ESOFT INC, SB-2/A, 1998-04-17

ESOFT INC
SB-2/A, 1998-04-17
PREPACKAGED SOFTWARE

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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 17, 1998
REGISTRATION NO. 333-43307
================================================================================

U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------------
AMENDMENT NO. 2 TO
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 organization) Classification Code Number)Identification Number)

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. |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
<TABLE>
<CAPTION>
======================================================================================================================

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
======================================================================================================================
</TABLE>
(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.

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

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

2,411,161 Shares

[LOGO]

ESOFT, INC.

Common Stock

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

The 2,411,161 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 in the United States 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. The Common Stock is presently traded only on
the Vancouver Stock Exchange which is expected to continue to be the primary
market for these stocks. The offering price of the Common Stock to be offered by
this Prospectus will be determined by the market price in effect from time to
time. See "Summary - Initial Public Offering in Canada" and "Market for Common
Equity and Related Stockholder Matters."

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

THE SHARES OF COMMON STOCK OFFERED HEREBY INVOLVE A HIGH DEGREE OF
RISK. SEE "RISK FACTORS," LOCATED AT PAGES 4 THROUGH 8.

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

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.

The date of this Prospectus is April , 1998.
----

<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. was incorporated under the laws of the State of Colorado on
March 3, 1984. On February 17, 1998, pursuant to approval by the Board of
Directors and shareholders of the Company, the Company merged into a newly
incorporated Delaware corporation, and has thus become reincorporated in the
State of Delaware.

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

On March 16, 1998, the Company completed an initial public offering of
1,550,000 shares of its Common Stock at a price of $1.00 per share in British
Columbia, Canada (the "Canadian Offering"). The offering was made by C.M.

-2-

<PAGE>

Oliver & Company Limited (the "Agent") pursuant to an Agency Agreement under
which the Agent guaranteed the sale of all of the shares. The shares sold in
such offering will not be registered under the Securities Act of 1933 (the "1933
Act") and will be offered pursuant to an exemption from the registration
requirements of the 1933 Act provided by Regulation S under the 1993 Act. The
Shares in the Canadian Offering will not be offered or sold to U.S. persons. The
Agent received a commission of $.075 per share sold in the Canadian Offering and
also received 110,000 shares of Common Stock as a corporate finance fee and a
warrant to purchase up to 250,000 shares of Common Stock for up to two years at
a price of $1.00 per share for the first year after the offering and for $1.15
per share during the second year after the offering. Pursuant to a Sponsorship
Agreement between the Company and the Agent, dated November 26, 1997, the
Company also paid to the Agent a sponsorship fee of $15,000.

The net proceeds to the Company from the Canadian Offering were
approximately $1,158,250 after payment of $116,750 commissions to the Agent
(7.5% of the offering price) and the payment of other expenses of the offering,
estimated at $350,000, of which $75,000 was evidenced by a promissory note that
was paid, pursuant to the Company's option, by the issuance of shares of common
stock valued at $1.00 per share. The net cash proceeds of the Canadian Offering
are proposed to be used as follows:

Capital Equipment Purchases $ 196,000
Research and Development 214,000
Sales and Distribution Channel Development 340,000
Working Capital (1) $ 408,250
---------
Total $1,158,250
---------

(1) Salaries for planned additional sales and marketing and administrative
personnel, planned at approximately $412,000 over the next 12 months, will
be paid from working capital, partially contributed by proceeds of the
offering.

In the event that the proceeds of the offering, together with cash flow from
operations, if any, is insufficient to meet all of the expenses to which the
proceeds have been allocated, the Company will be required to re-evaluate its
planned expenditures and allocate its total resources in such manner as the
Board of Directors and management deems to be in the best interest of the
Company. Moreover, the Board of Directors and Management may, for business
reasons, reallocate funds among these or other uses in order to achieve the
Company's operating objectives.

THIS OFFERING

The Company is registering an aggregate of 2,411,161 shares of its
Common Stock to be offered for sale by stockholders of the Company. Of these
shares, 1,909,061 shares are presently owned by the Selling Stockholders. 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 warrants to purchase shares of Common Stock of the Company at
an exercise price of $1.00 per share, and 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...................... 5,081,061 shares

Common Stock Offered:
By the Selling Stockholders............ 2,411,061 shares

Common Stock To Be Outstanding
After This Offering................... 5,583,161 shares*

Use of Proceeds............................ The Company will receive no proceeds
from the sale of shares by the
Selling Stockholders.
- -------------------

*Assumes the exercise of warrants to purchase 502,100 shares.

-3-

<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 "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.

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 to increase selling, general and administrative expenses which expenditures,
together with capital purchases in the year subsequent to the date of this
Prospectus, 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.

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
overcome such events cannot be assured.

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, will be dependent, in part, 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.

-4-

<PAGE>

TECHNOLOGICAL OBSOLESCENCE

The Company operates within an industry subject to a rapid pace of
technological obsolescence. There can be no assurance 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. See "Business - Planned New Software
Product." There can be no assurances as to the ability 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, a wider
base of technical resources and greater financial resources than the Company.
There can be no assurance that the Company will be able to effectively compete
against such competitors given their entrenched market presence.

FEW 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 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.

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.

-5-

<PAGE>

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.

ACQUISITIONS OF NEW PERSONNEL

The Company has hired and expects to hire approximately twenty new
personnel in about one 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 or at all cannot be assured. See "Business - Government Regulations."

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 fiscal year ended December 31, 1997, the Company recorded an
operating loss of $193,252. The net loss was $355,252, due in part to 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.

NO PUBLIC MARKET

There has, to date, been no public market for the Company's Common
Stock in the United States. The shares became listed on the Vancouver Stock
Exchange on March 17, 1998, which is expected to be the primary market for the
shares, but there can be no assurance that an active public market on the
Vancouver Stock Exchange will be sustained. See "Market for Common Equity and
Related Stockholder Matters-Common Stock."

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. For a discussion of the
intended use of the proceeds of the Canadian Offering see the "Summary Initial
Public Offering in Canada."

-6-

<PAGE>

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 in the fiscal year ended December 31, 1997
declined from the fiscal year ended December 31, 1996 primarily as a result of
the decline in revenue from sales of the Company's TBBS product. TBBS product
sales accounted for $239,000 in revenue in 1996 (17% of total revenues), but
only approximately $62,000 (5% of revenue) in 1997. IPAD related product sales
in 1997 were $1,171,000, substantially unchanged from $1,167,000 in 1996, but
IPAD sales had declined 33% in the first nine months of 1997 from the comparable
1996 period as marketing and sales activity were curtailed until the fourth
quarter of 1997 as a result of the Company's shortage of working capital.
Approximately 44% of the 1997 IPAD sales were recorded in the fourth quarter
when sales and marketing efforts were revived after the infusion of
approximately $347,000 in a private placement in September 1997.

The Company's gross profit margins were approximately 66%, an
improvement over the 57% margins realized in 1996. The 1997 margins improved as
a result of the IPAD product being produced internally instead of being
outsourced to contract manufacturers. The improvement in gross margins was also
attributed to reduced costs of raw material created by quantity purchases and
multiple vendor sourcing.

Research and Development Expenditures

The Company conducts research and development through internal research
projects. Costs are incurred from time to time, in specific projects that employ
existing technologies for which feasibility previously has been established to
develop applications. Production costs for the development of the software used
for which technological feasibility has been established but before the product
is ready for sale, are capitalized when broad applications are identified within
its existing product lines. Costs for which technological feasibility had been
established, which were capitalized in 1997 totaled $233,000. The Company
capitalized $440,000 for such expenditures in 1996. The Company incurred $57,000
of expenses relating to research and development costs in 1997, compared to no
such expenses in 1996.

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<PAGE>

Other Expenses

Selling, general and administrative costs ("SG&A") increased from
$631,000 (45% of sales) in fiscal 1996, to $922,000 (75% of sales) in 1997,
primarily because of the overt fourth quarter activities including expenditures
to build the organization by hiring professional management and personnel,
increases in new employee hiring, the relocation of the Company from Aurora,
Colorado to Boulder, Colorado, the introduction of the Model 1200 IPAD, the
production of support and sales collateral material, the recruitment of
international sales representatives, and the increase in inventories necessary
to support the increased revenue levels of fiscal year 1998. Sales and marketing
expenses for 1997 were reported as $77,544, a decrease of 35% below the $120,259
spent in 1996, as a result of significant decreases in advertising and trade
show expenses, but general and administrative expenses were up 65% in 1997 to
$844,800 from the 1996 level of $510,865. Consultant expense was also higher as
consultants were retained on an interim basis to develop the sales support
literature and brochures to direct the recruitment and hiring of sales personnel
and international representatives.

Net Income (Loss)

The Company realized net income in the fiscal year ended December 31,
1996, but in 1997 the Company recorded a loss of $355,000, of which $193,000 was
attributable to operations. The balance of the loss, $162,000, was substantially
a result of recording deferred taxes because the Company changed its federal
income tax status from an S Corporation to a C Corporation during that period.

Income Taxes and Net Operating Losses

As discussed in Note 4 to the accompanying financial statements, the
Company has recorded an expense to recognize deferred tax liability due to the
change in tax status from an S corporation to a C corporation in September 1997.
The deferred tax liability primarily results from capitalized software
development costs being expensed for income tax purposes in the period such
costs are incurred.

The Company has $155,000 in net operating loss carryforwards with
expirations through 2013. The net operating losses are limited due to issuances
of common stock.

CAPITAL RESOURCES AND LIQUIDITY

Historically, the Company had funded its working capital requirements
from internal operations. 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 advances from Philip Becker, in addition to
approximately $112,000 that he had loaned in 1995 to assist the Company in
funding the IPAD product development, thus increasing the Company's indebtedness
to Mr. Becker to $239,903 at December 31, 1996. This indebtedness was 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. In February and
March, 1998, the Company elected to pay that obligation, as well as $116,000 of
notes payable to consultants by the issuance of shares.

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 $410,000 of
outside equity permitted the Company to significantly advance its marketing
efforts and to attract additional management personnel. On December 22, 1997,
the Company sold 350,000 shares of Common Stock and warrants to purchase an
additional 87,500 shares to Opus Capital Fund, LLC, for a total purchase price
of $350,438. Net proceeds from these offerings was $679,159. Working capital at
December 31, 1997, had increased to approximately $251,000 from less than
$23,000 at December 31, 1996.

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<PAGE>

Operating activities resulted in a $44,000 cash reduction in 1997, since the
loss recorded for this period was substantially a result of increased
depreciation and amortization and the recording of deferred taxes, which did not
affect current cash flow.

In February and March 1998, the Company sold and issued an additional
440,000 shares, all at a price of $1.00 per share in private transactions to
officers, directors, key employees and consultants of the Company, and sold
60,000 shares to Wayne Farlow, former president of the Company in accordance
with his agreement upon termination of his employment.

On January 3, 1998, the loan from First National Bank of Arvada,
Colorado, described above, was extended to April 3, 1998 for the payment of the
outstanding balance of $73,363, with monthly installment payments of $3,325 in
February and March 1998, and on April 5, 1998 it was further extended until
October 5, 1998, with monthly payments of $3,325 continuing. The Company has
received from two banks preliminary loan proposals. A portion of such a loan, if
obtained, would be used to pay the indebtedness to First National Bank of
Arvada, with the balance of the commitment to be for a working capital line of
credit that would finance eligible accounts receivable and inventory. The
borrowings would be secured by a lien on all of the Company's assets. Neither
bank has approved a proposed loan or made a commitment for a loan to the Company
and there is no assurance that a loan will be obtained. The Company believes
that such a line of credit, if obtained, will assist the Company in financing
its anticipated growth of sales if the growth is achieved.

In the fourth quarter of fiscal 1997, the Company undertook
preparations for its initial public offering, completed in March 1998, through
which approximately $1,158,250 of net cash proceeds has been generated, after
payment of expenses and commissions. This equity infusion, together with working
capital 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 for the next 12 months.

