets occurred as of January 1,
1995.

CONCENTRATIONS OF The Company's financial instruments that are exposed
CREDIT RISK to concentrations of credit risk consist primarily
of cash and cash equivalent balances in excess of the
insurance provided by governmental insurance authorities.
The Company's cash and cash equivalents are placed with
financial institutions and are primarily invested in money
market investments.

USE OF The preparation of financial statements in conformity with
ESTIMATES generally accepted accounting principles requires
management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the
date of the financial statements and revenues and expenses
during the reporting period. Actual results could differ
from those estimates and assumptions.

F-9

<PAGE>
eSOFT, INCORPORATED
SUMMARY OF ACCOUNTING POLICIES

FAIR VALUE OF Unless otherwise specified, the Company believes the book
FINANCIAL value of financial instruments approximates their fair
INSTRUMENTS value.

INVENTORIES Inventories, consisting of purchased goods, are valued at
the lower of cost (first-in, first-out) or market.

PROPERTY AND Property and equipment are stated at cost. Depreciation is
EQUIPMENT computed using straight-line methods over the estimated
useful lives (generally five years) of the assets.

CAPITALIZED Costs incurred internally in creating software
SOFTWARE COSTS products for resale are charged to expense until
technological feasibility has been established upon
completion of a detail program design. Thereafter, all
software development costs are capitalized until the point
that the product is ready for sale and subsequently
reported at the lower of amortized cost or net realizable
value.

In accordance with Statement of Financial Accounting
Standard No. 86, the Company recognizes the greater amount
of annual amortization of capitalized software costs under
1) the ratio of current year revenues by product, to the
product's total estimated revenues method or 2) over the
products estimated economic useful life by the straight-
line method.

REVENUE Revenue from licensing of software products is recognized
RECOGNITION upon shipment. Revenue from support and update service
agreements is deferred at the time the agreement is
executed and recognized ratably over the contractual
period. The Company recognizes revenues from customer
training and consulting services when such services are
provided. All costs associated with licensing of software
products, support and update services, and training and
consulting services are expensed as incurred.

INCOME TAXES The Company with consent of its stockholder, through
September 4, 1997, elected under the Internal Revenue Code
to be an S-corporation. Subsequent to September 4, 1997,
the Company is taxed as a C-corporation. Philip L.
Becker, Ltd. elected to be taxed as a partnership.

F-10

<PAGE>
eSOFT, INCORPORATED
SUMMARY OF ACCOUNTING POLICIES

In lieu of corporation income taxes, the stockholder and
partners were taxed on their proportional share of the
Company's or partnership's taxable income. Therefore
through September 4, 1997, no provision for income taxes
has been made in the accompanying financial statements.

The Company follows the provisions of Statement of
Financial Accounting Standards No. 109 - Accounting for
Income Taxes ("SFAS No. 109"), which requires use of the
"liability method." Accordingly, deferred tax liabilities
and assets are determined based on the temporary
differences between the financial statement and tax bases
of assets and liabilities, using the enacted tax rates in
effect for the year in which the differences are expected
to reverse. The provisions of SFAS No. 109 did not have an
impact until after September 4, 1997.

CASH EQUIVALENTS The Company considers cash and all highly liquid
investments purchased with an original maturity of
three months or less to be cash equivalents.

LONG-TERM The Company applies SFAS No. 121, "Accounting for the
ASSETS Impairment of Long-Lived Assets". Under SFAS No. 121,
long-lived assets and certain intangibles are reported at
the lower of the carrying amount or their estimated
recoverable amounts.

NET INCOME (LOSS) Net income (loss) per common and common equivalent
PER SHARE share is based on the weighted average number of shares
outstanding during each period presented. Options to
purchase stock are included as common stock equivalents,
when dilutive. Primary and fully diluted earnings are the
same for all periods presented.

STOCK OPTION PLANS The Company applies Accounting Principles Board
Opinion 25, "Accounting for Stock Issued to Employees,"
(APB Opinion 25) and related Interpretations in
accounting for all stock option plans. Under APB Opinion
25, no compensation cost has been recognized for stock
options granted as the option price equals or exceeds the
market price of the underlying common stock on the date of
grant.

F-11

<PAGE>
eSOFT, INCORPORATED
SUMMARY OF ACCOUNTING POLICIES

Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" (SFAS No. 123),
requires the Company to provide pro forma information
regarding net income as if compensation cost for the
Company's stock option plans had been determined in
accordance with the fair value based method prescribed in
SFAS No. 123.

DEFERRED OFFERING Costs incurred in connection with the Company's anticipated
COSTS public offering are deferred and will be charged against
stockholders' equity upon the successful completion of the
offering or charged to expense if the offering is not
consummated.

NEW ACCOUNTING The Financial Accounting Standards Board (FASB) has issued
PRONOUNCEMENTS Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" (SFAS No. 128). This pronouncement
provides a different method of calculating earnings per
share than is currently used in accordance with Accounting
Board Opinion No. 15, "Earnings Per Share". SFAS No. 128
provides for the calculation of "Basic" and "Dilutive"
earnings per share. Basic earnings per share includes no
dilution and is computed by dividing income available to
common shareholders by the weighted average number of
common shares outstanding for the period. Diluted earnings
per share reflects the potential dilution of securities
that could share in the earnings of an entity, similar to
fully diluted earnings per share. The Company will adopt
SFAS No. 128 in 1998 and its implementation is not expected
to have a material effect on the consolidated financial
statements.

In June 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 130,
Reporting Comprehensive Income (SFAS 130), which
establishes standards for reporting and display of
comprehensive income, its components and accumulated
balances. Comprehensive income is defined to include all
changes in equity except those resulting from investments
by owners and distributions to owners. Among other
disclosures, SFAS 130 requires that all items that are
required to be recognized under current accounting
standards as components of comprehensive income be reported
in a financial statement that is displayed with the same
prominence as other financial statements.

F-12

<PAGE>
eSOFT, INCORPORATED
SUMMARY OF ACCOUNTING POLICIES

Also, in June 1997, FASB issued SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information"
which supersedes SFAS No.14, "Financial Reporting for
Segments of a Business Enterprise." SFAS No. 131
establishes standards for the way that public companies
report information about operating segments in annual
financial statements and requires reporting of selected
information about operating segments in interim financial
statements issued to the public. It also establishes
standards for disclosures regarding products and services,
geographic areas and major customers. SFAS No. 131 defines
operating segments as components of a company about which
separate financial information is available that is
evaluated regularly by the chief operating decision maker
in deciding how to allocate resources and in assessing
performance.

SFAS 130 and 131 are effective for financial statements for
periods beginning after December 15, 1997 and requires
comparative information for earlier years to be restated.
Because of the recent issuance of the standards, management
has been unable to fully evaluate the impact, if any, the
standards may have on future financial statement
disclosures. Results of operations and financial position,
however, will be unaffected by implementation of these
standards.

In October 1997, Statement of Position 97-2, Software
Revenue Recognition (SOP 97-2) was issued. The SOP provides
guidance on when revenue should be recognized and in what
amounts licensing, selling, leasing, or otherwise marketing
computer software. SOP 97-2 is effective for transactions
entered into in fiscal years after December 15, 1997.
Because of the recent issuance of the SOP, management has
been unable to fully evaluate the impact, if any, the SOP
may have on future financial statement disclosure.

UNAUDITED PERIODS The Financial information with respect to the nine months
ended September 30, 1997 and 1996 is unaudited. In the
opinion of management, such information contains all
adjustments, consisting only of normal recurring accruals
necessary for a fair presentation of the results for such
period. The results of operations for interim periods are
not necessarily indicative of the results of operations for
the full fiscal year.

F-13
<PAGE>

eSOFT, INCORPORATED
NOTES TO FINANCIAL STATEMENTS

1. CONVERTIBLE At December 31, 1994, the Company entered into an
NOTES unsecured note agreement with the initial
PAYABLE - stockholder in the amount of $125,000 with
RELATED interest at 9% per annum, maturing December 31,
PARTIES 1997.

The Company through December 31, 1995 borrowed an additional
$111,598 from the stockholder under various unsecured demand
note agreements with interest at 7% per annum.

On June 21, 1996, the stockholder converted in a noncash
transaction $130,555 of the above notes into 341,454 shares
of common stock. The remaining amounts outstanding and
additional advances from the stockholder during 1996 were
combined into a $239,903 unsecured demand note payable. The
note bears interest at 7% per annum and requires monthly
interest payments of $1,399. In October 1997, the note was
amended which provides the Company the option to convert the
note into equity at the price of the Company's contemplated
initial public offering. The note is payable in full on
January 2, 1999.

The Company has borrowed a total of $20,000 from the
stockholder in April and June 1997 (unaudited). The 7%
unsecured notes payable are due on demand and require
monthly interest payments.

The Company entered into an agreement on October 14, 1996
with a business consulting firm to provide services through
May 31, 1998 in exchange for convertible notes payable
totalling $116,000. The convertible notes payable bear
interest at a rate of 12% per annum and are payable on
January 2, 1999. The notes are convertible into common
stock, at the Company's option, at the price of the
Company's contemplated initial public offering.

