CYPOST CORP, 10KSB/A, 2000-10-16

CYPOST CORP
10KSB/A, 2000-10-16
BLANK CHECKS

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

AMENDMENT NO. SEVEN

FORM 10-KSB

(Mark One)
|X| ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934

For Fiscal Year Ended: December 31, 1999

|_| TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the transition period from ________________ to ________________

Commission file number 000-26751
---------------------------------------------

CyPost Corporation
--------------------------------------------
(Exact name of small business issuer as
specified in its charter)

Delaware 98-0178674
--------------------------------- -------------------
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)

900-1281 West Georgia St.
Vancouver, British Columbia V6E 3J7
--------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)

Issuer's telephone number (604) 904 -4422
------------------------------------------------------

Securities registered under Section 12(b) of the Act: NONE
--------------------------

Securities registered under Section 12(g) of the Act: Common Stock, par value
$.0001 per share

Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes |X| No
|_| Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this form 10-KSB. [ ]

1
<PAGE>
Aggregate market value of voting and non-voting common equity held by
non-affiliates computed by reference to the average bid and asked price of such
common equity as of January 31, 2000. $ 26,470,070

State issuer's revenues for its most recent fiscal year. $ 1,020,347
-----------

Transitional Small Business Disclosure Format (check one):
Yes |_|; No |X|

DOCUMENTS INCORPORATED BY REFERENCE

If the following documents are incorporated by reference, briefly describe
them and identify the part of the Form 10-KSB (e.g., Part I, Part II, etc.) into
which the document is incorporated: (1) any annual report to security holders;
(2) any proxy or information statement; and (3) any prospectus filed pursuant to
Rule 424(b) or (c) of the Securities Act of 1933 ("Securities Act"): NONE,
however certain exhibits hereto are incorporated by reference to the Form 10-SB
and amendment there to previously filed by the Registrant with the Commission.

Item Number and Caption Page
----------------------- ----

PART I

1. Description of Business...........................................

2. Description of Property...........................................

3. Legal Proceedings.................................................

4. Submission of Matters to a Vote of Security Holders...............

PART II

5. Market for Common Equity and Related Stockholder Matters...........

6. Management's Discussion and Analysis or Plan of Operations.........

7. Financial Statements..............................................

8. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure..............................................

PART III

9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act.................

10. Executive Compensation............................................

11. Security Ownership of Certain Beneficial Owners and Management....

12. Certain Relationships and Related Transactions....................

13. Exhibits and Reports on Form 8-K..................................

Item 1. Description of Business.

2
<PAGE>
(a) Business Development.

CyPost Corporation (hereinafter referred to as the "Registrant", the
"Issuer", or as "CyPost"), was chartered in Delaware on September 5,1997. The
original name was "E Post Corporation" but shortly after its formation it
changed its name to minimize potential trademark difficulties with third
parties. From its inception CyPost was headquartered in Vancouver, British
Columbia but in order to access U.S. capital and product markets it was
organized as a Delaware corporation. On the same date as its original date of
charter, ie. September 5, 1997, it also organized a separate wholly owned U.S.
subsidiary, CyPost USA, Inc. CyPost Corporation was chartered to engage in any
lawful activity in which Delaware corporations may engage but it was intended
that it act primarily as a holding company with its business operations
conducted through one or more subsidiaries, either in Canada, the United States
or elsewhere. CyPost acquired a second subsidiary, ePost Innovations, Inc.
("ePost Canada", a British Columbia corporation, from Mushroom Innovations, Inc.
("MII"), also a British Columbia corporation on September 15, 1997. At the time
of this acquisition, ePost Innovations, Inc. possessed certain intellectual
property rights and by virtue of the acquisition, CyPost indirectly acquired
these intellectual property rights. Neither CyPost, CyPost USA nor ePost Canada
had commenced substantial business operations at this time and therefore all
were considered "development stage companies". Under the terms of the ePost
Canada transaction, CyPost acquired all the issued and outstanding shares of
ePost Canada from MII, and in return issued 2,000,000 of its pre-split, or
3,000,000 of its post-split shares to MII. On October 29, 1998, CyPost acquired
all of the issued and outstanding capital stock of Communication Exchange
Management Inc. ("CEM"), a British Columbia corporation, from MII in exchange
for 4,180,000 pre-split or 6,270,000 post-split shares of CyPost common stock.
Both CEM and CyPost were still development stage companies at the time of this
acquisition. CEM remains a wholly-owned subsidiary of the Registrant. In
addition, shareholders of MII were also shareholders of the Registrant at the
time of the CEM acquisition. CyPost acquired CEM for the intellectual property
that CEM possessed. Currently the encryption technology and software code that
was acquired from CEM is required to build the Navaho family of products.
Further details regarding the ePost Canada and CEM acquisitions are set forth in
"Item 7. Certain Relationships and Related Transactions". CyPost remained a
development stage company until the first quarter of 1999 when it began to offer
the first of its "Navajo" software encryption products. In February 2000,
CyPost acquired Playa Corporation, a Japanese-based provider of electronic
instant messaging services. Through various acquisitions, CyPost conducts its
business through the subsidiaries listed on Exhibit 21. (b) Business of the
Issuer.

The Issuer is a holding company, the principal assets of which
consist of the capital stock of the subsidiaries listed on Exhibit 21. To date,
the Issuer, through its operating subsidiaries, has been largely involved in
three separate, but complementary businesses, i.e.(i)the development and sale of
software products using email encryption to enhance user security and
convenience ("Software Products"), (ii) providing internet connection services
to subscribers and (iii) providing instant messaging and electronic greeting
card services. (Unless otherwise qualified herein, the term "Company" shall be
used to refer to the business operations of the Registrant and its
subsidiaries.) The Company is currently offering two (2) versions of its
"Navaho" software encryption programs (Navaho Lock with Voice (Paid&
Promotional) and , Navaho Zipsafe.) The Company is developing or partnering with
a number of companies to provide products and services to its Internet Service
provider customers through an application server model which promotes server
level distribution of products rather than end user solutions. On February 23,
2000, the Company completed the acquisition of Playa Corporation developers of
the "Yabumi" instant messaging and e-greeting card service. The "Yabumi"
community of users numbers approximately 85,000 and is located primarily in
Japan.

Markets for Software Products.

The Company has developed the Navaho family of software products for the
following markets:

1) Personal Use--consumers who have little or no technical knowledge
of computers and computer programs but who wish to keep electronic
correspondence private.

2) Professional Use--professional business users such as attorneys,
accountants, medical doctors, as well those who need secure communication
capability while traveling

3) Small Businesses--companies between 10-50 employees with a small,
or no Information Services department and who operate out of a single location
The Company is developing software for a fourth target audience:

4) Enterprise--large businesses with more than 50 employees and who
use corporate intranets including LAN's and WAN's, Extranets, and government
institutions

Products

Over the last two years, the Company has discussed offering five (5)
different security encryption software products each of which bear the name
"Navaho". These have been re-clarified and re-grouped, changing the total to
two (2)product offerings. (See discussion of these under "Status of any
publicly announced new product or service").

Distribution Method of Software Products and ISP Service.

The CyPost family of Software Products are delivered digitally over the
Internet. CyPost's website, www.cypost.com, offers a full description of its
products and the chance for viewers to make a "cyber-purchase " of its software.
In addition, consumers are able to purchase products directly from popular
online retail sites such as www.beyond.com, , , and www.futureshop.com to name a
few. CyPost has entered into a distribution agreement with Digital River, Inc.,
a company that provides proprietary software delivery technology to more than
2000 software publishers and online retailers. The Company has also negotiated
with several distribution competitors of Digital River, Inc. who offer similar
capabilities including ReleaseNow.com, NetSales, Inc. and ShopNow.com. The
Company estimates that its Navaho products are currently available at more than
1000 secure websites.

CyPost's acquisition strategy includes the acquisition of Internet Service
providers with a target of acquiring 50,000-100,000 subscribers to add to its
approximately 20,000 existing subscribers. This network of service provider
subscribers become a direct marketing and distribution channel for CyPost. The
Company plans to market the Navaho family of products including Navaho Lock with
Voice (Promotional) (formerly called Navaho Express ) to its ISP client base in
early 2000. CyPost will also distribute a line of privacy and protection
solutions through industry partnerships such as content management solutions and
anti-virus protection.

Further to the ISP distribution network, the Company plans to secure a
relationship with a major advertising firm to work as representatives of the
aforementioned Navaho Express, the promotional version of the Navaho products.
The Company has spoken with several advertising firms, but has not entered into
any definitive agreements. A relationship with an advertising firm, if
consummated, would leverage the advertising firm's client base and their need
for one to one marketing tools.

Status of any publicly announced new product or service.

CyPost has announced and or marketed the following products, over the last two
years:

Navaho Lock (version 2.x)
Navaho Lock with Voice (Paid& Promotional)Navaho Viewer
Navaho ZipSafe
Navaho Office Edition (Currently under development)

Early Versions of Software

Navaho Lock version 2.x: Navaho Lock 2.x was the first generation of Navaho
products and have now been superceded by Navaho Lock with Voice. These early
versions of Navaho Lock software enabled consumers to send and receive secure
email and attachments such as documents, spreadsheets, digital sound files, and
business presentation. The program (many of the features available now in the
successor products) is intuitive, simple to operate, and exceptionally fast.
The product's unique combination of features include: full integration with all
major e-mail programs; built-in file compression for faster transmission times;
a user-friendly GUI (Graphical User Interface); and CyPost's exclusive
"drag-and-drop" feature that enables users to encrypt and compress files simply
by dragging and dropping them into an encryption field. Users can select the
strength of privacy protection according to their needs, by simply specifying
40-, 56-, 112-, 128-, or 3DES 168-bit encryption algorithms.

Navaho Lock version 2.x uses private key, or symmetric key, encryption.
Many regard this as superior to public key encryption. In comparison, the
largest-selling competing software relies on an "asymmetric" method of
encryption commonly known as "public/private key". In a public/private key
approach, a publicly available algorithm is used in combination with two
corresponding private keys that generally must be issued by a third party. Not
only is public key encryption notoriously slow (approximately 1,000 times slower
than symmetrical encryption), but the approach also exposes users to the
additional costs and risks involved in relying on a third party to verify the
identity of the sender.

Navaho Viewer: Navaho Viewer provided an alternative for those consumers Who did
not want to purchase a full working copy of Navaho Lock 2.x, but who required
the ability to read encrypted files sent to them by friends or colleagues.
Navaho Viewer was available for download free at CyPost's web site and numerous
shareware web sites on the Internet. This product is no longer offered, as the
company has a free version of Navaho Lock with Voice available to anyone who
wants to view received Navaho email packages.

Software currently offered by CyPost

The product's unique combination of features include: full integration with
all major e-mail programs; built-in file compression for faster transmission
times; a user-friendly GUI (Graphical User Interface); and CyPost's exclusive
"drag-and-drop" feature that enables users to encrypt and compress files simply
by dragging and dropping them into an encryption field. Users can select the
strength of privacy protection according to their needs, by simply specifying
40-, 56-, 112-, 128-, or 3DES 168-bit encryption algorithms.

Navaho Lock family of products uses private key, or symmetric key,
encryption. Many regard this as superior to public key encryption. In
comparison, the largest-selling competing software relies on an "asymmetric"
method of encryption commonly known as "public/private key". In a
public/private key approach, a publicly available algorithm is used in
combination with two corresponding private keys that generally must be issued by
a third party. Not only is public key encryption notoriously slow
(approximately 1,000 times slower than symmetrical encryption), but the approach
also exposes users to the additional costs and risks involved in relying on a
third party to verify the identity of the sender.