PLANNED PRIVATE PLACEMENT

On March 25, 1998, the Company entered into an engagement letter with
C. M. Oliver & Company Limited ("Agent"), the Agent for the Canadian Offering,
that sets forth the terms of a proposed private placement of shares of the
Company's Common Stock. The offering price provided for in the engagement letter
is $4.25 per share and the Agent will receive compensation of 7.5% ($0.32 per
share) of the gross proceeds. The Agent has agreed to use its reasonable best
efforts to sell the offered shares with a minimum purchase per investor of
$70,000, in British Columbia, Europe and other jurisdictions. The offering is
proposed to be made pursuant to an exemption from the registration requirements
of the Securities Act of 1933 under Regulation S for shares sold outside the
U.S. and not to U.S. Persons. Shares may also be offered and sold in the U.S. or
to U.S. Persons pursuant to exemptions from such registration under Regulation
D. The engagement letter provides that the Company will file a registration
statement under the Securities Act of 1933 to register all shares issued in the
private placement for sale in the U.S., and to use its best efforts to cause
such a registration statement to become effective within 180 days of the closing
of the private placement. The Company does not expect to complete the private
placement until approximately the end of May 1998. There can be no assurance
that the private placement will be effectively completed for all or any of the
1,200,000 shares offered.

YEAR 2000 EFFECT

The Company's TBBS product line has one deficiency associated with year
2000 for which a correction is scheduled for a revision release in October 1998.
The IPAD product line has no known susceptibility to year 2000 issues. The cost
of the revision to the TBBS product is not expected to be material.

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:

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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.

In February 1998, the FASB issued SFAS No. 132, "Employer's Disclosures
about Pensions and Other Postretirement Benefits" which standardizes the
disclosure requirements for pensions and other postretirement benefits and
requires additional information on changes in the benefit obligations and fair
values of plan assets that will facilitate financial analysis. SFAS No. 132 is
effective for years beginning after December 15, 1997 and requires comparative
information for earlier years to be restated, unless such information is not
readily available. Management believes the adoption of this statement will have
no material impact on the Company's financial statements.

* * *

FORWARD-LOOKING STATEMENTS

This prospectus 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-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 under
"Business" 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

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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.

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BUSINESS

GLOSSARY

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

"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.

"CPU" means Central Processing Unit, the computational engine of a
computer.

"CSU/DSU" means Customer Service Unit/Digital Service Unit. A device
which converts the signals on a high speed leased line circuit to the digital
signals required to connect to a computer interface.

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

"DOS" means Disk Operating System.

"ETHERNET" is a high speed transmission medium which allows direct
connection of computers in a local area at data transmission speeds of either
10Mhz or 100Mhz.

"FCC" means Federal Communications Commission (US).

"FINGER SERVER" is software which provides responses to queries using
the standard Finger protocol.

"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.

"GB" means Gigabyte. One billion bytes.

"INTEGRAL 56 KB LEASED LINE CSU/DSU" is a complete interface to allow
direct connection to a particular type of leased line known as a 56KB leased
line. Includes both the digital interface and the CSU/DSU required for this type
of connection.

"ISDN" means Integrated Services Digital Network. A special type of
telephone circuit which allows direct digital connections.

"KB" means Kilobyte. One thousand bytes.

"LAN" means Local Area Network. A group of computers in a local area
(usually within a single building) which are connected together to share data.

"MB" means Megabyte. One million bytes.

"MHZ" means Megahertz. One million cycles per second.

"MICROPROCESSOR" is a computer on a single integrated circuit chip.

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"PACKET ROUTING FIREWALL" is a security system based on applying rules
to each packet which enters a router to determine if it should be allowed to
continue onward or be rejected.

"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.

"RAM" means Random Access Memory. A computer's working program and
data memory.

"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 Office Protocol 3) server.

"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.

"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.

"UL" means Underwriter's Laboratories, Inc.

"UNIX" is a multiuser computer operating system.

"VPN (VIRTUAL PRIVATE NETWORK)" is the result of using encryption and
special protocols to create a private network using public data transmission
lines to promote lower cost and easy mobile access.

"WWW" means World Wide Web.

CORPORATE HISTORY

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.

BUSINESS HISTORY

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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 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.

The Company's IPAD is designed to integrate key software and hardware
components to facilitate an Internet presence. This includes the functionality
of a router and a broad range of servers including full DNS, SMTP, POP3, world
wide web, FTP, Telnet and related applications. Also included is a capability to
provide for text-mode user access from data terminals or other hosts such as
BBS's. Given these features, the Company's IPAD product line can be used by
Internet service providers who resell Internet access to the public, as well as
by businesses which can find ready application for the technology, to enhance
internal communications and Internet access for their employees working through
their Internet service provider.

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.

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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.

SEMINARS

The Company also offers Internet training seminars. These
comprehensive, two day programs are offered on a regional basis throughout North
America. 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 in the future 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.

PLANNED NEW SOFTWARE PRODUCT

The Company proposes to develop an IPAD-supported virtual private
network ("VPN") product. This product will require the development and
integration into the IPAD product of encryption software. The Company expects to
license the encryption software from a firm or firms specializing in this
technology. The Company has identified encryption software which it believes
will meet the needs of this proposed new product and has begun negotiating the
terms of a license. The Company has also begun research to identify the
important characteristics of a future VPN product offering. The Company believes
that the inclusion of the VPN technology in an IPAD product will have
considerable market appeal for prospective customers that require secure network
connections from remote locations. Development of this proposed new product is
in a very early stage and there can be no assurance that the Company will be
able to license the necessary technology at a reasonable cost, or at all, nor
that the Company will be able to satisfactorily integrate the encryption
technology into the IPAD product in a timely manner or at a cost which will
permit the Company to effectively compete with other products offering similar
technology.

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

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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.

If and when the sales volume increases to a level beyond the capacity
of the Company's facilities, presently anticipated to be in six to nine months,
the Company expects to outsource the assembly of the product to a contract
manufacturer in the U.S. The Company has engaged a contract manufacturer in
Holland to manufacture products for the European market. This manufacturer was
chosen for its existing requisite approvals and certifications, and it is
investigating European safety standard requirements for the IPAD products. See
"Business - Government Regulations" below.

It is the intention of the Company to sell its products 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 against 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.

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.

The Company conducts research and development through internal research
projects. Costs are incurred from time to time, in specific projects that employ
existing technologies for which feasibility previously has been established to
develop applications. Production costs for the development of the software used
for which technological feasibility has been established but before the product
is ready for sale, are capitalized when broad applications are identified within
its existing product lines. Costs for which technological feasibility had been
established resulted in $130,000 in costs being capitalized in 1995, $440,000 in
1996, and $233,000 in 1997. The Company incurred research and development
expenses of $254,000 in 1995, $0 in 1996, and $57,000 in 1997.

From time to time, the Company has entered into software development
consulting agreements. Two agreements entered into with John Patrick McMillan, a
consultant, provided for the Company to pay percentages of gross software
licensing fees on certain of its products, including the IPAD software. The
Company and the consultant have entered into a Termination Agreement terminating
those consulting arrangements in consideration of payment of

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$60,000, one-half on execution of the Termination Agreement and one-half after
completion of the Canadian IPO, and a warrant to purchase 20,000 shares of the
Company's Common Stock at $1.00 per share for one year and $1.15 per year for a
second year.

THE MARKET FOR THE PRODUCTS

The primary market being pursued by the Company consists of small to
medium size businesses. The Company believes these businesses 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.

The Company believes that for most small to medium size businesses,
high speed large diameter pipeline access to the Internet is sufficiently
important that the businesses would continue to rely upon an Internet service
provider in order to gain that advantage if it were not available in Internet
connectivity products such as the Company's IPAD products. With new advancements
in Internet software, however, 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. Perhaps 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 has
entered into a contract for manufacture of its products in Holland. The contract
manufacturer was chosen for its existing requisite approvals and certification
and it is investigating European safety standards applicable to the IPAD
products. See "Business - Government Regulations."

The Company has sold more than 400 IPAD units since the introduction of
its product line in 1995. In 1997, the Company sold 146 IPAD units. No one
customer has accounted for as much as 10% of the Company's revenue in 1995, 1996
or 1997.

In an article entitled "All-In-One Net Boxes to the Rescue," published
in the September 8, 1997 edition of Inter@ctive Week, an Internet industry trade
publication, market analysts indicate that in 1997, fewer than 6,000 units of
IPAD like products were 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.

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.

The Company believes that 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

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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 Company has observed a 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 distributors, resellers
and direct sales to disseminate its product line throughout the market. The
Company recently hired a Director of Marketing Communications, and has retained
international sales agents for Europe, Latin America and Asia. Manufacturing and
customer support capability have been put in place in Europe in the first
quarter of 1998. A Vice President of Sales will be added in the second quarter
of 1998.

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

Competition among the industry participants is based upon a number of
factors including product features, type of user primarily serviced, reputation
of the Company, ease of installation or use, reliability, cost, service
availability and other factors. The Company believes that its principal
competitive advantages are the product features, simplicity and ease of
installation and the availability of technical support for the product and the
customer. The Company's products are also designed to meet the specific needs of
the smaller to mid-sized companies that are the Company's target market. For
example, 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.

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.

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.

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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 established.

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"). The Company's IPAD products use components purchased from
other manufacturers which have the required FCC approvals and the Company relies
upon the certification of compliance furnished by those manufacturers. 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. The Company believes there are no
other material U.S. federal or state regulations which must be satisfied to
permit the sale of its products in the U.S.

The Company has not acquired requisite product approvals and
certification from appropriate agencies to permit IPAD products to be marketed
in the European Union. The Company has entered into an agreement with a
subcontract manufacturer located in Holland. This subcontract manufacturer was
chosen for its existing requisite approvals and certifications held, including
ISO 9002 certification. The Company's contract manufacturer is investigating
European safety standard requirements for the IPAD products by its Quality
Organization. The Company has not yet ascertained which approvals and
certifications are required to sell its product in the European Union. There can
be no assurance that the necessary approvals will be obtained without extended
delays, or at all.

-19-

<PAGE>

EMPLOYEES

At April 10, 1998, 22 people were employed by the Company, all on a
full-time basis, and four persons were performing services for the Company on
a contract basis until full-time management can be hired. The Company believes
its employee relations are excellent.

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 1998 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 this 1,300 square feet is approximately
$13,000 per year. The Company hopes to sublet this space in the near future, but
at present the Company is using that space for storage.

-20-

<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:

<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
NAME AND ADDRESS PRINCIPAL OCCUPATION FOR PREVIOUS FIVE YEARS
- -----------------------------------------------------------------------------------------------------------------------
<S> <C>

PHILIP L. BECKER(1) Age 51. Chairman, Chief Technology Officer and Chief
Chairman, Chief Executive Officer and Chief Executive Officer of the Company since September 1997;
Technology Officer and Director President of the Company from July 1985 to September, 1997;
Director of the Company from 1984 to present.

REGIS A. FRANK(1) Age 52. President and Chief Operating Officer of the Company
President, Chief Operating Officer and Director since January 1998; Vice-President, Marketing and Sales, of
Sigmacom Corporation, a software developer and
integration services company, from May 1997 to December
1997; President of Team Advisors, a business and
marketing consulting company, from November 1995 to April
1997; President and Chief Executive Officer for
SecaGraphics, Inc., a software development company;
from September 1986 to October 1995.

MICHAEL W. JOHNSON Age 36. President and CEO, INFONOW Corporation, Denver,
Director Colorado, since 1995; Engagement Manager, McKinsey &
1875 Lawrence Street Company, Inc., consultants, Dallas, Texas and Amsterdam,
Denver, CO 80302 Netherlands from 1990 to 1995.

ROBERT B. LOUTHAN Age 56. President of RBL Management Sciences, a management
Director marketing and sales consulting company, since 1986.
P. O. Box 4966
Vail, CO 81658

RICHARD B. RICE Age 47. Owner, The Costwatch Consulting Group, Inc., a
Director telecommunications consulting company, since 1989. Since
5380 Lookout Ridge Drive March 1998, President and CEO of Cannect Communications,
Boulder, Colorado 80301 Inc., a telecommunications company that provides voice, data and
Internet services to the Canadian market.

THOMAS R. TENNESSEN(1) Age 38. Elected Secretary, Treasurer and Chief Financial Officer
Secretary, Treasurer and Chief Financial Officer of the Company April 9, 1998. Formerly self-employed financial
consultant from March 1997 to April 1998 and from May 1991
to August 1994; Chief Financial Officer of Topro,
Inc., Denver, Colorado, a publicly-held system
integrator from September 1994 to March 1997.

ROBERT B. HARTMAN(1) Age 37. Vice-President, Engineering of the Company since
Vice President-Engineering January 1993; Senior Software Engineer for the Company from
1990 to 1993; President of Spark Software, a computer
consulting company from 1986 to 1990; Senior Software
Engineer and Project Leader for Automatrix, Inc., a
software development company, from 1983 to 1986.

