MINDARROW SYSTEMS INC, S-1/A, 2000-08-17

MINDARROW SYSTEMS INC
S-1/A, 2000-08-17
BUSINESS SERVICES, NEC

Previous: ADVANCED SWITCHING COMMUNICATIONS INC, S-1/A, EX-27.1, 2000-08-17

Next: MINDARROW SYSTEMS INC, S-1/A, EX-23.1, 2000-08-17

<PAGE>

As filed with the Securities and Exchange Commission on August 17, 2000.
Registration No. 333-91819.
================================================================================
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------

AMENDMENT NO. 5
To
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
MindArrow Systems, Inc.
(formerly eCommercial.com, Inc.)
(Exact name of registrant as specified in charter)
---------------
<TABLE>
<S> <C> <C>
Delaware 7372 77-0511097
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
101 Enterprise, Suite 340
Aliso Viejo, California 92656
(949) 916-8705
(Address, including ZIP code and telephone number, including area code, of
registrant's principal executive offices)
---------------
Michael R. Friedl
Chief Financial Officer
MindArrow Systems, Inc.
101 Enterprise, Suite 340
Aliso Viejo, CA 92656
Telephone (949) 916-8705
(Name, address, including ZIP code, and telephone number,
including area code, of agent for service)
Copies to:
Attention: Kevin Coyle, Esq.
Gray Cary Ware & Freidenrich LLP
400 Capitol Mall, Suite 2400
Sacramento, CA 95814
Telephone: (916) 930-3240
---------------
Approximate date of commencement of proposed sale to the public: From time
to time after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act Registration Statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
---------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
==================================================================================
Proposed
Title of each class of Amount maximum Proposed maximum Amount of
securities to be to be offering price aggregate registration
registered registered per unit offering price(1) fee
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value
$.001 per share....... 2,800,782 -- $14,704,106 $0(2)
==================================================================================
</TABLE>

(1) The offering price is estimated solely for the purpose of calculating the
registration fee in accordance with Rule 457(c), using the closing price
reported by the Over-the-Counter Bulletin Board market for the common stock
on August 9, 2000, based upon the last trade of such shares which was $5.25
per share.
(2) A fee of $26,486 has been previously paid. The registrant hereby amends
this registration statement on such date or dates as may be necessary to
delay its effective date until the registrant shall file a further
amendment which specifically states that this registration statement shall
thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section
8(a), may determine.
---------------
These securities have not been approved or disapproved by the Securities and
Exchange Commission or any state securities commission nor has the Securities
and Exchange Commission or any state securities commission passed upon the
accuracy or adequacy of this Prospectus. Any representation to the contrary is
a criminal offense.
================================================================================
<PAGE>

++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and it is not soliciting offers to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++

SUBJECT TO COMPLETION, DATED AUGUST 17, 2000

PROSPECTUS

[LOGO OF MINDARROW APPEARS HERE]

2,800,782 Shares of Common Stock

MindArrow Systems, Inc.

This prospectus covers our registration for possible resale of 2,160,014
shares of our common stock which are issuable upon (i) conversion of shares of
Series B preferred stock into shares of our common stock, or (ii) exercise of
certain warrants issued in connection with our private offering of Series B
preferred stock. We are also registering for resale 15,000 shares of common
stock issuable upon exercise of a warrant granted to a customer, 475,768 shares
of currently issued and outstanding common stock issued in a prior private
placement and 150,000 shares of currently issued and outstanding common stock
issued in connection with our acquisition of Fusionactive.com, Ltd. All
proceeds from sale of the shares will be received by the selling stockholders
and not by us.

We are not currently a reporting company as defined in Section 12(g) of the
Securities Exchange Act of 1934.

The selling stockholders may sell up to 2,800,782 shares from time to time in
the open market or otherwise at prevailing market prices.

Our common stock is traded on the Over-the-Counter Bulletin Board market
under the symbol "ARRW". On August 9, 2000, the last reported sale price of our
common stock was $5.25 per share.

We will bear substantially all expenses of registration of the shares under
federal and state securities laws. We have also agreed to indemnify some of the
selling stockholders against liabilities under the Securities Act of 1933. See
"Selling Stockholders" and "Plan of Distribution."

-----------

Investing in the shares involves a high degree of risk.
See "Risk Factors" beginning on page 4.

-----------

Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.

The date of this prospectus is , 2000.
<PAGE>

You should rely only on the information contained in this prospectus. We and
the selling stockholders have not authorized anyone to provide you with
information different from that contained in this prospectus. The selling
stockholders are offering to sell, and seeking offers to buy, shares of common
stock only in jurisdictions where offers and sales are permitted. The
information contained in this prospectus is accurate only as of the date of
this prospectus, regardless of the time of delivery of this prospectus or any
sale of common stock. In this prospectus, "MindArrow," "we," "us" and "our"
refer to MindArrow Systems, Inc. and its subsidiary.

TABLE OF CONTENTS

<TABLE>
<S> <C>
Summary................................................................... 1
Risk Factors.............................................................. 4
Use of Proceeds........................................................... 14
Dividends................................................................. 14
Capitalization............................................................ 15
Dilution.................................................................. 15
Plan of Distribution...................................................... 15
Selected Financial Data................................................... 16
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 17
Business.................................................................. 20
Management................................................................ 28
Certain Transactions and Relationships.................................... 35
Market for Common Stock................................................... 35
Significant Stockholders.................................................. 36
Selling Security Holders.................................................. 38
Description of Securities................................................. 44
Legal Matters............................................................. 48
Experts................................................................... 49
Where You Can Find More Information....................................... 49
Index to Consolidated Financial Statements................................ F-1
</TABLE>

We have applied for trademark registration for eCommercial(R), eBrochure(R)
and Virtual Prospector(TM). This prospectus also contains trademarks of other
companies.

i
<PAGE>

SUMMARY

This summary may not contain all of the information that is important to you
in making a decision of whether or not to invest. To fully understand us and
this offering, you should read the entire prospectus. Most importantly, you
should read the "Risk Factors" beginning on page 4.

The Company

MindArrow Systems, Inc. is in the business of creating and delivering, via
the Internet, electronic presentations called eCommercials , then tracking and
reporting the responses they generate. Our business was founded in March 1999
and we were a development-stage company through December 31, 1999. In January
2000, significant principal operations commenced. We have recorded a cumulative
loss of $13,836,347 through June 30, 2000 and anticipate recording substantial
losses for the foreseeable future.

eCommercials are highly compressed multimedia files that can contain high
quality audio and video, graphics, animation, hypertext links and
telecommunications links, and are delivered to recipients via email or
downloaded directly from a website. eCommercials can be used in place of or in
addition to printed brochures and other marketing collateral.

We believe eCommercials provide value to our clients because:

. delivery using the Internet is immediate and can occur at any time;

. our systems track and report the content viewed by each recipient, which
facilitates accurate evaluation of the effectiveness of marketing
campaigns;

. eCommercials are interactive and typically contain audio and video and
can be engaging and entertaining;

. eCommercials are easy and inexpensive to change;

. there is a potential e-mail rippling effect, or viral marketing
advantage, as the message can be easily forwarded to other interested
parties by the recipient, via email, and we can measure the so-called
"pass-along" effect.

eCommercials differ from other multi-media content delivery systems such as
Real Networks and QuickTime in that:

. the recipient is not required to download or install any other software
to view the message;

. the recipient is not required to be connected to the Internet to view the
message;

. the recipient is not required to have a high speed or "broadband"
Internet connection.

We began distributing promotional eCommercials in August 1999, and have
completed over 165 eCommercial campaigns to date. The number of recipients who
view the eCommercial as a percentage of those who receive the e-mail message
has varied with the category and size of the target group; however, the average
view/response rate has been approximately 22% for those campaigns. Of the
recipients who viewed an eCommercial, approximately 75% have taken some form of
additional action, such as responding to questions, clicking a hypertext link,
placing a product order, or forwarding the eCommercial to a third party.

1
<PAGE>

allows each sales person to manage eCommercials sent to their prospective
customers and organize and prioritize follow-up contacts. Virtual Prospector
augments other sales force automation and customer relationship marketing
tools. The entire system operates in an application service provider ("ASP")
model, whereby we provide computing services from our data centers. All access
to Virtual Prospector is via the Internet. The first version of Virtual
Prospector was released in May 2000.

We currently market our products and services through a direct sales force
and indirectly through selected third-party resellers, primarily to
organizations with large sales forces and/or those that aggressively use the
Internet for marketing. We expect to generate revenue by:

. charging clients for design services to create eCommercials;

. charging clients on a per-send basis for delivery and tracking;

. obtaining subscription license fees on a per user basis for Virtual
Prospector;

. sharing revenue with our clients based on the effectiveness of their
sales and marketing efforts;

. obtaining third-party reseller fees; and

. providing additional consulting, implementation, and maintenance services
on a time and materials basis.

From inception through June 30, 2000, 20% of revenue has been generated from
per-item charges, 57% has been generated from production consultation fees, and
23% from third-party reseller fees.

Additional Information

Our business was founded in March 1999 and was incorporated as
eCommercial.com, Inc., a California corporation on April 9, 1999. On April 19,
1999, we merged into Wireless Netcom, Inc., a pre-existing Nevada corporation.
On March 31, 2000, we reincorporated as a Delaware corporation and changed our
name to MindArrow Systems, Inc. Our common stock trades in the Over-the-Counter
Bulletin Board market under the symbol "ARRW." See "Risk Factors" beginning on
page 4.

Our main office is located at 101 Enterprise, Suite 340, Aliso Viejo,
California 92656 and our telephone number is (949) 916-8705. Our email address
is [email protected].

2
<PAGE>

The Offering

The shares offered in this offering are (i) issuable upon conversion of
shares of Series B preferred stock into shares of our common stock or exercise
of warrants issued to a customer or issued in connection with our private
offering of Series B preferred stock or (ii) shares of common stock issued in a
prior private placement.

<TABLE>
<C> <S>
Common stock outstanding prior to this offering.. 10,139,651 shares
Common stock issuable on conversion of Series B
preferred....................................... 1,513,073 shares
Common stock issuable on exercise of warrants.... 661,941 shares
Common stock outstanding after conversion and
exercise........................................ 12,314,665 shares
Use of Proceeds.................................. We will not receive any of
the proceeds of the sale of
the shares.
Risk Factors..................................... This offering involves a
high degree of risk.
See "Risk Factors"beginning
on page 4.
</TABLE>

The number of shares that will be outstanding after this offering is based
on the number of shares outstanding on August 4, 2000 and excludes 3,000,000
shares of common stock reserved for issuance under the 1999 Stock Option Plan,
1,451,550 shares issuable upon conversion of Series C preferred stock and
1,316,856 shares reserved for issuance upon the exercise of outstanding
warrants not included above.

Summary Financial Information

The following summary financial data should be read together with our
financial statements and the notes thereto included elsewhere in this
prospectus. The statement of operations data and the balance sheet data are
derived from, and are qualified by reference to, our financial statements
included elsewhere in this prospectus.
<TABLE>
<CAPTION>
For the period For the period
from inception For the Nine from inception
(March 26, 1999) to Months Ended (March 26, 1999) to
September 30, 1999 June 30, 2000 June 30, 1999
------------------- ------------- -------------------
(Unaudited) (Unaudited)
<S> <C> <C> <C>
Statement of Operations
Data
Revenues................ $ 6,250 $ 921,148 $ --
Interest income......... 24,274 300,682 2,670
Total costs and
expenses............... 2,380,975 12,707,726 802,432
----------- ------------ ------------
Net loss................ (2,350,451) (11,485,896) (799,762)
Beneficial conversion
feature on preferred
stock.................. 1,043,142 12,346,440 --
----------- ------------ ------------
Net loss available to
common stockholders.... $(3,393,593) $(23,832,336) $ (799,762)
=========== ============ ============
Net loss per common
share outstanding...... $ (0.39) $ (2.45) $ (0.10)
=========== ============ ============
Weighted average common
shares outstanding..... 8,751,760 9,739,023 8,082,128
=========== ============ ============
<CAPTION>
September 30, 1999 June 30, 2000 June 30, 1999
------------------- ------------- -------------------
(Unaudited) (Unaudited)
<S> <C> <C> <C>
Balance Sheet Data
Current assets.......... $ 4,894,143 $ 16,378,766 $ 83,275
Working capital......... 2,351,053 12,465,594 (3,431,429)
Total assets............ 6,820,236 24,413,615 1,212,015
Total liabilities....... 2,543,090 3,916,736 3,514,704
Stockholders' equity.... 4,277,146 20,496,879 (2,302,689)
</TABLE>

3
<PAGE>

RISK FACTORS

The purchase of our common stock involves substantial investment risk. You
should carefully consider the following factors and other information in this
prospectus before deciding to invest in shares of our common stock. This
prospectus contains "forward-looking statements" that are subject to a number
of risks and uncertainties, many of which are beyond our control. All
statements, other than statements of historical fact included in this
prospectus regarding our business strategy, future operations, financial
position, estimated revenues, projected costs, prospects, plans and objectives
of management as well as third parties are forward-looking statements. When
used in this prospectus, the words "anticipate," "intend," "estimate,"
"expect," "project," and similar expressions are intended to identify forward-
looking statements, although not all forward-looking statements contain such
identifying words. All forward-looking statements speak only as of the date of
this prospectus. Although we believe that the expectations reflected in the
forward-looking statements are reasonable, we can give no assurance that such
expectations will prove to be correct. Important factors that could cause our
actual results to differ materially from our expectations are described below
and elsewhere in this prospectus.

Our limited operating history makes evaluation of our business difficult

Our business was formed as eCommercial.com in March 1999 and we were a
development-stage company through December 31, 1999. In January 2000,
significant principal operations commenced. We have recorded a cumulative loss
of $13,836,347 through June 30, 2000 and anticipate recording substantial
losses for the foreseeable future. Accordingly, we have a limited operating
history on which to base our evaluation of current business and prospects. Our
short operating history makes it difficult to predict future results, and there
are no assurances that our revenues will increase, or that we will achieve or
maintain profitability or generate sufficient cash from operations in future
periods.

Our ability to achieve and sustain profitability would be adversely affected
if we:

. fail to effectively market and sell our services;

. fail to develop new and maintain existing relationships with clients;

. fail to continue to develop and upgrade our technology and network
infrastructure;

. fail to respond to competitive developments;

. fail to introduce enhancements to our existing products and services to
address new technologies and standards; and

. fail to attract and retain qualified personnel.