2. COST OF REVENUE

<TABLE>
<CAPTION>
NINE-MONTH
PERIODS ENDED Years ended
SEPTEMBER 30, December 31,
---------------------- ------------------------
1997 1996 1996 1995
(unaudited) (unaudited)

<S> <C> <C> <C> <C>
Inventory, beginning 58,659 $ 96,392 $ 96,393 $ 71,629
Purchases 244,424 459,870 557,785 721,824
Other 12,973 1,681 3,217 3,159
Inventory, ending (75,973) (68,120) (58,659) (96,393)
- --------------------------------------- --------- --------- --------- ---------

Total $ 240,083 $ 489,823 $ 598,736 $ 700,219
======================================= ========= ========= ========= =========
</TABLE>

F-14

<PAGE>

eSOFT, INCORPORATED
NOTES TO FINANCIAL STATEMENTS

3. RESEARCH AND During the nine month periods ended September 30, 1997 and
DEVELOPMENT 1996 and the years ended December 31, 1996 and 1995, the
Company capitalized $196,878 (unaudited), $355,015
(unaudited), $440,237, and $130,481 of software development
costs. Amortization expense of capitalized software
development costs, included in depreciation and
amortization, for the nine months ended September 30, 1997
and 1996 was $85,608 (unaudited) and $22,350 (unaudited) for
the years ended December 31, 1996 and 1995 amounted to
approximately $35,761, and $0. Research and development
costs were $0 (unaudited), $0 (unaudited), $0, $253,290, for
the nine months ended September 30, 1997 and 1996 and the
years ended December 31, 1996, 1995.

Research and development expenditures during the following
periods were comprised as follows:

NINE-MONTH
PERIODS ENDED Years ended
SEPTEMBER 30, December 31,
-------------------- --------------------
1997 1996 1996 1995
- -------------------------------- -------- -------- -------- --------
(unaudited) (unaudited)
Payroll and related costs $ 151,954 $ 200,134 $ 266,845 $ 197,737
Internet and telephone
expenses 8,000 26,457 35,276 36,580
Beta testing -- 36,535 36,535 70,565
Other 36,924 91,889 101,581 78,889
- -------------------------------- -------- -------- -------- --------

196,878 355,015 440,237 383,771
Less capitalized
software costs 196,878 355,015 440,237 130,481

$ -- $ -- $ -- $253,290
================================ ======== ======== ======== ========

4. LEASE The Company leases certain of its facilities and equipment
COMMITMENTS under noncancellable operating lease agreements which expire
at various dates through 1998. Rent expense for the nine
months ended September 30, 1997 and 1996 was $37,578
(unaudited) and $38,198 (unaudited) and for the years ended
December 31, 1996 and 1995 was $31,160 and $65,101.

F-15

<PAGE>

eSOFT, INCORPORATED
NOTES TO FINANCIAL STATEMENTS

The Company has leased 5,295 square feet of office space in
Boulder, Colorado for its new corporate headquarters. The
lease commences on November 1, 1997 and with a term through
October 31, 2000. The annual lease rate is $58,245.

Future minimum lease payments under noncancellable operating
leases are as follows:

Year ending December 31,
--------------------------------------
1997 $ 55,000
1998 73,000
1999 58,000
2000 49,000
--------------------------------------
$235,000
======================================

5. INCOME As stated in the summary of accounting policies, the Company
TAXES had elected to be taxed as an S corporation. In lieu of the
corporation income taxes, the stockholders and partners were
taxed on their proportional share of the Company's taxable
income. The proforma income (loss) per common share if the
Company was subject to taxes (federal statutory rate of 34%
would be as follows:

<TABLE>
<CAPTION>
NINE-MONTH
PERIODS ENDED Years ended
SEPTEMBER 30, September 30, December 31,
---------------------------------------------
1997 1996 1996 1995
-------- -------- -------- --------
(unaudited)
<S> <C> <C> <C> <C>
Income before income
taxes $ 54,457 $114,248 $119,349 $ 80,372
Proforma income taxes
expense 19,000 39,000 41,000 27,000
-------- -------- -------- --------

Proforma net income
(loss) $ 35,457 $ 75,248 $ 78,349 $ 53,372
======== ======== ======== ========

Proforma income (loss) $ .03 $ .08 $ .08 $ .06
per share
======== ======== ======== ========
</TABLE>

F-16

<PAGE>

eSOFT, INCORPORATED
NOTES TO FINANCIAL STATEMENTS

With the change in tax status from an S corporation to a C
corporation on September 4, 1997, the Company recorded an
expense to recognize a deferred tax liability. The deferred
tax liability primarily results from the capitalized
software development costs being expensed for income tax
purposes in the period such costs are incurred.

6. CAPITAL stock split of 63.1579 to 1. All references to common share
TRANSACTIONS and per share amounts in the accompanying financial
statements have been retroactively restated to reflect the
effect of the stock split.

The transactions occurring in September 1997 and detailed
below are unaudited.

On September 12, 1997, the Company sold 820,000 shares of
common stock for $410,000 in a private placement. The net
proceeds to the Company after stock issuance costs was
$347,354.

In September 1997 the Company granted various options to
purchase an aggregate of 614,600 shares of its common stock
to employees and consultants. The options vest over a
36-month period with no vesting until March 1998 or at such
later date as the proposed offering occurs.

Terms of the employee options are 200,000 shares at $1 per
share which expire September 2002.

Options to purchase 414,600 shares of common stock have been
issued to consultants. The options consist of 264,600 shares
at $1 per share expiring in September 1998 and 150,000
shares at $1 per share which expire in September 2002.

F-17

<PAGE>

eSOFT, INCORPORATED
NOTES TO FINANCIAL STATEMENTS

The Company also granted in September 60,000 options to an
employee at $.50 per share that were exercisable
immediately. The options expire in September 1998.

FASB Statement 123, "Accounting for Stock-Based
Compensation" (SFAS No. 123), requires the Company to
provide pro forma information regarding net income and net
income per share as if compensation costs for the Company's
stock option plans and other stock awards had been
determined in accordance with fair value based methods
prescribed in SFAS No. 123. The proforma net loss and net
loss per share for the nine month period ended September 30,
1997 would have been $(187,302) and ($.14).

A summary of the status of the Company's stock option plans
and outstanding options as of September 30, 1997 and changes
during the nine-month period ended is presented below:

Weighted
Average
Range of Exercise
Shares Price
------------------------------------------------- -------- --------
Outstanding, beginning of period $ -- $ --
Granted 674,600 .96
Cancelled -- --
Exercised -- --
------------------------------------------------- -------- --------

Outstanding, end of period 674,600 $ .96
================================================= ======== =======
Options exercisable, end of period 60,000 $ .50
Weighted average fair value of options granted
during the period $ .96
================================================= ======== =======

F-18

<PAGE>

eSOFT, INCORPORATED
NOTES TO FINANCIAL STATEMENTS

The following table summarizes information about stock
options outstanding at September 30, 1997:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ----------------------------------------------- ---------------------------------------------
Weighted
Average Weighted Weighted
Range of Number Remaining Average Number Average
Exercise Outstanding Contractual Exercise Exercisable Exercise
Prices at 9/30/97 Life Price at 9/30/97 Price
- -------------- --------------- -------------- -------------- --------------- --------------

<S> <C> <C> <C> <C> <C>
$ .50 60,000 1 .50 60,000 .50
1.00 614,600 5 1.00 -- --
- -------------- --------------- -------------- -------------- --------------- --------------

$ .96 674,600 5 .96 60,000 .50
============== =============== ============== ============== =============== ==============
</TABLE>

7. NOTES PAYABLE The Company borrowed $100,000 from a bank on January 3,
1997. The note bears interest at 12% per annum and is
payable on January 3, 1998. The note is secured by the
assets of the Company.

8. EMPLOYMENT The Company entered into employment agreements with certain
AGREEMENTS members of management in September 1997. The agreements
(UNAUDITED) expire on August 31, 2000. Future commitments are
1997-$60,000, 1998-$120,000, 1999-$120,000, and
2000-$90,000.

Subsequent to September 30, 1997, the Company and its former
President entered into a severance agreement and mutual
release pursuant to which the Company would pay its former
president $10,000 per month through March 7, 1998.

9. PUBLIC The Company has entered into a letter of intent with
OFFERING an underwriter for a proposed public offering of 1,750,000
(UNAUDITED) shares of common stock on the Vancouver Stock Exchange.
There can be no assurance, however, that the offering will
be completed.

F-19
<PAGE>

[BACK COVER PAGE OF PROSPECTUS]

[logo]

ESOFT, INC.

PROSPECTUS

NO DEALER, SALESMAN OR OTHER PERSON IS AUTHORIZED TO GIVE ANY INFORMATION
OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING AND NOT
CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY, ANY SECURITY OTHER THAN THE REGISTERED SECURITIES OFFERED BY THIS
PROSPECTUS OR AN OFFER TO, OR A SOLICITATION OF, ANY PERSON IN ANY JURISDICTION
IN WHICH SUCH AN OFFER OR SOLICITATION IS NOT AUTHORIZED OR WOULD BE UNLAWFUL.
NEITHER THE DELIVERY OF THIS PROSPECTUS, NOR ANY OFFER OR SALE MADE HEREUNDER
SHALL, UNDER THE CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.

TABLE OF CONTENTS

SUMMARY......................................................................2

RISK FACTORS.................................................................4

USE OF PROCEEDS..............................................................7

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS................................................................7

BUSINESS....................................................................11

DESCRIPTION OF PROPERTY.....................................................17

DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS................18

EXECUTIVE COMPENSATION......................................................19

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT..............21

SELLING STOCKHOLDERS........................................................22

MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS....................25

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..............................26

SALE OF SHARES..............................................................27

LEGAL PROCEEDINGS...........................................................28

DESCRIPTION OF SECURITIES...................................................28

INTEREST OF NAMED EXPERTS AND COUNSEL.......................................28

AVAILABLE INFORMATION.......................................................28

UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
-----
EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.

, 1998
----------

-29-

<PAGE>

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 24 INDEMNIFICATION OF DIRECTORS AND OFFICERS

Although the Company is currently incorporated in the state of Colorado,
the Company proposes to merge with a newly incorporated Delaware corporation to
effect reincorporation in the state of Delaware prior to the effective date of
this registration statement. Section 145 of the General Corporation Law of the
State of Delaware contains provisions permitting corporations organized
thereunder to indemnify directors, officers and other representatives from
liabilities in connection with any threatened, pending or completed action, suit
or proceeding, whether civil, criminal, administrative or investigative, by
reason of the fact that such person was or is a director, officer, employee or
agent of the corporation, against liabilities arising in any such action, suit
or proceeding, expenses incurred in connection therewith, and against certain
other liabilities.