Summary of new features include:

o Ability to send and receive encrypted Voice E-mail

o Addition of a shredder for securely deleting data from the hard disk

o A new and improved streamlined user interface for greater ease of use

o Numerous changes to increase user productivity and maximize usage

Navaho Lock with Voice consists of two products, one paid and the other
promotional. The paid version retails in the same channels as Navaho Lock 2.x
for $49.95 US. Navaho Lock with Voice (Promotional) differs from Navaho Lock
with Voice (Paid) in that it is distributed to users free of charge in exchange
for users agreeing to view advertising supplied within. The paid version
retails at www.cypost.com. The Promotional version is available at
www.cypost.com and other download sites on the web. (e.g. zdnet.com,
download.com, fileworld.com)

Navaho Lock with Voice (Promotional) {product renamed prior to market release
from Navaho Express. It should be noted that this product has replace and made
Navaho Viewer obsolete}: This released product name of the promotional version
of the single user Navaho Lock with Voice product , was used until late 1999
however 'Navaho Express' is no longer being used. Now referred to as 'Navaho
Lock with Voice (Promotional)', it offers a unique one to one marketing
opportunity for any business concerned about their clients' privacy and
protection. This product integrates the functionality of Navaho Lock with Voice
and a promotional HTML window allowing the sponsor company to communicate offers
and promotions directly to their client base. There are no differences (except
for the upgrades that occur in any software development process) except in name
between Nahavo Express and Navaho Lock Promotional.

Navaho ZipSafe: (released in March 1999) This file-security software,
designed to ensure the privacy of data on laptops and home PCS, is an extension
of CyPost's Navaho product line. Utilizing the same advanced encryption
and compression technology used in Navaho Lock and offering comparable
ease-of-use features (including a user- friendly GUI and similar "drag-and-drop"
methodology), ZipSafe has the ability to encrypt and then condense files by as
much as 70% in a matter of seconds. This product enables users to secure all
computer files, folders, and directories on a local hard drive such as that
found on a laptop computer. Navaho ZipSafe is available on a free thirty (30)
day trial basisat the CyPost owned website www.cypost.com, as well as zdnet.com,
download.com and winfile.com and for immediate purchase for $19.95 USD, at
beyond.com, shop.tucows.com and digitalriver.com

Products under Development

Navaho Lock Office Edition: On March 24 1999, CyPost announced the commencement
of development of its office edition. The product concept is still under
development, but temporarily on hold with the focus devoted to the launch and
market development of Navaho Lock with Voice (paid and promotional).

Competitive Encryption Products

CyPost's Navaho line of privacy and protection solutions faces competition from
a number of rival products. The largest and most noteworthy competitors are:
NETWORK ASSOCIATES INC., INVISIMAIL INTERNATIONAL LTD., and BALTIMORE. The
following table compares these products to Navaho Lock with Voice version 3.0.
All information was gathered from the respective company web sites and September
1, 1999 issue of PC Magazine.

<TABLE>
<CAPTION>
TABLE 2. COMPARATIVE ANALYSIS OF NAVAHO LOCK WITH VOICE 3.0

FEATURE NAVAHO LOCK PGP DATA RPK INVISIMAIL MAILSECURE 2.4
WITH VOICE 3.0 SECURITY SUITE DELUXE 4.0
6.53
COMPANY CYPOST CORP. NETWORK INVISIMAIL INTL. BALTIMORE
ASSOCIATES
<S> <C> <C> <C> <C>

PRICE $ 49.95 $ $84.00 $ 44.99 $ 49.95
KEY STRENGTH 40/168 BIT 1024-4906 BIT 607-1279 BIT 128/2048 BIT
SECRET KEY PUBLIC KEY PUBLIC KEY PUBLIC KEY

VOICE EMAIL Y N N N
DOCUMENT SHREDDER Y Y Y N
ENCRYPTION METHOD SYMMETRIC ASYMMETRIC ASYMMETRIC ASYMMETRIC
FILE COMPRESSION Y N Y N
DRAG & DROP ENCRYPTION Y Y N N
EXPORTABLE OUTSIDE US Y Y N N
X.509 CERTIFICATE SUPPORT N Y N Y
</TABLE>

Key Lengths With Similar Resistance to Brute-Force Attacks

The following table compares symmetric key encryption (method used by Navaho
Lock with Voice) against brute-force attacks, defined as an attacker/hacker
trying every possible key until the right one is found. You will note
asymmetric ciphers typically require significantly longer keys to provide the
same level of security as symmetric ciphers. Therefore the system used by
Navaho products utilizes less computing power to accomplish the same level of
security, in less time. All other products compared above use assymetric key
encryption, illustrating a clear advantage for the Navaho line of products.

Symmetric Key Length Public Key Length
56 bits 384 bits
64 bits 512 bits
80 bits 768 bits
112 bits 1792 bits
128 bits 2304 bits
168 bits 3840+ bits

NETWORK ASSOCIATES INC. (Nasdaq: NETA), a public company headquartered in Santa
Clara, California is the world's largest independent network security and
management software company, and the eighth largest independent software company
with more than 60 million users worldwide, $683 million in revenue in fiscal
1999, and over 2700 employees worldwide.

According to claims made on the Company web site, Network Associates has the
largest market share of email encryption software, with its PGP software being
the most well-known email encryption software program currently on the market.
PGP Data Security Suite ($84.00) is available for purchase at the Network
Associates owned web site www.pgp.com as well as other online vendor sites.

Notable differences between PGP DATA SECURITY SUITE 6.53 and Navaho Lock with
Voice 3.0 are: 1) the lack of voice capability in PGP, 2) the lower purchase
price of Navaho Lock with Voice, 3) built in file compression in Navaho Lock
with Voice 3.0, and 4) use of symmetric key encryption in Navaho Lock with
Voice.

BALTIMORE (Nasdaq: BALT), formerly BALTIMORE TECHNOLOGIES, is a public company
with regional headquarters in Dublin (Ireland), Needham (Massachusetts) and
Sydney (Australia), develops and markets security products and services for a
wide range of e-commerce and enterprise applications. Its products include
Public Key Infrastructure (PKI) systems, cryptographic toolkits, security
applications and hardware cryptographic devices.

BALTIMORE was formed by the merger in January 1999 of BALTIMORE TECHNOLOGIES
Limited and Zergo Holdings plc. BALTIMORE now employs nearly 700 people in over
26 global locations. The company reported unaudited pro forma group revenues
for the 12 months to 31 December 1998 of $30 million (More recent financial
figures were not available from the company web site nor www.freeedgar.com).

BALTIMORE's email encryption software, named MAILSECURE is an S/MIME plugin for
Microsoft email clients, Lotus Notes and Eudora. Unlike Navaho Lock with Voice,
MAILSECURE is 1) based on public key infrastructure technology, 2) does not have
built in voice email capability and 3) lacks the ability to securely delete
documents via a document shredder.

INVISIMAIL INTERNATIONAL LTD., founded in 1997, specializes in secure Internet
commerce and communications solutions for a wide range of applications.
Developed using RPK Security, Inc.'s core technology, the RPK Encryptonite
Engine , the INVISIMAIL range of products supports secure message-based
applications including Client Services, E-Commerce, and EDI.

InvisiMail International Ltd., email encryption program called INVISIMAIL Deluxe
automatically encrypts and decrypts e-mail using 607-1279bit public/private key
encryption and signs files using DSA Digital File Signing. The program was
selected in the September 1999 issue of PC Magazine as the Editors Choice for
email encryption.

Market - ISP Division

CyPost Network of Service Providers: Through ISP acquisitions, CyPost has
established approximately 20,000 ISP subscribers to date. The Company hopes to
acquire a target of 50,000 to 100,000 ISP customers. Its goal is not to
establish itself as a competitor of the large service providers, including
telecommunication and cable companies, but rather to establish a niche market in
response to the growing concerns for privacy and protection. The CyPost network
offers a range of services including connectivity services, server co-locations,
web hosting, email services (listservs for corporate emailings) as well as lump
sum payments for custom programming and other specific projects. These services
will be extended to include privacy and protection solutions such as the
previously mentioned content management and anti-virus solutions as well as a
number of other consulting services for network security issues. The Company
has a vendor arrangement with UUNet Canada to provide connectivity across the
country and plans to enter into a similar arrangement in the U.S. These
arrangements allow the CyPost Network of Service Providers to focus on excellent
customer service and security solutions rather than merely providing points of
connectivity.

The 'niche' market that the Company hopes to serve will focus on end to end
secure communication services and solutions for small to medium sized
businesses. These customers tend to require additional services (as smaller
companies are less likely to have dedicated individuals to manage networking
issues, web programming, and other technical issues). CyPost does not believe
that larger ISP's will fail to address security issues altogether. The company
does believe that its focus on customer service for smaller businesses and
security will allow it to provide a greater range of security products and
services to its smaller client base.

Competition - ISP Division

The CyPost Network of Service providers operates in the growing and
extremely competitive Internet services market. According to a December 1999
report by International Data Corporation, America Online and UUNet still have a
commanding lead over their competitors in their ISP market segments (consumer
and business access, respectively). Moreover, the U.S. ISP market is projected
to increase at a 27.9% compound annual growth rate from $17.1 billion in 1999 to
$60.5 billion in 2004. The overall market will be driven by wholesale and value
added services. Wholesale services' revenue will be highest in the early part
of the forecast period, and value-added services, led by Web hosting , will
accelerate in 2001 and 2002. Business access services will increase at a brisk
pace throughout the forecast period. Consumer Internet access services will
continue to grow but at a slower rate than the other market segments.

Our competitors in connectivity, wholesale services and value added
services include many large companies that have substantially greater market
presence, financial, technical, marketing and other resources than we have. The
Company competes directly or indirectly with the following types of companies:

- established online services, such as America Online, the Microsoft
Network, Earthlink and Prodigy;

- local, regional and national ISP's;

- national telecommunications companies, such as AT&T and GTE;

- regional Bell operating companies; and

- online cable services.

Competition in the future is likely to increase and we believe this will
happen as diversified telecommunications and media companies acquire ISP's, and
as ISP's consolidate into larger, more competitive entities.

Competitors may bundle security services and products with Internet
connectivity services, potentially placing the CyPost Network of Service
providers at a significant competitive disadvantage. In addition, competitors
may charge less than we do for Internet services, forcing us to reduce and/or
prevent us from raising our fees. Subsequently future revenue growth and
earnings may suffer. CyPost will attempt to compete against such companies by
offering a combination of proprietary software as well as software from partners
to its ISP subscribers. While other larger ISP's offer some security solutions
(many are offering client-end filtering as an example) CyPost is reviewing the
entire spectrum of products and services available in house or through
partnerships, to ensure the CyPost Network of Service Providers have a thorough
selection of security options to utilize or choose from. Specifically, CyPost
can offer its subscribers anti-virus filtering at the server level, content
management filtering (through an arrangement with LogOn Data's Xstop),
proprietary email security products (Navaho product line), secure transaction
solutions (custom programming) and soon to be delivered, secured instant
messaging (Yabumi). Email encryption is merely one piece of the larger security
product line available or soon to be available to the CyPost Network of Service
Providers.

Government Regulation

The Company believes that the design features of the Navaho products are
unique in connecting to existing Crypto Service Providers and using them without
itself containing any direct encryption coding. Because of this feature, the
Navaho products fall outside of government regulations such as the munition or
export laws that previously restricted other forms of software encryption
programs. The term "crypto service provider" is short for "cryptographic
service provider" and refers to the computer language by which cryptographic
standards and algorithms are implemented or used. Different "crypto service
providers " use different programming assumptions and data formatting protocols.
Thus one software encryption program may work well one type of crypto service
provider but not necessarily work well with another type. The result is that it
is difficult to design encryption software that will be readily compatible with
the widely varying crypto service provider formats/protocols which are in use
today in today's digital communication environment. In contrast, CyPost's
"Navaho" family of Software Products is readily compatible with a broad range of
provider formats/protocols.

Dependence on Key Customers

The Company derives the majority of its revenues from its ISP and electronic
messaging operations and as such enjoys the benefit of a broadly diversified
customer base of approximately 115,000 located throughout Ontario, the Canadian
and Pacific Northwest and in Japan.

With respect to its direct software sales which comprised approximately
1.5% of its 1999 revenues, the Company has derived a significant portion of its
sales revenues from a "Preferred Provider Contract". Under this March 1999
agreement, the Canadian Bar Association, British Columbia branch will license
250 copies of Navaho Lock and Navaho ZipSafe. In addition, clients of these bar
members will be able, for a fee, to license their own versions of these
programs. This contract accounts for a significant portion of the Company's
Software Products revenues to date.