Our operating results are also dependent on factors outside of our control,
such as strength of competition and the growth of the market for our services.
There is no assurance that we will be successful in addressing these risks, and
failure to do so could have a material adverse effect on our financial
performance.

We expect to incur significant losses for the foreseeable future, and if we
are unable to generate sufficient cash flow or raise the capital necessary to
allow us to continue to meet all of our obligations as they come due, our
business could suffer.

Our future revenues are not predictable, and our results could vary
significantly

Because of our limited operating history and the emerging nature of our
markets, we are unable to reliably forecast our revenues. We plan to
substantially increase our operating expenses in order to:

. expand our sales and distribution network;

. fund increased sales and marketing activities; and

. develop and upgrade our technology.

4
<PAGE>

Our fixed expenses, which generally are comprised of the costs of personnel,
facilities, depreciation and amortization, have been averaging approximately
$800,000 per month. Our expected expense levels are based, in part, on planned
revenues and our ability to raise additional funding. If we are unsuccessful in
generating significant revenues or raising additional funds, we may be unable
to adjust spending in time to compensate for a shortfall or we may have to
forego potential revenue generating activities, either of which could hurt our
financial performance.

Our quarterly operating results may fluctuate significantly in the future as
a result of a variety of factors. These factors include:

. the demand for our services;

. the addition or loss of individual clients;

. the amount and timing of capital expenditures and other costs relating to
the expansion of our operations;

. the introduction of new products or services by us or our competitors;
and

. general economic conditions and economic conditions specific to the
Internet, such as electronic commerce and online media.

Any one of these factors could cause our revenues and operating results to
vary significantly. In addition, as a strategic response to changes in the
competitive environment, we may from time to time make certain pricing, service
or marketing decisions or acquisitions that could significantly hurt our
operating results in a given period.

Due to all of the foregoing factors, we believe that period-to-period
comparisons of our results of operations are not necessarily meaningful and
should not be relied upon as indications of future performance. Furthermore, it
is possible that our operating results in one or more quarters will fail to
meet the expectations of securities analysts or investors. In such event, the
market price of our common stock could drop.

Possible need for additional financing

The capital requirements associated with developing our network and
corporate infrastructure have been and will continue to be significant. We have
been substantially dependent on the private placements of our equity securities
to fund such requirements. These private placements have raised approximately
$30 million in gross proceeds. We anticipate that our existing capital
resources and private placements will be sufficient to satisfy our contemplated
cash requirements for at least twelve months. Although we believe our
assumptions to be reasonable, we lack the operating history of a more seasoned
company and there can be no assurance that our forecasts will prove accurate.
In the event that our plans change, our assumptions change or prove inaccurate,
or if future private placements, other capital resources and projected cash
flow otherwise prove to be insufficient to fund operations, we could be
required to seek additional financing sooner than currently anticipated. We
have no current arrangements with respect to sources of additional financing if
and when needed, or that, if available, such additional financing would be on
terms acceptable to us. To the extent that any such financing involves the sale
of our equity securities, the interests of our shareholders could be
substantially diluted. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."

We are not sure if the market will accept our systems

Our ability to succeed will depend on the following, none of which can be
assured:

. the effectiveness of our marketing and sales efforts;

. market acceptance of our current and future offerings;

. the reliability of our networks and services; and

. the extent to which end users are able to receive eCommercials at
tolerable download speeds.

5
<PAGE>

We operate in a market that is at a very early stage of development, is
rapidly evolving, and is characterized by an increasing number of competitors
and risk surrounding market acceptance of new technologies and services.
Potential customers must accept eCommercials as a viable alternative to
traditional commercial advertising and brochure distribution. Because this
market is so new, it is difficult to predict its size and growth rate. If the
market fails to develop as we expect, our growth will be slower than expected.

Our success also depends on the market acceptance of our technology. For
example, congestion over the Internet may interrupt eCommercial broadcasts,
resulting in unsatisfying user experiences. Some users may block reception of
executable email attachments such as eCommercials or be unwilling to download
them due to the large size of the files. Through May 31, 2000, 84% of the
eCommercials we've sent have been delivered successfully; however, widespread
adoption of eCommercial technology depends on overcoming these obstacles,
improving audio and video quality and educating clients and users. If our
technology fails to achieve broad commercial acceptance, our growth will be
slower than expected.

If we are unable to manage or sustain our growth our operating results could be
impaired

We anticipate that we will be required to rapidly expand our operations in
the near future to address market opportunities. Such growth, if it occurs,
will place a significant strain on our managerial, operational and financial
resources and systems. To manage this growth, we must implement, improve and
effectively utilize operational, management, marketing and financial systems,
and train and manage our employees. There can be no assurance that we will be
able to manage effectively the expansion of operations or that our personnel,
systems, procedures and controls will be adequate to support operations. Any
failure to manage our growth effectively could hurt our financial performance.

Network and system failures could adversely impact our business

The performance, reliability and availability of our websites and network
infrastructure is critical to our reputation and ability to attract and retain
clients. Our systems and operations are vulnerable to damage or interruption
from earthquake, fire, flood, power loss, telecommunications failure, Internet
breakdowns, break-ins, tornadoes and similar events. We carry business
interruption insurance to compensate for losses that may occur, but insurance
is not guaranteed to remove all risk of loss. Services based on sophisticated
software and computer systems often encounter development delays and the
underlying software may contain errors that could cause system failures. Any
system failure that causes an interruption could result in a loss of clients
and could reduce the attractiveness of our services.

We are also dependent upon web browsers, Internet service providers and
online service providers to provide Internet users access to our clients, users
and web sites. Users may experience difficulties due to system failures or
delays unrelated to our systems. These difficulties may hurt audio and video
quality or result in intermittent interruptions in broadcasting and thereby
slow our growth.

Circumvention of our security measures and viruses could disrupt our business

Despite the implementation of security measures, our networks may be
vulnerable to unauthorized access, computer viruses and other disruptive
problems. Anyone who is able to circumvent security measures could steal
proprietary information or cause interruptions in our operations. Service
providers have occasionally experienced interruptions in service as a result of
the accidental actions of users or intentional actions of hackers. We may have
to spend significant capital to protect against security breaches or to fix
problems caused by such breaches. Although we have implemented security
measures, there can be no assurance that such measures will not be circumvented
in the future. Eliminating computer viruses and alleviating other security
problems may require interruptions, delays or cessation of service to users,
which could hurt our business.

Our dependence on short-term contracts could make future revenues volatile

Although future clients may enter into multi-year agreements, less than
$10,000 of our revenues through June 30, 2000 have been derived from contracts
with greater than three months duration. Consequently, our

6
<PAGE>

clients can stop using our systems quickly and without penalty, thereby
increasing our exposure to competitive pressures. There can be no assurance
that current clients will continue to be clients, or that we will be able to
attract new clients.

We need to be scalable in the number of users we serve

Our success depends on our ability to deliver and track a large of number of
eCommercials. At our current capacity, we can deliver and track approximately
two million eCommercials per week. In May 2000, we delivered an average of
365,000 eCommercials per week. If demand for our services exceeds capacity, we
may not be able to add to our extensive network capability quickly enough to
serve clients.

We depend on continued growth in use of the Internet

Rapid growth in use of the Internet is a recent phenomenon and there can be
no assurance that use of the Internet will continue to grow or that a
sufficient base of users will emerge to support our business. The Internet may
not be accepted as a viable medium for broadcasting advertising, for a number
of reasons, including:

. potentially inadequate development of the necessary infrastructure;

. inadequate development of enabling technologies;

. lack of acceptance of the Internet as a medium for distributing rich
media advertising; and

. inadequate commercial support for Web-based advertising.

To the extent that Internet use continues to increase, there can be no
assurance that the Internet infrastructure will be able to support the demands
placed upon it, and especially the demands of delivering high-quality video
content.

Furthermore, user experiences on the Internet are affected by access speed.
There is no assurance that broadband access technologies will become widely
adopted. In addition, the Internet could lose its viability as a commercial
medium due to delays in the development or adoption of new standards and
protocols required to handle increased levels of Internet activity, or due to
increased government regulation. Our business could suffer if use of the
Internet grows more slowly than expected, or if the Internet infrastructure
does not effectively support the growth that does occur.

If we do not respond to technological change, we could lose or fail to develop
customers

The development of our eCommercial business entails significant technical
and business risks. To remain competitive, we must continue to enhance and
improve the functionality and features of our technology. The Internet and the
e-commerce industry are characterized by:

. rapid technological change;

. changes in client requirements and preferences;

. frequent new product and service introductions embodying new
technologies; and

. the emergence of new industry standards and practices.

The evolving nature of the Internet could render our existing systems
obsolete. Our success will depend, in part, on our ability to:

. develop and enhance technologies useful in our business;

. develop new services and technology that address the increasingly
sophisticated and varied needs of our current and prospective clients;
and

. adapt to technological advances and emerging industry and regulatory
standards and practices in a cost-effective and timely manner.

7
<PAGE>

Future advances in technology may not be beneficial to, or compatible with,
our business. Furthermore, we may not use new technologies effectively or adapt
our systems to client requirements or emerging industry standards on a timely
basis. Our ability to remain technologically competitive may require
substantial expenditures and lead time. If we are unable to adapt to changing
market conditions or user requirements in a timely manner, we will lose
clients.

We could face liability for Internet content

As a distributor of Internet content, we face potential liability for
negligence, copyright, patent or trademark infringement, defamation, indecency
and other claims based on the content of our broadcasts. Such claims have been
brought, and sometimes successfully pressed, against Internet content
distributors. Our general liability insurance may not be adequate to indemnify
us for all liability that may be imposed. Although we generally require our
clients to indemnify us for such liability, such indemnification may be
inadequate. Any imposition of liability that is not covered by insurance or by
an indemnification by a client could harm our business.

Our operating results could be impaired if we become subject to burdensome
government regulations and legal uncertainties concerning the Internet

Due to the increasing popularity and use of the Internet, it is possible
that a number of laws and regulations may be adopted with respect to the
Internet, relating to:

. user privacy;

. pricing, usage fees and taxes;

. content;

. copyrights;

. distribution;

. characteristics and quality of products and services; and

. online advertising and marketing.

The adoption of any additional laws or regulations may decrease the
popularity or impede the expansion of the Internet and could seriously harm our
business. A decline in the popularity or growth of the Internet could decrease
demand for our products and services, reduce our revenues and margins and
increase our cost of doing business. Moreover, the applicability of existing
laws to the Internet is uncertain with regard to many important issues,
including property ownership, intellectual property, export of encryption
technology, libel and personal privacy. The application of laws and regulations
from jurisdictions whose laws do not currently apply to our business, or the
application of existing laws and regulations to the Internet and other online
services, could also harm our business.

Our stock price has been and may continue to be volatile

The trading price of our common stock has been and is likely to continue to
be highly volatile. For example, on March 14, 2000, our common stock closed at
$51.25 per share, and on August 9, 2000, our common stock closed at $5.25 per
share. Our stock price could be subject to wide fluctuations in response to
factors such as:

. actual or anticipated variations in quarterly operating results;

. announcements of technological innovations, new products or services by
us or our competitors;

. the addition or loss of strategic relationships or relationships with our
key customers;

8
<PAGE>

. conditions or trends in the Internet, media streaming, media delivery,
and online commerce markets;

. changes in the market valuations of other Internet, online service, or
software companies;

. announcements by us or our competitors of significant acquisitions,
strategic partnerships, joint ventures, or capital commitments;

. legal or regulatory developments;

. additions or departures of key personnel;

. sales of our common stock; and

. general market conditions.

The historical volatility of our stock price may make it more difficult for
you to resell shares when you want at prices you find attractive.

In addition, the stock market in general, and the Nasdaq National Market and
the market for Internet and technology companies in particular, have
experienced extreme price and volume fluctuations that have often been
unrelated or disproportionate to the operating performance of these companies.
These broad market and industry factors may reduce our stock price, regardless
of our operating performance.

A prolonged decline in the price of our stock may make it difficult for us
to obtain additional financing on terms favorable to the Company.

Our efforts to protect our intellectual property rights may not sufficiently
protect us and we may incur costly litigation to protect our rights

We have filed twenty-two patent applications and we plan to file additional
patent applications in the future with respect to various additional aspects of
our technologies. We mark our software with copyright notices, and intend to
file copyright registration applications where appropriate. We have also filed
several federal trademark registration applications for trademarks and service
marks we use. There can, however, be no assurance that any patents, copyright
registrations, or trademark registrations applied for by us will be issued, or
if issued, will sufficiently protect our proprietary rights. See Business--
Intellectual Property.

We also rely substantially on certain technologies that are not patentable
or proprietary and are therefore available to our competitors. In addition,
many of the processes and much of the know-how of importance to our technology
are dependent upon the skills, knowledge and expertise of our technical
personnel, whose skill, knowledge and experience are not patentable. To protect
our rights in these areas, we require all employees, significant consultants
and advisors to enter into confidentiality agreements under which they agree
not to use or disclose our confidential information as long as that information
remains proprietary. We also require that our employees agree to assign to us
all rights to any inventions made during their employment relating to our
activities, and not engage in activities similar to ours during the term of
their employment. There can be no assurance, however, that these agreements
will provide meaningful protection for our trade secrets, know-how or other
proprietary information in the event of any unauthorized use or disclosure of
such trade secrets, know-how or proprietary information. Further, in the
absence of patent protection, we may be exposed to competitors who
independently develop substantially equivalent technology or otherwise gain
access to our trade secrets, knowledge or other proprietary information.

Despite our efforts to protect our intellectual property, a third party or a
former employee could copy, reverse-engineer or otherwise obtain and use our
intellectual property or trade secrets without authorization or could develop
technology competitive to ours.

Our intellectual property may be misappropriated or infringed upon.
Consequently, litigation may be necessary in the future to enforce our
intellectual property rights, to protect our confidential information or trade

9
<PAGE>

secrets, or to determine the validity or scope of the rights of others.
Litigation could result in substantial costs and diversion of management and
other resources and may not successfully protect our intellectual property.
Additionally, we may deem it advisable to enter into royalty or licensing
agreements to resolve such claims. Such agreements, if required, may not be
available on commercially reasonable or desirable terms or at all.