Article 8 of the Certificate of Incorporation of the Delaware corporation
described above provides that, to the furthest extent permitted by applicable
law in effect from time to time, no director of the Company shall have any
personal liability for monetary damages to the Company or its shareholders for
breach of his fiduciary duty as a director, except that indemnity is not
provided to a director whose conduct involves (i) a breach of the director's
duty of loyalty to the Company or its shareholders, (ii) acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation of
the law, (iii) unlawful distributions as defined in Section 174 of the Delaware
General Corporation Law any transaction from which the director derived an
improper personal benefit.

Article 9 of the Certificate of Incorporation and the bylaws of the
Company will provide similar indemnification provisions as that provided by
Section 145 of the General Corporation Law of the state of Delaware. The Company
will also indemnify any person who is serving or has served the Company as an
officer to the same extent as a director.

ITEM 25 OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

The following table sets forth the costs and expenses, other than
underwriting discounts and commissions and the Nonaccountable Expense Allowance,
payable by the Company in connection with the sale of Common Stock being
registered (all amounts are estimated except the Commission Registration Fee and
the Nasdaq SmallCap Filing Fee.

Commission Registration Fee............................................$988.60
Blue Sky Qualification Fees and Expenses (including legal fees)...... *
Printing Expenses.................................................... *
Legal Fees and Expenses.............................................. *
Accountants' Fees and Expenses....................................... *
Miscellaneous Expenses............................................... *
Total.............................................................. *

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

* To be furnished by amendment

II-1

<PAGE>

ITEM 26 RECENT SALES OF UNREGISTERED SECURITIES

PRIVATE PLACEMENT TRANSACTION

On September 4, 1997 the Company sold in a private placement transaction
820,000 shares of Common Stock to 25 investors, 14 of which were Canadian
investors, one of which was a Bahamian investor and one of which investor was
from Bermuda. The Company believes this sale was exempt from the registration
requirements of Section 5 of the Act by virtue of the exemptions provided by
Regulation D under the Act and Regulation S of the Act. The Company has
authorized the issuance of an additional 350,000 shares at a price of $1.00 per
share and 87,500 warrants to purchase shares at $1.00 per share for one year
after the Canadian Offering and $1.15 per share in the 2nd year, to Opus Capital
Fund Ltd. in a transaction that is planned for December 29, 1997, and has agreed
to sell an additional 60,000 shares at $.50 per share before the Canadian
Offering.

CONVERTIBLE PROMISSORY NOTES

The Company issued to Transition Partners, Ltd. an $18,750 promissory note
and a $10,250 promissory note, each payable on the earlier of January 2, 1999 or
30 days after the date of the Canadian Offering. The promissory notes are
payable at the option of the Company by issuance of such number of shares of
Common Stock, priced at the offering price to the public in the Canadian
Offering, that in the aggregate equals the amount outstanding under the
promissory note.

The Company issued to Copeland Consulting Group, Inc. an $18,750
promissory note and a $10,250 promissory note, each payable on the earlier of
January 2, 1999 or 30 days after the date of the Canadian Offering. The
promissory notes are payable, at the option of the Company by issuance of such
number of shares of Common Stock, priced at the offering price to the public in
the Canadian Offering, that in the aggregate equals the amount outstanding under
the promissory note.

The Company issued to Pantheon Capital Ltd. a $37,500 promissory note and
a $20,500 promissory note, each payable on the earlier of January 2, 1999 or 30
days after the date of the Canadian Offering. The promissory notes are payable,
at the option of the Company by issuance of such number of shares of Common
Stock, priced at the offering price to the public in the Canadian Offering, that
in the aggregate equals the amount outstanding under the promissory note.

The Company believes that the issuance of the promissory notes is exempt
from the registration requirements of Section 5 of the Act by virtue of the
exemption contained in Section 4(2) of the Act.

SEVERANCE AGREEMENT

Pursuant to the Severance Agreement, the Company has agreed to sell to
Wayne Farlow 60,000 shares of Common Stock of the Company at a price of $0.50
per share, the par value of which is to be paid in cash ($600) with the balance
to be paid by a non-recourse promissory note payable to the Company and due
September 5, 1999.

II-2

<PAGE>

ITEM 27 EXHIBITS AND FINANCIAL STATEMENTS

EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
3.1 ARTICLES OF INCORPORATION*

3.2 BYLAWS*

4.1 FORM OF COMMON STOCK CERTIFICATE**

4.2 VOTING AGREEMENT DATED SEPTEMBER 2, 1997 BETWEEN PHILIP BECKER,
PANTHEON CAPITAL LTD. AND TRANSITION PARTNERS, LTD.*

4.3 REGISTRATION RIGHTS AGREEMENT DATED SEPTEMBER 2, 1997 BETWEEN
TRANSITION PARTNERS, LTD., PANTHEON CAPITAL LTD. AND THE COMPANY*

5.1 FORM OF OPINION OF DAVIS, GRAHAM & STUBBS LLP AS TO LEGALITY OF
ISSUANCE OF COMMON STOCK**

10.1 SEVERANCE AGREEMENT AND MUTUAL RELEASE DATED DECEMBER 19, 1997
BETWEEN THE COMPANY AND WAYNE FARLOW*

10.2 FORM OF AGENCY AGREEMENT WITH C.M. OLIVER CAPITAL**

10.3 LEASE AGREEMENT DATED SEPTEMBER 18, 1997 BETWEEN THE COMPANY AND
ASPEN INDUSTRIAL PARK PARTNERSHIP

10.6 AGREEMENT DATED MAY 6, 1997 BETWEEN TRANSITION PARTNERS, LTD. AND
THE COMPANY*

10.7 AGREEMENT DATED OCTOBER 14, 1996 BETWEEN TRANSITION PARTNERS,
LTD. AND THE COMPANY*

10.8 AMENDMENT TO AGREEMENT DATED AUGUST 22, 1997 BETWEEN TRANSITION
PARTNERS, LTD. AND THE COMPANY*

10.9 SECOND AMENDMENT TO AGREEMENT DATED NOVEMBER 11, 1997 BETWEEN
TRANSITION PARTNERS, LTD. AND THE COMPANY*

10.10 STOCK OPTION AGREEMENT DATED NOVEMBER 11, 1997 BETWEEN
TRANSITION PARTNERS, LTD. AND THE COMPANY*

10.11 CONSULTING AGREEMENT DATED AUGUST 1, 1997 BETWEEN THE COMPANY
AND KENT NUZUM*

10.12 CONSULTING AGREEMENT DATED AUGUST 22, 1997 BETWEEN PANTHEON
CAPITAL LTD. AND THE COMPANY*

10.13 AMENDMENT TO CONSULTING AGREEMENT DATED AUGUST 22, 1997 BETWEEN
PANTHEON CAPITAL LTD. AND THE COMPANY*

10.14 STOCK OPTION AGREEMENT DATED NOVEMBER 11, 1997 BETWEEN PANTHEON
CAPITAL LTD. AND THE COMPANY*

10.15 STOCK OPTION AGREEMENT DATED NOVEMBER 11, 1997 BETWEEN COPELAND
CONSULTING GROUP, INC. AND THE COMPANY*

10.16 EMPLOYMENT AGREEMENT DATED SEPTEMBER 2, 1997 BETWEEN PHILIP
BECKER AND THE COMPANY*

23.1 CONSENT OF BDO SEIDMAN, LLP

23.2 CONSENT OF DAVIS, GRAHAM & STUBBS LLP**

24 POWER OF ATTORNEY (INCLUDED ON PAGE II-5)

II-3

<PAGE>

- -----------
27 FINANCIAL DATA SCHEDULE
- -----------
* FILED WITH REGISTRATION STATEMENT ON FORM 10-SB ON DECEMBER 22, 1997.

** TO BE FILED BY AMENDMENT.

(B) FINANCIAL STATEMENT SCHEDULES

NONE

II-4

<PAGE>

ITEM 28 UNDERTAKINGS

Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended (the "Act") may be permitted to directors, officers and
controlling persons of the registrant pursuant to the Company's Bylaws or the
Certificate of Incorporation, the registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is therefore unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.

The undersigned hereby undertakes that:

(1) for purposes of determining any liability under the Act, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Act shall be deemed to be part of this registration statement as of
the time it was declared effective.

(2) For the purpose of determining any liability under the Act, each
post-effective amendment that contains a form of prospectus shall be deemed to
be a new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.

(3) It will file, during any period in which it offers or sells
securities, a post-effective amendment to this registration statement to:

(i) include any prospectus required by section 10(a)(3) of the Act;

(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the information in
the registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any deviation
from the low or high end of the estimated maximum offering range may be
reflected in the form of prospectus filed with the Commission pursuant to Rule
424(b) if, in the aggregate, the changes in volume and price represent no more
than a 20 percent change in the maximum aggregate offering price set forth in
the "Calculation of Registration Fee" table in the effective registration
statement; and

(iii) include any additional or changed material information on the
plan of distribution.

(4) For purposes of determining liability under the Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.

(5) The Company will file a post effective amendment to remove from
registration any of the securities that remain unsold at the end of the
offering.

II-5

<PAGE>

SIGNATURES

In accordance with the requirements of the Securities Act of 1933, as
amended, the registrant certifies that it has reasonable grounds to believe that
it meets the requirements for filing on Form SB-2 and has authorized this
registration statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Boulder, State of Colorado, on December 23,
1997.

eSOFT, INC.