The Company is actively seeking to broadly market its products and has
taken a number of steps to actively market its products including use of a
variety of print and communications media to build consumer awareness such as
direct mailings, featured appearances of Company personnel on various television
and radio shows broadcast in the U.S. and Canada (Caspar Weinberger's World
Business Review, Dave Chalk's Computer Show; Dotto's Cafe, CKNW radio and CKWX
radio), and features in selected magazines (Security Magazine, PC Magazine
Online, Portable Computing, PC Magazine OnLine, Portable Computing , Computer
Paper, and Canadian Bar).

The Company has hired a director of marketing and anticipates hiring a
director of sales in the near future. In addition, during 1999 the Company
concluded acquisitions of five internet service providers. See "The 1999
Acquisitions and the Company's Broadened Strategic Focus". ePost

Research and Development

The Company has abandoned its former development of the CyPost
Terminal, a type of communications software designed to operate on a remote
terminal network. Since December 1998, the Company has focused its research and
development efforts on refinements and/or improvements to its Software Products.
The Company has introduced six (6) versions of its "Navaho" encryption software
during 1999. It is currently developing English and other language versions of
the "Yabumi" Instant Messaging software which it acquired when it bought Playa
Corporation in February of 2000. Any monies expended on research and
development will be absorbed directly by the Company and cannot be "passed
through" to customers in the form of any "cost plus" type of contract.

The cost incurred by the Company for research and development in 1998 was
$150,382 and in 1999 was $209,303.

The 1999 Acquisitions and the Company's Broadened Strategic Focus

The Company has acquired five (5) Internet service providers during
1999.

<PAGE>
Acquisition of Hermes Net Solutions, Inc. and Intouch Internet
Inc.: Effective June 30, 1999, the Company purchased all the issued and
outstanding shares of Hermes Net Solutions, Inc. for a total cash consideration
of $528,000 USD, of which $453,000 was paid on closing and $75,000 USD holdback
was paid to the seller in December 1999,as defined in the purchase agreement.

Also effective June 30, 1999, the Company purchased all the issued and
outstanding shares of Intouch.Internet Inc. for a purchase price of $293,000
USD. The consideration for this purchase consisted of cash of $265,000 USD and
the issuance of 6,570 pre-split, or 9,855 post-split, common shares (issued on
August 9, 1999) valued at $28,000 USD. Both acquisitions have been accounted
for by the purchase method of accounting. In both acquisitions, the net assets
acquired included goodwill and customer lists which will be amortized over three
years on the straight line basis.

Acquisition of NetRover Inc. and NetRover Office Inc.: On October 4,
1999, the Company purchased all the issued and outstanding shares of NetRover
Inc. and NetRover Office Inc. for a purchase price of $2,700,000 USD. The
purchase price was satisfied by a cash payment of $2,000,000 USD, and the issue
of 219,000 post-split common shares valued at $$700,000 USD. These purchases
have been accounted for under the purchase method of accounting.

Acquisition of Connect Northwest and Internet Arena: On October 24,
1999, the Company purchased the assets of the business of Connect Northwest for
a net purchase price of $1,400,000 USD. The purchase price was satisfied by a
cash payment of $670,000 USD and the issuance of 147,985 of the Company's common
shares. On November 9, 1999, the Company purchased the assets of the business
of Internet Arena for a purchase price of $600,000 USD. The purchase price was
satisfied by a cash payment of $242,000 USD, the issuance of 100,698 of the
Company's post-split common shares, and a deferred cash payment of $58,000 USD
due in January, 2000. These purchases have been accounted for under the
purchase method of accounting.

ISP's provide several complementary features to CyPost's business
strategy. CyPost gains the advantage of an existing client base who, it is
hoped, will become significant purchasers of encryption products while the ISP
gains the ability to work hand-in-hand with an encryption services provider.
also, much of an ISP's business is service-based and based on nine months of
operating history have provided predictable cash flows. CyPost has undertaken
negotiations to license software which will protect against virus transmission
at the ISP level and is developing programs to regulate content and provide
"Family Safe Surfing"at the Server level.

The ISP's generate monthly revenues from connectivity services, server
co-locations, web hosting, email services (listservs for corporate emailings) as
well as lump sum payments for custom programming and other specific projects.
An example of custom or specific projects is Hermes generating revenue from
creating a secure area on a web site for a graphic design firm's clients to view
their works in progress, without fear of competitor's eyes. The bulk of the
revenue can be attributed to connectivity currently, although the entire cypost
network of service providers is moving towards focusing on the custom projects,
web hosting and server co-location, anticipating a strong hold over connectivity
by the larger ISP's in a few years time. Cypost is also actively seeking
further opportunities to ally with isp's and other cyber-businesses both within
north america and abroad. A brief survey of the various members of the cypost
network of service providers is provided below:

Hermes Net Solutions

Based in Vancouver, British Columbia, Hermes services 800 business clients.
They offer a range of service from connectivity (variety of dial up speeds to
adsl), server co-location, web hosting, custom programming and email services.

Intouch Internet, inc.

4
<PAGE>
Based in Vancouver, British Columbia, Intouch has 2000 residential/small office
home office ("soho") clients. Intouch has an excellent "community" feel, and is
primarily focused on dial up connectivity, basic web hosting and email services.
Hermes and Intouch have been integrated (staffing and technically) and
essentially run as a single unit.

NetRover Inc.

NetRover, based in Toronto and chatham, Ontario, is the largest of cypost's
ISP's. Currently with 14,000 residential and small business clients, NetRover
offers inexpensive packages focusing on web hosting and dial up as well as some
server co-location. NetRover's management offers cypost experience with
integrating ISP's (they had completed 3 acquisitions when we purchased them in
October 1999). NetRover has a division called NetRover Office inc. Which
focuses more specifically with the company's business clientele. NetRover
currently offers dial up service with the network infrastructure hosted through
UUNet in Canada at a cost of $9.50 per user,and has dial up availability across
Canada. With this national reach, Cypost will use the NetRover brand for
expansion.

Connect Northwest

CNW, based in Mt. Vernon and Seattle, Washington, has over 1800 business and
residential services. More focused on custom work, CNW's management experience
includes ethical hacking and other security monitoring. CNW also offers web
hosting, dial up and dsl connectivity to its clients.

Internet Arena

Internet Arena, based in Portland, Oregon, with 1500 primarily residential/soho
clients, offers a similar range of services to Intouch Internet. Internet Arena
was a strategic acquisition geographically as it opened up the pacific northwest
and a link to the large california market.

CyPost is also actively seeking further opportunities to ally with
ISP's and other cyber-businesses both within North America and abroad. On
February 23, 2000, the Company concluded the purchase of Playa Corporation, the
developers of YABUMI instant messaging and e-greeting technologies. YABUMI is
based in Japan and with its 85,000 current users offers a promising opportunity
for both community-building as well as rolling out an integrated and private
solution for instant messaging using the existing messaging technology as the
base. The purchase price was $3,000,000 with $300,000 being paid in cash with
the balance paid in785,455 shares.

The Yabumi website at Yabumi.com currently generates over 500,000
visitors per month and offers several "value added" communications services.
Yabumi "Instant Messaging" Software allows users to instantly receive
ecommunications by way of a desktop notification. This allows message
recipients to bypass the need for frequent checking of email mailboxes and
permits "real time messaging". The Yabumi software to do this, Yabumi v.2.1, is
available via a free download and can be downloaded in approximately 2 minutes
or less by a user using a 56K modem. In keeping with CyPost's design
philosophy, the software is easy to install and its user interface is extremely
"user friendly". In addition to its ease of use, the program also features real
time chat line capabilities and will easily allow attachment of files and URL's.
The number of Yabumi users has grown by approximately 25% during the last 3
months of 1999 and CyPost anticipates that an additional 100,000 Japanese users
may be added by the end of 2000. Yabumi is particularly popular among young
Japanese women who are a demographically important group for marketing purposes,
as they are considered to be more receptive to innovative e-communications
products and therefore are more likely to be users of products like Yabumi..
The Company has recently introduced a MacIntosh-compatible version of its
"Instant Messaging Software" as well as a "Business to Business" version
designed for use in a networked computing environment.

5
<PAGE>
CyPost believes that the Yabumi software can be readily "localized" for use
in English- language and other cultural settings. The task of translating and
making the software compatible with existing CyPost technology. has already
begun and will use both internal and outsourced software development personnel.
CyPost anticipates that English-language versions of the Yabumi technology will
be developed during the first six months of 2000 and will be available for
product introduction during the second half of 2000.

Item 2. Description of Property.

The Company entered into a net lease with respect to its new office
premises located at 900-1281 West Georgia St.,Vancouver, British Columbia (the
"Premises") for approximately 6500 square feet of office space. The term of the
lease is for 60 months and ends on June 1, 2005. The monthly rent under this
lease is $12,171 CDN$ or approximately $7,911 USD. The Company believes that it
could secure comparable office space in the event that it needed to do so.

Item 3. Legal Proceedings.

On June 11, 1999, Canada Post Corporation filed a statement of claim in the
federal court of canada in which it sought injunctive and unspecified monetary
relief for the allegedly "improper use by the company of certain marks and names
which contain the component "post". On October 18, 1999, the company filed its
defence and counterclaim. In a motion heard November 24, 1999, Canada Post
Corporation challenged certain parts of the counterclaim and the federal court
reserved judgment. There has been no pre-trial discovery and no trial date has
been set.

On May 25, 1999, the company filed a statement of claim in the BC court
seeking a declaration that the public notice of Canada Post Corporation's
adoption and use of cyberposte and cyberpost on November 18, 1998 and December
9, 1998 respectively, did not affect the company's use of Cypost and ePost as
trade-marks and trade-names prior to said dates. the company sought summary
judgment for such a declaration and on September 14, 1999, the BC court rejected
summary judgment on the basis that no right of the company was being infringed
and that a trial of the issues was more appropriate. the rejection is pending
appeal. there has been no pre-trial discovery (except to the extent that some
was done as part of the summary judgment application) and no trial date has been
set.

On or about April 13, 2000, Steven Berry, the former CEO of CyPost brought
an action in the civil court of the State of New York, New York County
(Manhattan). The suit involves the release for the transfer of 600,000 shares
of restricted 144 shares that were issued to Steven Berry as a condition of
employment. CyPost and Continental Stock Transfer & Trust Company as
defendants. The damages that the Company expects to incur, are none at present.
As the shares were previously issued and are accounted for from the issued
shares.

Item 14: Submission of Matters to a Vote of Security Holders.

There were no matters submitted during the fourth quarter of fiscal 1999
to a vote of security holders, through the solicitation of proxies or otherwise.

6
<PAGE>
PART II

Item 5. Market Price for Common Equity
and Related Shareholder Matters.

1. (a) The Issuer's Common Stock is listed on the National Association of
Securities Dealers, Inc. Electronic Bulletin Board under the trading symbol of
"POST". The Common Stock became listed on September 21, 1998. Prior to that
time, there had been no trading in the Issuer's Common Stock. Pending the
resolutions of comments previously received in the ordinary course from the SEC
when it filed its Form 10-SB Registration Statement, the OTC "Bulletin Board"
has placed an "E" symbol on the Company's stock. The Company has filed an
Amendment No. 1 to its Form 10-SB with the SEC. The Company, its attorneys and
accountants have submitted their responses to these SEC comments and are
awaiting processing of them by the SEC. The Company is required to resolve
these comments with the SEC before April 14, 2000 in order to retain its OTC
Bulletin Board eligibility. Should these comments not be resolved by such time,
the Company's Common Stock will be removed from the OTC and will be traded in
the "pink sheets" which is generally regarded as a less liquid trading forum.
The Company will be able to reapply for listing on the OTC as soon as it
resolved all comments with the SEC.

Accordingly, the high and low bid prices for the Issuer's Common
Stock for each quarter since its date of listing, as reported by National
Quotation Bureau, LLC, are as follows:

QUARTER HIGH BID PRICE LOW BID PRICE
------- -------------- -------------

1999 Q4 (10/01-12/31) $6.50 $3.00

1999 Q3 (7/1-9/30) $8.25 $3.00

1999 Q2 (4/1 -6/30) $3.00 $1.78

1999 Q1 (01/01 - 03/31) $1.78 $0.83

1998 Q4 (10/01- 12/31) $0.89 $0.05

These quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commission, and may not represent actual transactions.