Our technology may infringe on the rights of others

Even if the patents, copyrights and trademarks we apply for are granted,
they do not confer on us the right to manufacture or market products or
services if such products or services infringe on intellectual property rights
held by others. If any third parties hold conflicting rights, we may be
required to stop making, using, or marketing one or more of our products or to
obtain licenses from and pay royalties to others, which could have a
significant and material adverse effect on us. There can be no assurance that
we will be able to obtain or maintain any such license on acceptable terms at
all.

We may also be subject to litigation to defend against claims of
infringement of the rights of others or to determine the scope and validity of
the intellectual property rights of others. If third parties hold trademark,
copyright or patent rights that conflict with our business, then we may be
forced to litigate infringement claims that could result in substantial costs
to us. In addition, if we were unsuccessful in defending such a claim, it could
have a negative financial impact. If third parties prepare and file
applications in the United States that claim trademarks used or registered by
us, we may oppose those applications and be required to participate in
proceedings before the United States Patent and Trademark Office to determine
priority of rights to the trademark, which could result in substantial costs to
us. An adverse outcome in litigation or privity proceedings could require us to
license disputed rights from third parties or to cease using such rights. Any
litigation regarding our proprietary rights could be costly, divert
management's attention, result in the loss of certain of our proprietary
rights, require us to seek licenses from third parties and prevent us from
selling our services, any one of which could have a negative financial impact.
In addition, inasmuch as we broadcast content developed by third parties, our
exposure to copyright infringement actions may increase because we must rely
upon such third parties for information as to the origin and ownership of such
licensed content. We generally obtain representations as to the origin and
ownership of such licensed content and generally obtain indemnification to
cover any breach of such representations; however, there can be no assurance
that such representations will be accurate or given, or that such
indemnification will adequately protect us.

Our officers and directors control a significant percentage of our outstanding
common stock which will enable them to exert control over many significant
corporate actions and may prevent a change in control that would otherwise be
beneficial to our stockholders

Upon completion of this offering, our officers and directors will
beneficially own approximately 45% of our outstanding stock. This level of
ownership could have a substantial impact on matters requiring the vote of the
stockholders, including the election of our directors and most of our corporate
actions. This control could delay, defer or prevent others from initiating a
potential merger, takeover or other change in our control, even if these
actions would benefit our stockholders and us. This control could adversely
affect the voting and other rights of our other stockholders and could depress
the market price of our common stock.

The length of our sales cycle increases our costs

Many of our potential customers conduct extensive and lengthy evaluations of
our products before deciding whether to purchase or license our products. In
our experience to date we've seen the sales cycle range anywhere from 30 days
to 6 months. While the potential customer is making this decision, we continue
to incur salary, travel and other similar costs of following up with these
accounts. Therefore, the risk associated with our lengthy sales cycle is that
we may expend substantial time and resources over the course of the sales cycle
only to realize no revenue from such efforts as a result of the customer's
decision not to purchase from us. Any significant change in customer buying
decisions or sales cycles for our products could have a material adverse effect
on our business, results of operations, and financial conditions.

10
<PAGE>

We have a limited operating history in international markets

We have only limited experience in operating in international markets.
Although we have distributed our products and services internationally since
August 1999, we had no experience in international operations prior to our
acquisition of our Hong Kong-based subsidiary, Fusionactive.com, Ltd., in April
2000. To date, we have recognized approximately $160,000 of revenue related to
our international operations in eastern Asia. There can be no assurance that
our international operations will be successful.

There are risks inherent in conducting international operations

There are many risks associated with our international operations in eastern
Asia, including, but not limited to:

. difficulties in collecting accounts receivable and longer collection
periods;

. changing and conflicting regulatory requirements;

. potentially adverse tax consequences;

. tariffs and general export and customs restrictions;

. difficulties in staffing and managing foreign operations;

. political instability;

. fluctuations in currency exchange rates;

. the need to develop localized versions of our products;

. national standardization and certification requirements;

. seasonal reductions of business activity; and

. the impact of local economic conditions and practices.

Any of the above-listed risks could have a material adverse effect on our
future business, financial condition, or results of operations.

International markets for online marketing are in their very early stages of
development

We distribute our eCommercials globally. To date, we have developed or
modified into foreign language text and delivered eCommercials to recipients in
the United Kingdom, France, Switzerland, Austria, Norway, Sweden, Iceland,
Finland, Denmark, Greece, Lebanon, Mexico, Panama, Peru, Philippines,
Australia, Singapore, Hong Kong, China, and Taiwan. The markets for online
advertising and direct marketing in these countries are generally in earlier
stages of development than in the United States, and we cannot assure you that
the market for, and use of online advertising and direct marketing in
international markets such as these and others will be significant in the
future. Factors that may account for slower growth in the online advertising
and direct marketing markets include, but are not limited to:

. slower growth in the number of individuals using the Internet
internationally;

. privacy concerns;

. a lower rate of advertising spending internationally than in the United
States; and

. a greater reluctance to use the Internet for advertising and direct
marketing.

Any of the above-listed risks could have a material adverse effect on our
future business, financial condition, or results of operations.

We are subject to risks associated with governmental regulation and legal
uncertainties

We are subject to general business laws and regulations. These laws and
regulations, as well as new laws and regulations that may be adopted in the
United States and other countries with respect to the Internet, may

11
<PAGE>

impede the growth of the Internet. These laws may relate to areas such as
advertising, taxation, personal privacy, content issues (such as obscenity,
indecency, and defamation), copyright and other intellectual property rights,
encryption, electronic contracts and "digital signatures," electronic commerce
liability, e-mail, network and information security, and the convergence of
traditional communication services with Internet communications, including the
future availability of broadband transmission capability. Other countries and
political organizations are likely to impose or favor more and different
regulation than that which has been proposed in the United States, thus
furthering the complexity of regulation. In addition, state and local
governments may impose regulations in addition to, inconsistent with, or
stricter than, federal regulations. The adoption of such laws or regulations,
and uncertainties associated with their validity, applicability, and
enforcement, may affect the available distribution channels for and costs
associated with our products and services, and may affect the growth of the
Internet. Such laws or regulations may therefore harm our business.

We do not know for certain how existing laws governing issues such as
privacy, property ownership, copyright and other intellectual property issues,
taxation, illegal or obscene content, retransmission of media, and data
protection, apply to the Internet. The vast majority of such laws were adopted
before the advent of the Internet and related technologies and do not address
the unique issues associated with the Internet and related technologies. Most
of the laws that relate to the Internet have not yet been interpreted. Changes
to or the interpretation of these laws could:

. limit the growth of the Internet;

. create uncertainty in the marketplace that could reduce demand for our
products and services;

. increase our cost of doing business;

. expose us to significant liabilities associated with content distributed
or accessed through our products or services, and with our provision of
products and services, and with the features or performance of our
products;

. lead to increased product development costs, or otherwise harm our
business; or

. decrease the rate of growth of our user base and limit our ability to
effectively communicate with and market to our user base.

Any of the above-listed consequences could have a material adverse effect on
our future business, financial condition, or results of operations.

We may be subject to legal liability in connection with the data collection
capabilities of our products and services

Our products are interactive Internet applications that by their very nature
require communication between a client and server to operate. To provide better
consumer experiences and to operate effectively, our products occasionally send
information to servers at MindArrow. Many of the services we provide also
require that a user provides certain information to us (see Business--Products
and Services). We post privacy policies concerning the use and disclosure of
our user data. Any failure by us to comply with our posted privacy policies
could impact the market for our products and services, subject us to
litigation, and harm our business.

In addition, the Child Online Privacy Protection Act (COPPA) became
effective as of April 21, 2000. COPPA requires operators of commercial websites
and online services directed to children (under 13), and general audience sites
that know that they are collecting personal information from a child, to:
provide parents notice of their information practices; obtain verifiable
parental consent before collecting a child's personal information, with certain
limited exceptions; give parents a choice as to whether their child's
information will be disclosed to third parties; provide parents access to their
child's personal information and allow them to review it and/or have it
deleted; give parents the opportunity to prevent further use or collection of
information; not require a child to provide more information than is reasonably
necessary to participate in an activity; and maintain the confidentiality,
security, and integrity of information collected from children. We do not
knowingly collect and disclose personal information from such minors, and
therefore believe that we are fully compliant

12
<PAGE>

with COPPA. However, the manner in which COPPA may be interpreted and enforced
cannot be fully determined, and thus COPPA and future legislation such as COPPA
could subject us to potential liability which in turn would harm our business.

If we fail to obtain or maintain our Nasdaq listing, the liquidity of your
investment may be adversely affected

The Nasdaq National Market System on which we have applied for trading of
our common stock has established certain initial listing and continued listing
requirements that must be satisfied in order for a company's shares to be
initially listed and traded, and to continue to be listed and traded.
Currently, our common stock meets the Nasdaq National Market System initial
listing and continued listing requirements. However, we cannot assure that we
will always be able to meet the Nasdaq National Market listing requirements in
the future. Failure to meet the Nasdaq National Market listing requirements
could result in the delisting of our common stock from the Nasdaq National
Market which may adversely affect the liquidity of our shares.

If we fail to maintain our OTC Bulletin Board listing, the liquidity of your
investment may be adversely affected

Currently, transactions of our common stock are quoted on a real-time basis
on the Over-The-Counter Bulletin Board ("OTCBB"). The OTCBB has recently
implemented a rule limiting quotations on the OTCBB to the securities of
issuers that make current filings pursuant to the Securities Exchange Act of
1934. We are not currently in compliance with this requirement. Because of our
non-compliance, our stock trading symbol "ARRW" has been appended with an "e"
by the OTCBB. If we do not become compliant by August 24, 2000 as a result of
the effectiveness of both this Registration Statement and our Form 8A
registration statement under the Securities Exchange Act of 1934, the OTCBB
will de-list our common stock effective August 25, 2000.

The effect of de-listing on the OTCBB would be that there would be no real-
time quotations for trades in the Company's common stock, which may limit the
liquidity of the Company's shares. However, transactions in the Company's
common stock would still be subject to real-time last sale trade reporting,
which reports are publicly disseminated through market data vendors on a real-
time basis. In addition, once the Company's Registration Statement is declared
effective, it would become compliant with the OTCBB eligibility rule.

13
<PAGE>

USE OF PROCEEDS

Since the only securities being offered are those of the selling
stockholders, we will not receive any of the proceeds from the sale of the
Shares.

Proceeds from exercise of warrants of up to $5,094,278 will be used for
general working capital purposes. However, each warrant contains a cashless
exercise feature so there can be no assurances that we will receive any
proceeds from the exercise of warrants or that any warrants will be exercised
at all.

DIVIDENDS

We have not declared or paid any dividends since our inception and do not
intend to declare or pay any such dividends in the foreseeable future. Our
ability to declare and pay dividends is subject to limitations imposed by
Delaware law.

14
<PAGE>

CAPITALIZATION

The following table sets forth our total capitalization:

. on an actual basis as of September 30, 1999;

. on an actual basis as of June 30, 2000;

. on a pro forma basis as of June 30, 2000, giving effect to the conversion
of all outstanding shares of Series B convertible preferred stock into
1,513,073 shares of common stock and the exercise of warrants to purchase
661,941 shares of common stock. The exercise of all of the warrants
hereunder for cash would result in proceeds of $5,094,278. Each warrant
contains a cashless exercise feature so there can be no assurances that
we will receive any proceeds for the exercise of warrants or that any
warrants will be exercised at all.

<TABLE>
<CAPTION>
September 30, 1999 June 30, 2000
Actual Actual Pro Forma
------------------ ------------- ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C>
Stockholders' Equity
Series B Convertible Preferred
Stock, $0.001 par value;
2,000,000 shares authorized;
1,085,573 and 1,513,073 shares
issued and outstanding,
actual; no shares issued and
outstanding, pro forma........ $ 1,086 $ 1,513 $ --
Series C Convertible Preferred
Stock, $0.001 par value,
3,000,000 shares authorized;
zero and 725,775 shares issued
and outstanding, actual;
725,775 shares issued and
outstanding, pro forma........ -- 726 726
Common Stock, $0.001 par value;
20,000,000 and 30,000,000
shares authorized; 9,536,623
and 10,139,651 shares issued
and outstanding, actual;
12,314,665 shares issued and
outstanding, pro forma........ 9,537 10,141 12,316
Additional paid-in capital...... 8,254,591 48,061,781 53,155,397
Accumulated deficit............. (3,393,593) (27,225,929) (27,225,929)
Unearned stock-based
compensation................... (594,475) (351,353) (351,353)
----------- ------------ ------------
Total stockholders' equity.... $ 4,277,146 $ 20,496,879 $ 25,591,157
=========== ============ ============
</TABLE>

DILUTION

Since we do not receive the proceeds of the sale of the Shares, we will not
experience any direct dilution. The existing common shareholders paid
substantially less per share than the offering price of the shares sold under
this prospectus.

PLAN OF DISTRIBUTION

The selling stockholders may offer their Shares at various times in one or
more of the following transactions:

1. In the over-the-counter market where our common stock is listed, or on
the Nasdaq National Market, where we have applied to have our common
stock listed;

2. Private transactions;

3. In connection with short sales of our common stock;

4. By pledgees or donees; or

5. A combination of any of the above transactions.

The selling stockholders may sell their shares at the market price
prevailing at the time of sale or at negotiated prices.

The selling stockholders may use broker-dealers to sell their shares. If
this happens, the broker-dealers will either receive discounts or commissions
from the selling stockholders or they will receive commissions from purchasers
of shares for whom they acted as agents. Selling stockholders and broker-
dealers acting on their behalf may be deemed underwriters under the Securities
Act of 1933.

The selling stockholders may attempt to sell all of the shares. This could
cause the supply of shares to exceed demand, which could drive the price of
our shares down.

15
<PAGE>

SELECTED FINANCIAL DATA

The following summary financial data should be read together with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our financial statements and the notes thereto included
elsewhere in this prospectus. The Statement of Operations Data for the period
ending September 30, 1999 and the Balance Sheet Data as of September 30, 1999
are derived from, and are qualified by reference to, our audited financial
statements included elsewhere in this Prospectus. The selected financial data
for the nine months ended June 30, 2000 and 1999 is unaudited. The results for
the period ended June 30, 2000 are not necessarily indicative of results that
may be expected for any other interim period or for a full year.