By: /S/ PHILIP L. BECKER
----------------------------------
Philip L. Becker, Chairman, Chief
Executive Officer and Chief
Technology Officer

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears herein constitutes and appoints Philip L. Becker and Kent Nuzum, and
each of them, as his true and lawful attorneys-in-fact and agents, with full
power and substitution and resubstitutions, for him and in his name, place and
stead, in any and all capacities, to sign any and all amendments to this
Registration Statement (including post-effective amendments), including a
registration statement filed pursuant to Rule 462(b) under the Securities Act of
1933, as amended, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents, and each of them, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in connection therewith, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents, or any of them, or their or his
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

In accordance with the requirements of the Securities Act of 1933 as
amended, this registration statement has been signed by the following persons in
the capacities and on the dates indicated.

SIGNATURES TITLE DATE

/S/ PHILIP L. BECKER Chairman, Chief Executive December 23, 1997
- --------------------------------- Officer, Chief Technology
Philip L. Becker Officer and Director

/S/ KENT NUZUM Chief Financial Officer December 23, 1997
- --------------------------------- (Principal Financial and
Kent Nuzum Accounting Officer) and
Director

/S/ GENE R. COPELAND Director December 23, 1997
- ---------------------------------
Gene R. Copeland

II-6

LEASE AGREEMENT

This Lease Agreement is made this 18th day of September, 1997, by and
between ASPEN INDUSTRIAL PARK PARTNERSHIP, a Colorado limited partnership
"Landlord"), and eSOFT, a Colorado corporation ("Tenant").

I. LEASE OF PREMISES

A. DESCRIPTION.

Landlord leases to Tenant and Tenant leases from Landlord the following
described real property, and improvements thereon ("premises") located at 5335
Sterling Drive, Boulder, Colorado, and commonly known as 5335 Sterling Drive
Building (the "Building"):

See plans of the Building consisting of the north portion of the second
level, a copy of which plans are attached hereto as EXHIBIT "A."

The premises, together with one-half of common area (as defined below)
contained within the Building, comprise approximately 5295 square feet.

Tenant shall have full and unimpaired access to the premises at all times.
The premises are to be delivered to Tenant in accordance with EXHIBIT "B"
relating to tenant finish to be supplied by Landlord.

B. COMMON AREAS.

The term "common areas" means all areas or facilities whether inside or
outside the premises and within the exterior boundaries of the lot on which the
Building is located that are provided and designated by Landlord from time to
time for the general use and convenience of Tenant and of other tenants at the
Building. Facilities in the common areas include, without limitation, restrooms,
pedestrian walkways, stairways, hallways, entryways, elevator, landscaped areas,
sprinkler systems, machine room, sidewalks, service corridors, lighting
fixtures, trash enclosures, loading areas, parking areas, and roads. Tenant
shall have the non-exclusive right to use the common areas. Landlord shall
maintain the common areas in good condition at all times, and shall have the
right to establish and enforce reasonable rules and regulations applicable to
all tenants concerning the maintenance, management, use, and operation of the
common areas.

<PAGE>

II. TERM

A. COMMENCEMENT.

The term shall commence at 12:01 a.m. on November 1, 1997, and, unless
terminated as herein provided for, the term of the Lease shall be for three
years from the commencement date.

B. POSSESSION.

1. If the Landlord, for any reason whatsoever, cannot deliver possession
of the said premises to the Tenant at the commencement of the term hereof, this
Lease shall not be void or voidable, nor shall Landlord be liable to Tenant for
any loss or damage resulting therefrom, nor shall the expiration date of the
above term be in any way extended, but, in that event, all rent shall be abated
during the period between the commencement of said term and the time when
Landlord delivers possession. Notwithstanding the foregoing, the Tenant shall
have the option to terminate this Lease if Landlord does not deliver possession
of the premises within sixty (60) days of the commencement date.

2. Notwithstanding any provision to the contrary in this Lease, Landlord
agrees that the obligations for minimum rent and for Direct Expenses as set
forth in Article IV shall not commence until fifteen (15) days after Tenant has
received right of possession of the premises.

III. COMPLETION

On commencement of the term, the premises shall be in good condition and
Landlord shall have substantially completed the construction of the premises and
tenant finish to be supplied by Landlord. Tenant's taking possession of the
premises on commencement of the term shall constitute Tenant's acknowledgment
that the premises are in good condition. Tenant may provide Landlord with a
punch-list of unsatisfactory items, which Landlord shall make good faith efforts
to remedy in a timely fashion.

With the express written permission of Landlord, Tenant shall be allowed
to install tenant finish in addition to that performed by Landlord prior to the
commencement date. However, if Landlord, at any time and at its reasonable
discretion, determines that Tenant's activities interfere with construction
efforts by Landlord or its contractors, then Tenant, upon receiving written
notice from Landlord, must immediately vacate the premises and discontinue all
tenant finish activities. Such written notice by Landlord shall remain in effect
until the commencement date unless modified to an earlier date by Landlord.

-2-

<PAGE>

IV. RENT

A. RENT.

1. Tenant shall pay for the full three (3) year term of this Lease, a
minimum rent of $174,735. The Tenant covenants and agrees to pay minimum rent
for the premises as follows:

Monthly Rental
ANNUAL RENT INSTALLMENTS

First Year Term $ 58,245 $ 4,853.75
Second Year Term $ 58,245 $ 4,853.75
Third Year Term $ 58,245 $ 4,853.75

2. All minimum rent payable hereunder shall be paid without setoff or
deduction, in advance, on or before the first day of each month during the term
of this Lease at the address of the Landlord set forth in Article XXII, or such
other address or addresses as Landlord may hereafter determine by notice to the
Tenant.

3. Rent for any period during the term hereof which is for less than one
(1) month shall be a prorated portion of the monthly installment herein, based
on a thirty (30) day month.

B. OPERATING EXPENSE ADJUSTMENTS. For the purposes of this Article, the term
Direct Expenses is defined as follows:

All direct costs of operation and maintenance, as determined by reasonable
and customary practices, and shall include the following costs by way of
illustration, but not be limited to: real property taxes and assessments;
water and sewer charges; security systems and alarms; insurance premiums;
utilities; janitorial services; snow removal; labor; window cleaning;
costs incurred in the management of the Building, if any; air conditioning
and heating maintenance; elevator maintenance; supplies; materials,
equipment, and tools; including maintenance, costs, and upkeep of all
common areas, landscaping repairs (which, for purposes of this Agreement,
shall mean repairs in excess of $5,000.00) to or replacement of roofs,
HVAC, plumbing, sewer, electrical, elevators, or parking areas ("Direct
Expenses" shall not include depreciation on the Building of which the
premises are a part of equipment therein, loan payments, executive
salaries, real estate brokers' commissions or any repairs or maintenance
covered by warranty or insurance).

-3-

<PAGE>

Tenant shall pay Landlord additional annual rent equal to twenty five
percent (25%) of Direct Expenses paid or incurred by Landlord for the operation
or maintenance of the Building or the lot on which the premises are a part. Such
additional rent shall be paid at monthly intervals in advance upon receipt of
statements of estimated charges from Landlord. At the end of each calendar year,
or, at Landlord's option, at any other more frequent interval, Landlord shall
provide an accounting (including copies of any invoices requested by Tenant) of
Tenant's share of Direct Expenses, and Tenant's payments toward such amount
during the year or interval. During the thirty (30) day period following such
accounting, Landlord shall pay any excess to Tenant if payments exceed expenses,
and Tenant shall pay additional rent to Landlord if expenses exceed payments. If
Direct Expenses increase by more than ten percent (10%) in any year, Tenant
shall have the right to inspect Landlord's invoices and records of account
relating to the Direct Expenses. Tenant shall pay the cost of such inspection
unless the inspection reveals an overstatement of Direct Expenses of more than
ten percent (10%), in which case Landlord shall reimburse Tenant for the cost of
the inspection.

Even though the term has expired and Tenant has vacated the premises, when
the final determination is made of Tenant's share of Direct Expenses for the
year in which this Lease terminates, Tenant shall immediately pay any increase
due over the estimated expenses paid and conversely any overpayment made in the
event of said expenses decrease shall be immediately rebated by Landlord to
Tenant.

C. SECURITY DEPOSIT.

On execution of this Lease, Tenant shall deposit with Landlord the
additional sum of $4,853.75 as a security deposit for the performance by Tenant
of the provisions of this Lease. If Tenant is in default, Landlord can use the
security deposit, or any unapplied advance rental payments, or any portion of
such funds, to cure the default or to compensate Landlord for any damages
sustained by Landlord resulting from Tenant's default. Tenant shall, immediately
upon demand, pay to Landlord the sum equal to the portion of the security
deposit expended or applied by Landlord so as to maintain the security deposit
in the sum initially deposited with Landlord. If Tenant is not in default at the
expiration or termination of this Lease, Landlord shall return the security
deposit to Tenant within thirty (30) days. Landlord can maintain the security
deposit separate and apart from Landlord's general funds or can commingle the
security deposit with Landlord's general and other funds. Landlord shall not be
required to pay Tenant interest on the security deposit.

-4-

<PAGE>

V. TAXES - PERSONAL PROPERTY - RESPONSIBILITY

Tenant shall be responsible and pay for any and all taxes and/or
assessments levied and/or assessed against any furniture, fixtures, equipment
and items of a similar nature installed and/or located in or about the leased
premises by Tenant.

VI. USE

A. PERMITTED USES.

Tenant shall use the premises for any manufacturing and office-warehouse
use permitted by the City of Boulder on such premises.

B. LIMITATIONS ON USE.

Tenant shall not do, bring, or keep anything in or about the premises that
will cause a cancellation of any insurance covering the premises. If the rate of
any insurance carried by Landlord is increased as a result of Tenant's use,
Tenant shall pay to Landlord within 10 days before the date Landlord is
obligated to pay a premium on the insurance, a sum equal to the difference
between the original premium and the increased premium.