-21-

<PAGE>

JASON M. ROLLINGS(1) Age 36. Vice-President, Operations of the Company since
Vice President - Operations November 1997; Director of Factory Operations for Micromotion
Inc., an electronics manufacturer, from July 1997
to October 1997; Director of Manufacturing for Hi-Tech
Manufacturing, a printed circuit board and computer
manufacturer, from April 1995 to July 1997; Director of
Manufacturing for Codar Inc., a military computer
manufacturer, from September 1988 to March 1995.
</TABLE>

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

(1) Address: 5335 Sterling Drive, Suite C, Boulder, Colorado 80301.

Messrs. Becker, Frank, Hartman and Rollings are all full-time employees
of the Company.

ELECTION OF DIRECTORS

Four directors of the Company were elected by the shareholders at a
meeting on February 10, 1998 and will hold office until the next annual meeting
at which time they may be re-elected or replaced. The Certificate of
Incorporation of the Company permits 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. On March 16, 1998, the directors
elected and appointed Richard B. Rice as a director.

EXECUTIVE COMPENSATION

The following tables contain disclosure regarding compensation awarded
to, earned by, or paid to the named executive officers.

EXECUTIVE COMPENSATION TABLE

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

PHILIP L. BECKER, 1997 100,000 -- -- -- -- -- --
Chief Executive 1996 60,000 -- -- -- -- -- --
Officer (1) 1995 45,000 -- -- -- -- -- --

J. WAYNE FARLOW 1997 40,000(2) -- -- -- -- -- --
- ------------------------
</TABLE>

(1) A detailed description of the employment agreement between the Company and
Mr. Becker follows under "Certain Relationship and Related Transactions"
below.

(2) Served as CEO from September 2, 1997 to November 7, 1997. Mr. Farlow
received a salary of $10,000 per month while serving as CEO. Pursuant to
the Severance Agreement described below, the Company paid Mr. Farlow's
salary through March 7, 1998.

-22-

<PAGE>

OPTIONS/SAR GRANTS IN LAST FISCAL YEAR

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

In February 1998, the Board of Directors and shareholders of the
Company approved an amended Stock Option Plan, originally adopted in August 1997
(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 900,000 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 five (5)
years.

In the fiscal year ending December 31, 1997, stock options were granted
as follows:

<TABLE>
<CAPTION>
OPTION/SAR GRANTS IN LAST FISCAL YEAR

% OF TOTAL
NUMBER OF OPTIONS GRANTED
SHARES UNDERLYING TO EMPLOYEES IN EXERCISE EXPIRATION
NAME OPTIONS GRANTED FISCAL YEAR PRICE DATE
<S> <C> <C> <C> <C>

Philip L. Becker 200,000(1) 36% $1.00/share 9/2/2002

J. Wayne Farlow 60,000(2) 10% $ .50/share 9/2/1998(2)

J. Wayne Farlow 200,000(3) 36% $1.00/share 3/17/2003(3)

J. Wayne Farlow 100,000(3) 18% $2.00/share 3/17/2003(3)
</TABLE>

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

(1) No options were exercised during the fiscal year ended December 31, 1997.

(2) Pursuant to the Severance Agreement described below, Mr. Farlow exercised
this option on December 19,1997 and purchased the shares on February 20,
1998.

(3) Upon Mr. Farlow's resignation on November 7, 1997 as described below,
these options expired.

<TABLE>
<CAPTION>
AGGREGATED OPTIONS/SAR EXERCISES FY-END OPTION/SAR VALUES

(A) (B) (C) (D) (E)
NUMBER OF SECURITIES VALUE OF UNEXERCISED IN-
SHARES UNDERLYING UNEXERCISED THE MONEY OPTIONS/SARS
ACQUIRED VALUE OPTIONS/SARS AT FY-END(#) AT FY-END(#) EXERCISABLE/
NAME ON EXERCISE REALIZED EXERCISABLE/UNEXERCISABLE UNEXERCISABLE
<S> <C> <C> <C> <C>

Philip L. Becker - 0 - - 0 - 200,000 (U) $ 0
Chairman & CEO

J. Wayne Farlow 60,000(1) $30,000 - 0 - $ 0
</TABLE>

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

(1) Pursuant to the severance agreement described below, Mr. Farlow exercised
this option on December 19,1997 and purchased the shares on February 20,
1998.

-23-

<PAGE>

During the fiscal year ended December 31, 1997, the Company did not
make any long-term incentive plan awards not disclosed above.

DIRECTOR COMPENSATION

The directors of the Company are not currently compensated for serving
as directors, but each director has been granted an option to purchase 18,000
shares of Common Stock at $1.00 per share. Mr. Becker and Mr. Frank also receive
compensation as officers.

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 that Agreement, the Company and Mr. Farlow agreed to Mr.
Farlow's resignation as an officer and director effective November 7, 1997, the
Company paid Mr. Farlow $10,000 per month through March 7, 1998, plus $1,875 in
lieu of accrued vacation, and Mr. Farlow continued to participate in the
Company's health insurance program, with premiums paid by the Company, until
March 1998. In accordance with an option previously granted to Mr. Farlow, he
has purchased 60,000 shares of Common Stock of the Company at a price of $0.50
per share, paid for by cash ($600) with the balance secured by a non-recourse
promissory note, payable to the Company and due September 5, 1999.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The Company has a total of 5,081,061 shares of Common Stock issued and
outstanding after the issuance of 1,550,000 shares in the Canadian Offering and
110,000 shares to the Agent in that Offering. 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 Prospectus 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.

<TABLE>
<CAPTION>
AMOUNT AND NATURE OF
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP PERCENT OF CLASS
- ---------------------------------------------------- --------------------------- --------------------
<S> <C> <C>

Philip L. Becker, Director, Chairman and 1,093,750(1) 21.3%
CEO...............................................
5335 Sterling Drive, Suite C
Boulder, CO 80301

Regis A. Frank, President, Chief Operating 48,000(2) 0.9%
Officer and Director .............................
5335 Sterling Drive, Suite C
Boulder, CO 80301

Michael W. Johnson, Director ....................... 18,000(3) 0.4%
1875 Lawrence Street
Denver, CO 80302

Robert B. Louthan, Director ........................ 10,000(4) 0.2%
P. O. Box 4966
Vail, CO 81658

-24-

<PAGE>

<CAPTION>
AMOUNT AND NATURE OF
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP PERCENT OF CLASS
- ---------------------------------------------------- --------------------------- --------------------
<S> <C> <C>

Opus Capital Fund, LLC.............................. 437,500(5) 8.5%
1113 Spruce St.
Boulder, CO 80302

Daryl Yurek(6)...................................... 360,330(6) 7.1%
1041 Kalmia Avenue
Boulder, CO 80304

W. Terrance Schreier(7)............................. 247,265(7) 4.9%
1942 Broadway, Suite 303
Boulder, CO 80302

Gene R. Copeland(8)................................. 217,267(8) 4.3%
5373 Lookout Ridge Drive
Boulder, CO 80301

J. Wayne Farlow, Former Director
and CEO(10)....................................... 180,000(11) 3.5%

Directors and Executive Officers.................... 1,232,750(9) 24.3%
as a group
</TABLE>

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

(1) Includes 53,750 options exercisable presently or within 60 days.

(2) Includes 23,000 options exercisable presently or within 60 days.

(3) Includes 3,000 options exercisable within 60 days.

(4) Reflects 10,000 options exercisable presently or within 60 days.

(5) Includes 87,500 shares purchasable upon exercise of warrants.

(6) 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. Excludes warrants to purchase 207,300 shares of Common
Stock exercisable beginning September 16, 1998 and expiring March 31,
1999.

(7) Includes 41,500 shares held in the name of W. Terrance Schreier Simplified
Employee Pension (SEP) of which Everen Securities is custodian, and
202,265 shares held by Transition Partners, Ltd. Transition Partners, Ltd.
is controlled by Mr. Schreier and he is therefore the beneficial owner of
all shares and warrants held in the name of Transition Partners, Ltd.
Excludes warrants held by Transition Partners, Ltd. to purchase up to
103,650 shares of Common Stock of the Company exercisable beginning
September 16, 1998 and expiring March 31, 1999.

(8) Shares are held by Copeland Consulting Group, Inc. which is controlled by
Mr. Copeland and he is therefore the beneficial owner of all shares and
warrants held in the name of Copeland Consulting Group, Inc. Excludes
warrants held by the Copeland Consulting Group, Inc. to purchase 103,650
shares of Common Stock of the Company exercisable beginning September 16,
1998 and expiring March 31, 1999.

(9) Includes 89,250 options exercisable presently or within 60 days.

(10) Served as CEO from September 2, 1997 to November 7, 1997.

(11) Includes 60,000 shares held by the Company as security for the payment of
a promissory note payable to the Company.

SELLING STOCKHOLDERS

The following table sets forth certain information regarding beneficial
ownership of Common Stock as of March 17, 1998, after giving effect to the
Canadian Offering by the stockholders selling shares in this offering.

-25-

<PAGE>

SHARES SHARES SHARES POST-
BENEFICIALLY PRE-OFFERING OFFERED BENEFICIALLY 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................... 1,093,750 21.4% 100,000 993,750 17.8%
5335 Sterling Drive, Suite C
Boulder, CO 80301

Opus Capital Fund, LLC............. 437,500(2) 8.5% 437,500(2) -0- 0%
1113 Spruce Street
Boulder, CO 80302

Daryl Yurek........................ 360,330(3) 7.1% 467,630(3) 100,000 1.8%
1041 Kalmia Avenue
Boulder, CO 80304

Transition Partners, Ltd........... 247,265(4) 4.9% 300,915(4) 50,000 0.9%
1942 Broadway, Suite 303
Boulder, CO 80302

Copeland Consulting Group, Inc..... 217,267(5) 4.3% 270,917(5) 50,000 0.9%
5373 Lookout Ridge Drive
Boulder, CO 80301

Wayne Farlow....................... 180,000 3.5% 180,000 -0- 0%
4020 Pinon Drive
Boulder, CO 80303

Marion Jack Rickard................ 100,000 2.0% 100,000 -0- 0%
8500 W. Bowles Ave, #210
Littleton, CO 80123

Robert C. Hartman, Jr.............. 46,500 1.0% 20,000 26,500 0.5%
3837 S. Olathe Circle
Aurora, CO 80013

Robert C. Hartman, Sr.............. 15,000 0.3% 10,000 5,000 0.1%
3837 S. Olathe Circle
Aurora, CO 80013

Joe W. Green....................... 70,000 1.4% 30,000 30,000 0.7%
2182 S. Grant St.
Denver, CO 80210

William G. Witmore................. 20,000 0.4% 20,000 -0- 0%
3905 Promontory Court
Boulder, CO 80304

Terrance W. Hefty.................. 20,000 0.4% 20,000 -0- 0%
8558 Baseline Road
Lafayette, CO 80026

Kent Nuzum......................... 29,200 0.2% 29,200 -0- 0%
5335 Sterling Drive, Suite C
Boulder, CO 80301

-26-

<PAGE>

SHARES SHARES SHARES POST-
BENEFICIALLY PRE-OFFERING OFFERED BENEFICIALLY OFFERING
OWNED PRE- PERCENTAGE IN THE OWNED POST- %
NAME AND ADDRESS OFFERING OWNERSHIP (1) OFFERING OFFERING OWNERSHIP
- ----------------------------------- -------------- ---------------- ------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Alexander Dawson Foundation........ 5,000 0.1% 5,000 -0- 0%
4801 North 107th Street
Lafayette, CO 80026

James Oleynick..................... 40,000 0.8% 40,000 -0- 0%
1749 McSpadden Ave
Van Couver, British Columbia
V5N1L3

Adrian Swanton..................... 20,000 0.4% 20,000 -0- 0%
4336 Prospect Road
North Vancouver, British Columbia
V7N3L7

Equity Ventures Ltd................ 20,000 0.4% 20,000 -0- 0%
44 Church Street
Hamilton HM12, Bermuda

The Goleen Corp. Ltd............... 40,000 0.8% 40,000 -0- 0%
94 Dowdeswell St.
Box N7521
Nassau, Bahamas

William E. Hodal................... 10,000 0.2% 10,000 -0- 0%
2200 - 609 Granville Street
P.O. Box 10337, Pacific Centre
Vancouver, BC V7Y 1H2

Jeana Traviss...................... 50,000 1.0% 50,000 -0- 0%
2200 - 609 Granville Street
P.O. Box 10337, Pacific Centre
Vancouver, BC V7Y 1H2

Henry Ewanchuk..................... 80,000 1.6% 80,000 -0- 0%
4116 West 8th Avenue
Vancouver, BC V6R 1Z6