<TABLE>
<CAPTION>
For the period For the period
from inception For the Nine from inception
(March 26, 1999) to Months Ended (March 26, 1999)
September 30, 1999 June 30, 2000 to June 30, 1999
------------------- ------------- ----------------
(Unaudited) (Unaudited)
<S> <C> <C> <C>
Statement of Operations
Data
Revenues.................. $ 6,250 $ 921,148 $ --
----------- ------------ -----------
Operating expenses:
Development............. 320,766 1,440,723 115,751
Production.............. 139,674 664,785 52,277
Sales and marketing..... 1,060,795 5,241,520 267,073
General and
administration......... 684,343 4,442,542 307,644
Depreciation and
amortization........... 173,797 931,477 58,087
----------- ------------ -----------
Total operating
expenses............. 2,379,375 12,721,047 800,832
----------- ------------ -----------
Operating loss.......... (2,373,125) (11,799,899) (800,832)
Interest income........... 24,274 300,682 2,670
Provision for income
taxes.................... (1,600) (1,628) (1,600)
Minority interest......... -- 14,949 --
----------- ------------ -----------
Net loss................ (2,350,451) (11,485,896) (799,762)
Beneficial conversion
feature on preferred
stock.................... 1,043,142 12,346,440 --
----------- ------------ -----------
Net loss available to
common stockholders.... $(3,393,593) $(23,832,336) $ (799,762)
=========== ============ ===========
Net loss per common share
outstanding.............. $ (0.39) $ (2.45) $ (0.10)
=========== ============ ===========
Weighted average common
shares outstanding....... 8,751,760 9,739,023 8,082,128
=========== ============ ===========

<CAPTION>
September 30, 1999 June 30, 2000 June 30, 1999
------------------- ------------- ----------------
(Unaudited) (Unaudited)
<S> <C> <C> <C>
Balance Sheet Data
Cash and cash
equivalents.............. $ 4,744,741 $ 14,936,378 $ 33,229
Working capital........... 2,351,053 12,465,594 (3,431,429)
Total assets.............. 6,820,236 24,413,615 1,212,015
Total liabilities......... 2,543,090 3,916,736 3,514,704
Stockholders' equity...... 4,277,146 20,496,879 (2,302,689)
</TABLE>

16
<PAGE>

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

The following discussion should be read together with our financial
statements and related notes included elsewhere in this Prospectus.

Overview

Our business was founded in March 1999 and we had our first revenues in
August 1999. We were a development-stage company until December 31, 1999.
Significant operations commenced in January 2000. On April 24, 2000, we
acquired 90% of Fusionactive.com, Ltd. in exchange for 150,000 shares of our
common stock. The results of operations of Fusionactive.com have been included
in the consolidated financial statements commencing April 1, 2000. The results
of operations of Fusionactive.com from April 1 through April 23 are immaterial
to our consolidated results.

Through June 30, 2000, our revenues were derived from the production and
delivery of eCommercials as well as reseller fees. eCommercial production
services include theme development, eCommercial design and layout, video
production, special effects, hyperlink recommendations, hyperlink page design
and creation, reporting and sales cycle consultation.

Revenues are recognized when the consulting or production services are
rendered and delivery revenues are recognized when the eCommercials are
delivered. We will recognize software license fee revenue when persuasive
evidence of an agreement exists, the product has been delivered, we have no
remaining significant obligations with regard to implementation, the license
fee is fixed or determinable and collection of the fee is probable.
Fusionactive.com's revenue from media sales is recognized upon the placing of
advertisements with the media. Revenue from production sales is recognized upon
delivery of goods and services to customers, and consulting revenue is
recognized as the services are rendered.

We record cash receipts from clients and billed amounts due from clients in
excess of revenue recognized as deferred revenue. The timing and amount of cash
receipts from clients can vary significantly depending on specific contract
terms and can therefore have a significant impact on the amount of deferred
revenue in any given period.

We currently sell our products and services through a direct sales force and
are developing a network of resellers to expand our ability to identify
potential clients and develop relationships with them.

Results of operations

For the period from March 26, 1999 (inception) to September 30, 1999,
revenues totaled $6,250 as we focused on developing our technologies and
increasing our ability to serve clients. For the nine months ended June 30,
2000, revenues increased to $921,148.

For the period ended September 30, 1999 our net loss was $2,350,451. For the
nine months ended June 30, 2000, our net loss was $11,485,896. The loss for
both periods can be attributed to development, marketing and selling, and
general and administrative expenses incurred to expand our operations. As a
result of the beneficial conversion feature on preferred stock of $1,043,142
and $12,346,440, our net loss available to common stockholders was $3,393,593,
or $0.39 per share, and $23,832,336, or $2.45 per share, for the period ended
September 30, 1999 and the nine months ended June 30, 2000, respectively.

17
<PAGE>

Development expenses consist primarily of salaries and related expenses for
design engineers and other technical personnel, including consultants, and were
focused on continued advancements in eCommercial technology and development of
our proprietary network. Total costs for the period ended September 30, 1999
and the nine months ended June 30, 2000 amounted to $320,766 and $1,440,723. We
charge all research and development expenses to operations as incurred. We
believe that continued investment in research and development is critical to
our long-term success. Accordingly, we expect that our research and development
expenses will increase in future periods.

Production efforts focused on building a team of creative and client service
people and producing eCommercials and related websites. Total costs for the
period ended September 30, 1999 and the nine months ended June 30, 2000
amounted to $139,674 and $664,785.

Sales and marketing expenses for the period ended September 30, 1999 and for
the nine months ended June 30, 2000 amounted to $1,060,795 and $5,241,520 and
consisted primarily of salaries and related expenses for developing our direct
and reseller organizations, as well as marketing expenses designed to create
and promote brand awareness for eCommercials. Included in this amount for the
period ended September 30, 1999 is a non-cash charge of $240,000, which
represents the value of the common stock issued upon the signing of an
agreement with Lockheed Martin Corporation, and a non-cash charge of $78,780,
which represents compensation expense related to the issuance of stock options.
Included in the amount for the nine months ended June 30, 2000 is a non-cash
charge of $1,719,870, which represents compensation expense related to the
issuance of stock options and warrants. We intend to pursue aggressive selling
and marketing campaigns and to expand our network of resellers, continue
branding efforts and identifying strategic relationships. We therefore expect
that our sales and marketing expenses will increase in future periods.

General and administrative costs of $684,343 for the period ended September
30, 1999 and $4,442,542 for the nine months ended June 30, 2000 primarily
included salaries and related expenses for administrative, finance and human
resources personnel, professional fees and other corporate expenses related to
establishing and expanding our operations. Included in these amounts are non-
cash charges of $86,455 for the period ended September 30, 1999 and $1,497,038
for the nine months ended June 30, 2000, which represent compensation expense
related to the issuance of stock options and warrants. We expect that, in
support of our continued growth and our operations as a public company, general
and administrative expenses will increase in the foreseeable future.

Stock-based compensation increased to $3,227,855 for the nine months ended
June 30, 2000 from $167,923 for the period from inception to September 30,
1999. This increase was attributable to the fair value of warrants as
calculated using the Black-Scholes option pricing model. Amortization of
unearned stock-based compensation represents the difference between the
exercise price of stock option grants and the deemed fair value of the
Company's stock at the time of such grants. Such amounts are amortized over the
vesting period for such grants, which is typically three years. At June 30,
2000 we had $351,353 in unearned stock-based compensation scheduled to be
amortized as follows: $40,971 in the period July 1, 2000 to September 30, 2000,
$169,220 in fiscal year ending September 30, 2001, $141,050 in fiscal year
ending September 30, 2002, and $112 in fiscal year ending September 30, 2003.

Recent financings

In December 1999, we completed a private placement offering of 1,388,073
shares of Series B preferred stock at $8 per share and issued an option to
purchase an additional 125,000 shares of Series B preferred at $8.00 per share,
expiring March 31, 2000. These shares are convertible into 1,388,073 shares of
common stock. Gross proceeds amounted to $11,104,584. The shares were sold to
approximately 185 accredited investors. Net proceeds to us, after selling
commissions of $829,242 and direct offering costs of $121,869, totaled
$10,153,473, of which $2,392,981 was received after September 30, 1999. On the
initial closing date, the trading price of our common stock was $9.44 per
share. On March 24, 2000 the option to purchase 125,000 shares was exercised.

18
<PAGE>

In April 2000, we completed a private placement offering of 725,775 shares of
Series C preferred stock at $25 per share. Gross proceeds amounted to
$18,144,375. On the initial closing date, the trading price of our common stock
was $51.25 per share. When originally issued, the shares of Series C preferred
were convertible into common stock on a one-for-one basis. However, in response
to changes in market conditions, in August 2000, we adjusted the conversion
ratio to two-for-one. Accordingly, the 725,775 shares of Series C preferred are
convertible into 1,451,550 shares of common stock. See "Description of
Securities".

Liquidity and sources of capital

As a provider of Internet business services, we do not expect the liquidity
constraints that face companies that must maintain significant inventories.
However, we anticipate that we will have negative cash flow for the foreseeable
future. We also currently anticipate that we will invest $2 to $4 million in
capital expenditures in the next twelve months to expand our infrastructure.

Since our inception, we have funded our operations by selling stock. As of
June 30, 2000, our cash position reduced short-term liquidity problems. While
we expect to begin generating significant revenues during the rest of fiscal
2000, we do not anticipate that revenues will be sufficient to offset expected
expenditures. However, we anticipate that we have sufficient cash to fund our
operations for at least twelve months.

As of September 30, 1999 and June 30, 2000, we had current assets of
$4,894,143 and $16,378,766, respectively, and current liabilities of $2,543,090
and $3,913,172, respectively. This represents working capital of $2,351,053 at
September 30, 1999 and $12,465,594 at June 30, 2000. Current liabilities at
June 30, 2000 included $2,028,645 of liabilities acquired in acquisitions, of
which $1,800,000 is reserved to pay the judgment in the Voxel matter. In
January 2000, we appealed the judgment and pledged a $2 million certificate of
deposit with the court. One of our significant shareholders, who is also a
director, has agreed to repay to us in common stock or cash, at his option, any
amounts we must pay to the plaintiffs in this matter. See "Business--Legal
Proceedings."

For the period ended September 30, 1999, we used $2,013,188 of cash for
operating activities and for the nine months ended June 30, 2000, we used
$7,239,124 of cash for operating activities, which were primarily focused on
growing our organizational infrastructure to be able to service our clients.
During the same periods, $1,263,133 and $4,422,013, respectively, was used in
investing activities, primarily for acquisitions of fixed assets used to expand
our technology infrastructure and network. During the periods ended September
30, 1999 and June 30, 2000, $8,021,062 and $21,852,774 was provided by
financing activities, primarily from issuance of preferred stock.

19
<PAGE>

BUSINESS

Overview

MindArrow Systems, Inc. is in the business of creating and delivering, via
the Internet, electronic presentations called eCommercials, then tracking and
reporting the responses they generate.

In addition, we have developed a software product called Virtual Prospector,
which is a tool our clients can use to manage the eCommercials they send.
Virtual Prospector is accessed through the Internet using any standard browser
and is licensed on a per user basis. Targeted at clients with medium to large
sales forces, it allows each sales person to manage eCommercials sent to their
prospective customers and organize and prioritize follow-up contacts. Virtual
Prospector augments other sales force automation and customer relationship
marketing tools. The entire system operates in an application service provider
("ASP") model, whereby we provide computing services from our data center. All
access to Virtual Prospector is via the Internet. The first version of Virtual
Prospector was released in May 2000.

Our business was founded in March 1999 and we were a development-stage
company through December 31, 1999. In January 2000, significant principal
operations commenced.

Company Strategy

Target clients. By offering what we believe are significant advantages over
competing methods, we intend to focus on recruiting clients from the Fortune
1000, and smaller organizations that aggressively use the Internet for
marketing purposes. We have established industry-specific internal divisions
focused on servicing the travel, leisure and pharmaceuticals industries.

Establish marketing relationships. We intend to form relationships with
companies that enable us to extend and strengthen our sales presence (see
Business--Sales & Marketing).

Expanding our business into global markets. Because we believe that
significant commercial opportunities exist outside of the United States, we
intend to expand our business to promising global markets, principally through
the adoption of our systems and technology by international companies, sending
eCommercials globally on behalf of U.S.-based clients and acquiring companies
and opening offices in key foreign markets such as Europe and Asia.

In April 2000, we acquired 90% of Fusionactive.com, Ltd. in exchange for
150,000 shares of our common stock. Fusionactive.com is an advertising company
based in Hong Kong, through which we intend to serve Southeast Asia. As our
subsidiary, Fusionactive.com will be the exclusive provider of our products and
services in Hong Kong, Singapore, Korea and China.

Commercialize a variety of applications. We intend to commercialize our
technology in applications where our technology may provide benefits over
existing methods. These generally include applications that deliver content
over the Internet.

Industry Background

The Internet. The Internet and electronic commerce are fundamentally
changing the way businesses interact with customers, suppliers, employees and
other interested constituents. Companies across most industries

20
<PAGE>

are using the Internet and electronic commerce to redefine the way that goods
and services are marketed, sold and distributed. They are also using this new
medium to redefine how they communicate with their customers and constituents.
Some key Internet statistics include:

. Access: In February 2000, the Strategis Group reported the number of
households in the US with Internet access had increased from 14.9 million
in 1995 to 46.5 million. By 2005, that number is expected to increase to
90 million.

. Use: Email is a widely used Internet application. As of December 31,
1999, there were 78 million active e-mail users in the U.S. aged 13 and
over and the number of email boxes was expected to increase from 234
million worldwide in 1998 to 409 million in 1999, according to eMarketer.

. Commerce: The amount of merchandise sold over the Internet is expected to
increase to $3.2 trillion in 2003, according to Forrester Research.
Although we do not conduct ecommerce activities directly, this statistic
is indirectly applicable to us since our services are dependent on
businesses continuing to conduct ecommerce activities.

. Advertising: U.S. Internet advertising is expected to grow from $2.8
billion in 1999 to $22 billion in 2004, according to Forrester Research.

This growth has been spurred by developments such as easy-to-use Web
browsers, the availability of less expensive multimedia PCs and widespread
Internet access, and the emergence of Web-based content and commerce
applications. The proliferation of email accounts has enabled businesses to use
email as the primary means to communicate with their customers online. For
example, email is often used to confirm electronic transactions and to notify
customers of important new developments or product offerings.