(b) The approximate number of record holders of the Issuer's
Common Stock according to its transfer agent is 74. included in this number
are shares held by Cede & Co., the nominee for Depository Trust Company, a
stock clearing house for financial institutions. The Issuer has not contacted
stock brokerage firms shown on the Issuer's stock transfer records to determine
the number of beneficial holders whose stock is held in "street name", or the
name of the brokerage house with which a shareholder's account is maintained.

(c) The Issuer has not paid any cash dividends on its Common Stock,
nor does it intend to do so in the foreseeable future. Under the General
Corporation Law of the State of Delaware, the Issuer may only pay dividends out
of capital and surplus, or out of certain delineated retained earnings, all as
defined in the General Corporation Law. There

<PAGE>
can be no assurance that the Issuer will have such funds legally available for
the payment of dividends in the event that the Issuer should decide to do so.

(d) On August 9, 1999, the Company issued 6,570 pre-split, or 9,855
post-split shares of its common stock to the former owners of Intouch.Internet,
Inc. as partial payment for the Company's acquisition of that company. These
shares were issued under the Section 4(2) exemption for transactions by an
issuer not involving a public offering under the Securities Act.

On August 16, 1999, the Company issued 1,000,000 pre-split, or
1,500,000 post-split, shares of its common stock to Blue Heron Venture Fund Ltd
("Blue Heron") pursuant to Regulation S under the Securities Act. No
underwriting commissions, fees, or discounts were paid in connection therewith.

On September 29, 1999, the Company agreed to issue 219,000 post split
shares of its common stock to the former owners of NetRover, Inc. the shares
issued in the Net Rover transaction were disclosed in the 8-K Report filed by
the Company on October 2, 1999. The shares issued in the Net Rover acquisition
were issued pursuant to the Section 4(2) Securities Act statutory exemption for
transactions by an issuer not involving a public offering.

On October 26, 1999, the Company issued 147,985 shares of its common
stock to the former owners of Connect Northwest Internet Services LLC as partial
payment for the Company's acquisition of the assets of the business of Connect
Northwest. These shares were issued under the Section 4(2) Securities Act
exemption for transactions by an issuer not involving a public offering.

On November 24, 1999 the Company issued 3,000,000 shares of its common
stock to Blue Heron in consideration of which Blue Heron cancelled indebtedness
owing from the Company in the aggregate principal amount of $3,000,000 together
with accrued interest. These shares were issued directly to Blue Heron pursuant
to Regulation S under the Securities Act and no underwriting commissions, fees
or discounts were paid in connection therewith.

On November 9, 1999, the Company issued 20,140 shares of its common
stock to the former owners of Internet Arena, Inc. as partial payment for the
Company's acquisition of that entity. These shares were issued under the
Section 4(2) Securities Act exemption for transactions by an issuer not
involving a public offering.

Item 6: Management's Discussion and Analysis of Financial Condition and
Results of Operations.

General: End of development stage activities and commencement of business
operations

Cypost produces and markets computer privacy protection technologies
and provides Internet conductivity to business and residential customers. From
the Company's inception date until approximately mid-March of 1999, the Company
was considered a development stage enterprise. Since that time, the Company has
(i) discussed five (5) software encryption products under its "Navaho"
trademark, the company is currently marketing two (2) products, (ii) acquired
five U.S. and Canadian Internet service providers during the year ending
December 31, 1999, and (iii) acquired Playa Corporation, the developers of
"Yabumi"

<PAGE>
Japanese-language instant messaging and greeting card services, with
an existing customer base of 85,000 customers.

The Company's results of operations for the year ending December 31, 1999 should
be viewed with considerable caution due to the following factors:

1) Results of operations for the year ending December 31, 1999 do not
reflect a full year's worth of revenues but rather six (6) months of revenues as
the Company only commenced generating revenues beginning in the third quarter of
1999.

2) The Company completed five (5) acquisitions of ISP's and most of its
revenues are based on these. The future growth rate of the present customer
base cannot be predicted with certainty and it is not certain that the Company
will be able to continue its strategy of expansion by acquisition.

3) Inherent in any acquisitions are costs which arise from integration of
operations into the Company's existing business operations. Many of these may
be viewed as one-time, non- recurring charges which are not likely to be
repeated in future performance periods.

Due to these factors, the 1999 results of operations discussed below may not be
an accurate indication of future performance. In addition, comparison of
results for the year ended December 31, 1999 with those for the year ended
December 31, 1998 are difficult to make due to the basic dissimilarity between a
developing stage company and a company that has commenced substantial business
operations.

Results of operations for the year ended December 31, 1999 and for the year
ended December 31, 1998.

The Company commenced substantial business operations during the third
quarter of 1999 and its revenues are attributed to operations since that time.
These revenues are attributable virtually entirely to the operations of the
various Internet service providers which the Company acquired during the year
ending December 31, 1999. The Company generated revenues of $1,020,347 for the
year ended December 31, 1999. It had no revenues for the prior year as the
Company was a development stage company and had no revenue operations.

Direct costs of $563,118 for the year ended December 31, 1999 consist of
telecommunication charges in respect of providing internet connection services
to customers. Selling, general and administrative expenses of $1,998,957 for
the year ended December 31, 1999 includes $342,888 for sales and marketing,
$707,799 for salaries and benefits, $425,604 for professional services, and
$522,666 for general and administrative expenses. Development costs of $150,382
for the year ended December 31, 1998 represent amounts incurred in developing
the Company's encryption software products. The increase in the above noted
costs during 1999 over 1998 results from the Company emerging from the
development stage in 1999 and commencing revenue generating activities.

Interest expense of $2,221,322 for the year ended December 31, 1999 is
substantially in respect of the beneficial conversion features on convertible
promissory notes between the Company and Blue Heron Venture Fund, Ltd. A
beneficial conversion feature arises when, at the commitment date of the
promissory note (the date of agreement to the terms of the promissory note), the
convertible promissory note is "in-the-money" (the conversion price of the
promissory note is less than the fair value of the common stock into which the
promissory note is convertible). The interest expense is calculated as the
difference between the conversion price and the fair value of the common stock,
multiplied by the number of common stock into which the promissory note is
convertible (intrinsic value) at the commitment date of the loan.

Subsequent to year end, the former president of the Company filed various
legal claims against the Company and the Company's transfer agent in respect of
the ownership of 600,000 shares of common stock of the Company awarded to him.
The claims do not include any dollar amounts.

The Company believes that the claims are without merit and intends to
contest them vigorously. As a result, no amounts have been accrued in the
financial statements in respect to these claims, and the outcome of the claims
is not determinable.

Liquidity and capital resources

The accompanying financial statements have been prepared on a going concern
basis, which assumes that the Company will continue in operation for at least
one year and will be able to realize its assets and discharge its liabilities in
the normal course of business. The Company incurred net losses of $4,351,588
for the year ending December 31, 1999 compared to $539,661 for the year ending
December 31, 1998. Although expenses in 1999 include non-cash charges of
$2,801,038 (amortization and depreciation charges of $588,538 and interest
expenses of $2,212,500), the Company has not generated positive cash

<PAGE>
flow from operations in 1999. These factors indicate that the Company's
continuation as a going concern is dependent upon, among other things, its
ability to obtain adequate financing.

Although the Company's cash position at December 31, 1999 had improved to
$415,779, as compared to $47,212 at December 31, 1998, the increase in cash is
primarily to loans made to the Company by Blue Heron Venture Fund, Ltd. These
loans were made under agreements with that lender under which the Company may
draw up to $16 million in unsecured loans. These loans bear interest at 8% per
annum and are payable on demand. In 1999, Blue Heron Venture Fund, Ltd.
converted $4,000,000 of loans to 4,500,000 shares of common stock. At December
31, 1999 the outstanding loans are convertible at the lender's option into
Common Stock of the Company. If the total loans of $875,000 at December 31,
1999 were converted, the lender would be entitled to an aggregate of 656,250
shares of common stock. The lender is free to withdraw this credit facility at
any time, and since the loans are payable on demand the Company's ability to
continue operations is dependent upon the willingness of its lender to forebear
from demanding payment. The Company believes that its lender will continue not
to demand payment of the loan for the immediately foreseeable future, but it is
under no obligation to do so. Should the Company's lender demand payment the
Company would be required to obtain financing from other sources. The Company
does not believe that bank borrowings are available under present circumstances,
and there can be no assurance that the necessary financing could be obtained
from other sources. Even if the necessary funding were available, it might be
available only on terms which management would not find acceptable.

For the years ended; December 31, 1999 and 1998, the Company's net cash
used in operating activities totaled $970,964 and $286,278, respectively. The
net cash used primarily results from a low revenue base which was insufficient
to cover selling, general and administrative expenses, and development expenses.

The Company's net cash used in investing activities totaled $4,091,496 and
$27,711 for the years ended December 31, 1999 and 1998, respectively. The
Company's investing activities in 1999 included the acquisition of five (5)
businesses for a net cash payment of $3,612,066. Investing activities in 1999
also included $270,1000 for property and equipment purchases and $209,303 for
software development of the Company's encryption software products.

The Company's financing activities for the year ended December 31, 1999
included $4,875,000 of loans provided by Blue Heron Venture Fund, Ltd. and
$556,000 provided by issuance of shares of common stock.

Item 7. Financial Statements.

Registrant's Consolidated Financial Statements as of December 31, 1999 and
for the year ending December 31, 1999, and the independent auditor's report of
Arthur Andersen LLP, independent public accountants, with respect thereto,
appear in pages F1 -F16 of this Report on Form 10-KSB.

Item 8. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.

None. As disclosed in the 8-K filed on October 15, 1999, CyPost has
engaged Arthur Andersen LLP as its auditor.

Part III

Item 9. Directors, Executive Officers, Promoters and Control Persons;Compliance
with Section 16(a) of the Exchange Act.

Directors of the Company serve for a term of one year or until their
successors are elected. Officers are appointed by, and serve at the pleasure
of, the Board. Profiles of the current Directors and Executive Officers of the
Issuer are set forth below:

Robert Sendoh, 49, Director and Chief Executive Officer

Mr.Sendoh acted as a Director throughout 1999 and in January, 2000
succeeded to the position of Chief Executive Officer formerly occupied by Steven
Berry. Bob has successfully conceived and operated three separate companies and
brings a wealth of business knowledge and financial understanding to the
Company. After receiving his B.A. in Economics from Meiji University in Tokyo
in 1973, he founded KKG Incorporated, a project planning and development firm,
also located in Tokyo, Japan. KKG Incorporated was responsible for the planning
and construction of major shopping centers, golf courses and residential
complexes around the world. Dissatisfied with the lack of spreadsheet and
product management software for businesses, Bob developed his own, as well as
implementing a highly efficient security and communication system to maintain
and expand the reputation of his company. After moving to Vancouver, Canada in
1991, Bob started his own sailing school, Windvalley Sailing School, which was
in operation from February 11, 1994 to December 1998. He is currently an
Instructor/Director, and Evaluator with the International Sail and Power
Association, a non-profit organization.

Rounding out his business expertise, since June 23, 1990, Bob has been a
co-owner and director of EFFE Sportswear USA Inc., under the corporate name;
Generator Distribution Company Ltd., which manufactures and markets their high
quality snowboarding apparel internationally.

Carl Whitehead, 30, Director and Head of Strategic Acquisitions and Partnerships

During the period 1996-99, Carl was a corporate officer and director in
Mushroom Innovations, Inc. and ePost Innovations, Inc., two technology-oriented
companies the latter of which was acquired by CyPost. Between 1993-97 he was
the founder and owner of Futuresite Productions, a computer service company
which supplies, maintains, and services, home and business computers in the
lower mainland. Specializing in the Windows95 environment and TCP/IP protocols
he naturally embraced this opportunity to develop CyPost into a competitive
leader in the software industry. Carl has completed secondary business courses
in accounting and finance.

James T. Johnston, 59, Director.