Tenant shall comply with all laws concerning the premises or Tenant's use
of the premises, including, without limitation, the obligation at Tenant's cost
to alter, maintain or restore the premises in compliance and conformity with all
laws relating to the condition, use, or occupancy of the premises during the
term. Landlord warrants conformance with all such laws at the commencement date
of this Lease.

Tenant shall not use the premises in any manner that will constitute waste
or nuisance in the Building in which the premises are located, nor shall Tenant
overload the floors or any part of the premises in a manner exceeding the floor
loading restrictions of the Uniform Building Code as adopted by the City of
Boulder.

VII. MAINTENANCE

A. LANDLORD'S MAINTENANCE.

Landlord, at its cost, shall maintain, in good condition, (i) the
structural parts of the Building and other improvements in which the premises
are located, which structural parts include only the foundations, bearing and
exterior walls (including glass and doors), sub-flooring, and roof; (ii) the
unexposed electrical, plumbing, and sewage systems, including, without
limitation, the lighting fixtures installed by Landlord pursuant to EXHIBIT "B"
(but not including replacement of bulbs, tubes or ballasts) and

-5-

<PAGE>

including those portions of the systems lying outside the premises; and (iii)
window frames, gutters, and roof drains on the Building and other improvements
in which the premises are located; provided however, if the maintenance or
repairs are required in part or in whole by the act, neglect, fault or omission
of any duty by the Tenant, its agents, servants, employees, and invitees, the
Tenant shall, at Tenant's sole cost and expense, make such repairs and
maintenance as are necessary to restore the premises to a good condition.
Landlord, at its cost, shall also make any necessary major repairs to or
replacements of roofs, HVAC, plumbing, sewer, electrical, elevators, and parking
areas.

B. TENANT'S MAINTENANCE.

Except as provided in the previous subparagraph, Tenant, at its cost,
shall maintain, in good condition, all portions of the premises, including,
without limitation, all Tenant's personal property, carpet, and flooring. Tenant
shall be liable for any damage to the Building in which the premises are located
resulting from the acts or omissions of Tenant or its authorized
representatives.

VIII. ALTERATIONS

Tenant shall not make any structural or exterior alterations to the
premises without Landlord's consent. Tenant, at its cost, shall have the right
to make non-structural alterations to the interior of the premises, subject to
Landlord's prior approval, which shall not be unreasonably withheld or delayed.
Tenant shall submit reasonably detailed final plans and specifications and
working drawings of the proposed Tenant finish five days before it intends to
commence the alterations. The alterations shall be approved by all appropriate
governmental agencies and all applicable permits and authorizations shall be
obtained before commencement. Any alterations made shall remain on and be
surrendered with the premises on expiration or termination of the term of this
Lease, unless otherwise agreed in writing. However, Landlord shall not
unreasonably withhold its consent to Tenant removing alterations installed by
Tenant, so long as Tenant repairs any damage caused by such removal.

IX. MECHANIC'S LIENS

Tenant shall pay all costs for construction done by it or caused to be
done by it on the premises as permitted by this Lease. Tenant shall keep the
Building, other improvements, and land of which the premises are a part free and
clear of all mechanic's liens resulting from construction by or for Tenant.
Tenant shall have the right to contest the correctness or validity of any such
lien if, immediately on demand by Landlord, Tenant procures a bond

-6-

<PAGE>

in an amount equal to one and one-half times the amount of the claim of lien.

Landlord shall have the right to require Tenant's contractor(s) to furnish
to both Tenant and Landlord adequate lien waivers on work completed. Landlord
reserves the right to post notices in leased premises that Landlord is not
responsible for payment of work performed and that Landlord's interest is not
subject to any lien.

X. UTILITIES

Tenant shall pay for all gas, electric, and telephone utilities and
services supplied to the premises, together with any taxes thereon. Such
services shall be metered separately to the premises, and, in addition,
Landlord's separate gas and electric meter will also be connected to the common
area facilities. Tenant shall make all arrangements for and pay all utilities
and services furnished to or used by it. For services not separately metered to
the premises, but which are furnished jointly for the benefit of Tenant and
selected other tenants in the Building, Tenant shall pay Landlord the reasonable
portion, as determined by Landlord, of all charges for such jointly provided
services.

XI. LIABILITY INDEMNITY AND INSURANCE

A. INDEMNITY.

Tenant will indemnify and hold Landlord harmless from and against any and
all claims, losses, expenses, costs, judgments, and/or demands arising from the
conduct of Tenant in or about the premises and/or on account of any operation or
action by Tenant and/or from and against all claims arising from any breach or
default on the part of Tenant or any act of negligence of Tenant, its agents,
contractors, servants, employees, licensees, or invitees, or any accident,
injury or death of any person or damage to any property in or about the
premises. Tenant's obligation to indemnify and hold Landlord harmless shall
include Landlord's reasonable attorney's fees, and shall be limited to the sum
that exceeds the amount of insurance proceeds, if any, received by Landlord.

B. PUBLIC LIABILITY AND PROPERTY DAMAGE INSURANCE.

Tenant, at its costs, shall maintain general liability insurance, with
liability limits of not less than $1,000,000.00 for each occurrence of bodily
injury and $200,000.00 property damage, insuring against all liability of Tenant
and its authorized representatives arising out of any connection with Tenant's
use or occupancy of the premises. All general liability insurance shall insure
performance by Tenant of the indemnity provisions of this

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Article. The Landlord shall be named as an additional insured and the Tenant
shall deliver certificates of insurance to the Landlord.

C. TENANT'S FIRE INSURANCE.

Tenant, at its cost, shall maintain on all of its personal property in, on
or about the premises, a standard policy of property insurance, with "all risk"
coverage, to the extent of at least 100% of full replacement value. The proceeds
from any such policy shall be used by Tenant for the restoration of Tenant's
improvements or alterations.

D. FIRE INSURANCE ON BUILDING AND OTHER IMPROVEMENTS.

Landlord shall maintain on the Building and other improvements in which
the premises are located a policy of property insurance with all risk coverage
insurance to the extent of at least one hundred percent (100%) of full
replacement value. The insurance policy shall be issued in the names of
Landlord, and Landlord's lender, as their interests appear. The insurance policy
shall also provide coverage for rental value insurance, including all operating
expenses, for a period of one year. The insurance policy shall provide that all
proceeds shall be made payable to Landlord. The cost of such insurance shall be
passed on to Tenant as part of the operating expenses for the Building pursuant
to paragraph IV.B.

E. WAIVER OF SUBROGATION.

The parties release each other, and their respective authorized
representatives, from any claims for damages to any person or to the premises
and the Building or other improvements in which the premises are located, and to
the fixtures, personal property, Tenant's improvements, and alterations of
either Landlord or Tenant in or on the premises and the Building or other
improvements in which the premises are located that are caused by or result from
risks insured against under any insurance policies carried by the parties and in
force at the time of such damage. Each party shall cause each insurance policy
obtained by it to provide that the insurance company waives all rights of
recovery by way of subrogation against either party in connection with any
damage covered by any policy.

F. OTHER INSURANCE REQUIREMENTS.

All the insurance required under this Lease shall be issued with insurance
companies authorized to do business in the State of Colorado, and shall contain
an endorsement requiring thirty (30) days' written notice from the insurance
company to both parties and to Landlord's lender before cancellation or change
in the coverage, scope, or amount of any policy. Each policy, or a certificate
of the policy, together with evidence of payment of premiums, shall be

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deposited with the other party at the commencement of the Lease, and on renewal
of the policy not less than twenty (20) days before expiration of the term of
the policy.

XII. PROTECTIVE COVENANTS

Tenant shall faithfully observe and comply with the covenants, conditions,
and restrictions set forth in a Declaration of Covenants of Aspen Industrial
Park Subdivision recorded with the Boulder County Clerk and Recorder on November
11, 1979 (the "Covenants") as Reception No. 363409, as amended. Tenant hereby
acknowledges having received a copy of such Covenants with the execution of this
Lease. Landlord reserves the right from time to time to make all reasonable
modifications to said Covenants. The additions and modifications to those
Covenants shall be binding upon Tenant upon delivery of a copy of them to
Tenant. Landlord shall not be responsible to Tenant for the nonperformance of
any said Covenants by any other tenants or occupants provided that Landlord
makes a good faith effort to enforce the Covenants when it has actual knowledge
of a violation.

XIII. DESTRUCTION

A. RISK COVERED BY INSURANCE.

If, during the term, the premises or the Building and other improvements
in which the premises are located are totally or partially destroyed from a risk
covered by the insurance described in Article XI, rendering the premises totally
or partially inaccessible or unusable, Landlord shall restore the premises or
the Building and other improvements in which the premises are located to
substantially the same condition as they were in immediately before destruction.
Such destruction shall not terminate this Lease. If the existing laws do not
permit the restoration, either party can terminate this Lease immediately by
giving notice to the other party. Furthermore, if such restoration can not be
accomplished within 90 days from the date of destruction, either party shall
have the option to terminate this Lease immediately by giving notice to the
other party.

If the projected cost of restoration exceeds the amount of proceeds
received from the insurance required under Article XI, Landlord can elect to
terminate this Lease by giving notice to Tenant within fifteen (15) days after
determining that projected restoration costs will exceed the insurance proceeds.
In the case of destruction to the premises only, if Landlord elects to terminate
this Lease, Tenant, within fifteen (15) days after receiving Landlord's notice
to terminate, can elect to pay to Landlord, at the time Tenant notifies Landlord
of its election, the difference between the amount of insurance proceeds and the
cost of restoration, in which case Landlord shall restore the premises.

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Landlord shall give Tenant satisfactory evidence that all sums contributed by
Tenant as provided in this paragraph have been expended by Landlord in paying
the cost of restoration.

If Landlord elects to terminate this Lease and Tenant does not elect to
contribute toward the cost of restoration as provided in this paragraph, this
Lease shall terminate.