Mike Meyers....................... 20,000 0.4% 20,000 -0- 0%
826 West 48th Avenue
Vancouver, BC V5Z 2R9

Chelsea Capital Corporation........ 40,000 0.8% 40,000 -0- 0%
1600 - 750 W. Pender Street
Vancouver, BC V6C 2T8

Michael Thomson.................... 20,000 0.4% 20,000 -0- 0%
1600 - 750 W. Pender Street
Vancouver, BC V6C 2T8

C.M. Oliver Capital Corporation.... 20,000 0.4% 20,000 -0- 0%
1600 - 750 W. Pender Street
Vancouver, BC V6C 2T8

-27-

<PAGE>

SHARES SHARES SHARES POST-
BENEFICIALLY PRE-OFFERING OFFERED BENEFICIALLY OFFERING
OWNED PRE- PERCENTAGE IN THE OWNED POST- %
NAME AND ADDRESS OFFERING OWNERSHIP (1) OFFERING OFFERING OWNERSHIP
- ----------------------------------- -------------- ---------------- ------------- --------------- --------------
<S> <C> <C> <C> <C> <C>
Garrow Bay Holdings Ltd............ 8,000 0.2% 8,000 -0- 0%
6175 Nelson Avenue
West Vancouver, BC V7W 2A1

Bruce Buckland..................... 8,000 0.2% 8,000 -0- 0%
2200-609 Granville Street
P.O. Box 10337, Pacific Centre
Vancouver, BC V7Y 1H2

Randy Ayers........................ 8,000 0.2% 8,000 -0- 0%
2200 - 609 Granville Street
P.O. Box 10337, Pacific Centre
Vancouver, BC V7Y 1H2

Glenn Butterworth.................. 8,000 0.2% 8,000 -0- 0%
2200 - 609 Granville Street
P.O. Box 10337, Pacific Centre
Vancouver, BC V7Y 1H2

Richard H. Becker.................. 10,000 0.2% 10,000 -0- 0%
1056 Ortego Road
Pebblebeach, CA 93953

Dale Eckert........................ 8,000 0.2% 8,000 -0- 0%
2200 - 609 Granville Street
P.O. Box 10337, Pacific Centre
Vancouver, BC V7Y 1H2

Daniel R. Copeland................. 3,333 0.1% 3,333 -0- 0%
5373 Lookout Ridge Dr.
Boulder, CO 80301

Patrick J. Copeland................ 3,333 0.1% 3,333 -0- 0%
5373 Lookout Ridge Dr.
Boulder, CO 80301

Michelle L. Peebles................ 3,333 0.1% 3,333 -0- 0%
5373 Lookout Ridge Dr.
Boulder, CO 80301
</TABLE>

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

(1) The percentages are calculated after 1,550,000 shares of Common Stock were
sold in the Canadian Offering and 110,000 shares were issued to C.M.
Oliver & Company Limited as a corporate finance fee relating to the
Canadian Offering.

(2) Includes warrants to purchase 87,500 shares of Common Stock.

(3) Includes 100,000 shares held in the name of the Daryl F. Yurek Self
Employed Pension of which Smith Barney Inc. is custodian. Shares
Beneficially Owned Pre-Offering excludes warrants to purchase up to
207,300 shares exercisable from September 16, 1998 to March 31, 1999, but
Shares Offered in the Offering include such warrant shares.

(4) Shares Beneficially Owned Pre-Offering excludes warrants to purchase up to
103,650 shares of Common Stock of the Company exercisable from September
15, 1998 to March 31, 1999, but such warrant shares are included in Shares
Offered in the Offering. Transition Partners, Ltd. is controlled by Mr.
Schreier and he is the beneficial owner of all shares and warrants held in
the name of Transition Partners, Ltd.

-28-

<PAGE>

(5) Shares Beneficially Owned Pre-Offering excludes warrants to purchase
103,650 shares of Common Stock of the Company exercisable from September
15, 1998 to March 31, 1999, but such warrant shares are included in Shares
Offered in the Offering. Copeland Consulting Group, Inc. is controlled by
Gene R. Copeland and he is the beneficial owner of all shares and options
held in the name of Copeland Consulting Group, Inc.

MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

COMMON STOCK

Effective March 17, 1998, following completion of the Canadian Offering,
the Common Stock of the Company became listed and began trading on the Vancouver
Stock Exchange. Such exchange is presently the only market, and is expected to
continue to be the primary market for the Common Stock. There are no proposals,
arrangements or understandings with any U.S. brokers, dealers or other persons
to establish a market for the Common Stock in the United States, and no market
is expected to develop in the near future. Moreover, at the date of this
Prospectus, the Common Stock has not been registered or qualified for sale under
state securities or Blue Sky laws of any states. The shares may therefore be
sold by the Selling Stockholders, or resold by a purchaser of the shares from a
Selling Stockholder, in the U.S., only to residents of states in which the sale
of the shares, and in transactions, which are exempt from any registration or
qualification requirement of the laws of that state.

The Company has 5,081,061 shares of Common Stock issued and outstanding,
of which 2,576,110 shares held by U.S. Persons are "restricted securities" under
Rule 144 of the Securities Act of 1933, as amended (the "Act"). The 1,660,000
shares issued in connection with the Canadian Offering are freely tradable in
Canada and such shares are subject to Regulation S under the Act and may not be
sold in the United States or to U.S. Persons (as defined in Regulation S) until
April 27, 1998, and an additional 410,000 shares issued pursuant to Regulation S
in September 1997 cannot be sold in the U.S. or to U.S. Persons until September
4, 1998, unless registered or exempt under the Act. 940,000 of the shares held
by Philip Becker have been held for the one-year period under Rule 144, and will
satisfy the two-year holding period under Rule 144 on June 21, 1998. The
remaining 1,701,110 shares subject to Rule 144 will satisfy the Rule 144
one-year and two-year (as the case may be) holding periods at various times from
September 4, 1998 through March 16, 2000. In addition to Rule 144 and Regulation
S restrictions on sales under the U.S. securities laws, in accordance with
Vancouver Stock Exchange requirements, 887,500 shares are subject to a "hold"
and may not be sold by the owners until at least June 16, 1998, and additionally
151,579 shares are subject to a "hold" until September 16, 1998 and 150,000
shares until March 16, 1999.

STOCK OPTIONS AND WARRANTS

As of the date of this Registration Statement, options to purchase 756,000
shares have been granted under the Company's Stock Option Plan (the "Option
Plan"), 161,250 of which are currently exercisable. In addition, the Company has
granted warrants to consultants to purchase an aggregate of 522,100 shares of
Common Stock. All such options are exercisable at a price of $1.00 per share,
and the warrants are exercisable at $1.00 per share until March 16, 1999 and at
$1.15 per share thereafter until March 16, 2000.

The Company has granted to the Agent for the Canadian Offering a
non-transferable warrant (the "Agent's Warrant") to acquire up to 250,000 shares
of Common Stock. The Agent's Warrant is exercisable at $1.00 per share until
March 16, 1999, and thereafter at $1.15 per share until March 16, 2000. In April
1998, the Agent exercised the Agent's Warrant to purchase 42,000 shares.

HOLDERS

At March 17, 1998, there were approximately 500 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

-29-

<PAGE>

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 stockholders listed above or affiliated entities as described
below.

EMPLOYMENT AGREEMENT - PHILIP BECKER

On September 2, 1997 the Company and Philip Becker ("Becker"), the
founder, 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 March 17, 1998, 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 issuance, September 2, 1997. The
options 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 issuance,
September 2, 1997, 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
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.

EMPLOYMENT AGREEMENT - REGIS A. FRANK

On March 6, 1998, the Company and Regis Frank ("Frank"), the President,
Chief Operating Officer and a director, entered into an employment agreement
(the "Frank Agreement") which extends for a thirty six month period commencing
on January 1, 1998. Under the terms of the Frank Agreement the Company will pay
to Frank the sum of $10,000 per month plus incentive stock options to acquire
90,000 shares of Common Stock at a price of $1.00 per share for a period of five
years from the date of the issuance, January 8, 1998. The option will vest over
a 36 month period, with no options exercisable initially, but 6/36 of the
options will vest seven months after the date of the issuance, and 1/36 of the
options will vest on the first day of each month thereafter (the "Standard
Executive Option Terms"). The Frank Agreement also provides that Frank shall be
eligible to receive a quarterly performance bonus not to exceed $20,000 per
quarter.

The Frank Agreement includes non-competition and confidentiality
provisions which extend for 12 months and five years following the termination
of Frank's employment with the Company, respectively. The Frank Agreement may be
terminated by either the Company or Frank on 30 days notice without cause. If
his employment is terminated by the Company without cause, the Company must pay
Frank the greater of three (3) month's salary and benefits or that number of
months equal to the number of years which have elapsed since January 1, 1998
until the date of Frank's termination by the Company.

EMPLOYMENT AGREEMENT - ROBERT C. HARTMAN

On March 6, 1998, the Company and Robert C. Hartman ("Hartman"), the Vice
President of Engineering, entered into an employment agreement (the "Hartman
Agreement") which extends for a thirty six month period commencing

-30-

<PAGE>

on January 1, 1998. Under the terms of the Hartman Agreement the Company paid to
Hartman the sum of $5,600 per month until the completion of the Canadian
Offering, March 17, 1998, and thereafter the sum of $7,500 per month plus
incentive stock options on Standard Executive Option Terms to acquire 40,000
shares of Common Stock at a price of $1.00 per share for a period of four years
from the date of the issuance, January 8, 1998. The Hartman Agreement also
provides that Hartman shall be eligible to receive a quarterly performance bonus
not to exceed $5,000 per quarter.

The Hartman Agreement includes non-competition and confidentiality
provisions which extend for 12 months and five years following the termination
of Hartman's employment with the Company, respectively. The Hartman Agreement
may be terminated by either the Company or Hartman on 30 days notice without
cause. If his employment is terminated by the Company without cause, the Company
must pay Hartman the greater of three (3) month's salary and benefits or that
number of months equal to the number of years which have elapsed since January
1, 1998 until the date of Hartman's termination by the Company.

EMPLOYMENT LETTER - JASON M. ROLLINGS

On October 7, 1997, the Company provided a letter (the "Rollings Letter")
to Jason M. Rollings ("Rollings"), the Vice President of Operations, outlining
the terms of his employment by the Company. Under the terms of the Rollings
Letter, the Company will pay to Rollings the sum of $7,500 per month plus
incentive stock options on Standard Executive Option Terms to acquire 30,000
shares of Common Stock at a price of $1.00 per share for a period of five years
from the date of issuance, January 8, 1998. Rollings is also eligible to receive
a quarterly performance bonus, based equally on Rollings performance and the
Company's performance, not to exceed $7,500 per quarter.

The Rollings Letter also provides that the Company will loan Rollings
$20,000. The loan is to be forgiven over a two-year period, with $10,000 being
forgiven after one year of service and the remainder being forgiven when he has
completed his second year of employment with the Company. If Rollings chooses to
leave the Company before completing two years of employment with the Company, he
agrees to repay any portion of the loan still outstanding. If the Company
terminates Rollings' employment for any reason, other than cause, any
outstanding loan balance will be immediately forgiven and Rollings will be
entitled to three months severance.

The Company also agreed to loan Rollings $15,000 on the earlier of
February 28, 1998 or the closing of the Canadian Offering, March 17, 1998. Any
such loan is to be repaid from any quarterly bonus Rollings receives. If
Rollings chooses to leave the Company before any such loan has been repaid,
Rollings agrees to repay any outstanding balance related thereto. If the Company
terminates Rollings for any reason, other than cause, any outstanding loan
balance will be forgiven.

PROPOSED EMPLOYMENT AGREEMENT - THOMAS R. TENNESSEN

The Company and Thomas R. Tennessen ("Tennessen"), the Chief Financial
Officer, propose to enter into an employment agreement (the "Proposed Tennessen
Agreement") which extends for a thirty six month period commencing on April 16,
1998. Under the terms of the Proposed Tennessen Agreement the Company will pay
to Tennessen the sum of $7,500 per month plus incentive stock options to acquire
45,000 shares of Common Stock at a price of $1.00 per share on Standard
Executive Option Terms for a period of four years from the date of the issuance,
February 20, 1998. The Proposed Tennessen Agreement also provides that Tennessen
shall be eligible to receive a quarterly performance bonus not to exceed $5,000
per quarter.