Mr. Johnston joined our Board in order to fill the vacancy created by the
resignation of Steve Berry. Mr. Johnston is, and has been, a licensed pilot
for Canadian Airlines for 34 years and an airline Captain for 28 years. Mr.
Johnston has been active in representing the airline pilot's union in a number
of capacities and has been involved in several high-level contract negotiations.

Steven M. Berry, 40, acted as Director, Chief Executive Officer and
President during 1999. Mr. Berry resigned from all positions, including
directorships, held with CyPost and its subsidiaries on January 17, 2000 citing
personal reasons for his departure.

Item 10. Executive Compensation.

Steven M. Berry became Chief Executive Officer and Chief Operating Officer
in January 1999 and received an annual salary of $120,000. Mr. Berry had
previously rendered consulting services to the Company prior to his formal
installation as Chief Executive Officer and President. In connection with his
agreement to become Chief Executive Officer, Mr. Berry was awarded 400,000
pre-split, or 600,000 post-split shares. Prior to that time, Carl Whitehead
exercised primary executive responsibilities. Neither Mr. Whitehead nor any
other executive officer received cash compensation in excess of $100,000 for the
years 1997 and 1998. For the year ending December 31, 1998, Mr. Whitehead
received cash compensation and expense reimbursement of $10,000.

Mr. Robert Sendoh currently serves as Chief Executive Officer of CyPost
for an annual salary of $82,759.

All directors currently serve without pay.

Item 11. Security Ownership of Certain Beneficial Owners and Management.

(a) Security Ownership of Certain Beneficial Owners.

The following information relates to those persons known to the Issuer to
be the beneficial owner of more than five percent (5%) of the Common Stock, par
value $.001 per share, the only class of voting securities of the Issuer
outstanding.

10
<PAGE>
<TABLE>
<CAPTION>
Name and Amount and
Title of Address of Nature of Percentage
Class Beneficial Owner Beneficial Ownership of Class*
<S> <C> <C> <C>
Common Stock, par value Kelly Shane Montalban 6,062,550 Million shares 29.8%
$0.001 per share P.O Box 700, direct and indirect beneficial
British Columbia VON 2EO ownership
<FN>
* Based on 20,353,538 shares issued and outstanding. Mr. Montalban's holdings indicated
above include shares owned by Blue Heron Venture Fund Ltd. and Pacific Gate Capital Fund,
the beneficial ownership of which is attributed to Mr. Montalban.
</TABLE>

The Company has not contacted stock brokerage firms holding shares of the
Company's Common Stock in "street name" to determine whether there are
additional substantial shareholders of the Company. 5,314,997 shares or 26.1%
of the Common Stock outstanding is held in the name of Cede & Co., a nominee for
Depository Trust Company, a stock clearing house servicing financial
institutions.

(b) Security Ownership of Management.

The number of shares of Common Stock of the Issuer owned by the Directors
and Executive Officers of the Issuer is as follows:

<TABLE>
<CAPTION>
Name and Amount and
Title of Address of Nature of Percentage
Class Beneficial Owner Beneficial Ownership of Class*
<S> <C> <C> <C>

Common stock, par value Carl Whitehead 327,000 shares 1.6%
$0.001 per share 20 Oceanview Road direct ownership
Vancouver, British
Columbia VON 2EO

Common stock, par value Robert Sendoh 330,000 shares 1.6%
$0.001 per share 990 Beach Avenue, #304 direct ownership
Vancouver, British
Columbia V6Z 2N9

All Officers and Directors (2 persons): 657,000 shares 3.2%
<FN>
* Based on 20,353,538 shares issued and outstanding. Forward-Looking Statements
</TABLE>

11
<PAGE>
Item 12. Certain Relationships and Related Transactions.

On September 17, 1997, CyPost purchased all of the shares of ePost
Canada. In return for such purchase, CyPost issued a total of 2,000,000
pre-split, or 3,000,000 post-split shares to the following individual: Robert
Sendoh 1,020,000 pre-split (1,530,000 post-split) shares; Carl Whitehead 600,000
pre-split (900,000 post-split) shares; William Kaleta 200,000 pre-split (300,000
post-split) shares; and Chiyoko Asanuma 180,000 pre-split (270,000 post-split)
shares. There were no other outstanding shares at the time, and therefore, as a
result Mr. Sendoh became a 51% stockholder, Mr. Whitehead became a 30%
stockholder, Mr. Kaleta became a 10% stockholder and Ms. Asanuma became a 9%
stockholder of CyPost. Prior to and after the acquisition of ePost, Robert
Sendoh held majority interest (60%) in Mushroom as well as majority interest
(51%) in the company

On October 29, 1998, CyPost acquired all of the issued and outstanding
capital stock of Communications Exchange Management, a Canadian corporation from
Mushroom Innovations Inc. CyPost issued 4,180,000 pre-split, or 6,270,000
post-split, shares to Mushroom which in turn issued these shares to its
shareholders in the following proportion.: Robert Sendoh 480,000 pre-split
(720,000 post-split) shares; Carl Whitehead 900,000 pre-split (1,350,000
post-split) shares; William Kaleta 1,300,000 pre-split 1,950,000 post-split)
shares, and Kelly Shane Montalban 1,500,000 pre-split 2,250,000 post-split)
shares. These shares were issued in proportion to the recipient's proportional
share ownership in Mushroom Innovations. At the time of this transaction, Mr.
Sendoh and Mr. Whitehead were directors of CyPost and Mr. Kaleta was an
officer of Cypost. Further information relating to these transactions can be
found in the footnotes to the Consolidated Financial Statements of CyPost under
the caption "Issuance of Common Stock".

CyPost has secured financing through issuance of certain 8 % Demand
Notes payable to Blue Heron Venture Capital Fund Ltd. ("Blue Heron"), a
corporation in which Kelly Shane Montalban is deemed to have an "indirect
pecuniary" interest as a result of Mr. Montalban's status as investment adviser
for Blue Heron. The Demand Notes are unsecured and are convertible into common
stock at the lender's option The table below shows the discount to market
negotiated between CyPost Corporation and Blue Heron. Between May and June of
1999, at a time when CyPost had virtually no operating revenues, it obtained $1
Million in financing through issuance of these Demand Notes. These Demand Notes
were later converted into 1,500,000 post-split (1,000,000 pre-split) common
shares. at $0.67 per share on August 16, 1999. Between July and November of
1999, the Company executed various further demand notes with similar terms and
in November 1999, an aggregate principal amount of $3 Million was converted into
3,000,000 post-split (2,000,000 pre-split) common shares at $1.00 per share.
Each borrowing and the execution of the associated Demand Note was approved by a
disinterested majority of Directors.

At December 31, 1999, the loans balance with Blue Heron is $875,000.
Subsequent to December 31, 1999, the Company borrowed an additional $625,000
against the promissory note.

<TABLE>
<CAPTION>
Closing Share
Price Conversion Discount to
Commitment Date AMOUNT OF commitment Share conversion Price Market
---------------- --------------------- ---------------- -------------- ----------- ------------
<S> <C> <C> <C> <C> <C>

February 9, 1999 $ 1,000,000 1,500,000 $ 1.0208 $ 0.67 35%
---------------- --------------------- ---------------- -------------- ----------- ------------
March 17, 1999 $ 3,000,000 3,000,000 $ 1.5208 $ 1.00 35%
---------------- --------------------- ---------------- -------------- ----------- ------------
March 17, 1999 $ 2,000,000 1,500,000 $ 1.5208 $ 1.33 14%
---------------- --------------------- ---------------- -------------- ----------- ------------
July 12, 1999 $ 10,000,000 3,750,000 $ 2.9792 $ 2.67 10%
---------------- --------------------- ---------------- -------------- ----------- ------------
</TABLE>

Currently the July 12, 1999 promissory note is still in negotiations with
the Board of Directors and the Fund Manager of Blue Heron Venture Fund.

Item 13. Exhibits List and Reports on Form 8-K.

(a) Exhibit No. Description
----------- -----------

2 Certificate of Incorporation of Registrant (previously
filed with 10-SB on July 19, 1999)

2.1 Certificate of Amendment to Certificate of
Incorporation of Registrant (previously filed with
10-SB on July 19, 1999)

12
<PAGE>
2.2 Amended and Restated Certificate of Incorporation
(previously filed with 10-SB on July 19, 1999)

2.3 ByLaws (previously filed with 10-SB on July 19, 1999)

6.1 Preferred Supplier Agreement with Canadian Bar
Association (previously filed with Amendment No. 1 of
10-SB)

6.2 Lease re: CyPost headquarters (W. Georgia St.)
(Omitted - will be supplied on request)

8.1 Acquisition Agreement dated as of September 17, 1997
between the Issuer and ePost Canada (previously filed)

8.2 Share Purchase Agreement dated as of October 29,1998
between the Issuer and Mushroom Innovations, Inc.
(previously filed)

8.3 Share Purchase Agreement dated as of June 30, 1999
regarding acquisition of Hermes Net Solutions Inc.
shares (previously filed)

8.4 Share Purchase Agreement dated as of June 30, 1999
regarding acquisition of Intouch.Internet Inc. shares
(previously filed with Amendment 3 of 10-SB on April
14, 1999)

8.5 Acquisition agreement dated as of October 4 1999
between the issuer and Net Rover Inc (previously filed
with 8-k on october 12, 1999)

8.6 Acquisition agreement dated as of October 4, 1999
between the issuer and Net Rover Office Inc
(previously filed with 8-k of Netrover Inc. On
October 12, 1999)

8.7 Acquisition agreement dated as of October 26, 1999
between the issuer and Connect Northwest Services
(previously filed with 8-K on November 12, 1999)

10 Consent of Thomas Monahan, Certified Public Accountant

21 List of Subsidiaries

23 Consent of Arthur Andersen LLP, Independent
Public Accountants

27 Financial Statement Schedule

13
<PAGE>
FILED WITH THE COMMISSION ON OCTOBER 12, 1999.

***** INCORPORATED BY REFERENCE FROM THE FORM 8-K FILED WITH THE COMMISSION
ON NOVEMBER 12, 1999.

10-SB filed with the Commission on March 9, 2000.

(b) The Registrant filed the following 8-K Reports during the last
quarter of 1999:

1. October 12, 1999 re: acquisition of Net Rover Inc. and Net Rover
Office Inc.

(Item 2)

2. October 15, 1999 re: change in Registrant's Certifying Accountant

(Item 4)

3. November 12, 1999 re: acquisition of Connect Northwest Services
LLC assets

(Item 2)

SIGNATURES

In accordance with Section 12 of the Securities Exchange Act of
1934, the registrant caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized.

CYPOST CORPORATION

DATE: MAY 30, 2000 By: /s/ Robert Sendoh
----------------------------
Robert Sendoh
Chief Executive Officer

14
<PAGE>
================================================================================

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

================================================================================

To the Shareholders of

CYPOST CORPORATION:

We have audited the accompanying consolidated balance sheet of Cypost
Corporation (a Delaware corporation) as of December 31, 1999 and the related
consolidated statements of operations, cash flows and shareholders' equity for
the year then ended. 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 audit.

We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides 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 CyPost Corporation as of
December 31, 1999 and the results of its operations and its cash flows for the
year then ended in accordance with accounting principles generally accepted in
the United States.

The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As described in Note 1, the
Company has incurred operating losses since its inception and requires
additional financing to continue operations. These conditions raise substantial
doubt about the Company's ability to continue as a going concern. Management's
plans in regard to these matters are described in Note 1. The consolidated
financial statements do not include any adjustments relating to the
recoverability and classification of asset carrying amounts or the amount and
classification of liabilities that may result should the Company be unable to
continue as a going concern.

The consolidated financial statements of CyPost Corporation as of December 31,
1998 and for the periods ended December 31, 1998 and 1997 were audited by
another auditor whose report dated March 12, 1999 expressed an unqualified
opinion with an explanatory going concern paragraph on those statements.

"ARTHUR ANDERSEN LLP"

Vancouver, British Columbia
March 23, 2000.