B. RISK NOT COVERED BY INSURANCE.

If, during the term, the premises or the Building and other improvements
in which the premises are located are totally or partially destroyed from a risk
not covered by the insurance described in Article XI, rendering the premises
totally or partially inaccessible or unusable, Landlord shall restore the
premises or the Building and other improvements in which the premises are
located to substantially the same condition as they were in immediately before
destruction. Such destruction shall not terminate this Lease. If the existing
laws do not permit the restoration, either party can terminate this Lease
immediately by giving notice to the other party. Furthermore, if such
restoration can not be accomplished within 90 days from the date of destruction,
either party shall have the option to terminate this Lease immediately by giving
notice to the other party.

If the projected cost of restoration exceeds ten percent (10%) of the
projected value following restoration of the premises or the Building and other
improvements in which the premises are located that are destroyed, Landlord can
elect to terminate this Lease by giving notice to Tenant within fifteen (l5)
days after determining projected restoration costs and replacement value.

In the case of destruction to the premises only, if Landlord elects to
terminate this Lease, Tenant, within fifteen (15) days after receiving
Landlord's notice to terminate, can elect to pay to Landlord, at the time Tenant
notifies Landlord of its election, the difference between ten percent (10%) of
the projected value of the premises following destruction and the actual costs
of restoration, in which case Landlord shall restore the premises. Landlord
shall give Tenant satisfactory evidence that all sums contributed by Tenant as
provided in this paragraph have been expended by Landlord in paying the cost of
restoration.

If Landlord elects to terminate this Lease and Tenant does not elect to
perform the restoration or contribute toward the cost of restoration as provided
in this paragraph, this Lease shall terminate.

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C. RIGHT TO TERMINATE ON PARTIAL DESTRUCTION.

If there is destruction to the Building and other improvements in which
the premises are located that exceeds thirty-three and one-third percent (33
1/3%) of the then replacement value of the Building and other improvements from
any risk, Landlord can elect to terminate this Lease whether or not the premises
are destroyed, as long as Landlord terminates the leases of all tenants in the
Building and other improvements.

D. ABATEMENT OR REDUCTION OF RENT.

In the event of destruction of all or a portion of the premises or the
Building and other improvements in which the premises are located, there shall
be an abatement or reduction of rent, between the date of destruction and the
date of completion of restoration, based on the extent to which the destruction
interferes with Tenant's use of the premises.

XIV. CONDEMNATION

A. TOTAL TAKING.

If, during the term or during the period of time between the execution of
the Lease and the date the term commences, there is any transfer by Landlord to
any condemning governmental agency, either under threat of condemnation, during
legal proceedings for condemnation, or by exercise of the power of condemnation,
and the premises are totally taken by such condemnation, this Lease shall
terminate on the date of taking.

B. PARTIAL TAKING.

If any portion of the premises including the common areas is taken by
condemnation, this Lease shall remain in effect, except that Tenant can elect to
terminate this Lease if the remaining portion is rendered unsuitable for
Tenant's continued use of the premises. If Tenant elects to terminate this Lease
Tenant must exercise its right to terminate by giving notice to Landlord within
thirty (30) days after Landlord has given notice to Tenant of the nature and the
extent of the taking. If Tenant does not terminate this Lease within the
thirty-day period, this Lease shall continue in full force and effect, except
that minimum monthly rent shall be reduced pursuant to this Article.

Subject to the preceding paragraph, if the Building or other improvements
which are a part of the premises is taken by condemnation, this Lease shall
remain in full force and effect, except that if fifty percent (50%) or more of
the Building or other improvements which are a part of the premises is taken by
condemnation, Landlord shall have the election to terminate this

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Lease pursuant to this paragraph. If Landlord elects to terminate this Lease, it
must terminate by giving notice to Tenant within thirty (30) days after the
nature and the extent of the taking have been finally determined. If this Lease
is not terminated within the thirty-day period, it shall continue in full force
and effect, except minimum monthly rent shall be reduced pursuant to this
Article.

C. EFFECT ON RENT.

If any portion of the premises is taken by condemnation and this Lease
remains in full force and effect, on the date of taking the minimum monthly rent
shall be reduced by an amount that is in the same ratio to minimum monthly rent
as the total number of square feet in the premises taken bears to the total
number of square feet in the premises immediately before the date of taking.

D. DISTRIBUTION OF AWARD.

All compensation, sums, or anything of value awarded, paid or received on
a total or partial condemnation shall belong to and be paid to Landlord. Tenant
shall be entitled to maintain a separate action for any of its fixtures or
personal property taken.

XV. ENVIRONMENTAL MATTERS

A. DEFINITIONS.

1. HAZARDOUS MATERIAL. Hazardous Material means any substance:

(a) which is or becomes defined as a "hazardous material,"
"hazardous waste," "hazardous substance," "regulated substance," pollutant or
contaminant under any federal, state or local statute, regulation, rule, order,
or ordinance or amendments thereto, including petroleum and petroleum products;
or

(b) the presence of which on the leased premises causes or threatens
to cause a nuisance upon the premises or to adjacent properties or poses or
threatens to pose a hazard to the health or safety of persons on or about the
leased premises or requires investigation or remediation under any federal,
state or local statute, regulation, rule, order, or ordinance or amendments
thereto.

2. ENVIRONMENTAL REQUIREMENTS. Environmental Requirements means all
applicable present and future statutes, regulations, rules, ordinances, codes,
licenses, permits, orders, approvals, plans, authorization, concessions,
franchises, and similar items, of all governmental agencies, departments,
commissions, boards, bureaus, or instrumentalities, of the United States, states
and

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political subdivisions thereof and all applicable judicial, administrative, and
regulatory decrees, judgments, and orders relating to the protection of human
health or the environment.

3. ENVIRONMENTAL DAMAGES. Environmental Damages means all claims,
judgments, injuries, damages (including without limitation damages for
diminution in the value of the leased premises and adjoining property and for
the loss of business from the leased premises and adjoining property), losses,
penalties, fines, liabilities (including strict liability), encumbrances, liens,
costs, and expenses of investigation and defense of any claim, and of any good
faith settlement of judgment, or whatever kind or nature, contingent or
otherwise, matured or unmatured, foreseeable or unforeseeable, including without
limitation reasonable attorneys' fees and disbursements and consultants' fees,
any of which are incurred at any time as a result of the existence of "Hazardous
Material" upon, about, beneath the leased premises or migrating or threatening
to migrate to or from the leased premises or the existence of a violation of
"Environmental Requirements" pertaining to the leased premises.

B. OBLIGATION TO INDEMNIFY DEFEND AND HOLD HARMLESS.

1. Tenant, its successors, assigns and guarantors, agree to indemnify,
defend, reimburse and hold harmless the following persons from and against any
and all "Environmental Damages" arising from activities of Tenant or its
employees, agents, or invitees which (a) result in the presence of "Hazardous
Materials" upon, about or beneath the leased premises or migrating to or from
the leased premises, or (b) result in the violation of any "Environmental
Requirements" pertaining to the leased premises and the activities thereon:

(a) Landlord;

(b) any other person who acquires a portion of the leased premises
in any manner, including but not limited to through purchase, at a foreclosure
sale or otherwise through the exercise of the rights and remedies of Landlord
under this Lease; and

(c) the directors, officers, shareholders, employees, partners,
agents, contractors, subcontractors, experts, licensees, affiliates, lessees,
mortgages, trustees, heirs, devisees, successors, assigns and invitees of such
persons.

2. This obligation shall include, but not be limited to, the burden and
expense of defending all claims, suits and administrative proceedings (with
counsel reasonably approved by the indemnified parties), and conducting all
negotiations of any description, and paying and discharging, when and as the
same become due, any and all judgments, penalties or other sums due

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against such indemnified persons. Tenant, at it sole expense, may employ
additional counsel of its choice to associate with counsel representing
Landlord.

3. The obligations of Tenant in this section shall survive the expiration
or termination of this Lease.

C. NOTIFICATION.

If Tenant shall become aware of or receive notice or other communication
concerning any actual, alleged, suspected or threatened violation of
"Environmental Requirements," or liability of Tenant for "Environmental Damages"
in connection with the leased premises or past or present activities of any
person thereon, or that any representation set forth in this Agreement is not or
is no longer accurate, then Tenant shall deliver to Landlord, within ten days of
the receipt of such notice, or communication or correcting information by
Tenant, a written description of such information or condition, together with
copies of any documents evidencing same.

D. NEGATIVE COVENANTS.

1. NO HAZARDOUS MATERIAL ON PREMISES. Except in strict compliance with all
Environmental Requirements, Tenant shall not cause, permit or suffer any
"Hazardous Material" to be brought upon, treated, kept, stored, disposed of,
discharged, released, produced, manufactured, generated, refined or used upon,
about or beneath the leased premises or any portion thereof by Tenant, its
agents, employees, contractors, tenants or invitees, or any other person without
prior written consent of Landlord.

2. NO VIOLATIONS OF ENVIRONMENTAL REQUIREMENTS. Tenant shall not cause,
permit or suffer the existence or the commission by Tenant, its agents,
employees, contractors, or invitees, or by any other person of a violation of
any "Environmental Requirements" upon, about or beneath the leased premises or
any portion thereof.

E. RIGHT TO INSPECT.

Subject to the notice, accompaniment, and confidentiality provisions
contained above, Landlord shall have the right in its sole and absolute
discretion, but not the duty, to enter and conduct an inspection of the leased
premises at any reasonable time to determine whether Tenant is complying with
the terms of this Lease, including but not limited to the compliance of the
leased premises and the activities thereon with "Environmental Requirements" and
the existence of "Environmental Damages." Tenant hereby grants to Landlord the
right to enter the leased premises and to perform such tests on the leased
premises as are reasonably necessary in the opinion of Landlord to conduct such
reviews and investigations. Landlord shall use reasonable efforts to minimize

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interference with the business of Tenant but Landlord shall not be liable for
any interference caused thereby. Tenant shall provide to Landlord copies of all
manifests, permits, reports, test results, and analyses submitted to any
environmental agency within ten (10) days of submittal.