Much of the Internet's rapid evolution towards becoming a mass medium can be
attributed to the accelerated pace of technological innovation, which has
expanded the Web's capabilities and improved users' experiences. Most notably,
the Internet has evolved from a mass of static, text-oriented Web pages and
email services to a much richer environment, capable of delivering graphical,
interactive and multimedia content.

Remaining Competitive. Many websites, particularly consumer-oriented sites,
rely on broadcast advertising to encourage current and prospective customers to
visit regularly. Concurrently, these companies also conduct regular research or
invest in applications to help them understand how customers interact with
their website once they have arrived. Our technologies allow companies to
deliver targeted web content to their audience via email, reducing the need for
broad-based advertising and fostering a one-to-one relationship.

Direct Marketing. Direct marketing, always a significant portion of overall
advertising spending, is becoming a significant force on the Internet. Some key
statistics include:

. Overall: Businesses and other organizations spent approximately $285
billion on general advertising in 1998, of which $163 billion (57%) was
spent on direct marketing, according to the Direct Marketing Association.

. Internet-based: According to a study by CE Underberg Towbin, interactive
marketing expenditures will grow from approximately $1 billion in 1998 to
an estimated $9 billion in 2003.

Online marketing allows businesses to cost-effectively target online
customers through customized email campaigns. Email did not initially gain wide
acceptance as a marketing tool because of concerns regarding privacy and
unsolicited communication. With the recent advent of permission-based email,
where individuals sign up or "opt-in" to receive information from specific
sources on topics of interest to them, email has become an increasingly
important direct marketing tool. Email campaigns offer significant advantages
over traditional direct mail, including shorter production times, reduced cost
and more rapid delivery.

Products and Services

General.

Our proprietary eCommercial technology enables our clients to deliver a
"website" to their customers via email. eCommercials are highly compressed,
multimedia files that can combine high quality audio and video,

21
<PAGE>

graphics, animation, chat, hypertext links, and telecommunication links.
eCommercials differ from other multi-media delivery systems such as Real
Network and QuickTime in that:

. the recipient is not required to be connected to the Internet when
viewing;

. the recipient is not required to have a high speed or "broadband"
Internet connection; and

. the recipient is not required to install any other software to view the
eCommercial.

Activity tracking, reporting and analysis. Our systems track and report the
content viewed by each recipient, including persons to whom the original
recipient has forwarded the eCommercial.

This information allows our clients to accurately measure the interest and
attention generated by their sales and marketing efforts, including the so-
called viral or "pass-along" impact of their content.

Immediate customer-initiated feedback. eCommercials are designed to generate
immediate feedback using links to our clients' websites, or telecommunication
links, such as a "call me" button which can generate a phone call to the
recipient, or a "chat" button that can initiate an on-line chat session with
the recipient.

Web-based technology. Our Virtual Prospector system is accessible via any
Internet browser and is easy to use, which enables rapid wide-scale deployment.
Our software systems are offered from offsite computer operations centers on
what is known as an Application Service Provider or ASP basis.

Virtual Prospector, our patent-pending system which is deployed over the
Internet on an Application Service Provider (ASP) basis. Licensed users use the
Virtual Prospector system to manage eCommercial deliveries to individuals or
groups with whom they have relationships, much the same way individual sales
representatives deliver printed collateral to interested parties upon request.
Delivering collateral over the Internet is faster, significantly less
expensive, interactive and can yield better results than traditional paper
collateral delivered via postal or overnight delivery.

We intend to establish Virtual Prospector as a cost-effective alternative to
printed collateral. The Virtual Prospector system is designed to improve the
efficiency and effectiveness of sales representatives by enabling Internet-
based delivery of electronic collateral and providing reports that help them
prioritize their callbacks.

Prior to releasing Virtual Prospector in May 2000, all eCommercials
campaigns were managed by us and delivered to our clients' lists of people who
have signed up to receive them. Because Virtual Prospector allows our clients
to send eCommercials to individuals or groups, we expect that many future
eCommercial campaigns will be managed by our clients themselves. However, we
expect to continue to provide campaign services for larger campaigns that
require more complex management.

Our eCommercial technology offers content that is not deliverable via text
or graphic. Such content can be entertaining, educational or persuasive.
Delivering content desired by affinity groups is an excellent use of the
technology.

Other important aspects. Other important aspects of our products and
services include the ability to integrate our products and services with those
currently deployed by our clients, the ability to view eCommercials without a
current web connection, and using our technology as a "front-end" for
streaming.

22
<PAGE>

Integrate with enterprise systems. We intend to help our clients to
integrate our Virtual Prospector system with their website content
management, sales force automation, enterprise resource planning and
enterprise relationship management packages to enable information sharing
between the systems.

View without a current web connection. Our technology has significant
advantages over on-line, or streaming media content delivery. Recipients
can view and respond when convenient, rather than requiring online viewing.
Rather than providing streaming multimedia content delivery services in
which users must have an active connection to the content provider in order
to view rich media content, we deliver eCommercials in a manner that allows
end users to view them while not connected to the Internet. In addition,
our technologies allow us to provide highly specific feedback on the
effectiveness of each campaign to our customers.

Front-end for streaming technologies. While all eCommercials created to
date can be viewed offline, they can also serve as a "front end" for
streaming technologies, which require users to connect to content broadcast
over the Internet. An eCommercial can serve as a convenient viewer and
buffer for an Internet broadcast, by delivering the first 15 to 30 seconds
of rich media content then delivering the remainder using streaming media.
For example, if the content is an announcement by a company CEO, the
eCommercial can deliver the first 15 seconds, then seamlessly serve the
remainder of the message via streaming media. This improves the quality of
the streaming media message and reduces the time spent waiting for the
streaming video download.

eCommercial Network Deliveries and Tracking. All eCommercials are delivered
via our proprietary network, and are generally handled in one of three ways:

. campaign sends managed by us;

. managed by our clients using our Virtual Prospector system; or

. downloaded directly from web sites.

eCommercial Activity Tracking and Reporting. eCommercials use industry-
standard web logging techniques to track the effectiveness of a campaign. We
gather information about how often each eCommercial is opened and viewed and
track the activity on related websites that we host.

At the request of our client, when a recipient views or interacts with an
eCommercial, our servers can recognize the following information:

. the content viewed by each recipient, including referrals; and

. whether the initial recipient forwarded the eCommercial to others.

This information allows our client to accurately measure the interest and
attention generated by an eCommercial or eCommercial campaign.

eCommercial Consultation and Production. eCommercial consultation and
production is managed by our production unit and third-party ad agencies. Sound
and video production can involve simple editing or more elaborate on-location
filming or special effects. We anticipate that company-licensed third-party
firms such as advertising agencies will increasingly provide this service.
Consultation charges vary depending on the size, scope and length of a given
campaign.

Reseller Fees. We charge a fee to resellers who join our reseller program.
The fee varies based on the territory and generally relates to initial
training, eCommercial production and Virtual Prospector licenses.

Software License Fees. In May 2000, we released our software product Virtual
Prospector 1.0, and have begun to license it to companies on a per user basis.

23
<PAGE>

Through June 30, 2000, 20% of our revenue has been generated from per-item
charges, 57% has been generated from production consultation, and 23% has come
from third-party reseller fees.

Sales and Marketing

We have a national team of sales people and are pursuing direct sales and
sales via resellers to large, well-established companies in several industries,
including, but not limited to:

. Travel and Leisure

. Pharmaceuticals

. Financial services

. Computer hardware/software

. Entertainment

. Electronic commerce web sites

. Telecommunications

. Industrial products

. Government

We have established industry-specific sales divisions focused on servicing
the travel, leisure and pharmaceuticals industries.

In addition, we intend to form relationships with companies that enable us
to extend and strengthen our sales presence, as follows:

. Technology Integration--Our technologies, particularly Virtual
Prospector, lend themselves to work with, or "integrate" with other
products offered by other companies, such as Customer Relationship
Management software vendors. We intend to work together with these
companies to integrate our products so they work together and provide
benefits to our mutual customers.

. Creative Integration--eCommercials have a creative design component to
them. We intend to enlist advertising and media companies to provide
eCommercial design services to their clients, who must then use our
proprietary network to deliver and track the eCommercials that are
created.

. Resellers--We are developing a network of authorized resellers who extend
our reach into their markets.

Cross-Marketing and Revenue Sharing Arrangements

As noted in our strategy, we intend to establish relationships that will
increase the breadth of market acceptance of our systems and more effectively
and efficiently commercialize our technology. A summary of our current
relationships is set forth below.

Lockheed Martin: In July 1999, we entered into an agreement with Lockheed
Martin Integrated Business Solutions (Lockheed), a leading systems integrator,
which provides for joint marketing efforts and allows us to utilize Lockheed in
establishing and managing e-commerce projects. Our Virtual Prospector solution
is designed to be integrated with Enterprise Resource Planning and Enterprise
Relationship Management packages. As a premier systems integrator, Lockheed is
in the position to lead integrations for our large customers. In addition,
Lockheed has established relationships with companies we believe can be key
customers for us. Our cross-marketing arrangement provides for Lockheed to
recommend our solutions to their customers and for us to recommend Lockheed
system integration solutions to our customers who require systems integration
capabilities. The term of the agreement is three years, and we issued 30,000
shares of our

24
<PAGE>

common stock valued at $240,000 to Lockheed as compensation for them to enter
into this arrangement with us. All other aspects of our arrangement are
expected to be at our normal pricing.

eContributor.com: In January 2000, we entered into an agreement with
eContributor.com, Inc. that provides for joint integration of technologies and
cross-promotion of services. eContributor.com is an Internet-based fundraising
management and donation processing firm. They have developed proprietary
technologies that streamline charitable giving, which we intend to integrate
into related eCommercials. The term of the agreement is three years and
provides for revenue sharing in the amount of 15% of net revenues generated by
eContributor.com as a direct result of our marketing efforts and 25% of
eContributor.com gross revenues generated through the utilization of an
eCommercial. We have also made an equity investment into eContributor.com in
the amount of $100,000.

Intellectual Property

We regard our copyrights, trademarks, trade secrets and similar intellectual
property as critical to our success, and we rely on a combination of copyright
and trademark laws, trade secret protection, confidentiality and non-disclosure
agreements and contractual provisions with our employees and with third parties
to establish and protect our proprietary rights.

We have filed twenty-two patent applications through the U.S. Patent and
Trademark Office (USPTO) under the Patent Cooperation Treaty designating all
member countries, including the United States, essentially all of Europe,
Japan, Korea, China, Canada and Mexico. These patent applications were filed
beginning in October 1999 and cover aspects of our proprietary eCommercial
authoring software and our network architecture, as well as methods of using
eCommercials and related media in marketing. We plan to file additional patent
applications in the future with respect to various additional aspects of these
and other technologies.

Our patent applications cover three basic areas of our technology and
business. We are attempting to protect various aspects of the eCommercials
themselves, including certain downloading and tracking technologies, the multi-
media features of eCommercials and production and information gathering
methods. We are also attempting to protect various marketing methods associated
with eCommercials, including virtual prospecting, e-mail advertising campaigns
and e-mail pass along methods. Finally, we are attempting to protect various
methods associated with message handling, including the ways in which an e-mail
is forwarded and tracked.

We continue to develop proprietary computer software. We mark our software
with copyright notices, and intend to file copyright registration applications
where appropriate. We have also filed several federal trademark registration
applications for trademarks and service marks we use. In addition, we seek to
protect certain proprietary aspects of our products through nondisclosure
agreements with our employees, contractors and other third parties. There can,
however, be no assurance that any patents, copyright registrations, or
trademark registrations applied for by us will be issued, or if issued, will
sufficiently protect our proprietary rights.

We intend to continue to seek patent protection for technologies that we
consider important to the development of our business. We also intend to rely
upon copyright, trademark, trade secrets, know-how, and continuing
technological innovations to develop and maintain a competitive advantage.

Government Regulation

Although there are currently few laws and regulations directly applicable to
the Internet, it is likely that new laws and regulations will be adopted in the
United States and elsewhere covering issues such as broadcast license fees,
copyrights, privacy, pricing, sales taxes and characteristics and quality of
Internet services. The adoption of restrictive laws or regulations could slow
Internet growth. The application of existing laws and regulations governing
Internet issues such as property ownership, libel and personal privacy is also
subject to

25
<PAGE>

substantial uncertainty. There can be no assurance that current or new
government laws and regulations, or the application of existing laws and
regulations (including laws and regulations governing issues such as property
ownership, taxation, defamation and personal injury), will not expose us to
significant liabilities, slow Internet growth or otherwise hurt us financially.

We currently do not collect nor do we intend to collect sales or other taxes
with respect to the sale of services or products in states and countries where
we believe we are not required to do so. We do collect sales and other taxes in
the states in which we have offices and believe we are required by law to do
so. One or more states or countries have sought to impose sales or other tax
obligations on companies that engage in online commerce within their
jurisdictions. A successful assertion by one or more states or countries that
we should collect sales or other taxes on products and services, or remit
payment of sales or other taxes for prior periods, could have a material
adverse effect on our business, results of operations and financial condition.

The Communications Decency Act of 1996 (the "CDA") was enacted in 1996.
Although those sections of the CDA that, among other things, proposed to impose
criminal penalties on anyone distributing "indecent" material to minors over
the Internet were held to be unconstitutional by the U.S. Supreme Court, there
can be no assurance that similar laws will not be proposed and adopted.
Although we do not currently distribute the types of materials that the CDA may
have deemed illegal, the nature of such similar legislation and the manner in
which it may be interpreted and enforced cannot be fully determined, and
legislation similar to the CDA could subject us to potential liability, which
in turn could have an adverse effect on our business, financial condition and
results of operations. Such laws could also damage the growth of the Internet
generally and decrease the demand for our products and services, which could
adversely affect our business, results of operations and financial condition.

Competition

The market for Internet marketing services is highly competitive and we
expect that competition will continue to intensify. Many of our competitors
have longer operating histories, significantly greater financial, technical,
marketing, and other resources, with wider recognition and more extensive
customer bases. However, because the technologies and related service offerings
are new and evolving rapidly, our competition is widely distributed among a
variety of companies, none of which enjoys a dominant position or market share.