<PAGE>
THOMAS P. MONAHAN
CERTIFIED PUBLIC ACCOUNTANT
208 LEXINGTON AVENUE
PATERSON, NEW JERSEY 07502
(973) 790-8775

To The Board of Directors and Shareholders
of Cypost Corporation ( a development stage company)

I have audited the accompanying consolidated balance sheet of Cypost
Corporation ( a development stage company) as of December 31, 1998 and the
related consolidated statements of operations, cash flows and stockholders'
equity for the period from inception, September 5, 1997, to December 31,
1997, for the year ended December 31, 1998 and for period from inception,
September 5, 1997, to December 31, 1998. These consolidated financial statements
are the responsibility of the company's management. My responsibility is to
express an opinion on these financial statements based on my audits.

I conducted my audits in accordance with generally accepted auditing
standards. Those standards require that I 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 and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
I believe that my audits provide a reasonable basis for my opinion.

In my opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Cypost
Corporation ( a development stage company) as of December 31, 1998 and the
related consolidated statements of operations, cash flows and stockholders'
equity for period from inception, September 5, 1997, to December 31, 1997, for
the year ended December 31, 1998 and for period from inception, September 5,
1997, to December 31, 1998 in conformity with generally accepted accounting
principles.

The accompanying consolidated financial statements have been prepared
assuming that Cypost Corporation ( a development stage company) will continue as
a going concern. As more fully described in Note 1, the Company has incurred
operating losses since inception and requires additional capital to continue
operations. These conditions raise substantial doubt about the Company's ability
to continue as a going concern. Management's plans as to these matters are
described in Note 1. The financial statements do not include any adjustments to
reflect the possible effects on the recoverability and classification of assets
or the amounts and classifications of liabilities that may result from the
possible inability of Cypost Corporation (a development stage company) to
continue as a going concern.

Thomas P. Monahan, CPA
March 12, 1999
Paterson, New Jersey

15
<PAGE>
<TABLE>
<CAPTION>
CYPOST CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
(U.S. Dollars)

1999 1998
------------ -----------
<S> <C> <C>

ASSETS

CURRENT ASSETS

CASH . . . . . . . . . . . . . . . . . . . . . . . . $ 415,779 $ 47,212
ACCOUNTS RECEIVABLE, NET OF ALLOWANCE FOR
DOUBTFUL ACCOUNTS OF $34,000 (1998- $NIL). . . . . . 233,188 --
PREPAIDS AND DEPOSITS. . . . . . . . . . . . . . . . 173,319 27,998
------------ -----------

822,286 75,210
PROPERTY AND EQUIPMENT, NET. . . . . . . . . . . . . . 599,582 22,330

GOODWILL AND OTHER INTANGIBLES, NET OF
AMORTIZATION OF $458,758 (1998- $NIL). . . . . . . . 5,036,785 --

OTHER ASSETS . . . . . . . . . . . . . . . . . . . . . 69,389 28,657
SOFTWARE DEVELOPMENT, NET OF AMORTIZATION OF $69,768 . 139,535 --
------------ -----------

$ 6,667,577 $ 126,197

LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES

ACCOUNTS PAYABLE . . . . . . . . . . . . . . . . . . $ 849,300 $ 11,090
ACCRUED LIABILITIES. . . . . . . . . . . . . . . . . 133,937 --
LOANS. . . . . . . . . . . . . . . . . . . . . . . . 875,000 --
DEFERRED REVENUE . . . . . . . . . . . . . . . . . . 626,143 --
PURCHASE OF INTERNET ARENA . . . . . . . . . . . . . 240,000 --
------------ -----------

2,724,380 11,090
------------ -----------
SHAREHOLDERS' EQUITY

SHARE CAPITAL
AUTHORIZED

5,000,000 PREFERRED STOCK WITH A PAR VALUE OF $.001
30,000,000 COMMON STOCK WITH A PAR VALUE OF $.001

ISSUED AND OUTSTANDING
NIL PREFERRED STOCK

20,246,480 COMMON STOCK (1998- 13,264,500) . . . 20,246 13,264
PAID-IN CAPITAL. . . . . . . . . . . . . . . . . . . 8,814,002 624,416
DEFICIT. . . . . . . . . . . . . . . . . . . . . . . (4,908,127) (556,539)
CURRENCY TRANSLATION ADJUSTMENT. . . . . . . . . . . 17,076 33,966
------------ -----------

3,943,197 115,107
------------ -----------

$ 6,667,577 $ 126,197
============ ===========
</TABLE>

Approved by the Directors:

............../s/ Carl Whitehead...................................... Director

............../s/ Robert Sendoh....................................... Director

The accompanying notes are an integral part of these consolidated
financial statements.

<PAGE>
<TABLE>
<CAPTION>
CYPOST CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(U.S. Dollars)

Period From
September 5,
YEAR ENDED Year Ended 1997 to
DECEMBER 31, December 31, December 31,
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
REVENUE .............................. $ 1,020,541 $ -- $ --

DIRECT COSTS ......................... 563,118 -- --
------------ ------------ ------------

457,423 -- --
------------ ------------ ------------

EXPENSES

SELLING, GENERAL AND ADMINISTRATIVE 1,999,151 383,046 --
AMORTIZATION AND DEPRECIATION ..... 588,538 6,233 --
DEVELOPMENT ....................... -- 150,382 16,878
------------ ------------ ------------

2,587,689 539,661 16,878
------------ ------------ ------------

(2,130,266) (539,661) (16,878)

INTEREST EXPENSE ..................... 2,221,322 -- --
------------ ------------ ------------

NET LOSS ............................. $ (4,351,588) $ (539,661) $ (16,878)
============ ============ ============

LOSS PER SHARE, BASIC AND DILUTED .... $ (0.28) $ (0.08) $ (0.01)
============ ============ ============

WEIGHTED AVERAGE NUMBER OF

SHARES OUTSTANDING ................ 15,816,232 7,033,479 3,345,283
============ ============ ============
</TABLE>

The accompanying notes are an integral part of these consolidated
financial statements.

17
<PAGE>
<TABLE>
<CAPTION>
CYPOST CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(U.S. Dollars)

Period From
September 5,
YEAR ENDED Year Ended 1997 to
DECEMBER 31, December 31, December 31,
1999 1998 1997
------------ ----------- -----------
<S> <C> <C> <C>

CASH FLOWS FROM OPERATING
ACTIVITIES

NET LOSS ............................ $(4,351,588) $ (539,661) $ (16,878)
Add items not affecting cash
AMORTIZATION AND DEPRECIATION .... 588,538 6,233 --
INTEREST EXPENSE ................. 2,212,500 -- --
NON-CASH EXPENSES ................ -- 207,500 --
------------ ------------- ------------
(1,550,550) (325,928) (16,878)
Changes in non-cash operating
accounts
ACCOUNTS RECEIVABLE .......... (90,017) -- --
PREPAIDS AND DEPOSITS ........ (109,550) (27,998) --
OTHER ASSETS ................. (15,972) 58,523 --
ACCOUNTS PAYABLE ............. 583,787 9,125 1,965
ACCRUED LIABILITIES .......... 61,417 -- --
DEFERRED REVENUE ............. 149,921 -- --
------------ ------------- ------------
Net cash provided by (used in)
operating activities (970,964) (286,278) (14,913)
------------ ------------- ------------

CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions of businesses, less cash
THEREIN OF $115,953 .............. (3,612,066) -- --
PROPERTY AND EQUIPMENT, NET ......... (270,100) (27,711) (852)
SOFTWARE DEVELOPMENT (209,303)
------------ ------------- ------------
Net cash used in investing
activities (4,091,469) (27,711) (852)
------------ ------------- ------------

CASH FLOWS FROM FINANCING ACTIVITIES
LOAN ................................ 4,875,000 -- --
SALE OF COMMON STOCK ................ 556,000 323,000 20,000
------------ ------------- ------------
Net cash provided by financing
Activities 5,431,000 323,000 20,000
Exchange rate changes on Cash in
Foreign currency -- 33,966 --

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

NET INCREASE IN CASH .......................... 368,567 42,977 4,235
CASH, BEGINNING OF PERIOD ................. 47,212 4,235 --
------------ ------------- ------------

CASH, END OF PERIOD ....................... $ 415,779 $ 47,212 $ 4,235
============ ============= ============

CASH PAID DURING THE PERIOD FOR
INTEREST ............................... $ -- $ -- $ --
INCOME TAXES ........................... -- -- --
</TABLE>

The accompanying notes are an integral part of these consolidated
financial statements.

18
<PAGE>
<TABLE>
<CAPTION>
CYPOST CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(U.S. Dollars)

Additional Currency
COMMON STOCK Paid-in Translation
NUMBER AMOUNT CAPITAL DEFICIT Adjustment TOTAL
---------- -------- ----------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Incorporation date, September 5, 1997
Issued for acquisition of
ePost Innovations, Inc. .................... 3,000,000 $ 3,000 $ (1,000) $ -- $ 2,000
ISSUED ON SALE OF UNITS ....................... 600,000 600 19,400 -- 20,000
Net loss (16,878) (16,878)
---------- -------- ----------- ------------ ------------ -----------
Balance, December 31, 1997 ........................ 3,600,000 3,600 18,400 -- -- 5,122
Issued on sale of units ....................... 2,400,000 2,400 77,600 -- -- 80,000
Issued for cash ............................... 57,000 57 18,943 -- -- 19,000
Issued for legal services ..................... 22,500 22 7,478 -- -- 7,500
Issued for acquisition of
Communication Exchange Management, Inc. ..... 6,270,000 6,270 (2,090) -- -- 4,180
Issued for exercise of warrants ............... 915,000 915 243,085 -- -- 244,000
Offering expenses ............................. -- -- (20,000) -- -- (20,000)
Share transfer for services -- -- 281,000 -- -- 281,000
NET LOSS ...................................... -- -- -- (539,661) -- (539,661)
Currency translation adjustment -- -- -- 33,966 33,966
---------- -------- ----------- ------------ ------------ -----------
Balance, December 31, 1998 ........................ 13,264,500 13,264 624,416 (556,539) 33,966 115,107
Issued for acquisition of Intouch.Internet Inc. 9,855 10 28,515 -- -- 28,525
Issued for acquisition of NetRover Inc.
and NetRover Office Inc. .................... 219,000 219 679,324 -- -- 679,543
Issued for acquisition of Connect Northwest ... 147,985 148 659,852 -- -- 660,000
Issued for acquisition of Internet Arena ...... 20,140 20 59,980 -- -- 60,000
Issued for loan conversion .................... 4,500,000 4,500 3,995,500 -- -- 4,000,000
Issued for exercise of warrants ............... 2,085,000 2,085 553,915 -- -- 556,000
Beneficial conversion feature on loans ........ -- -- 2,212,500 -- -- 2,212,500
NET LOSS ...................................... -- -- -- (4,351,588) -- (4,351,588)
Currency translation adjustment -- -- (16,890) (16,890)
---------- -------- ----------- ------------ ------------ -----------

BALANCE, DECEMBER 31, 1999 ........................ 20,246,480 $ 20,246 $8,814,002 $(4,908,127) $ 17,076 $ 3,943,197
========== ======== =========== ============ ============ ===========
</TABLE>

The accompanying notes are an integral part of these consolidated
financial statements.

<PAGE>
CYPOST CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
(U.S. Dollars)

1. NATURE OF OPERATIONS AND GOING CONCERN

CyPost Corporation was formed on September 5, 1997 under the laws of the
State of Delaware and its head office is located in Vancouver, Canada. CyPost
Corporation and its subsidiaries (the "Company") generate revenues from
value-added protected internet connection services, web-site hosting,
advertising sales, promotional opportunities, and sales of privacy and
protection products. The Company's activities also include determining the
feasibility of encryption software products, beginning initial programming
and product development, conducting market research, and undertaking various
private placement offerings. The Company emerged from the development stage in
1999 and commenced revenue generating activities.

The accompanying consolidated financial statements have been prepared on
the basis of accounting principles applicable to a "going concern", which assume
that the Company will continue in operation for at least one year and will be
able to realize its assets and discharge its liabilities in the normal course of
operations.