F. RIGHT TO REMEDIATE.

Should Tenant fail to perform or observe any of its obligations or
agreements pertaining to "Hazardous Materials" or "Environmental Requirements,"
then Landlord shall have the right, but not the duty, without limitation upon
any of the rights of Landlord pursuant to this Lease, to enter the leased
premises personally or through its agents, consultants or contractors and
perform the same. Tenant agrees to indemnify Landlord for the costs thereof and
liabilities therefrom as set forth in section A above.

XVI. ASSIGNMENT

A. PROHIBITION.

Tenant shall not voluntarily assign or encumber its interest in this Lease
or in the premises, or sublease all or any part of the premises, or allow any
other person or entity (except Tenant's authorized representatives) to occupy or
use all or any part of the premises, without first obtaining the Landlord's
written consent, which shall not be unreasonably withheld or delayed. Landlord
hereby consents to a sublease of a portion of the premises to Daryl Yurek
provided Landlord is furnished acceptable financial statements, terms of the
sublease and acceptable plans for the business he intends to conduct. Any
assignment, encumbrance, or sublease without Landlord's consent shall be
voidable and, at Landlord's election, shall constitute a default. No consent to
any assignment, encumbrance or sublease shall constitute a further waiver of the
provisions of this paragraph, nor shall any such assignment or subletting
relieve Tenant of any of its obligation hereunder, although performance of the
obligations hereunder by assignees or subtenants shall be considered as
performance by the Tenant.

B. INVOLUNTARY ASSIGNMENT.

No interest of Tenant in this Lease shall be assignable by operation of
law (including, without limitation, the transfer of this Lease by will or
intestacy), by assignment for the benefit of creditors, by a writ of attachment
or execution, or by any proceeding or action to which Tenant is a party in which
a receiver is appointed with authority to take possession of the premises. Any
of such actions shall constitute a default by Tenant and Landlord

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shall have the right to elect to terminate this Lease, in which case this Lease
shall not be treated as an asset of Tenant.

XVII. DEFAULT

A. TENANT'S DEFAULT.

The occurrence of any of the following shall constitute a default by
Tenant:

1. Failure to pay rent when due, if the failure continues for
fifteen (15) business days after written notice has been given to Tenant.

2. Failure to perform any other provision of this Lease if the
failure to perform is not cured within thirty (30) days after notice has
been given to Tenant. If the default cannot reasonably be cured within
thirty days, Tenant shall not be in default of this Lease if Tenant
commences to cure the default within the thirty day period and diligently
and in good faith continues to cure the default.

Notices given under this paragraph shall specify the alleged default and
the applicable Lease provisions, and shall demand that Tenant perform the
provisions of this Lease or pay the rent that is in arrears, as the case may be,
within the applicable period of time, or quit the premises. No such notice shall
be deemed a forfeiture or a termination of this Lease unless Landlord so elects
in the notice.

B. LANDLORD'S REMEDIES.

Landlord shall have the following remedies if Tenant commits a default.
These remedies are not exclusive; they are cumulative in addition to any
remedies now or later allowed by law.

1. TENANT'S RIGHT TO POSSESSION NOT TERMINATED. Landlord can
continue this Lease in full force and effect, and the Lease will continue
in effect as long as Landlord does not terminate Tenant's right to
possession, and Landlord shall have the right to collect rent when due.
During the period Tenant is in default, Landlord can enter the premises
and relet them, or any part of them, to third parties for Tenant's
account. Tenant shall be liable immediately to Landlord for all reasonable
costs Landlord incurs in re-letting the premises, including, without
limitation, broker's commissions, expenses of remodeling the premises
required by the reletting, and like costs. Re-letting can be for a period
shorter or longer than the remaining term of this Lease. Tenant shall pay
to Landlord the rent due under this Lease on the dates the rent is due,
less the rent Landlord receives

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from any re-letting. No act by Landlord allowed by this paragraph shall
terminate this Lease unless Landlord notifies Tenant that Landlord elects
to terminate this Lease. After Tenant's default and for as long as
Landlord does not terminate Tenant's right to possession of the premises,
if Tenant obtains Landlord's consent, Tenant shall have the right to
assign or sublet its interest in this Lease, but Tenant shall not be
released from liability. Landlord's consent to a proposed assignment or
subletting shall not be unreasonably withheld.

2. TERMINATION OF TENANT'S RIGHT TO POSSESSION. Landlord can
terminate Tenant's right to possession of the premises at any time during
default. No act by Landlord other than giving notice to Tenant shall
terminate this Lease. Landlord's efforts to re-let the premises shall not
constitute a termination of Tenant's right to possession. On termination,
Landlord has the right to recover from Tenant: (a) the worth at the time
of the award of the unpaid rent that had been earned at the time of the
termination of lease; (b) the worth at the time of the award of the amount
by which the unpaid rent that would have been earned after the date of the
termination of this Lease until the time of the award exceeds the amount
of the loss of rent that Tenant proves could have been reasonably avoided;
(c) the worth at the time of the award of the amount by which the unpaid
rent for the balance of the term after the time of the award exceeds the
amount of loss of rent that Tenant proves could have been reasonably
avoided; and (d) courts costs.

3. LANDLORD'S RIGHT TO CURE. Landlord, at any time after Tenant
commits a default, can cure the default at Tenant's cost. If Landlord at
any time, by reason of Tenant's default, pays any sum or does any act that
requires the payment of any sum, the sum paid by Landlord shall be due
immediately from Tenant to Landlord at the time the sum is paid, and if
paid at a later date shall bear interest at the rate of eighteen percent
(18%) per annum from the date the sum is paid by Landlord until Landlord
is reimbursed by Tenant. The sum, together with interest on it, shall be
additional rent.

C. LATE CHARGES. Tenant hereby acknowledges that late payment by Tenant to
Landlord of rent or other sums due will cause Landlord to incur costs not
contemplated by this Lease, the exact amount of which will be extremely
difficult to ascertain. The costs include, but are not limited to, processing
and accounting charges, and late charge which may be imposed upon Landlord by
terms of any mortgage or trust deed covering the Premises. Accordingly, if any
installment of rent or of a sum due from Tenant shall not be received by
Landlord or Landlord's designee within fifteen (15)

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days after the amount is due, Tenant shall pay Landlord a late charge equal to
five percent (5%) multiplied by the amount of past due sums. The parties agree
that the late charges represent a fair and reasonable estimate of the cost that
Landlord will incur by reason of the late payment by Tenant. Acceptance of such
late charges by the Landlord shall in no event constitute a wavier of Tenant's
default with respect to such overdue amount, nor prevent Landlord from
exercising any of the other rights and remedies granted under of this Lease or
by operation of law, including Landlord's right to collect interest on past due
sums.

D. INTEREST ON UNPAID RENT. Rent not paid when due shall bear interest at a rate
of eighteen percent (18%) per annum from the date due until paid.

E. TENANT'S RIGHT TO CURE LANDLORD'S DEFAULT.

Landlord shall be in default of this Lease if it fails or refuses to
perform any provision of this Lease that it is obligated to perform if the
failure to perform is not cured within thirty (30) days after notice of the
default has been given by Tenant to Landlord. If the default cannot reasonably
be cured within thirty days, Landlord shall not be in default of this Lease if
Landlord commences to cure the default within the thirty day period and
diligently and in good faith continues to cure the default.

Tenant, at any time after Landlord commits a default, can cure the default
at Landlord's cost. If Tenant, at any time, by reason of Landlord's default,
pays any sum or does any act that requires the payment of any sum, the sum paid
by Tenant shall be due immediately from Landlord to Tenant at the time the sum
is paid, and if paid at a later date shall bear interest at the rate of eighteen
percent (18%) per annum from the date the sum is paid by Tenant until Tenant is
reimbursed by Landlord. Tenant shall have no right to withhold from future rent
due any sums Tenant has paid.

XVIII. SIGNS

All signs and advertising displayed in and about the premises, including
signs and advertising displayed in, or visible through, windows shall be such
only as to advertise the business carried on upon the premises, and Landlord
shall control the character and size thereof. No sign or advertising shall be
displayed prior to written consent by Landlord and no awning shall be installed
or used on the exterior of the Building in which the premises are a part without
prior written consent of Landlord. Tenant shall not install any exterior signs
nor any interior signs intended to be displayed through exterior windows.
Landlord shall install and maintain a main building directory and the expenses
of such directory shall be passed on to Tenant as part of the operating expenses
for the Building pursuant to paragraph IV.B.

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XIX. LANDLORD'S ACCESS

Tenant shall permit Landlord, Landlord's mortgagees and their agents to
enter the premises at reasonable times for the purpose of inspecting the same,
of making repairs, additions, or alterations thereto or to the Building, and of
the showing the premises to prospective purchasers and lenders, and to
prospective tenants during the last ninety (90) days of Tenant's lease term. At
any time during the last ninety (90) days of Tenant's lease term, Landlord may
place signs upon the premises advertising the availability of the same. Landlord
acknowledges that Tenant's business involves proprietary information, materials,
and processes of a highly confidential nature. Accordingly, any entry into the
premises by Landlord or anyone claiming by, through, or under Landlord, shall
require at least twenty four (24) hours advance notice to Tenant with the names
and business affiliations of those persons who desire to enter the premises, and
the purpose for which such persons desire to enter the premises. All persons
entering the premises may be required to sign in and provide appropriate
identification, and may be escorted by a representative of Tenant. Tenant shall
have the right to deny entry to any individual based upon Tenant's reasonable
belief that permitting entry by such individual could compromise Tenant's
confidential or proprietary information.

Landlord reserves the right of free access at all times to the roof of the
premises and to the common areas. Tenant shall not use the roof for any purpose
without the written consent of the Landlord.