The Proposed Tennessen Agreement includes non-competition and
confidentiality provisions which extend for 12 months and five years following
the termination of Tennessen's employment with the Company, respectively. The
Proposed Tennessen Agreement may be terminated by either the Company or Frank on
30 days notice without cause. If his employment is terminated by the Company
without cause, the Company must pay Frank the greater of three (3) month's
salary and benefits or that number of months equal to the number of years which
elapse subsequent to execution of the proposed agreement until the date of
Tennessen's termination by the Company.

-31-

<PAGE>

CONSULTING AGREEMENTS

On September 2, 1997, the Company and Kent Nuzum ("Nuzum"), then 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 provides certain consulting services related to
the management of the regulatory issues associated with the listing of the
Company's Common Stock with various stock exchanges in Canada and the United
States. As payment for his consulting services Nuzum receives 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 was payable, at the
option of the Company, by issuance of Common Stock of the Company valued at the
price of the Common Stock issued in the Canadian Offering, and these promissory
notes have been paid by the issuance of shares of Common Stock at a price of
$1.00 per share. The TPL Agreement will terminate on May 21, 1998.

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 provided certain consulting
services relating to an interim private financing of up to $410,000 and to the
Canadian Offering and agreed not to disclose confidential information of the
Company for five years. All rights of Pantheon under the Pantheon Agreement have
subsequently been transferred to its Stockholders, Daryl Yurek and Kent Nuzum.
In consideration of its consulting services Pantheon was issued warrants to
purchase 414,600 shares of Common Stock of the Company at $1.00 per share
beginning September 16, 1998 and expiring March 31, 1999. The warrant provides
that it may be exercised by giving a non-interest bearing 12-month promissory
note to the Company.

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 described under "Executive Compensation - Severance Agreement."

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 such shares 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 shares of Common Stock hereunder might be
deemed to be "underwriters" within the meaning of Section 2(11) of the Act and
any 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.

-32-

<PAGE>

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

LEGAL MATTERS

The due authorization, valid issuance and non-assessability of the shares
of Common Stock offered hereby will be passed upon for the Company by the law
firm of Davis, Graham & Stubbs LLP, Denver, Colorado.

DESCRIPTION OF SECURITIES

The Company is authorized to issue 50,000,000 shares of Common Stock,
$.01 par value. The holders of Common Stock are entitled to vote at all meeting
of stockholders, 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.

EXPERTS

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.

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 files reports and other financial information with the
Commission pursuant to Section 13 of the Securities Exchange Act of 1934, and
following completion of this Offering, the Company 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.

-33-

<PAGE>

ESOFT, INCORPORATED

FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996

<PAGE>

ESOFT, INCORPORATED

CONTENTS

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

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 3

BALANCE SHEET AT DECEMBER 31, 1997 4 - 5

STATEMENTS OF OPERATIONS FOR THE YEARS ENDED
DECEMBER 31, 1997 AND 1996 6

STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED
DECEMBER 31, 1997 AND 1996 7

STATEMENTS OF CASH FLOWS FOR THE YEARS
ENDED DECEMBER 31, 1997 AND 1996 8

SUMMARY OF ACCOUNTING POLICIES 9 - 14

NOTES TO FINANCIAL STATEMENTS 15 - 23

F-2

<PAGE>

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

To the Board of Directors
eSoft, Incorporated
Boulder, Colorado

We have audited the accompanying balance sheet of eSoft, Incorporated as of
December 31, 1997 and the related statements of operations, stockholders' equity
and cash flows for each of the two years in the period ended December 31, 1997.
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, 1997 and the results of its operations and its cash flows for each of the
two years in the period ended December 31, 1997 in conformity with generally
accepted accounting principles.

/s/BDO Seidman, LLP

Denver, Colorado
March 5, 1998

F-3

<PAGE>

ESOFT, INCORPORATED

BALANCE SHEET

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

December 31, 1997
- -------------------------------------------------------------------------------

ASSETS

CURRENT:
Cash and cash equivalents $ 102,837
Accounts receivable, less allowance of
$48,000 for possible losses 199,832
Subscriptions receivable 200,000
Inventories 94,607
Prepaid expenses and other 44,799
Deferred income taxes 18,000
- -------------------------------------------------------------------------------

Total current assets 660,075
- -------------------------------------------------------------------------------

PROPERTY AND EQUIPMENT:
Computer equipment 119,544
Furniture and equipment 143,157
- -------------------------------------------------------------------------------

262,701

Less accumulated depreciation 147,881
- -------------------------------------------------------------------------------

Net property and equipment 114,820

OTHER ASSETS:
Capitalized software development costs,
net of accumulated amortization of $152,673 651,470
Deferred offering costs 280,896
Other 17,539
- -------------------------------------------------------------------------------

TOTAL OTHER ASSETS 949,905
- -------------------------------------------------------------------------------

$1,724,800
- -------------------------------------------------------------------------------

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

F-4

<PAGE>

ESOFT, INCORPORATED

BALANCE SHEET

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

December 31, 1997
- -------------------------------------------------------------------------------

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
Note payable - bank $ 75,757
Accounts payable 174,754
Deferred revenue 46,622
Accrued expenses and other 91,949
Notes payable, related party - current 20,000
- -------------------------------------------------------------------------------

Total current liabilities 409,082

DEFERRED TAX LIABILITY - NET 180,000
CONVERTIBLE NOTES PAYABLE -
RELATED PARTIES 355,903
- -------------------------------------------------------------------------------

Total liabilities 944,985
- -------------------------------------------------------------------------------

COMMITMENTS

STOCKHOLDERS' EQUITY:
Common stock, $.01 par value, 50,000,000 shares
authorized, 2,433,158 shares issued
and outstanding 24,332
Additional paid in capital 1,135,432
Accumulated deficit (379,949)
- -------------------------------------------------------------------------------

Total stockholders' equity 779,815
- -------------------------------------------------------------------------------

$1,724,800
- -------------------------------------------------------------------------------

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

F-5

<PAGE>

ESOFT, INCORPORATED

STATEMENTS OF OPERATIONS

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

Years Ended December 31, 1997 1996
- ------------------------------------------------------------------------------

REVENUES $ 1,233,137 $1,405,761
- ------------------------------------------------------------------------------

COSTS AND EXPENSES:
Cost of revenue 412,639 598,736
Research and development 56,671 -
Selling, general and
administrative 922,344 631,124
Interest expense 31,012 23,914
Loss on disposal of assets 7,803 27,739
Other (4,080) 4,899

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

Total costs and expenses 1,426,389 1,286,412
- ------------------------------------------------------------------------------

Income (loss) before income taxes (193,252) 119,349
- ------------------------------------------------------------------------------

Income tax expense 162,000 -
- ------------------------------------------------------------------------------

NET INCOME (LOSS) $ (355,252) $ 119,349
- ------------------------------------------------------------------------------

Basic and diluted income (loss) per common share $ (.23) $ .11
- ------------------------------------------------------------------------------

Weighted-average number of
common shares outstanding 1,536,884 1,102,253
- ------------------------------------------------------------------------------

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

F-6

<PAGE>

ESOFT, INCORPORATED

STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
Common Stock Additional Total
----------------------- Paid in Accumulated Stockholders'
Years Ended December 1996 and 1997 Shares Amount Capital Deficit Equity
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>

BALANCE, January 1, 1996 921,704 $ 9,217 $340,833 $(144,046) $206,004
Debt exchange for
common stock 341,454 3,415 127,140 - 130,555
Net income for the year - - - 119,349 119,349
- ----------------------------------------------------------------------------------------------------------------

BALANCE, December 31, 1996 1,263,158 12,632 467,973 (24,697) 455,908

Issuance of common stock
pursuant to private place-
ments, net of issuance costs
of $80,841 820,000 8,200 320,959 - 329,159
Common stock subscribed 350,000 3,500 346,500 - 350,000
Net loss for the year - - - (355,252) (355,252)
- ----------------------------------------------------------------------------------------------------------------

BALANCE, December 31, 1997 2,433,158 $ 24,332 $1,135,432 $(379,949) $779,815
- ----------------------------------------------------------------------------------------------------------------

See accompanying summary of accounting policies and notes to financial statements.
</TABLE>

F-7

<PAGE>

ESOFT, INCORPORATED

STATEMENTS OF CASH FLOWS

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

Increase (decrease) cash and cash equivalent

Years Ended December 31, 1997 1996
- -------------------------------------------------------------------------------

OPERATING ACTIVITIES:
Net income (loss) $ (355,252) $ 119,349
Adjustments to reconcile net income
(loss) to net cash (used in) provided by
operating activities:
Depreciation and amortization 141,943 79,637
Loss on disposal of capital assets 7,803 27,739
Provision for losses on accounts receivable 48,000 -
Deferred tax expense 162,000 -
Consulting expense incurred for note payable 41,000 -
Changes in operating assets and liabilities:
Accounts receivable (213,167) 12,173
Inventories (35,948) 37,734
Other assets (59,777) 18,949
Accounts payable 145,026 (58,667)
Accrued expenses and other 85,915 (35,122)
Deferred revenue (11,348) 57,970
- ------------------------------------------------------------------------------

Net cash (used in) provided by operating activities (43,805) 259,762
- ------------------------------------------------------------------------------

INVESTING ACTIVITIES:
Purchase of property and equipment (21,989) (19,041)
Additions to capitalized software (221,139) (440,237)
- ------------------------------------------------------------------------------

Net cash used in investing activities (243,128) (459,278)
- ------------------------------------------------------------------------------

FINANCING ACTIVITIES:
Proceeds from issuance of common stock - net 479,159 -
Proceeds from borrowings 100,000 -
Payments on debt (24,243) -
Proceeds from related party borrowings 20,000 208,550
Deferred offering costs (205,896) -
Payments on related party notes payable - (36,386)
- ------------------------------------------------------------------------------

Net cash provided by financing activities 369,020 172,164
- ------------------------------------------------------------------------------

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 82,087 (27,352)

CASH AND CASH EQUIVALENTS,
beginning of year 20,750 48,102
- ------------------------------------------------------------------------------

CASH AND CASH EQUIVALENTS,
end of year $ 102,837 $ 20,750
- ------------------------------------------------------------------------------

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.

The Company was previously a Colorado corporation and was merged
into a newly formed Delaware corporation as of February 17, 1998
of the same name with the Colorado corporation ceasing to exist.
The transaction was accounted for on a basis similar to a pooling
of interest with no change in the historical financial statements
of eSoft. The newly formed corporation had no operations prior to
the merger.

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, 1996.

CONCENTRATIONS The Company's financial instruments that are exposed to
OF CREDIT RISK concentrations of credit risk consist primarily of cash and cash
equivalents and trade accounts receivable. The Company's cash and
cash equivalents are deposited with financial institutions and
are primarily invested in money market accounts. The investment
policy limits the Company's exposure to concentration of credit
risk. Such deposit accounts at times may exceed federally insured
limits. The Company has not experienced any losses in such
accounts.

F-9

<PAGE>

ESOFT, INCORPORATED

SUMMARY OF ACCOUNTING POLICIES

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

Concentrations of credit risk with respect to trade accounts
receivable are generally limited due to customers dispersed
across geographic areas and generally short payment terms.
On-going credit evaluations of customers' financial condition are
performed and, generally no collateral is required. The Company
maintains an allowance for potential losses based on management's
analysis of possible uncollectible accounts

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.

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

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 products for
SOFTWARE COSTS 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.

F-10

<PAGE>

ESOFT, INCORPORATED

SUMMARY OF ACCOUNTING POLICIES

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

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 upon
RECOGNITION 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 U.S. C-corporation. Philip L. Becker, Ltd. elected to
be taxed as a partnership. 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 The Company considers cash and all highly liquid investments
EQUIVALENTS purchased with an original maturity of three months or less to be
cash equivalents.

F-11

<PAGE>

ESOFT, INCORPORATED

SUMMARY OF ACCOUNTING POLICIES

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

LONG-TERM The Company applies SFAS No. 121, "Accounting for the Impairment
ASSETS 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 Through December 31, 1996, the Company followed the provisions of
(LOSS) PER Accounting Principles Board Opinion (APB) No. 15, "Earnings Per
SHARE Share". Effective for the year ended December 31, 1997, the
Company implemented Statement of Financial Accounting Standards
(SFAS) No. 128, "Earnings Per Share". SFAS No. 128 provides for
the calculation of "Basic" and "Diluted" earnings per share.
Basic earnings per share includes no dilution and is computed by
dividing income available to common stockholders 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. In loss periods, dilutive
common equivalent shares are excluded as the effect would be
anti-dilutive. Basic and diluted earnings per share are the same
for all periods presented.