Several conditions and events cast doubt about the Company's ability to
continue as a "going concern". The Company has incurred net losses before
interest expense of approximately $2.7 million for the period from inception
September 5, 1997 to December 31, 1999, has a working capital deficiency, and
requires additional financing for its business operations. As of December 31,
1999, the Company has $11.1 million of funding available which can be drawn
against a promissory note agreement with a lender; however, the lender has the
option, at any time, to withdraw its offer to lend this amount.

The Company's future capital requirements will depend on numerous factors
including, but not limited to, continued progress in developing its software
products, and market penetration and profitable operations from its internet
connection services. The Company is actively pursuing alternative financing and
has had discussions with various third parties, although no firm commitments
have been obtained. Management is also pursuing acquisitions of other
businesses with existing positive cash flows. In addition, management is
working on attaining cost and efficiency synergies by consolidating the
operations of the businesses acquired.

These financial statements do not reflect adjustments that would be
necessary if the Company were unable to continue as a "going concern". While
management believes that the actions already taken or planned, as described
above, will mitigate the adverse conditions and events which raise doubt about
the validity of the "going concern" assumption used in preparing these financial
statements, there can be no assurance that these actions will be successful.

If the Company were unable to continue as a "going concern", then
substantial adjustments would be necessary to the carrying values of assets, the
reported amounts of its liabilities, the reported revenues and expenses, and the
balance sheet classifications used.

<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

CONSOLIDATION

The consolidated financial statements include the accounts of CyPost
Corporation and its subsidiaries. The principal subsidiaries, all of which are
wholly owned, include ePost Innovations Inc., NetRover Inc., NetRover Office
Inc., Hermes Net Solutions Inc. and Intouch.Internet Inc.

FOREIGN CURRENCY TRANSLATION

The functional currency of the Company is U.S. dollars. Balance sheet
accounts of international self-sustaining subsidiaries, principally Canadian,
are translated at the current exchange rate as of the balance sheet date.
Income statement items are translated at average exchange rates during the
period. The resulting translation adjustment is recorded as a separate
component of shareholders' equity.

USE OF ESTIMATES

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

FINANCIAL INSTRUMENTS

The Company has, where practicable, estimated the fair value of financial
instruments based on quoted market prices or valuation techniques such as
present value of estimated future cash flows. These fair value amounts may be
significantly affected by the assumptions used, including the discount rate and
estimates of cash flow. Accordingly, the estimates are not necessarily
indicative of the amounts that could be realized in a current market exchange.
Where these estimates approximate carrying value, no separate disclosure of fair
value is shown.

PROPERTY AND EQUIPMENT

Property and equipment are stated at cost less accumulated depreciation.
Depreciation is computed over the estimated useful lives using the straight-line
method over a period of five years. Maintenance and repairs are charged against
operations and betterments are capitalized.

EARNINGS (LOSS) PER SHARE

Earnings (loss) per share has been computed in accordance with SFAS 128.
Basic earnings (loss) per share is computed by dividing net income (loss)
attributable to common shareholders by the weighted average number of common
shares outstanding during the respective periods. Diluted earnings (loss) per
share is computed similarly, but also gives effect to the impact that
convertible securities, such as warrants, if dilutive, would have on net
earnings (loss) and average common shares outstanding if converted at the
beginning of the year. The effects of potential common shares such as warrants
would be antidilutive in each of the periods presented in these financial
statements.

At December 31, 1999, there are no warrants outstanding (1998-2,085,000)

<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

REVENUE RECOGNITION AND DEFERRED REVENUE

The Company's primary source of revenue is earned from internet connection
services. For contracts which exceed one month, revenue is recognized on a
straight-line basis over the term of the contract as services are provided.
Revenues applicable to future periods are classified as deferred revenue.

DIRECT COSTS

Direct costs consist of telecommunications charges in respect of providing
internet connection services to customers. These costs are expensed as incurred.

SELLING AND MARKETING COSTS

Selling and marketing costs are expensed as incurred and totaled $342,888
and $0 for the years ended December 31, 1999 and 1998, respectively. These
costs are reported under selling, general and administrative expenses on the
statement of operations.

SOFTWARE DEVELOPMENT COSTS

Under SFAS No. 86, "Accounting for the Costs of Computer Software to Be
Sold, Leased, or Otherwise Marketed", capitalization of software development
costs begins upon the establishment of technological feasibility of the product,
which the Company has defined as the completion of beta testing of a working
product. The establishment of technological feasibility and the ongoing
assessment of the recoverability of these costs require considerable judgment by
management with respect to certain external factors, including, but not limited
to, anticipated future gross product revenue, estimated economic life and
changes in software and hardware technology. Software developments costs
amortized on the straightline method over the estimated economic life of the
product of three years.

As at December 31, 1999, the company capitalized $209,303 of software
development costs and amortized $69,768 of these costs.

GOODWILL AND OTHER INTANGIBLE ASSETS

Intangible assets consist primarily of customer lists and goodwill related
to acquisitions accounted for under the purchase method of accounting.
Amortization of these purchased intangibles is provided on the straight-line
basis over the respective useful lives of the intangible assets which is
estimated to be three years.

The Company identifies and records impairment losses on intangible assets
when events and circumstances indicate that such assets might be impaired. The
Company considers factors such as significant changes in the regulatory or
business climate and projected future cash flows. Impairment losses are
measured as the amount by which the carrying amount of the asset exceeds the
fair value of the asset.

INCOME TAXES

The Company computes income taxes using the asset and liability method,
under which deferred income taxes are provided for the temporary differences
between the financial reporting basis and the tax basis of the Company's assets
and liabilities. Deferred tax assets and liabilities are measured using
currently enacted tax rates that are expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. A valuation allowance is established when necessary to reduce deferred
tax assets to the amounts expected to be realized.

<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

RECLASSIFICATIONS

Certain reclassifications have been made to conform prior years' figures to
the current year presentation.

ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities", requires the recognition of all derivatives as either assets or
liabilities and the measurement of those instruments at fair value. SFAS No.
137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of
the Effective Date of SFAS No. 133", issued in August 1999, postpones for one
year the mandatory effective date for adoption of SFAS No. 133 to January 1,
2001.

The Company does not currently engage in derivative trading or hedging
activities; hence, SFAS No. 133 and SFAS No. 137 will not have a material
impact on its financial position or results of operations.

STOCK-BASED COMPENSATION

SFAS No. 123, "Accounting for Stock-Based Compensation", encourages, but
does not require, companies to record compensation cost for stock-based employee
compensation under a fair value based method. Alternatively, stock-based
employee compensation can be accounted for under APB No. 25, "Accounting for
Stock Issued to Employees", under which no compensation is recorded.

The Company has not granted any stock-based compensation for any of the
periods presented in these financial statements.

PENSIONS AND OTHER POSTRETIREMENT BENEFITS

SFAS No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits, an amendment of FASB Statements No. 87, 88 and 106",
revises employers' disclosures about pension and other postretirement benefit
plans. It does not change the measurement or recognition of those plans. It
standardizes the disclosure requirements for pension and other postretirement
benefits to the extent practicable, requires additional information on changes
in benefit obligations and fair values of plan assets that will facilitate
financial analysis, and eliminates certain disclosures that are no longer
considered useful.

The Company does not offer any pension or other postretirement benefits.

RECENT ACCOUNTING PRONOUNCEMENTS

In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1 (SOP 98-1), "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use". SOP 98-1 is
effective for financial statements for years beginning after December 15, 1998.
SOP 98-1 provides guidance over accounting for computer software developed or
obtained for internal use including the requirement to capitalize specified
costs and amortization of such costs. The implementation of SOP 98-1 does not
have a material impact on the Company's financial position or results of
operations, as the Company has not incurred any costs for computer software
developed or obtained for internal use.

<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5 (SOP 98-5), "Reporting on the Costs of
Start-Up Activities". SOP 98-5, which is effective for fiscal years beginning
after December 15, 1998, provides guidance on the financial reporting of
start-up costs and organization costs. It requires costs of start-up activities
and organization costs to be expensed as incurred. The implementation of SOP
98-5 does not have a material impact on the Company's financial position or
results of operations.

In December 1999, the Securities and Exchange Commission released Staff
Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements", to provide guidance on the recognition, presentation and disclosure
of revenues in financial statements. The Company believes its revenue
recognition practices are in conformity with the guidelines prescribed in SAB
No. 101.

3. ACQUISITIONS

During 1999, the Company completed a number of business and asset
acquisitions. These acquisitions are accounted for using the purchase method,
and accordingly, these consolidated financial statements include the results of
operations from the date of acquisition of each respective business.

NETROVER INC. AND NETROVER OFFICE INC.

On October 4, 1999, the Company acquired all of the shares of NetRover Inc.
and NetRover Office Inc. for Cdn. $4 million (U.S. $2.7 million). The
consideration for the purchase included cash of Cdn. $3 million (U.S. $2
million) and 219,000 shares of common stock for Cdn. $1 million (U.S.
$$700,000). NetRover Inc. and NetRover Office Inc. are based in Toronto,
Canada.

The purchase included goodwill and other intangibles of Cdn. $4.2 million
(U.S. $2.9 million) which will be amortized on a straight-line basis over its
estimated useful life of three years.

HERMES NET SOLUTIONS INC.

As at December 31, 1999, the company capitalized $209,303 of software
development costs and amortized $69,768 of these costs.

<PAGE>
3. ACQUISITIONS (CONTINUED)

INTERNET ARENA

On November 9, 1999, the Company purchased certain assets and liabilities
of the business of Internet Arena for $600,000. The consideration for the
purchase included cash of $242,000, amount payable of $58,000 and 100,698 shares
of common stock for a value of $300,000. As of December 31, 1999, 20,140 shares
of common stock were issued and the remaining 80,558 were issued subsequent to
year end. Internet Arena is based in Oregon, United States.

The purchase included goodwill and other intangibles of $536,000 which will
be amortized on a straight-line basis over its estimated useful life of three
years.

CONNECT NORTHWEST

On October 27, 1999, the Company purchased certain assets and liabilities
of the business of Connect Northwest for $1.4 million. The consideration for
the purchase included cash of $670,000, amount payable of $70,000 and 147,985
shares of common stock for a value of $660,000. Connect Northwest is based in
Washington State, United States. The purchase included goodwill and other
intangibles of $1.3 million which will be amortized on a straight-line basis
over its estimated useful life of three years.

During 1998 and 1997, the Company completed two business acquisitions which
are described below.

ePost INNOVATIONS, INC.

On September 17, 1997, the Company acquired ePOST Innovations,
Inc.("ePost"), a wholly-owned subsidiary of Mushroom Innovations, Inc.
("Mushroom"). The Company and Mushroom have officers and directors in common.

The Company issued 3,000,000 shares of common stock to Mushroom in
consideration for all of the issued and outstanding shares of ePost. The shares
of common stock were valued at $.001 per share for an aggregate consideration of
$2,000. The Company acquired all the rights, title and interest to all the
assets owned by ePost, and those assets consisted of proprietary knowledge of
various computer software products under development by ePost.

As at December 31, 1999, the company capitalized $209,303 of software
development costs and amortized $69,768 of these costs.

b) Ownership Interests of CyPost

Prior to the acquisition of ePost, CyPost did not have any issued and
outstanding shares. The acquisition of ePost involved CyPost issuing 3,000,000
of its shares to Mushroom; in turn, Mushroom distributed these shares to its
shareholders in the following proportion:

Robert Sendoh 1,530,000 shares 51% interest
Carl Whitehead 900,000 shares 30% interest
William Kaleta 300,000 shares 10% interest
Chiyoko Asanumu 270,000 shares 9% interest
Total 3,000,000 shares 100% interest

Robert Sendoh at the time of acquisition was President and Director of
Epost and Chairman and of CyPost Corporation, Carl Whitehead was
Secretary/Treasurer and Director in Epost Innovations and President and Director
in CyPost Corporation and William Kaleta was Chief Technical Officer and
Director in EPost Innovations and Chief Technical Officer in CyPost Corporation.

Note: Robert Sendoh gifted 9% of his shares to Chiyoko Asanuma, his sister.
The Company acquired all the rights, title and interest to all the
assets previously owned by ePOST. Those assets consisted of proprietary
knowledge of various computer software products under development by ePost
Canada.

COMMUNICATION EXCHANGE MANAGEMENT, INC.