In addition, we compete with other marketing companies that provide various
components of our product and service offerings, including online thin media
and streaming media services, as well as traditional media such as television,
radio and print, for a share of the total budget for production and
distribution of marketing materials and targeted content.

We compete primarily on our technology and service, and while we don't
compete directly on price, we believe that our services provide outstanding
return on investment compared to traditional marketing methods or other
technologies.

It is possible that new competitors or alliances among competitors may
emerge and rapidly acquire significant market share. Such competition could
materially and adversely affect our ability to obtain revenues from either
license or service fees from new or existing customers on terms favorable to
us. Further, competitive pressures may require us to reduce the price of our
software and services. In either case, our business, operating results and
financial condition would be materially and adversely affected. There can be no
assurance that we will be able to compete successfully with existing or new
competitors or that competition will not have a material adverse effect on our
business, financial condition and operating results.

Research and Development

We have developed several proprietary technologies which are used in a
variety of Internet-related products and services. These products and services
are continually being enhanced to meet the needs of the Internet

26
<PAGE>

advertiser and retailer. The Research and Development department is organized
by area of interest including Multimedia Development, Database Development, Web
Development, and Networking. Each development area requires highly specialized
individuals with extensive backgrounds in their respective disciplines.

Through June 30, 2000, we had incurred $1,761,489 of research and
development expenses in the engineering of our software tools and our network.

Facilities

Our headquarters and production facilities are at 101 Enterprise, Suite 340,
Aliso Viejo, California 92656. The base rent is $29,642 per month and the lease
expires in November 2004. In March 2000, we leased additional sales offices in
San Clemente, California at a monthly rent of $3,675 through February 2001. In
addition, effective December 1, 1999, we opened an office in New York City, in
space we are subleasing for $2,883 per month. In June 2000, we leased space in
Aliso Viejo, California for our newly created Travel & Leisure division. The
monthly rent is $3,895 and the lease expires in March 2002.

We anticipate that we will require additional space within the next
12 months and that suitable additional space will be available on commercially
reasonable terms, although there can be no assurance in this regard. We do not
own any real estate.

Legal Proceedings

Although we have not become a party to any material legal proceeding since
MindArrow was founded, we are named as a defendant in a lawsuit filed on March
25, 1999 in the US Bankruptcy Court. The lawsuit arises from an Asset Purchase
Agreement, dated November 25, 1998, pursuant to which our predecessor, Wireless
Netcom, had proposed to acquire the assets of Voxel, Inc. for $5 million. A
dispute about the terms of the agreement arose, and Wireless Netcom did not
complete the acquisition. The Bankruptcy trustee then sold the assets of Voxel
for less and sued Wireless Netcom for the difference. We acquired this lawsuit
when we subsequently merged with Wireless Netcom on April 19, 1999.

On October 27, 1999, the trial judge granted a summary judgment motion in
favor of the plaintiffs in the amount of $1.8 million. In January 2000, we
appealed the decision and pledged a $2 million certificate of deposit to the
court. In July 2000, the bankruptcy trustee accepted our offer to settle this
dispute for $1.5 million. We expect the bankruptcy judge to approve the
settlement in August 2000, and refund the balance of the deposit we made with
the court.

Pursuant to an indemnity agreement, Eric McAfee, one of our significant
shareholders who is a director and is also a former officer, has agreed to
reimburse to us in common stock or cash, at his option, any amounts we must pay
to the plaintiffs. Assuming the settlement is approved by the bankruptcy judge,
Mr. McAfee will have six months to refund to us the $1.5 million settlement and
$173,000 in attorney fees. Accordingly, we have recorded the entire amount as
part of our current liabilities of September 30, 1999, and will record any
reductions in the balance due or amounts received in repayment as additional
paid-in capital at the time such amounts are received.

Employees

As of August 4, 2000, we had 116 full-time employees. None of our employees
are subject to a collective bargaining agreement and we believe that our
relations with our employees are good.

27
<PAGE>

MANAGEMENT

Directors and Executive Officers

The directors and executive officers of the company, their respective ages
and positions with us as of August 7, 2000 are as follows:

<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Thomas J. Blakeley...... 41 Co-Chairman of the Board
Eric A. McAfee.......... 37 Co-Chairman of the Board
Robert I. Webber........ 41 Chief Executive Officer, President, Director
John Troiano............ 30 Director
Joel Schoenfeld......... 49 Director
Michael R. Friedl....... 36 Chief Financial Officer, Treasurer
Rick McEwan............. 36 Executive Vice President of Engineering
Michael Briola.......... 30 Executive Vice President, Creative Director
Timothy J. McMullen..... 43 Executive Vice President of Business Development
Donald R. Howren........ 40 Executive Vice President of Sales and Client Services
Michael Pennell......... 37 Executive Vice President of Marketing
</TABLE>

Thomas J. Blakeley, 41, Co-Chairman of the Board. Mr. Blakeley co-founded
MindArrow Systems, and currently serves as Co-Chairman of the Board. Mr.
Blakeley served as President, Chief Executive Officer and Chairman of the Board
of MindArrow until June 2000. From 1998 until founding the Company, Mr.
Blakeley served as Vice President of Sales for Zap International, which was
subsequently acquired by eCommercial.com. From 1996 to 1998, he served as
director of marketing and sales for Cubic Videocomm, creators of CVideo-Mail.
From 1987 until 1996, he was a principal of Blakeley & Associates, a marketing
consulting and training organization which produced training seminars for
marketing executives.

Eric A. McAfee, 37, Co-Chairman of the Board. Mr. McAfee is a co-founder of
MindArrow Systems, and has served on our Board since inception. He was named
Co-Chairman in June 2000. He formerly served as Executive Vice President and
Corporate Secretary through June 2000. Mr. McAfee is also a principal at Berg
McAfee Companies, a venture capital partnership based in Cupertino, California,
with investments in Internet, software and telecommunications companies. From
1995 until joining us, he operated McAfee Capital, a venture capital firm. In
1992, Mr. McAfee co-founded New Media Corporation, a PC-card manufacturing
company and served as its Chief Financial Officer and Director until 1995. Mr.
McAfee has also served for six years as a member of the Board of Directors of
the California Manufacturer's Association. Mr. McAfee is a graduate of Fresno
State University with a B.S. in Management (with an emphasis in statistics) and
the Stanford Graduate School of Business Executive Program.

Robert I. Webber, 41, President, Chief Executive Officer and Director. Mr.
Webber joined the Company in June 2000 as President, Chief Operating Officer
and a director of the Company and was appointed Chief Executive Officer on June
30, 2000. Prior to joining MindArrow, Mr. Webber served as president, CEO and
director of Silicon Film Technologies, a developer of digital imaging software
and hardware products, for which he continues to serve on the board of
directors. Previously, Mr. Webber was president and a director of Inari Inc.
(formerly Intelogis), a Novell spin-off that develops and sells power-line
networking products for OEM and the consumer market. Mr. Webber also serves on
the board of directors of NewCore Networks, a developer of telecom switching
equipment in Silicon Valley. He was an executive at the international
management consulting firm McKinsey & Company, and worked as a corporate and
securities attorney at Skadden, Arps, Slate, Meagher & Flom. Mr. Webber holds a
B.A. from Brigham Young University, a J.D. from Columbia Law School, and an
M.B.A. from the Harvard Business School.

John Troiano, 30, Director. Mr. Troiano, who joined our Board in November
1999, is the Managing Director of @ONEX LLC, a significant shareholder of the
Company. @ONEX LLC is wholly-owned by Onex

28
<PAGE>

Corporation. Mr. Troiano has led Onex' strategic investments in a number of
areas, particularly e-commerce and the Internet. He has also initiated and
developed value creation ideas in a number of other industry sectors where Onex
may now invest, specifically telecommunications, financial services and
consumer products. Before joining Onex, he was employed by Donaldson, Lufkin &
Jenrette in both the Investment Banking and Merchant Banking Groups. He also
worked in corporate finance for Gleacher & Co. in New York. Mr. Troiano
received his B.S. in Economics (summa cum laude) from the Wharton School,
University of Pennsylvania; and his M.B.A. from the Harvard Graduate School of
Business Administration. Mr. Troiano was elected to our Board in November 1999
as a representative of @ONEX LLC.

Joel Schoenfeld, 49, Director. Mr. Schoenfeld was elected to the Company's
Board of Directors in June 2000. He has served most recently as general counsel
and senior vice president of BMG Entertainment. Mr. Schoenfeld also currently
serves as a member of the executive board and central board of directors of
IFPI, the international trade federation for the worldwide music business. He
was elected chairman of the IFPI Council in 1999, a position he still holds.
Mr. Schoenfeld was elected to our Board as a representative of the Series B
preferred stockholders.

Michael R. Friedl, CPA, 36, Chief Financial Officer. Mr. Friedl joined the
company as Chief Financial Officer and Treasurer in May 1999. Prior to joining
us, Mr. Friedl served as President of DialRight Software, Inc., a database
utility company for which he continues to serve as a member of its board of
directors. Prior to joining DialRight, Mr. Friedl was the Chief Financial
Officer of V-Systems, Inc., a software company that spun out DialRight as a
separate venture. From 1995 to 1997, Mr. Friedl served as Chief Financial
Officer for publicly-held Grip Technologies, Inc., an Irvine, California,
manufacturer of golf club components. From 1993 to 1995, Mr. Friedl served as
Corporate Controller for New Media Corporation, a high-tech manufacturing
company. From 1986 to 1993, Mr. Friedl worked in public accounting, most
recently for Arthur Andersen & Co. where he served as an Audit Manager. Mr.
Friedl is a graduate of Kent State University and is a Certified Public
Accountant licensed in Ohio and California.

Richard R. McEwan, 36, Executive Vice President of Engineering. Mr. McEwan
joined the company in April 1999 as Vice President of Engineering. Prior to
joining us, Mr. McEwan served as President, CEO, and a co-founder of Zap
International, a video compression technology company which was acquired by the
Company in April 1999. Prior to co-founding Zap International, Mr. McEwan was a
manager with Fourth Communications Network from 1993 through 1998, where he
managed the development of Internet systems for the hotel industry based on
Microsoft Windows NT Server, Windows 3.1/95, and NT Workstation as well as the
database systems for statistical gathering for all of Fourth Communications'
Internet-related advertising and commerce information. Prior to joining Fourth
Communications, Mr. McEwan ran his own consulting business where he created
custom sales information databases for various organizations. Before entering
the consulting field, Mr. McEwan spent over eight years in several technical
and marketing duties for SuperMac Technology, RasterOps Corporation, and Ramtek
Corporation.

Michael Briola, 30, Executive Vice President, Creative Director. Mr. Briola
joined the company in April 1999 as Vice President, Creative Director. Prior to
joining us, Mr. Briola founded and served as Vice President of Marketing and a
director of Zap International, where he played a major role in the development
of the Zap Media Messenger technology. Prior to his work at Zap International,
Mr. Briola co-founded Cameo International (now AnTares Systems) where he served
as Vice President of Technology and Marketing. Prior to founding Cameo, Mr.
Briola worked for MegaChips Corporation, a Japanese semiconductor design firm
specializing in audio/video codec and systems technologies. Previously, Mr.
Briola served as Technical Sales Director, Professional Products Division for
InVision Interactive, Inc. and was responsible for developing and maintaining
sales channels in the United States and abroad. From 1993 to 1996, Mr. Briola
maintained a consulting practice dedicated to supplying high-end computer-based
multimedia design and production equipment where he designed facilities and
equipment systems for clients.

Timothy J. McMullen, 43, Executive Vice President of Business Development.
Mr. McMullen joined the Company in June 2000 as Executive Vice President of
Business Development. He currently serves on the board

29
<PAGE>

of advisors for Alerio Software, a company specializing in Internet-based
applications and custom software development services. Mr. McMullen also
currently serves on the board of directors, and as an advisor, for Captura
Software, a software company which provides expense management solutions to
large organizations. From January 1997 to May 1998, Mr. McMullen served on the
board of directors and in an advisory capacity for Omni Vista Software
Corporation, a software company which provides enterprise level budgeting and
analysis products for middle market and large organizations. Prior to 1997,
Mr. McMullen served as Chief Technology Officer and Executive Vice President
of Products for Platinum Software Corporation, now called Epicor, a company he
cofounded in 1981.

Donald R. Howren, 40, Executive Vice President of Sales and Client
Services. Mr. Howren joined us in January 2000. Prior to joining us, he served
as Vice President and General Manager for the Analytic Applications Products
division of Best Software, which in 1999 acquired Omni Vista Software, a
company Mr. Howren served as Vice President of Marketing and Business
Development since 1998. From 1995 to 1997, he served as Vice President of
Marketing and Strategic Partners for Epicor Software, a provider of enterprise
business software.

Michael Pennell, 37, Executive Vice President of Marketing. Mr. Pennell
joined us in June 2000. Prior to joining us, he served as Vice President of
Product Marketing for Epicor Software, an enterprise and e-business software
provider. At Epicor, Mr. Pennell was responsible for defining overall product
strategy and managed a team of product marketing managers responsible for
market research, market positioning, analyst relations, competitive analysis,
product planning, and product alliances. He served in various other roles at
Epicor from 1993 to 1997 including Director of Product Strategy, Manager of
Applications Design, and Sales Engineer. Prior to joining Epicor in 1993, Mr.
Pennell was a manager at Andersen Consulting where he was responsible for
managing a variety of strategy and system implementation projects in the
United States, Europe and South America.

Other Significant Employees

Other significant employees of the company, their respective ages and
positions with us are as follows:

<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<C> <C> <S>
Adrian Turcotte............... 49 President-Pharmaceutical Division
Mark Grundy................... 39 President-Travel & Leisure Division
Jenifer Lee................... 49 Vice President of Client Services
Serge Herring................. 51 Vice President of Research & Development
Theresa Conte................. 39 Vice President of Human Resources
</TABLE>

Adrian Turcotte, 49, President-Pharmaceutical Division. Mr. Turcotte joined
the company as Vice President of Media Development in April 1999 and was named
President-Pharmaceutical Division in June 2000. From 1987 until joining us, he
was Executive Producer for Odyssey Productions, a producer of video
presentations for the educational and entertainment markets. Mr. Turcotte
holds a Master's Degree from UCLA.