Options and warrants to purchase 762,100 shares of common stock
and convertible notes payable-related parties into 355,903 shares
of common stock were not included in the computation of diluted
EPS because their effect was anti-dilutive for the year ended
December 31, 1997.

Subsequent to December 31, 1997, the Company granted 90,000
shares to certain employees, sold 290,000 shares of common stock,
and accepted subscriptions to another 100,000 shares of common
stock. Additionally, the Company converted $177,952 of the
convertible notes payable - related parties into 177,952 shares
of common stock. The Company also granted options to purchase
528,000 shares of common stock to employees, directors, and
consultants.

F-12

<PAGE>

ESOFT, INCORPORATED

SUMMARY OF ACCOUNTING POLICIES

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

STOCK OPTION The Company applies Accounting Principles Board Opinion 25,
PLANS "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.

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 Costs incurred in connection with the Company's anticipated
OFFERING 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 In June 1997, the Financial Accounting Standards Board issued
PRONOUNCEMENTS 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-13

<PAGE>

ESOFT, INCORPORATED

SUMMARY OF ACCOUNTING POLICIES

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

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.

In February 1998, the FASB issued SFAS No. 132, "Employer's"
Disclosures about Pensions and Other Postretirement Benefits"
which standardizes the disclosure requirements for pensions and
other postretirement benefits and requires additional information
on changes in the benefit obligations and fair values of plan
assets that will facilitate financial analysis. SFAS No. 132 is
effective for years beginning after December 15, 1997 and
requires comparative information for earlier years to be
restated, unless such information is not readily available.
Management believes the adoption of this statement will have no
material impact on the Company's financial statements.

RECLASSIFICATIONS

Certain items included in the prior year's financial statements
have been reclassified to conform to the current presentation.

F-14

<PAGE>

ESOFT, INCORPORATED

NOTES TO FINANCIAL STATEMENTS

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

1. CONVERTIBLE Prior to January 1, 1996 the Company had entered into an
NOTES unsecured note agreement with the initial stockholder in the
PAYABLE - amount of $125,000 with interest at 9% per annum, maturing
RELATED December 31, 1997. The Company also had borrowed an
PARTIES 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 $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 entered into an agreement 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.

Subsequent to December 31, 1997, holders of the convertible
notes payable accepted as partial payment of the principal
amounts owed 177,952 shares of the Company's common stock
valued at $1.00 per share.

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

2. RESEARCH AND During the years ended December 31, 1997 and 1996, the
DEVELOPMENT Company capitalized $233,425 and $440,237 of software
development costs. Amortization expense of capitalized
software development costs included in depreciation and
amortization for the years ended December 31, 1997 and 1996
amounted to $116,912 and $35,761. Research and development
costs were $56,671 and $0 for the years ended December 31,
1997 and 1996.

F-15

<PAGE>

ESOFT, INCORPORATED

NOTES TO FINANCIAL STATEMENTS

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

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

Years Ended December 31, 1997 1996

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

Payroll and related costs $ 131,627 $ 218,545

Officer payroll 50,000 48,300
Internet and telephone
expenses 30,056 35,276

Beta testing - 35,534
Occupancy costs 34,860 24,427
Purchased software - 23,800
Other 43,553 54,355

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

290,096 440,237
Less capitalized software 233,425 440,237
-----------------------------------------------------------

$ 56,671 $ -
-----------------------------------------------------------

3. COMMITMENTS Leases

The Company leases certain of its facilities and equipment
under noncancellable operating lease agreements which expire
at various dates through 2000. Rent expense for the years
ended December 31, 1997 and 1996 was $50,625 and $31,160.

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

Year ending December 31,
-----------------------------------------------------------
1998 $ 71,000
1999 58,000
2000 49,000
-----------------------------------------------------------
$ 178,000
-----------------------------------------------------------

F-16

<PAGE>

ESOFT, INCORPORATED

NOTES TO FINANCIAL STATEMENTS

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

Software Development and License Agreements

The Company has entered into several software development
and license agreements related to software utilized in
certain of the Company's products. The agreements require
compensation or royalty payments based on percentages
(ranging from 2.5% to 33.3%) of applicable gross sales and
subject to certain maximum amounts per license as defined in
the agreements.

Subsequent to December 31, 1997, the Company entered into an
agreement to terminate the software development agreements.
The termination agreement requires the Company to pay
$30,000 at the agreements inception; $30,000 no later than
15 days after the Company completes its proposed public
offering but not later than December 31, 1998 if the
proposed public offering is not completed by that date; and
the issuance of stock warrants entitling the warrant holder,
for a period of two years from January 29, 1998 to purchase
up to 20,000 shares of the Company's common stock at a price
of $1.00 per share until one year after the closing of the
public offering and $1.15 per share until the warrants
expire.

4. 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:

Year ended December 31, 1997 1996
-----------------------------------------------------------

Income (loss) before
income taxes $ (193,252) $ 119,349

Proforma income tax
benefit (expense) 66,000 (41,000)

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

Proforma net income (loss) $ (127,252) $ 78,349
-----------------------------------------------------------
Proforma income (loss) per share (.08) $ .07
-----------------------------------------------------------

F-17

<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.

The provision for income taxes consisted of the following:

Year ended December 31, 1997
-----------------------------------------------------------

CURRENT EXPENSE (BENEFIT):
Federal $ (16,000)
State (2,000)

DEFERRED EXPENSE (BENEFIT):
Federal 164,000
State 16,000

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

$ 162,000
-----------------------------------------------------------

A reconciliation of the effective tax rates and the
statutory U.S. federal income tax rates follows:

Year ended December 31, 1997
-----------------------------------------------------------

U.S. federal tax benefit at statutory rates $ (68,000)

State income tax benefit, net of federal
tax amount (7,000)
Other (6,000)
Deferred tax expense for software 243,000
-----------------------------------------------------------

Income tax expense 162,000
-----------------------------------------------------------

F-18

<PAGE>

ESOFT, INCORPORATED

NOTES TO FINANCIAL STATEMENTS

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

Temporary differences that give rise to a significant
portion of the deferred tax assets and liability are as
follows:

December 31, 1997
-----------------------------------------------------------

Net operating loss carryforward $ 58,000
Provision for allowance for uncollectible
accounts 18,000
Software amortization (243,000)
Other 5,000
-----------------------------------------------------------

Net deferred tax liability $ (162,000)
-----------------------------------------------------------

At December 31, 1997, the Company had net operating loss
carryforwards of approximately $155,000 with expirations
through 2013. The net operating losses are limited due to
issuances of common stock.

5. CAPITAL On August 27, 1997, the Board of Directors authorized a
TRANSACTIONS stock split of 63.1579 to 1. All references to common share
and per share amounts in the accompanying financial
statements have been retroactively restated to reflect the
effect of the stock split.

On September 12, 1997, the Company sold 820,000 shares of
common stock for $410,000 in a private placement. In
December 1997, the Company sold 350,000 shares of common
stock for $350,000 in a private placement. The Company
granted the promoter of the private placement warrants to
purchase an additional 87,500 shares of common stock at $1
per share. The warrants expire December 22, 1999. Of the
December 1997 private placement, $200,000 was recorded as a
subscription receivable. Subsequent to December 31, 1997,
the Company received the outstanding balance. The net
proceeds to the Company after stock issuance costs was
$679,159.

In January 1998, the Company granted 90,000 shares of common
stock to certain employees.

F-19

<PAGE>

ESOFT, INCORPORATED

NOTES TO FINANCIAL STATEMENTS

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

In February 1998, the Company sold and issued an additional
290,000 shares. The Company accepted subscriptions for an
additional 150,000 shares, all at a price of $1.00 per share
in private transactions to officers, directors, key
employees and consultants of the Company. Subscriptions
receivable of $100,000 from the private placement was
collected in March 1998.

In September 1997 the Company granted various options and
warrants to purchase an aggregate of 614,600 shares of its
common stock to employees and consultants. Terms of the
employee options are 200,000 shares at $1 per share which
expire September 2002. Warrants to purchase 414,600 shares
of common stock have been issued to consultants at $1 per
share. The warrants were modified in January 1998, changing
the term of the warrants to one year and fifteen days after
the Company's shares are listed for trading. If the shares
are not exercised within a year, the exercise price
increased to $1.15 for fifteen days.

The Company also granted in September 1997, 60,000 options
to an employee at $.50 per share that were exercisable
immediately. The options expire in September 1998. The
60,000 options were exercised in February 1998 under a stock
subscription. The Company received $600 cash and a note
receivable for $29,400 to exercise such shares.

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 year ended December 31, 1997 would
have been $(355,969) and ($.23).

F-20

<PAGE>

ESOFT, INCORPORATED

NOTES TO FINANCIAL STATEMENTS

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

A summary of the Company's outstanding options and warrants
as of December 31, 1997 and changes during the year then
ended is presented below:

Weighted
Average
Range of Exercise
Shares Price
-----------------------------------------------------------

Outstanding, beginning of year - $ -
Granted 762,100 .96
Cancelled - -
Exercised - -
-----------------------------------------------------------

Outstanding, end of year 762,100 $ .96
-----------------------------------------------------------

Weighted
Average
Range of Exercise
Shares Price
-----------------------------------------------------------

Options and warrants exercisable,
end of year 60,000 $ .50

Weighted average fair
value of options granted
during the year $ .96
-----------------------------------------------------------

F-21

<PAGE>

ESOFT, INCORPORATED

NOTES TO FINANCIAL STATEMENTS

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

The following table summarizes information about stock
options and warrants outstanding at December 31, 1997:

<TABLE>
<CAPTION>
Options and Warrants Outstanding Options and Warrants Exercisable
--------------------------------------------------------------------------

Weighted
Average Weighted Weighted
Range of Number Remaining Average Number Average
Exercise Outstanding Contractual Exercise Exercisable Exercise
Prices at 12/31/97 Life Price at 12/31/97 Price
--------------------------------------------------------------------------

<S> <C> <C> <C> <C> <C> <C>
$ .50 60,000 .75 $ .50 60,000 $ .50
1.00 702,100 2.19 1.00 - -
--------------------------------------------------------------------------

$ .96 762,100 2.08 $ .96 60,000 $ .50
--------------------------------------------------------------------------
</TABLE>

In January 1998, the Company granted options to purchase
418,000 shares of common stock at $1 per share to employees
and directors. The shares vest over various periods from 2
months to 36 months. The options expire through February
2003.

In January and February 1998, the Company granted 90,000
options to consultants at $1 per share, of which 65,000
options vest at date of grant and 25,000 options vest
ratably over a 36 month period. The options expire through
February 2003.

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

7. EMPLOYMENT The Company has entered into employment agreements with
AGREEMENTS certain members of management. The agreements expire on
August 31, 2000. Future commitments are 1998-$120,000,
1999-$120,000, and 2000-$80,000.

F-22

<PAGE>

ESOFT, INCORPORATED

NOTES TO FINANCIAL STATEMENTS

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

The Company and its former President have entered into a
severance agreement and mutual release pursuant to which the
Company will pay its former president $10,000 per month
through March 7, 1998.

8. RELATED PARTY The Company has entered into various agreements with certain
TRANSACTIONS outside directors to provide services in the year. One
director has an agreement to coordinate the offering process
in Vancouver for $3,500 a month. The agreement became
effective August 1, 1997 and expires July 31, 1998.

The Company has also been paying another director and the
Promoter $6,000 a month each to provide services with
respect to sales, marketing, sales channel development and
related administrative activities in the months of November
and December 1997.

9. PUBLIC OFFERING The Company has entered into a letter of intent with an
underwriter for a proposed public offering of 1,550,000
shares of common stock on the Vancouver Stock Exchange.

10. SUPPLEMENTAL Years ended December 31, 1997 1996
DISCLOSURE TO -----------------------------------------------------------
STATEMENTS OF
CASH FLOW AND Cash paid for interest $ 31,012 $ 23,914
NON CASH Convertible notes payable
INVESTING issued for consulting
AND FINANCING services and deferred
ACTIVITIES offering costs $ 116,000 $ -
Common stock issued for
subscription
receivable $ 200,000 $ -
Common stock issued for
conversion of debt $ - $ 130,555

F-23

<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................................................................6

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

BUSINESS......................................................................12

DESCRIPTION OF PROPERTY.......................................................20

DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS..................21

EXECUTIVE COMPENSATION........................................................22

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT................24

SELLING STOCKHOLDERS..........................................................25

MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS......................29

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................................30

SALE OF SHARES................................................................32

LEGAL MATTERS.................................................................33

DESCRIPTION OF SECURITIES.....................................................33

EXPERTS.......................................................................33

AVAILABLE INFORMATION.........................................................33

UNTIL JULY , 1998 (90 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.
APRIL , 1998
---

-34-

<PAGE>

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 24 INDEMNIFICATION OF DIRECTORS AND OFFICERS

The Company is incorporated in the state of Delaware. 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 Company 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 provides 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, payable by the
Company in connection with the sale of Common Stock being registered (all
amounts are estimated except the Commission Registration Fee).