XX. SUBORDINATION AND ESTOPPEL

A. SUBORDINATION ATTORNMENT.

Upon request of the Landlord, Tenant will, in writing, subordinate its
rights hereunder to the lien of any first mortgage or first deed of trust to any
bank, insurance company or other lending institution, now or hereafter in force
against the land and Building of which the premises are a part, and upon any
building hereafter placed upon the land of which the premises are a part, and to
all advances made or hereafter to be made upon the security thereof.

In the event any proceedings are brought for foreclosure or in the event
of the exercises of the power of sale under any mortgage or deed of trust made
by the Landlord covering the premises, the Tenant shall attorn to the purchaser
upon any such foreclosure of sale and recognize such purchases as the Landlord
under this Lease.

The provisions of this Article to the contrary not withstanding, and so
long as Tenant is not in default hereunder,

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this Lease shall remain in full force and effect for the full term hereof.

B. ESTOPPEL CERTIFICATES.

Each party, within ten (10) days after notice from the other party, shall
execute and deliver to the other party, in recordable form, a certificate
stating that this Lease is unmodified and in full force and effect or in full
force and effect as modified, and stating the modifications. The certificate
also shall state the amount of minimum monthly rent, the dates to which the rent
has been paid in advance, and the amount of any security deposit or prepaid
rent.

XXI. FINANCIAL STATEMENTS

A current financial statement of Tenant shall be provided to Landlord upon
execution hereof and annually thereafter if so requested by Landlord. All such
statements shall be kept strictly confidential by Landlord and not disclosed to
third parties or used for any other purposes than to verify the financial
ability of Tenant to perform under this Lease.

XXII. NOTICE

Any notice or communication that either party desires or is required to
give to the other party shall be in writing and either served personally or sent
by prepaid, first class mail. All notices and demands by the Landlord to the
Tenant shall be sent addressed to the Tenant, ATTN: Wayne Farlow, President &
CEO, 5335 Sterling Drive, Boulder, Colorado 80301, or to such other place as
Tenant may from time to time designate in a notice to Landlord. All notices and
demands by the Tenant to the Landlord shall be sent addressed to the Landlord at
HPS Division of MKS Instruments, Inc., ATTN: William D. Stewart III, 5330
Sterling Drive, Boulder, Colorado 80301, or to such other place as Landlord may
from time to time designate in a notice to Tenant. Notice shall be deemed
communicated within forty-eight (48) hours from the time of mailing if mailed as
provided in this paragraph.

XXIII. WAIVER

No delay or omission in the exercise of any right or remedy of Landlord on
any default of Tenant shall impair such a right or remedy or be construed as a
waiver. The receipt and acceptance by Landlord of delinquent rent shall not
constitute a waiver of any other default; it shall constitute only a waiver of
timely payment for the particular rent payment involved. No act or conduct of
Landlord, including, without limitation, the acceptance of the keys to the
premises, shall constitute an acceptance of the surrender of the premises by
Tenant before the expiration of the term. Only a

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notice from Landlord to Tenant shall constitute acceptance of the surrender of
the premises and accomplish a termination of the Lease. Any waiver by Landlord
of any default must be in writing and shall not be deemed a waiver of any other
default concerning the same or any other provision of this Lease.

XXIV. SALE OF PREMISES

In the event of any sale of the Building, Landlord shall be and is hereby
entirely freed and relieved of, all liability under any and all of its covenants
and obligations contained in or derived from this Lease arising out of any act,
occurrence or omission occurring after the consummation of such sale; and the
purchaser, at such sale or any subsequent sale of the premises shall be deemed,
without any further agreement between the parties or their successors in
interest or between the parties and any such purchaser, to have assumed and
agreed to carry out any and all of the covenants and obligations of the Landlord
under this Lease.

XXV. ATTORNEYS' FEES

In the event of any action or proceeding arising out of this Lease, its
interpretation, or the performance or breach of either party hereunder, the
prevailing party shall be entitled to recover all of its costs and expenses
incurred in connection therewith, including reasonable attorneys' fees and
expert witness fees, in addition to any other relief to which such party may be
entitled.

XXVI. SURRENDER OF PREMISES AND HOLDING OVER

On expiration of the term, Tenant shall surrender to Landlord the premises
and all Tenant's improvements and alterations in good condition (ordinary wear
and tear excepted), except for alterations that Tenant is obligated or permitted
to remove pursuant to an agreement between Landlord and Tenant. Tenant shall
perform all restoration made necessary by the removal of any alterations prior
to the expiration of the term.

If Tenant, with Landlord's consent, remains in possession of the premises
after expiration of the term, or after the date in any notice given by Landlord
to Tenant terminating this Lease, such possession by Tenant shall be deemed to
be a month-to-month tenancy terminable on thirty (30) days, notice given at any
time by either party. During any such month-to-month tenancy, Tenant shall pay
all rent required by this Lease, and all provisions of this Lease except those
pertaining to term and rent shall apply to the month-to-month tenancy.

If Tenant shall remain in possession of the premises after the termination
of this Lease, whether by expiration of the Lease term or otherwise, without any
written agreement to such possession,

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then Tenant shall be deemed a month-to-month tenant and rent rate during such
holdover tenancy shall be equivalent to 1.5 times the monthly rent paid for the
last month of tenancy under this Lease. No holding over by Tenant shall operate
to renew or extend this Lease without the written consent of Landlord to such
renewal or extension having been first obtained. Tenant shall indemnify Landlord
against loss or liability resulting from the delay by Tenant in surrendering
possession of the premises, including, without limitation, any claims made with
regard to any succeeding occupancy bounded by such holdover period.

XXVII. ACTS OR OMISSIONS OF OTHERS

Landlord, or its employees or agents, or any of them, shall not be
responsible or liable to Tenant or to Tenant's guests, invitees, employees,
agents or any other person or entity, for any loss or damage that may be caused
by the acts or omissions of other tenants, their guests or invitees, occupying
any other part of the Building or by persons who are trespassers on or in the
Building, or for any loss or damage caused by or resulting from the bursting,
stoppage, backing up, or leaking of water, gas, electricity or sewer" or caused
in any other manner whatsoever, unless such loss or damage is caused by or
results from the negligent acts of the Landlord, its agents or contractors.

XXVIII. EARLY TERMINATION PROVISIONS

If Landlord cannot reasonably accommodate Tenant's expansion requirements
during the term of the this Lease, Tenant reserves the right of early
termination of this Lease upon 120 days' advance written notice to Landlord and
upon reimbursing Landlord at the time of termination for the unamortized (over a
thirty-six (36) month period) balance of the following expenses relating to the
lease of the premises: (a) $26,000 of tenant finish supplied by Landlord, (b)
commissions paid by Landlord in connection with granting this lease, and (c)
reasonable legal fees.

XXIX. MISCELLANEOUS PROVISIONS

A. AUTHORITY OF PARTIES.

1. CORPORATE AUTHORITY. If Tenant is a corporation, each individual
executing this Lease on behalf of said corporation represents and warrants that
he or she is duly authorized to execute and deliver this Lease on behalf of the
corporation, in accordance with a duly adopted resolution of the board of
directors of said corporation or in accordance with the bylaws of said
corporation, and that this Lease is binding upon said corporation in accordance
with its terms.

2. LIMITED PARTNERSHIPS. If the Landlord herein is a limited partnership,
it is understood and agreed that any claims by

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Tenant on Landlord shall be limited to the assets of the limited partnerships,
and furthermore, Tenant expressly waives any and all rights to proceed against
the individual partners or the officers, directors or shareholders of any
corporate partner, except to the extent of their interest in said limited
partnership.

B. NAME.

Tenant shall not use the name of the Building or of the" development in
which the Building is situated for any purpose other than as an address of the
business to be conducted by the Tenant in the premises.

C. CONSTRUCTION OF TERMS.

Time shall be of the essence of each provision of this Lease. This Lease
shall be construed and interpreted in accordance with the laws of the State of
Colorado. This Lease contains all the agreements of the parties and cannot be
modified or amended except by a written agreement.

D. REPRESENTATIONS.

Tenant declares that in entering into this Lease, it relied solely upon
the statements contained in this Lease and fully understands that no agents or
representatives of the Landlord have authority to in any manner change, add to,
or detract from the terms of this Lease. Tenant acknowledges and agrees that it
has not relied on any statements, representations, agreements, or warranties,
except as are expressed herein.

E. RIGHTS UNDER THIS LEASE.

If any term, covenant, or provision of this Lease shall to any extent be
invalid or unenforceable, the remainder of this Lease shall nevertheless be
valid and enforceable. All of the rights given herein are cumulative and are
given without any other rights or of remedies of Landlord.

F. MEMORANDUM OF LEASE.

Neither party shall record this Lease. However, upon request by Tenant,
Landlord shall execute a Memorandum of Lease which Tenant may record. The
Memorandum of Lease shall state only the address and legal description of the
premises, the identity of the Landlord and of the Tenant, and the term of the
Lease.

IN WITNESS WHEREOF, the parties have executed this Lease as of day and
year first written above.

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LANDLORD: TENANT:

ASPEN INDUSTRIAL PARK eSOFT, a Colorado corporation
PARTNERSHIP, a Colorado
limited partnership

By: /s/ William D. Stewart, III By: /s/ Wayne Farlow
------------------------------ ----------------------------------
William D. Stewart III, Wayne Farlow
General Partner President and CEO

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CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

eSoft, Inc.
Boulder, Colorado

We hereby consent to the use in the Prospectus constituting a part of this
Registration Statement of our report dated November 26, 1997, relating to the
financial statements of eSoft, Inc. which is contained in that Prospectus.

We also consent to the reference to us under the caption "Experts" in the
Prospectus.

BDO Seidman, LLP

Denver, Colorado
December 23, 1997