Mark Grundy, 39, President, Travel and Leisure Division. Mr. Grundy
previously served as Executive Vice President, Chief Operating Officer and
Director of the Company through June 2000. Mr. Grundy joined the Company in
May 1999 as Executive Vice President, Chief Operating Officer and a director.
In 1990, he founded Destination America, Inc., a company that provided English
language tours of the United States. Mr. Grundy served as President of
Destination America from its inception until joining eCommercial.com in May
1999. From 1981 to 1990, he developed sales and marketing strategies for
Americantours International, Inc., where he served as Vice President, Sales
and Marketing.

Jenifer Lee, 49, Vice President of Client Services. Ms. Lee joined the
Company in September 1999 as Director of Client Services and was promoted to
Vice President of Client Services in June 2000. Prior to joining us Ms. Lee
served as Regional Manager for Intergraph Corporation.

30
<PAGE>

Serge Herring, 51, Vice President of Research & Development. Mr. Herring
joined the company in April 1999 as Director of Program Development, and was
named Vice President of Research & Development in November 1999. Prior to
joining us, Mr. Herring was Senior Software Engineer for Zap International, a
video compression technology company which was acquired by the company in April
1999. From 1997 to 1998, Mr. Herring worked in research and development for
Innovacom, Inc., a video compression company serving the broadcast industry.
From 1996 to 1997, he worked as a Principle Engineer for Intellect Electronics,
Inc., a developer of point-of-sale terminals for the retail and banking
industries.

Theresa Conte, 39, Vice President of Human Resources. Ms. Conte joined us as
Director of Human Resources in May 2000 and was promoted to Vice President of
Human Resources in June 2000. Prior to joining us, she had a human resources
consulting practice. She is a graduate of Arizona State University and is a
member of the Human Resources Independent Consultants Association.

Executive Compensation

The following table sets forth the total compensation for each of our most
highly compensated executive officers whose total salary and bonus for the year
ended September 30, 1999 would have exceeded $100,000 on an annualized basis
(collectively, the "Named Executive Officers"):

Summary Compensation Table

<TABLE>
<CAPTION>
Name and Principal Position Salary Bonus Options
--------------------------- -------- ------- -------
<S> <C> <C> <C>
Thomas Blakeley, Chief Executive Officer(1)........ $178,000 $ -- --
Eric A. McAfee, Co-Chairman of the Board(2)........ 172,000 -- --
Mark Grundy, Chief Operating Officer(3)............ 168,000 10,000 225,000
Michael Friedl, Chief Financial Officer............ 110,000 3,000 100,000
Deborah Olinto, Vice President of Sales(4)......... 130,000 -- 100,000
Ross Teasley, Vice President of Marketing(5)....... 120,000 -- 85,000
</TABLE>
--------
(1) Effective June 30, 2000, Mr. Blakeley resigned as Chief Executive Officer,
but he continues to serve on our Board as Co-Chairman.

(2) Effective June 9, 2000, Mr. McAfee resigned as an officer of the Company,
but he continues to serve on our Board as Co-Chairman.

(3) Effective June 9, 2000, Mr. Grundy resigned from our Board and his position
changed to President-Travel & Leisure Division.

(4) Effective October 2, 1999, Ms. Olinto left the company.

(5) Effective March 4, 2000, Mr. Teasley left the company.

31
<PAGE>

Fiscal 1999 Stock Option Grants to Executives

The following table sets forth for each of the Named Executive Officers
certain information concerning stock options granted during fiscal 1999.

<TABLE>
<CAPTION>
Potential
Realizable
Value at Assumed
Annual Rates of
Stock Price
Appreciation
for Option Term
Name and -----------------
Principal Position Options % of Total Exercise Price Expiration 5% 10%
------------------ ------- ---------- -------------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Thomas Blakeley, Chief
Executive Officer...... -- -- -- -- -- --
Eric A. McAfee,
Executive Vice
President.............. -- -- -- -- -- --
Mark Grundy, Chief
Operating Officer...... 175,000(1) 8% $ 1 2005 $ 59,517 $135,023
50,000(2) 2 8 2005 136,038 308,624
Michael Friedl, Chief
Financial Officer...... 100,000(3) 5 1 2004 27,628 61,051
Deborah Olinto, Vice
President of Sales..... 100,000(4) 5 8 2005 272,077 617,249
Ross Teasley, Vice
President of
Marketing.............. 85,000(4) 4 8 2005 231,265 524,661
</TABLE>

Potential realizable values are net of exercise price, but before the
payment of taxes associated with exercise. Amounts represent hypothetical gains
that could be achieved for the respective options if exercised at the end of
the option term. The 5% and 10% assumed annual rates of compounded stock price
appreciation are mandated by rules of the Securities and Exchange Commission
and do not represent our estimate or projection of our future common stock
prices. These amounts represent assumed rates of appreciation in the value of
the common stock from the fair market value on the date of grant. Actual gains,
if any, on stock option exercises are dependent on the future performance of
our common stock and overall stock market conditions. The amounts reflected in
the table may not necessarily be achieved.
--------
(1) This option was granted in April 1999 and vests one-third in April 2000
with the remainder vesting quarterly over the following two years.

(2) This option was granted in September 1999 and vests one-third in September
2000 with the remainder vesting quarterly over the following two years.

(3) This option was granted in April 1999. 60,000 shares of which are
immediately vested, 40,000 shares of which vest one-third in April 2000
with the remainder vesting quarterly over the following two years.

(4) These options were granted in August 1999 and vest one-third in August 2000
with the remainder vesting quarterly over the following two years.

32
<PAGE>

Stock Option Exercises And Year-End Value Table

The following table reflects the number of shares covered by both
exercisable and non-exercisable stock options as of September 30, 1999 for the
Named Executive Officers. Values for "in-the-money" options represent the
spread between the exercise price of existing options and the market value for
our common stock on September 30, 1999, which was $8.125 per share.

<TABLE>
<CAPTION>
Value of
Options Outstanding In-the-Money Options
Name and ------------------------- -------------------------
Principal Position Exercisable Unexercisable Exercisable Unexercisable
------------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Thomas Blakeley, Chief
Executive Officer...... -- -- -- --
Eric A. McAfee,
Executive Vice
President.............. -- -- -- --
Mark Grundy, Chief
Operating Officer...... -- 225,000 -- $1,603,125
Michael Friedl, Chief
Financial Officer...... 60,000 40,000 $427,500 285,000
Deborah Olinto, Vice
President of Sales..... -- 100,000 -- 12,500
Ross Teasley, Vice
President of
Marketing.............. -- 85,000 -- 10,625
</TABLE>

Compensation of Directors

We may reimburse directors for reasonable expenses pertaining to attending
meetings, including travel, lodging and meals but we do not pay directors for
their service as directors.

Voting Agreement

Thomas J. Blakeley, Eric A. McAfee, Clyde Berg, and @Onex, LLC, a Delaware
limited liability company ("@Onex"), have entered into a Voting Agreement dated
as of September 30, 1999. Pursuant to the Voting Agreement, Blakeley, McAfee,
and Berg agreed that, for so long as @Onex or its affiliates own at least
100,000 common or preferred shares, Blakeley, McAfee, and Berg will take all
necessary actions and will vote their shares in order to cause two designees of
@Onex to be elected to serve on the Company's Board of Directors. The Voting
Agreement will terminate on the earlier of the date when @Onex holds less than
100,000 shares, or September 30, 2014. To date, @Onex has designated only John
Troiano for election as a director, and has not designated a second director.

Employment Agreements

As of September 30, 1999, each of the Named Executive Officers was a party
to a Change in Control Agreement with us, which provides for payment of two
year's salary to the executive if we are acquired by another company and he (or
she) loses his (or her) job for other than cause, as defined in the agreement.

In addition, effective June 2000, we entered into a three-year employment
contract with Mr. Webber, setting forth terms of his employment, as follows:

<TABLE>
<CAPTION>
Base Salary Bonus(1)
----------- --------

<S> <C> <C>
Robert I. Webber, President............................. 240,000 1.9%
</TABLE>
--------
(1) Bonus is based upon a percentage of operating income.

Mr. Webber's employment agreement provides for payment in the amount of one
year salary if we terminate his employment for other than cause. In addition,
the contract provides a $1 million life insurance policy. Further, Mr. Webber
received a payment of $100,000 for consulting services provided prior to his
employment and an $85,000 loan, which will be forgiven over the course of three
years. If he leaves the Company during the three year term, any remaining
balance shall be due and payable.

33
<PAGE>

Stock Option Plans

Our Board of Directors adopted our 1999 Stock Option Plan (the "Plan") in
April 1999. The Plan as amended in December 1999, was established to furnish
incentives for employees, directors and consultants to continue their service
to us. We reserved 3,000,000 shares of common stock for issuance upon exercise
of options granted under the Plan, which have vesting schedules up to 3 years.
However, in the event we undergo a change in control, as defined in the Plan,
all unvested options immediately become fully vested. Under the Plan, options
are granted at a price equal to the fair market value on the date of grant.

As of August 4, 2000, options to purchase 1,980,332 shares of common stock
at exercise prices ranging from $1 to $25 were issued and outstanding under the
Plan. Our Board of Directors administers the Plan. We intend to issue
additional options or other incentives to attract and retain qualified
management and directors. Such plans and incentives could have a dilutive
effect on our common stock.

Indemnification of Directors and Officers

Our Bylaws provide for indemnification of our directors, officers and
employees as follows: Any person made a party to an action, suit or proceeding,
by reason of the fact that he/she, his/her testator or intestate representative
is or was a director, officer or general manager of the Corporation, or of any
Corporation in which he/she served as such at the request of the Corporation,
shall be indemnified by the Corporation against the reasonable expenses,
including attorney's fees, actually and necessarily incurred by him/her in
connection with any appeal therein, except in relation to matters as to which
it shall be adjudged in such action, suit or proceeding, or in connection with
any appeal therein that such officer, director or general manager is liable for
negligence or misconduct in the performance of his/her duties.

Our Bylaws further state that the foregoing right of indemnification shall
not be deemed exclusive of any other rights to which any officer or director or
general manager may be entitled apart from the provisions of this section.

The amount of indemnity to which any officer, director or general manager
may be entitled shall be fixed by the board of directors, except that in any
case where there is no disinterested majority of the board available, the
amount shall be fixed by arbitration pursuant to the then existing rules of the
American Arbitration Association. In the event that whatever liability
insurance is procured for the protection of the company, its officers,
directors or management, then the indemnification shall not exceed the maximum
percent of policy coverage procured. We have also entered into indemnification
agreements with each of our directors.

34
<PAGE>

CERTAIN TRANSACTIONS AND RELATIONSHIPS

Certain executive officers and directors of the company are former
shareholders of eCommercial.com, Inc., a California corporation ("eCommercial
California"). Pursuant to the terms of the Merger Agreement dated as of April
19, 1999, between us and the shareholders of eCommercial California, those
executive officers and directors acquired an aggregate of 4,000,000 shares of
our common stock in exchange for their eCommercial California shares.

In September 1999, we entered into a non-cancelable five-year sublease for a
satellite office in Cupertino, California. The sublease calls for minimum
monthly rental payments ranging from $10,091 per month at the start of the
lease and gradually increasing to $13,358 per month by the end of the lease.
The sublessor is a company related to Clyde Berg, a significant stockholder and
Eric McAfee, a former officer, who is a current director and significant
stockholder. The sublease terms are identical to the terms of the sublessor's
lease with the landlord, and are favorable to the terms we would have been able
to acquire on our own. Effective July 31, 2000, we closed our Cupertino office
and were permitted to cancel the lease without penalty.

In June 2000, Eric McAfee resigned as Executive Vice President.
Concurrently, we canceled his employment contract and entered into a consulting
contract under which he will be paid $265,000 per year through September 30,
2002.

On June 30, 2000, Thomas Blakeley resigned as Chief Executive Officer.
Concurrently, we canceled his employment contract and entered into a consulting
contract under which he will be paid $285,000 per year through September 30,
2002.

MARKET FOR COMMON STOCK

The principal United States market for our common stock is the OTC Bulletin
Board. Our common stock began trading on the OTC Bulletin Board on April 29,
1999. The high and low bid prices for shares of our common stock for each
quarter since April 29, 1999 were as follows:

<TABLE>
<CAPTION>
Low High
--- ----
<S> <C> <C>
Quarter ended June 30, 1999................................. 6 1/2 16
Quarter ended September 30, 1999............................ 7 10
Quarter ended December 31, 1999............................. 7 1/8 29 1/8
Quarter ended March 31, 2000................................ 18 7/8 55
Quarter ended June 30, 2000................................. 6 40 15/16
Quarter ending September 30, 2000*.......................... 4 7 1/32
</TABLE>
--------
* through August 9, 2000

Source: www.otcbb.com

These quotations represent inter-dealer prices, without retail mark-up,
markdown or commission, and may not represent actual transactions. On July 31,
2000, there were approximately 2,300 holders of record of our common stock and
200 holders of record of our preferred stock.

35
<PAGE>

SIGNIFICANT STOCKHOLDERS

The following sets forth certain information as of August 4, 2000 (the
"Reference Date") with respect to the beneficial ownership of our common stock,
(i) by each person known by us to own beneficially more than five percent of
our common or preferred stock, (ii) by each executive officer and director, and
(iii) by all officers and directors as a group. Unless otherwise indicated, all
persons have sole voting and investment powers over such shares, subject to
community property laws. As of the Reference Date, there were 10,139,651 shares
of common stock and 1,513,073 shares of Series B and 725,775 shares of Series C
preferred stock outstanding.