Commission Registration Fee.................................... $ 988.60
Blue Sky Qualification Fees and Expenses (including
legal fees) (estimated)...................................... 1,000.00
Printing Expenses (estimated).................................. 1,000.00
Legal Fees and Expenses (estimated)............................ 25,000.00
Accountants' Fees and Expenses (estimated)..................... 10,000.00
Miscellaneous Expenses (estimated)............................. 1,000.00
---------
Total........................................................ $38,988.60
=========

II-1

<PAGE>

ITEM 26 RECENT SALES OF UNREGISTERED SECURITIES

PRIVATE PLACEMENT TRANSACTIONS

In September 1997 the Company sold in a private placement transaction
820,000 shares of Common Stock at $.50 per share to 25 investors, nine of which
were U.S. persons. In December, the Company sold to a venture capital fund
350,000 shares of Common Stock at $1.00 per share and warrants to purchase
87,500 shares of Common Stock at $1.00 per share for one year and $1.15 per
share for a second year. The price paid for these warrants was $438.00. In
February and March 1998, the Company sold 440,000 shares at $1.00 per share. The
purchasers are all officers, directors, key employees and consultants of the
company. All of the sales to U.S. persons were made in reliance upon exemptions
from the registration requirements of Section 5 of the 1933 Act provided by Rule
505 of Regulation D under the 1933 Act, and sales outside of the United States
to non-U.S. persons were made in reliance upon Regulation S under the Act.

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
were 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, and the Company has paid the notes by the issuance of 29,000
shares of common stock at $1.00 per share.

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 were 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, and the Company has paid the notes by the issuance of
29,000 shares of common stock at $1.00 per share.

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 were
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, and the Company has paid the notes by the issuance of 58,000
shares of common stock at $1.00 per share.

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 sold 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 was 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>

EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------- -----------------------

3.1 Articles of Incorporation*

3.1a Certificate of Incorporation of New eSoft, Inc.***

3.1b Certificate of Merger of eSoft, Inc. into New eSoft, Inc.***

3.2 Bylaws of eSoft*

3.2a Bylaws of New eSoft, Inc.*

5.1 Legal Opinion

10.1 Severance Agreement and Mutual Release dated December 19, 1997 between
the Company and Wayne Farlow*

10.2 Agency Agreement with C.M. Oliver Capital****

10.2a Agent's Warrant****

10.3 Lease Agreement dated September 18, 1997 between the Company and
Aspen Industrial Park Partnership**

10.6 Voting Agreement dated September 2, 1997 between Philip Becker,
Pantheon Capital Ltd. and Transition Partners, Ltd.*

10.6a Termination Agreement***

10.7 Registration Rights Agreement dated September 2, 1997 between
Transition Partners, Ltd., Pantheon Capital Ltd. and the Company*

10.8 Agreement dated May 6, 1997 between Transition Partners, Ltd. and the
Company*

10.9 Agreement dated October 14, 1996 between Transition Partners, Ltd.
and the Company*

10.10 Amendment to Agreement dated August 22, 1997 between Transition
Partners, Ltd. and the Company*

10.11 Second Amendment to Agreement dated November 11, 1997 between
Transition Partners, Ltd. and the Company*

10.12 Stock Option Agreement dated November 11, 1997 between Transition
Partners, Ltd. and the Company*

10.12a Amended Stock Warrant Agreement dated January 29, 1998***

10.13 Consulting Agreement dated August 1, 1997 between the Company and Kent
Nuzum*

10.14 Consulting Agreement dated August 22, 1997 between Pantheon Capital
Ltd. and the Company*

10.15 Amendment to Consulting Agreement dated August 22, 1997 between
Pantheon Capital Ltd. and the Company*

10.16 Stock Option Agreement dated November 11, 1997 between Pantheon
Capital Ltd. and the Company*

II-3

<PAGE>

10.16a Amended Stock Warrant Agreement dated January 29, 1998***

10.17 Stock Option Agreement dated November 11, 1997 between Copeland
Consulting Group, Inc. and the Company*

10.17a Amended Stock Warrant Agreement dated January 29, 1998***

10.18 Employment Agreement dated September 2, 1997 between Philip Becker
and the Company*

10.19 Form of Employee Confidentiality Agreement***

10.20 Termination Agreement terminating Software Development and Consulting
Agreements***

10.21 Promissory Note to First National Bank of Arvada, Colorado***

10.22 Proposal for financing arrangement from Colorado National Bank***

10.23 Employment Agreement dated March 6, 1998 between Regis Frank and the
Company****

10.24 Employment Agreement dated March 6, 1998 between Robert C. Hartman
and the Company****

10.25 Employment Letter dated October 7, 1997 between Jason M. Rollings and
the Company

10.26 Proposed Employment Agreement between Thomas R. Tennessen and the
Company

23.1 Consent of Certified Public Accountants

27 Financial Data Schedule****

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

* Filed with Registration Statement on Form 10-SB on December 22, 1997.

** Filed with Registration Statement on Form SB-2 on December 24, 1997.

*** Filed with Amendment No. 1 to Registration Statement on Form 10-SB on
February 18, 1998.

**** Filed with Amendment No. 1 to this Registration Statement on Form SB-2,
filed March 24, 1998.

(b) Financial Statement Schedules

None

II-4

<PAGE>

ITEM 28

I. 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. UNDERTAKING PURSUANT TO REGULATION 415

The undersigned Registrant hereby undertakes: (1) to file, during any
period in which offers or sales are being made, a post-effective amendment to
this Registration Statement to (a) include any prospectus required by section
10(a)(3) of the Securities Act of 1933 (the "Act"), (b) reflect in the
prospectus any facts or events arising after

II-5

<PAGE>

the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the registration
statement, and (c) include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or any
material change to such information in the Registration Statement; (2) that, for
the purpose of determining any liability under the Act, each such post-effective
amendment 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; and (3) to remove
from registration by means of a post-effective amendment any of the securities
being registered which remain unsold at the termination of the offering.

II-6

<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
Amendment No. 2 to its registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Boulder, State of
Colorado, on April 17, 1998.

eSOFT, INC.

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

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.

<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<S> <C> <C>

/S/PHILIP L. BECKER Chairman, Chief Executive Officer, Chief April 17, 1998
- --------------------------------------------- Technology Officer and Director
Philip L. Becker

/S/THOMAS R. TENNESSEN Secretary, Treasurer and Chief Financial April 17, 1998
- --------------------------------------------- Officer (Principal Financial and Accounting
Thomas R. Tennessen Officer)

/S/REGIS A. FRANK President, Chief Operation Officer and April 17, 1998
- --------------------------------------------- Director
Regis A. Frank

/S/ROBERT B. LOUTHAN* Director April 17, 1998
- ---------------------------------------------
Robert B. Louthan

/S/MICHAEL W. JOHNSON* Director April 17, 1998
- ---------------------------------------------
Michael W. Johnson

/S/RICHARD B. RICE* Director April 17, 1998
- ---------------------------------------------
Richard B. Rice

*By /S/PHILIP L. BECKER, ATTORNEY IN FACT April 17, 1998
-------------------------------------------
Philip L. Becker
</TABLE>

II-7

[DAVIS, GRAHAM & STUBBS LETTERHEAD]

April 17, 1998

eSoft, Inc.
5335 Sterling Drive, Suite C
Boulder, Colorado 80301

Re: Registration Statement on Form SB-2 Relating to
2,411,161 SHARES OF COMMON STOCK, $.01 PAR VALUE

Ladies and Gentlemen:

We have acted as counsel for eSoft, Inc., a Delaware corporation (the
"Company"), in connection with the preparation of a Registration Statement on
Form SB-2 (the "Registration Statement") filed by the Company with the
Securities and Exchange Commission (the "Commission"). The Registration
Statement relates to the registration under the Securities Act of 1933, as
amended (the "1933 Act"), of 2,411,161 shares of common stock, $.01 par value of
the Company (the "Securities") that may be sold by the holders thereof (the
"Selling Stockholders").

This opinion is delivered pursuant to the requirements of Item
601(b)(5) of Regulation S-B under the 1933 Act.

We have examined and relied on originals or copies, certified or
otherwise identified to our satisfaction, of such documents, corporate records
and other instruments, have made such inquiries as to questions of fact of
officers and representatives of the Company and have made such examinations of
law as we have deemed necessary or appropriate for purposes of giving the
opinion expressed below. In such examination, we have assumed the genuineness of
all signatures, the authenticity of all documents submitted to us as originals
and the conformity with the originals of all documents submitted to us as
copies.

The following opinions are limited solely to applicable federal law of
the United States of America and the General Corporation Law of the State of
Delaware. While we are not licensed to practice in the State of Delaware, we
have reviewed applicable provisions of the General Corporation Law of the State
of Delaware as we have deemed appropriate in connection with the opinions
expressed herein. Except as described, we have neither examined nor do we
express any opinion with respect to Delaware law.

<PAGE>

eSoft, Inc.
April 17, 1998
Page 2

Based upon and subject to the foregoing, we are of the opinion that the
Securities offered for sale by the Selling Stockholders, as provided in the
Registration Statement, were duly and validly authorized by all necessary
corporate action of the Company, and are validly issued, fully paid and
non-assessable.

We hereby consent to the filing of this opinion with the Commission as
Exhibit 5.1 to the Registration Statement. We also consent to the reference to
this firm under the heading "Legal Matters" in the Prospectus included in the
Registration Statement as the counsel who will pass upon the validity of the
Securities. In giving this consent, we do not thereby admit that we are in the
category of persons whose consent is required under Section 7 of the Securities
Act or the rules of the Securities and Exchange Commission.

Very truly yours,

/S/LESTER R. WOODWARD
DAVIS, GRAHAM & STUBBS, LLP

[ESOFT LETTERHEAD]

October 7, 1997

Jason Rollings
1164 Hillside Lane
Louisville, Colorado 80027

Dear Jay,

I am pleased to offer you the position of Vice President of Operations,
reporting to me. Your salary will be $3750 per pay period, or $90,000 annually.
You will be eligible for a quarterly bonus of up to $7500, paid 1/2 on your
performance and 1/2 on company performance. As part of our offer, we will
provide a $7500 bonus for the quarter ending December 31, 1997.

Your package will also include a stock option for 30,000 shares of eSoft common
stock, vesting over 3 years. This will be granted when the company completes its
public offering presently scheduled for January 1998. Your option price will be
the IPO price, presently anticipated to be $1.00 per share. You will also be
eligible for all company benefits, including company paid Medical and Dental
insurance, company holidays and 15 days Vacation/Sick leave annually. The
company will also pay up to $3,000 annually for career related courses in which
you receive a grade of B or better.

In order to help you with your required payback to your present employer, as
well as provide you with some risk mitigation, eSoft will also provide you with
a $20,000 loan upon your joining the company. This loan will be forgiven over a
two-year period, with $10,000 being forgiven after one year of service and the
remainder being forgiven when you have completed your second year of employment
with eSoft. If you choose to leave eSoft at any time before completing two years
of employment at eSoft you agree to repay any portion of the loan that is still
outstanding. If eSoft chooses to release you, for any reason, other than cause,
any outstanding loan balance will be immediately forgiven and you will be
entitled to three months severance.

eSoft also agrees to provide you with a loan for $15,000 at the time that the
company receives funds from its IPO or February 28, 1998, whichever occurs
first. This loan will be paid off from your quarterly bonuses. If you choose to
leave eSoft before this loan has been reimbursed, you will repay any outstanding
balance to eSoft upon your departure. If eSoft releases you for any reason,
other than cause, the balance of this loan will be forgiven.

The management at eSoft looks forward to your joining our team. We are confident
that you will make a significant contribution to our success. I look forward to
working with you to build eSoft into a world class company.

Sincerely,

/s/Wayne Farlow
Wayne Farlow
President and CEO

PROPOSED EMPLOYMENT AGREEMENT

This Employment Agreement ("Agreement") is made and entered into as of
this 12th day of April, 1998, between eSoft, Inc., a Delaware corporation (the
"Company"), and THOMAS TENNESSEN, an individual person (the "Executive").