On October 29, 1998, the Company acquired Communication Exchange
Management, Inc. ("CEM"), a subsidiary of Mushroom. The Company issued
6,270,000 post - split shares of common stock valued at $4,180 for consideration
of all of the issued and outstanding stock of CEM. The Company acquired
all the rights, title and interest to all the assets owned by CEM which
consisted of proprietary knowledge of various computer software products under
development by CEM.

The acquisition of CEM involved CyPost issuing 6,270,000 of its shares
to Mushroom; in turn, Mushroom distributed these shares to its shareholders in
the following proportion:

<TABLE>
<CAPTION>
<S> <C> <C>
ROBERT SENDOH 720,000 SHARES 11% INTEREST
CARL WHITEHEAD 1,350,000 SHARES 22% INTEREST
WILLIAM KALETA 1,950,000 SHARES 31% INTEREST
KELLY MONTALBAN 2,250,000 SHARES 36% INTEREST
---------------- -------------
6,270,000 SHARES 100% INTEREST
</TABLE>

The acquisition has been accounted for under the purchase method.
Operating results of CEM prior to the date of acquisition were not
significant.

<PAGE>
4. PROPERTY AND EQUIPMENT

Property and equipment consist of the following:

<TABLE>
<CAPTION>
1999 1998
------------- -------------

<S> <C> <C>
OFFICE AND COMPUTER EQUIPMENT $ 1,008,405 $ 28,563
LESS- ACCUMULATED DEPRECIATION (408,823) (6,233)
------------- -------------

$ 599,582 $ 22,330
============= =============
5. GOODWILL AND OTHER INTANGIBLES

Goodwill and other intangibles consist of the following:

1999 1998
------------- -------------

CUSTOMER LISTS $ 3,663,000 $ -
GOODWILL 1,832,543 -
------------- -------------

5,495,543 -
LESS- ACCUMULATED AMORTIZATION (458,758) -
------------- -------------

$ 5,036,785 $ -
============= =============
</TABLE>

6. LOANS

During 1999, the Company borrowed $4,875,000 pursuant to two promissory
note agreements. The loans are unsecured, bear interest at 8% per annum, and
the principal and accrued interest are due on demand. The lender may elect to
convert the loans into shares of common stock of the Company as follows:

SHARES
PRINCIPAL PRE-SPLIT POST-SPLIT

$ 1,000,000 1,000,000 1,500,000

3,000,000 2,000,000 3,000,000

875,000 437,500 656,250

At the commitment dates of the promissory notes, the conversion prices
were less than the fair values of the common stock, hence a beneficial
conversion feature is attached to these convertible notes. The amount of this
beneficial conversion feature is $2,212,500 and has been recorded as interest
expense and additional paid-in-capital for the year ended December 31,
1999.

<PAGE>
6. LOANS (CONTINUED)

During 1999, $4,000,000 of loans were settled by the issuance of common
stock valued at $4,000,000. At December 31, 1999, the loans balance is
$875,000. Subsequent to year end, the Company borrowed an additional
$625,000 against the promissory note.

The fair values of the loans at December 31, 1999 are not practicable to
estimate because of the conversion features associated with the loans;
accordingly, it is not possible to estimate the present value of the
future cash flows with any reasonable degree of precision.

Subsequent to year end, the lender has offered to lend a further
$10,000,000 to the Company under similar terms except that the loans are
convertible to 3,750,000 shares of common stock at a conversion price of $2.67
per share. The lender has the option to withdraw its offer to lend any amount
of the $10,000,000 at any time. (see Note 12)

7. SHARE CAPITAL

AUTHORIZED STOCK

The Company is authorized to issue:

(a) 30,000,000 shares of common stock at a par value of $0.001 per
share.

(b) 5,000,000 shares of preferred stock at a par value of $.001 per
share. The Board of Directors of the Company has the authority,
without further action by the holders of the outstanding shares of
common stock, to issue shares of preferred stock from time to time
in one or more classes or series, to fix the number of shares
constituting any class or series and the stated value, if different
from the par value, and to fix the terms of any such series or
class, including dividend rights, dividend rates, conversion or
exchange rights, voting rights, rights and terms of redemption
(including sinking fund provisions), the redemption price and the
liquidation preference of such class or series. The designations,
rights and preferences of any shares of preferred stock would be set
forth in a Certificate of Designation which would be filed with the
Secretary of State of the State of Delaware.

SHARE SPLIT

On September 24, 1999, the Company effected a three-for-two subdivision of
its shares of common stock. All share, per share, unit, and warrant amounts in
the accompanying financial statements have been adjusted retroactively to give
effect to this subdivision.

COMMON STOCK SUBSCRIBED

As at December 31, 1999, the Company is obligated to issue 80,558 shares of
common stock valued at $2.98 per share as consideration for the purchase of the
assets of Internet Arena and this obligation has been reported as a liability of
$240,000 on the balance sheet. These shares were issued subsequent to year end.

<PAGE>
7. SHARE CAPITAL (CONTINUED)

SALE OF UNITS AND WARRANTS

In 1997, the Company offered for sale to persons who qualified as
"accredited investors" as defined under Regulation D promulgated by the
Securities and Exchange Commission 3,000,000 units at $0.05 per unit. Each unit
consists of one share of the Company's common stock and one warrant to purchase
one share of common stock at $0.27 per share.

In 1997, the Company sold 600,000 units for aggregate consideration of
$20,000. In 1998, the Company sold an additional 2,400,000 units for aggregate
consideration of $80,000 less offering expenses of $20,000.

During 1998, the Company issued 915,000 shares of common stock through the
exercise of 915,000 warrants for aggregate consideration of $244,000. As of
December 31, 1998, 2,085,000 warrants were outstanding. These warrants were
exercised for 2,085,000 shares of common stock during 1999 and at December 31,
1999, there are no warrants outstanding.

PRIVATE PLACEMENT

Pursuant to a private placement pursuant to Rule 504 of Regulation D, the
Company offered on March 26, 1998, 57,000 shares of common stock at $0.33 per
share. As of On May 5, 1998, the Company sold an aggregate 57,000 shares of
common stock for an aggregate consideration of $19,000. On May 5, 1998, the
Company sold 22,500 shares of common stock pursuant to Rule 504 of Regulation D
to Kaplan Gottbetter and Levenson, LLP in consideration for $7,500 in legal fees
valued at $0.33 per share.

8. INCOME TAXES

In accordance with SFAS 109, "Accounting for Income Taxes", income taxes
are accounted for under the liability method. Under this method, deferred tax
assets and liabilities are determined based on differences between the financial
statement reporting and the tax bases of the assets and liabilities, and are
measured at the enacted tax rates that will be in effect when the differences
are expected to reverse. Such differences principally arise from the timing of
income and expense recognition for accounting and tax purposes.

The application of SFAS 109 does not have any material effect on the
assets, liabilities, or operations for the periods presented in these
consolidated financial statements. Deferred tax assets arising from the
Company's net operating loss carryforwards have been fully offset by a valuation
allowance.

<PAGE>
8. INCOME TAXES (CONTINUED)

At December 31, 1999, the Company has net operating loss carryforwards for
income tax purposes of approximately $2,800,000 which are available to offset
future taxable income. The Company's utilization of these carryforwards may be
restricted due to changes in ownership of subsidiaries during the year. The
components of the deferred tax asset as of December 31, 1999 and 1998 are as
follows:

<TABLE>
<CAPTION>
1999 1998
-------------- --------------

<S> <C> <C>
NET OPERATING LOSS CARRYFORWARDS $ 1,260,000 $ 82,000
LESS- VALUATION ALLOWANCE 1,260,000 82,000
-------------- --------------

$ - $ -
============== ==============
</TABLE>

9. COMMITMENTS AND CONTIGENCIES

Litigation

Subsequent to year end, the former president of the Company filed various
Legal claims against the Company and the Company's transfer agent in
respect of the ownership of 600,000 shares of common stock of the Company
awarded to him. The claims do not include any dollar amounts.

Lease Commitments

The Company leases office space and equipment, and its lease payments in
the next five years and thereafter are as follows:

2000 $ 1,236,000
2001 1,091,000
2002 293,000
2003 122,000
2004 109,000
THEREAFTER 55,000
-------------
$ 2,906,000
==============

<PAGE>
10. PRO FORMA DISCLOSURES ON BUSINESS COMBINATIONS (UNAUDITED)

As described in Note 3, the Company completed various business and asset
acquisitions during 1999 and has entered into another acquisition in 2000
described in Note 12. The following presents unaudited pro forma financial
information as though each of the transactions occurred on January 1, 1999 and
1998. This pro forma financial information include adjustments giving effect to
goodwill amortizations associated with the acquisitions and interest expense on
debt incurred to finance the acquisitions.

PRO FORMA CONDENSED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER
31, 1999 (UNAUDITED)

<TABLE>
<CAPTION>
INTERNET CONNECT PRO FORMA
(US DOLLARS) CYPOST HERMES INTOUCH NETROVER ARENA NORTHWEST PLAYA ADJUSTMENTS TOTAL
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUE 1,020,000 187,000 189,000 1,402,000 466,000 563,000 452,000 0 4,279,000

NET INCOME (LOSS) (4,352,000) 0 (7,000) 90,000 (45,000) 7,000 (259,000) (3,420,000) (7,986,000)

LOSS PER SHARE (0.48)
</TABLE>

PRO FORMA CONDENSED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER
31, 1998 (UNAUDITED)

<TABLE>
<CAPTION>
INTERNET CONNECT PRO FORMA
(US DOLLARS) CYPOST HERMES INTOUCH NETROVER ARENA NORTHWEST PLAYA ADJUSTMENTS TOTAL
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUE 0 196,000 404,000 1,775,000 342,000 536,000 306,000 0 3,559,000

NET INCOME (LOSS) (540,000) 0 (16,000) (23,000) (221,000) (29,000) (182,000) (3,420,000) (4,431,000)

LOSS PER SHARE (0.53)
</TABLE>

11. NON-CASH INVESTING AND FINANCING ACTIVITIES

Loans of $4 million were converted into shares of common stock of the
Company.

<PAGE>
12. SUBSEQUENT EVENT

ACQUISITION OF PLAYA CORPORATION

On February 23, 2000, the Company completed the acquisition of Playa
Corporation (a Japan company), developer of Yabumi instant messaging and
e-greeting card services. The acquisition totals $3 million, comprised of
$300,000 in cash and $2.7 million in the Company's shares of common stock.

LETTER OF FINANCE

On April 27, 2000 the lender Blue Heron Venture Fund renegotiated with the
Company two of the commitment letters that were available as of that date. (see
Note 6) With the renegotiation, the March 17, 1999 and July 12, 1999 debt
financing commitment letters were amended to reflect a conversion price of
$0.75. Below the table indicates the discount to market on the amended
commitment letters. The change in these conversion terms were made subsequent to
December 31, 1999; hence no changes have been made to interest expense in these
Financial statements in respect of the loans with Blue Heron Venture Fund.

The loans balance of $875,000 at December 31, 1999 was issued under the
$2,000,000 commitment above. The beneficial conversion terms was $122,500. The
beneficial conversion feature on the loans calculated under the amended
conversion terms is $875,000. The Company will record an additional beneficial
conversion feature of $752,500 as interest expense in the first quarter of 2000.

The $625,000 loans borrowed by the Company subsequent to year-end will
result in a beneficial conversion feature of $625,000 which the Company will
record as interest expense in the first quarter of 2000.

<TABLE>
<CAPTION>
COMMITMENT DATE AMOUNT OF COMMITMENT SHARE CONVERSION CLOSING SHARE PRICE CONVERSION PRICE DISCOUNT TO MARKET
--------------- --------------------- ---------------- -------------------- ----------------- -------------------
<S> <C> <C> <C> <C> <C>

April 27, 2000 $ 2,000,000 2,666,666 $ 1.50 $ 0.75 50%
--------------- --------------------- ---------------- -------------------- ----------------- -------------------
April 27, 2000 $ 10,000,000 13,333,333 $ 1.50 $ 0.75 50%
--------------- --------------------- ---------------- -------------------- ----------------- -------------------
</TABLE>

<PAGE>