RECITAL

A. The Company desires to employ the CHIEF FINANCIAL OFFICER, and the
Executive desires to be employed by the Company in such position upon the terms
and conditions set forth in this Agreement.

B. The Executive acknowledges that during the course of the Executive's
employment the Executive will receive or be exposed to certain confidential
information and trade secrets (collectively referred to as "Confidential
Information") of the Company. The Executive also acknowledges that this
Confidential Information is among the Company's most important assets and that
the value of this Confidential Information would be diminished or extinguished
by disclosure.

AGREEMENT

In consideration of the mutual promises contained herein, the receipt
and sufficiency of which are hereby acknowledged, the parties hereby agree as
follows:

1. Employment; Position; Term. The Company hereby employs the
Executive and the Executive hereby accepts employment with the Company in the
capacity of Chief Financial Officer. Subject to Section 4, the term of
Executive's employment under this Agreement (the "Term") shall be for 36 months,
beginning April 16, 1998 and ending April 15, 2001.

2. Duties, Responsibilities and Authority. In his capacity as Chief
Financial Officer of the Company, the Executive shall have primary
responsibility for the establishment and maintenance of the Company's financial
policies and plans, accounting, budgeting, treasury, tax, insurance, and
investor relations. Responsibilities also include the Company's relationship
with financial institutions, investors and government agencies. The Executive
shall report to and be subject to the direction and control of the President of
the Company. The Executive shall devote substantially all of his full
professional and managerial time and effort to the performance of his duties as
Chief Financial Officer and he shall not engage in any other business activity
or activities which, in the judgement of the President of the Company, conflict
with the performance of his duties under this Agreement.

<PAGE>

3. Compensation

(a) SALARY. For services rendered under this Agreement, the
Company shall pay the Executive a salary at the rate of $7,500 per month.

(b) BONUSES. The Executive shall be eligible to receive a
performance bonus based upon mutually agreed performance criteria for each
fiscal quarter of the Company completed during the term of this Agreement
beginning with the fiscal quarter commencing April 1, 1998. The maximum
aggregate amount of the bonuses shall be $5,000 per quarter. The payment of the
Executive's performance bonus shall be made as soon as practicable but no later
than sixty (60) days following the end of the fiscal quarter. The Executive
shall not be entitled to a minimum performance bonus.

(c) ANNUAL REVIEW. The Executive's salary and terms of the
severance in Section 7 of this Agreement shall be reviewed annually beginning
January 1, 1999 and may be increased as the Board deems appropriate.

(d) STOCK OPTIONS. The Executive has been granted incentive
stock options pursuant to the Company's Stock Option Plan to purchase up to
40,000 shares of the Company's common stock at an exercise price equal to the
offering price of the Company's common stock in the Initial Public Offering
completed in March, 1998. Shares shall vest over a 36 month period with no
vesting until the beginning of the eighth month at which time
seven-thirty-sixths (7/36) of the options will vest, and then one-thirty-sixth
(1/36) will vest after the beginning of each month thereafter. vesting shall
occur as long as the Executive remains an employee of the Company. The options,
once vested shall have an expiration date of 4 years from the date of grant of
the option. In addition, the Executive may participate in stock option programs
of the Company upon such terms as the administrators of such programs in their
discretion determine.

(e) BENEFITS AND VACATION. The Executive shall be eligible to
participate in such insurance programs (health, disability or life) or such
other health, dental, retirement or similar employee benefits programs as the
Board may approve, on a basis comparable to that available to other officers and
executive employees of the Company. The Executive shall be entitled to a minimum
of four (4) weeks paid vacation per year. Vacation time may be accumulated for
up to one year beyond the year for which it is accrued and may be used any time
during such year. Any vacation time not used during such additional year shall
be forfeited. The value of any accrued but unused and unforfeited vacation time
shall be paid in cash to the Executive upon termination of his employment for
any reason.

(f) REIMBURSEMENT OF EXPENSES. The Company shall reimburse the
Executive in a timely manner for all reasonable out-of-pocket expenses incurred
by the Executive in connection with the performance of his duties under this
Agreement; provided that the Executive presents to the Company an itemized
accounting of such expenses including reasonable supporting data.

<PAGE>

4. Termination.

(a) TERMINATION BY THE COMPANY WITHOUT CAUSE. Notwithstanding
anything to the contrary contained herein but subject to Section 7 hereof, the
Company may, by delivering thirty (30) days' prior written notice to the
Executive, terminate the Executive's employment at any time without Cause (as
hereinafter defined).

(b) TERMINATION BY THE EXECUTIVE WITHOUT CAUSE.
Notwithstanding anything to the contrary contained herein but subject to Section
7 hereof, the Executive may, by delivering thirty (30) days' prior written
notice to the Company, terminate the Executive's employment hereunder.

(c) TERMINATION BY THE COMPANY FOR CAUSE. The Company may
terminate the Executive's employment for Cause immediately upon written notice
stating the basis for such termination. "Cause" for termination of the
Executive's employment shall only be deemed to exist if the Executive has (i)
breached this Agreement and if such breach continues or recurs more than thirty
(30) days after notice from the Company specifying the action which constitutes
the breach and demanding its discontinuance, (ii) exhibited willful disobedience
of directions of the President or of the Board, or (iii) committed gross
malfeasance in performance of his duties hereunder or acts resulting in an
indictment charging the Executive with the commission of a felony; provided that
the commission of acts resulting in such an indictment shall constitute Cause
only if a majority of the directors who are not also subject to any such
indictment determine that the Executive's conduct has substantially adversely
affected the Executive or its reputation. A material failure to perform his
duties hereunder that results from the disability of the Executive shall not be
considered Cause for this termination.

(d) TERMINATION BY THE EXECUTIVE FOR CAUSE. The Executive may
terminate employment for Cause immediately upon written notice stating the basis
for such termination. "Cause" for termination of employment by the Executive
shall only be deemed to exist if the Company has breached this Agreement and if
such breach continues or recurs more than thirty (30) days after notice from the
Executive specifying the action which constitutes the breach and demanding its
discontinuance.

5. Disability. In the event of disability of the Executive during
the term hereof, the Company shall, during the continuance of his disability but
only for a maximum of 90 days, pay the Executive his then current salary, as
provided for in Section 3(a), and adjusted pursuant to Section 3(b), and
continue to provide the Executive all other benefits provided hereunder. As used
herein, the term "disability" shall mean the complete and total inability of the
Executive, due to illness, physical or comprehensive mental impairment, to
substantially perform all of his duties as described herein for a consecutive
period of thirty (30) days or more.

6. Death. In the event of the death of the Executive, except with
respect to any benefits which have accrued and have not been paid to the
Executive hereunder, the provisions of this Agreement shall terminate
immediately. The Executive's estate shall have the right to receive compensation
due to the Executive as of and to the date of his death and shall have the right
to receive an additional amount equal to one-twelfth (12th) of the Executive's
annual compensation then in effect.

<PAGE>

7. Severance. In the event that the Executive's employment is
terminated by the Company other than for Cause or death of the Executive, or in
the event there is either a material change in the responsibilities of the
Executive or a loss of position within six (6) months after a Change of Control
(as defined in Section of this Agreement), or if Executive terminates this
Agreement for Cause, the Executive shall be entitled to receive his then current
salary and benefits, as provided for in Sections 3(a) and 3(e), and adjusted
pursuant to Section 3(b), payable in semi-monthly installments, for the greater
of three (3) months or that number of months which equals the number of years
that have elapsed from the initial date of this Agreement until the date of the
Executive's termination by the Company; PROVIDED, HOWEVER, that if any of such
payments would (i) constitute a "parachute payment" within the meaning of
Section 280G of the Internal Revenue Code of 1986 (the "Code") and (ii) but for
this provision, be subject to the excise tax imposed by Section 4999 of the Code
(the "Excise Tax"); the amount payable hereunder shall be reduced to the largest
amount which the Executive determines would not result in any portion of the
payments hereunder being subject to the Excise Tax. If the Executive voluntarily
resigns his employment hereunder or if his employment is terminated for Cause,
the Executive shall not be entitled to any severance pay or other compensation
beyond the date of termination of his employment.

8. Covenant Not to Compete.

(a) During the continuance of the Executive's employment
hereunder and for a period of twelve (12) months after termination of the
Executive's employment hereunder, the Executive shall not engage in any business
which competes with the Company or its affiliates anywhere in the United States
or Canada during the Executive's employment hereunder or at the time of
termination.

(b) The Executive shall not, for a period of twelve (12)
months after termination of the Executive's employment hereunder, employ, engage
or seek to employ or engage for himself or any other person or entities, any
individual who is or was employed or engaged by the Company or any of its
affiliates until the expiration of six (6) months following the termination of
such person's or entity's employment or engagement with the Company or any of
its affiliates.

9. Trade Secrets and Confidential Information. During his employment
by the Company and for a period of five (5) years thereafter, the Executive
shall not, directly or indirectly, use, disseminate, or disclose for any purpose
other than for the purposes of the Company's business, any Confidential
Information of the Company or its affiliates, unless such disclosure is
compelled in a judicial proceeding. Upon termination of his employment, all
documents, records, notebooks, and similar repositories of records containing
information relating to any Confidential Information then in the Executive's
possession or control, whether prepared by him or by others, shall be left with
the Company or, if requested, returned to the Company.

10. Severability. It is the desire and intent of the undersigned
parties that the provisions of Sections 8 and 9 shall be enforced to the fullest
extent permissible under the laws in each jurisdiction in which enforcement is
sought. Accordingly, if any particular sentence or

<PAGE>

portion of either Section 8 or 9 shall be adjudicated to be invalid or
unenforceable, the remaining portions o such section nevertheless shall continue
to be valid and enforceable as though the invalid portions were not a part
thereof. In the event that any of the provisions of Section 8 relating to the
geographic areas of restriction or the provisions of Sections 8 or 9 relating to
the duration of such sections shall be deemed to exceed the maximum area or
period of time which a court of competent jurisdiction would deem enforceable,
the geographic areas and times shall, for the purposes of this Agreement, be
deemed to be the maximum areas or time periods which a court of competent
jurisdiction would deem valid and enforceable in any state in which such court
of competent jurisdiction shall be convened.

11. Injunctive Relief. The Executive agrees that any violation by him
of the provisions contained in Sections 8 and 9 are likely to cause irreparable
damage to the Company, and therefore he agrees that if there is a breach or
threatened breach by the Executive of the provisions of said sections, the
Company shall be entitled to an injunction restraining the Executive from such
breach. Nothing herein shall be construed as prohibiting the Company from
pursuing any other available remedies for such breach or threatened breach.

12. Miscellaneous.

(a) NOTICES. Any notice required or permitted to be given
under this Agreement shall be directed to the appropriate party in writing and
mailed or delivered, if to the Company, to eSoft, Inc., to the attention of the
President, at 5335-C Sterling Drive, Boulder, Colorado 80301, and if to the
Executive, at 3837 South Olathe Circle, Aurora, Colorado, 80013.
Notification addresses may be changed with written notice.

(b) BINDING EFFECT. This Agreement is a personal service
agreement and may not be assigned by the Company or the Executive, except that
the Company may assign this Agreement to a successor of the Company by merger,
consolidation, sale of substantially all of the Company's assets or other
reorganization (a "Change of Control"). Subject to the foregoing, this Agreement
shall be binding upon and inure to the benefit of the parties hereto and their
respective successors, assigns, and legal representatives.

(c) AMENDMENT. This Agreement may not be amended except by an
instrument in writing executed by each of the undersigned parties.

(d) APPLICABLE LAW. This Agreement is entered into in the
State of Colorado and for all purposes shall be governed by the laws of the
State of Colorado.

(e) ATTORNEY'S FEES. In the event either party takes legal
action to enforce any of the terms of this Agreement, the unsuccessful party to
such action will pay the successful party's reasonable expenses, including
attorney's fees, incurred in such action.

(f) ENTIRE AGREEMENT. This Agreement supersedes and replaces
all prior agreements between the parties related to the employment of the
Executive by the Company.

<PAGE>

SIGNATURES

IN WITNESS WHEREOF, the parties have executed this Agreement as of the
first date mentioned above.

THE COMPANY:

By:
--------------------------------
Regis A. Frank
President & COO

THE EXECUTIVE:

By:
--------------------------------
Thomas Tennessen

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 March 5, 1998, 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.

/s/BDO Seidman, LLP
-------------------------------------------
BDO Seidman, LLP

Denver, Colorado
April 17, 1998