Common Stock:

<TABLE>
<CAPTION>
Number of Percent
Name and Address of Owner(1) Shares(2) of Class
---------------------------- --------- --------
<S> <C> <C>
Thomas J. Blakeley, Co-Chairman(3)..................... 1,925,000 19.0%

Eric A. McAfee, Co-Chairman(3)......................... 1,939,767 19.1

Robert I. Webber, President, CEO, Director............. 26,000 0.3

John Troiano, Director(3)(4)........................... 549,500 5.1
c/o @ONEX LLC, 712 Fifth Avenue, 40th Floor, New York,
NY 10019

Joel Schoenfeld, Director.............................. 4,713 0.0

Michael R. Friedl, CFO, Treasurer(5)................... 69,166 0.7

Mark Grundy, President-Travel & Leisure Division(6).... 481,816 4.6

All directors and executive officers taken as a
group(7).............................................. 4,893,278 45.0

Clyde Berg............................................. 920,333 9.1
10050 Bandley Drive, Cupertino, CA 95014
</TABLE>

Series B Preferred:

<TABLE>
<CAPTION>
Number of Percent
Name and Address of Owner Shares(2) of Class
------------------------- --------- --------
<S> <C> <C>
John Troiano, Director(3)(4)............................ 265,000 17.5%
c/o @ONEX LLC, 712 Fifth Avenue, 40th Floor, New York,
NY 10019

Alignment Capital Management, LLC....................... 125,000 8.3
One American Center, 600 Congress Ave., Suite 200,
Austin, TX 78701

Joel Schoenfeld, Director............................... 3,375 0.2

All directors and executive officers taken as a group... 272,375 18.0
</TABLE>

36
<PAGE>

Series C Preferred:

<TABLE>
<CAPTION>
Number Percent
Name and Address of Owner of Shares(2) of Class
------------------------- ------------ --------
<S> <C> <C>
Privet Row, LP(8)..................................... 180,000 24.8%
950 Mo Pac Expressway, Barton Oaks Plaza, Suite 100,
Austin, TX 78746

Highline Capital(9)................................... 100,000 13.8
1270 Avenue of the Americas, 12th Floor, Rockerfeller
Center, New York, NY 10020

Alignment Capital Management, LLC..................... 80,000 11.0
One American Center, 600 Congress Ave., Suite 200,
Austin, TX 78701

PSInet, Inc........................................... 80,000 11.0
4400 Post Oak Parkway, Suite 1100, Houston, TX 77027-
3413

Point West Ventures................................... 60,000 8.3
1700 Montgomery, Suite 250, San Francisco, CA 94111

International Network Group........................... 52,000 7.2
1279 Lake Worth Lane, N. Palm Beach, FL 33408

Gabelli Asset Management, Inc.(10).................... 40,000 5.5
One Corporate Center, Rye, NY 10580

Kevin & Ulla Parker................................... 40,000 5.5
941 Park Ave, New York, NY 10028

All directors and executive officers taken as a
group................................................ 6,000 0.8
</TABLE>
--------
(1) Except as otherwise noted, the address for each person is c/o MindArrow
Systems, Inc., 101 Enterprise, Suite 340, Aliso Viejo, CA 92656.

(2) Unless otherwise noted, we believe that all persons named in the table have
sole voting and investment power with respect to all shares of common stock
listed as beneficially owned by them. A person is deemed to be the
beneficial holder of securities that can be acquired within 60 days from
the Reference Date upon the exercise of warrants or options. Each
beneficial owner's percentage ownership is determined by including shares,
underlying options or warrants which are exercisable currently, or within
60 days following the Reference Date, and excluding shares underlying
options and warrants held by any other person.

(3) Thomas J. Blakeley, Eric A. McAfee, @Onex, LLC, and the Company have
entered into a "Tag Along Agreement" dated as of September 30, 1999.
Pursuant to the Tag Along Agreement, Blakeley and McAfee agreed not to sell
any of their shares to any unrelated third-party unless they first notified
@Onex in writing of the proposed sale and what percentage of their shares
they proposed to sell. @Onex would then have 15 days to decide whether to
participate in the sale to that same purchaser in the same proportional
amount. The Tag Along Agreement will terminate when a founder no longer
holds any shares or when @Onex holds less than 100,000 shares.

(4) 276,500 of these shares result from warrants that are exercisable within 60
days. Mr. Troiano is the managing director of @ONEX LLC. @ONEX LLC, the
beneficial owner of 525,000 shares, is wholly-owned by Onex Corporation.
Mr. Gerald W. Schwartz is the Chief Executive Officer of Onex Corporation
and owns stock having a majority of the voting power of Onex Corporation's
outstanding stock. Onex Corporation and Mr. Schwartz may also be deemed
beneficial owners of the shares owned by @ONEX LLC. The business address of
Onex Corporation and Mr. Schwartz is 161 Bay Street, Toronto, Ontario M5J
2S1, Canada.

(5) All of these shares result from options that are exercisable within 60
days.

(6) Mr. Grundy was COO, EVP and a Director as of September 30, 1999. 275,000 of
these shares result from options that are exercisable within 60 days.

(7) 461,498 of these shares result from options that are exercisable within 60
days.

(8) 80,000 of these shares are beneficially owned by Privet MindArrow Partners.

(9) 30,000 of these shares are beneficially owned by Highline Capital
International.

(10) 34,000 of these shares are beneficially owned by the Gabelli Global Growth
Fund, and 6,000 shares are beneficially owned by the Gabelli Mighty Mites
Fund.

37
<PAGE>

SELLING SECURITY HOLDERS

The stockholders who may from time to time offer their shares for sale
pursuant to this prospectus are as follows:

<TABLE>
<CAPTION>
Shares Owned
Prior to Shares Being Shares Owned
this Offered Pursuant After the
Name of Selling Stockholder(1) Offering(2) to this Prospectus Offering(3)
------------------------------ ------------ ------------------ ------------
<S> <C> <C> <C>
@ONEX LLC(4)..................... 525,000 525,000 --
Alfred Abiouness................. 11,000 11,000 --
Ari Adelberg..................... 26 26 --
Richard Aghababian............... 6,188 6,188 --
Altech Packaging Co.............. 3,300 3,300 --
Alignment Captial(5) ............ 137,500 137,500 --
America First Associates Corp. .. 1,875 1,875 --
American High Growth Equities
Retirement Trust................ 18,563 18,563 --
Francis Anderson................. 2,614 2,614 --
Arch Group International......... 45,000 45,000 --
Barclay M. Armitage.............. 3,713 3,713 --
William Barclay Trust............ 4,950 4,950 --
Barrington Barisic............... 1,444 1,444 --
Darin Barker..................... 2,062 2,062 --
Linda Bassin..................... 3,300 3,300 --
Steve Bauman..................... 8,334 8,334 --
Alan Beinhacker.................. 412 412 --
Melissa Belyski.................. 500 500 --
Jerome & Stuart Bercun........... 2,475 2,475 --
Valery Berger.................... 13,750 13,750 --
Bill Berkley..................... 4,950 4,950 --
Bill & Claudia Berkley........... 6,188 6,188 --
Paul D. Berkley.................. 2,475 2,475 --
Paul & Judith Berkman............ 6,188 6,188 --
David Berzon..................... 259 259 --
Morris Berzon.................... 2,852 2,852 --
Gregory Beyerl................... 6,188 6,188 --
Edwin R. Bindseil................ 4,400 4,400 --
Kostaki Bis...................... 3,713 3,713 --
George Bisnoff................... 2,363 2,363 --
BNB Associates c/o Ben Bollag.... 6,875 6,875 --
Michael Bollag................... 6,875 6,875 --
Richard Bowe..................... 3,300 3,300 --
Steven Braccini.................. 12,375 12,375 --
Christopher Brothers............. 2,062 2,062 --
Alan & Cathy Buraghi............. 1,238 1,238 --
Ronald Buzard.................... 2,200 2,200 --
B V H Holdings c/o Ronald
Krinick......................... 4,400 4,400 --
John Byram....................... 34,375 34,375 --
Sean Cahill...................... 5,500 5,500 --
Capitol Bay Securities........... 722 722 --
Car Cap, Co, LLC c/o Richard
Carney.......................... 11,413 11,413 --
James Carr....................... 3,300 3,300 --
Addie B. Carroll................. 1,856 1,856 --
Susan Carroll.................... 1,375 1,375 --
</TABLE>

38
<PAGE>

<TABLE>
<CAPTION>
Shares Owned
Prior to Shares Being Shares Owned
this Offered Pursuant After the
Name of Selling Stockholder(1) Offering(2) to this Prospectus Offering(3)
------------------------------ ------------ ------------------ ------------
<S> <C> <C> <C>
Richard Casari................... 2,475 2,475 --
Francis Cheong................... 1,238 1,238 --
Timothy & Nadine Cherney......... 2,475 2,475 --
Robert & Phyllis Ching........... 3,988 3,988 --
Robert Ching Trust............... 4,125 4,125 --
Raymond & Ellen Chow............. 4,950 4,950 --
Steven Churchill................. 778 778 --
James & Caren Cobb............... 22,000 22,000 --
Marc Cohen....................... 1,650 1,650 --
Del Coleman (Rose Inc.).......... 42,350 42,350 --
Thomas C. Coleman & Donna K.
Norell.......................... 2,200 2,200 --
Tom Coleman IRA.................. 6,875 6,875 --
James F. Corcoran................ 9,900 9,900 --
Edmund Cranch.................... 6,600 6,600 --
Robert W. Crawford............... 3,713 3,713 --
Jonathan Cress IRA............... 3,300 3,300 --
Scott Crowther................... 3,300 3,300 --
Brad Danforth.................... 2,475 2,475 --
Paul De Groot.................... 8,000 8,000 --
Harvey Deckert................... 6,188 6,188 --
Daniel Denihan................... 9,900 9,900 --
Albert Digangi................... 2,475 2,475 --
David B. Doft.................... 2,750 2,750 --
Jacob Doft....................... 5,500 5,500 --
John P. Donohue.................. 7,425 7,425 --
Paul Dorfman..................... 1,378 1,378 --
Yakov Dumanis.................... 3,300 3,300 --
Glenn & Dorothy Egli............. 2,475 2,475 --
Christopher C. Ertz.............. 8,334 8,334 --
Paul Eshelby..................... 3,600 3,600 --
Clifford A. & Helen Falkenau..... 2,200 2,200 --
Tim Farrell...................... 2,475 2,475 --
Aaron Feder...................... 1,856 1,856 --
Dale S. Feinblatt & Jack
Feinblatt....................... 4,400 4,400 --
Xiao Feng........................ 1,575 1,575 --
Michael Fenton................... 20,950 20,950 --
Lloyd Fields..................... 3,713 3,713 --
Kevin Fight...................... 9,281 9,281 --
Michael Finnell.................. 3,438 3,438 --
Jacob & Elizabeth Fish........... 4,813 4,813 --
D. A. Fleming.................... 800 800 --
Fred Foulkes..................... 2,475 2,475 --
Brian Frank...................... 141 141 --
Matthew Frank.................... 2,200 2,200 --
Henry Fredericks................. 11,000 11,000 --
Phil Fresen...................... 2,063 2,063 --
Stanley Friedlander.............. 3,300 3,300 --
Keith Gaeddert................... 3,713 3,713 --
Tim Gannon....................... 2,475 2,475 --
</TABLE>

39
<PAGE>

<TABLE>
<CAPTION>
Shares Owned
Prior to Shares Being Shares Owned
this Offered Pursuant After the
Name of Selling Stockholder(1) Offering(2) to this Prospectus Offering(3)
------------------------------ ------------ ------------------ ------------
<S> <C> <C> <C>
Robert Ganz(6)................... 100,000 100,000 --
Theodore Gardocki Trust.......... 13,338 13,338 --
Kent Garlinghouse c/o Shadow
Capital......................... 8,800 8,800 --
Mark Geller...................... 2,475 2,475 --
Richard E. Gerzof................ 37,125 37,125 --
Ray Glover....................... 3,200 3,200 --
Elliot Goldberg.................. 2,475 2,475 --
Stanley Goldberg................. 11,000 11,000 --
Steven Graves.................... 6,188 6,188 --
Sean Green....................... 3,713 3,713 --
Paul & Linda Gridley............. 3,438 3,438 --
Mark Grundy(7)................... 106,523 106,523 --
Adam Guetz....................... 39 39 --
Bill Guetz....................... 7,247 7,247 --
Martin P. Hanly.................. 30,000 30,000 --
Zachary Walker Hanson............ 5,000 5,000 --
Jordan Taylor Hanson............. 5,000 5,000 --
Clarke Isaac Hanson.............. 5,000 5,000 --
John Hatsopoulos................. 1,091 1,091 --
Lawrence S. and Barbara Heller... 4,259 4,259 --
R.G. Hildreth Jr. ............... 2,750 2,750 --
Daryl & Joan Hill................ 5,500 5,500 --
David Hodkinson.................. 2,000 2,000 --
Douglas & Alexis Hogue........... 3,300 3,300 --
Andrew Howard.................... 1,238 1,238 --
Donald R. Howren, Jr. ........... 4,400 4,400 --
Roger Husted..................... 6,188 6,188 --
Intellectual Partners............ 22,050 22,050 --
David Ivers...................... 4,950 4,950 --
JAOR c/o James Jacobs............ 5,500 5,500 --
Art Jenkins...................... 3,300 3,300 --
Colleen Jenkins.................. 1,100 1,100 --
Art Jones........................ 43 43 --
Irwin & Ruth Kabat............... 1,320 1,320 --
Leo G. & Merle Kailas............ 3,300 3,300 --
Robert Kantor.................... 12,375 12,375 --
Peter Kasik...................... 52 52 --
Gerald Kay....................... 2,200 2,200 --
Frances Kehoe.................... 600 600 --
Peter Kellner.................... 13,750 13,750 --
Jerry Kessler.................... 1,650 1,650 --
Raji Khabbaz..................... 1,650 1,650 --
Norman O. King................... 3,300 3,300 --
Aaron Kirzner.................... 2,200 2,200 --
Harvey Kohn...................... 16,500 16,500 --
Helen Kohn....................... 89,016 89,016 --
Jeffrey Kohn..................... 2,200 2,200 --
Michael Kohn..................... 1,562 1,562 --
Stuart Kohn...................... 1,563 1,563 --
</TABLE>

40
<PAGE>

<TABLE>
<CAPTION>
Shares Owned
Prior to Shares Being Shares Owned
Name of Selling this Offered Pursuant After the
Stockholder(1) Offering(2) to this Prospectus Offering(3)
--------------- ------------ ------------------ ------------
<S> <C> <C> <C>
Leonard Korets.......... 7,700 7,700 --
Lyudmila Korets......... 2,475 2,475 --
Walter Koschak.......... 6,875 6,875 --
Raymond Kralovic........ 11,000 11,000 --
Ronald & Elizabeth
Krinick................ 3,300 3,300 --
David & Catherine
Langlois............... 5,500 5,500 --
Curtis Lanning.......... 3,750 3,750 --
Barbara Lazarus......... 1,856 1,856 --
Alex Lee................ 5,250 5,250 --
Eddie E. Lee............ 11,000 11,000 --
Sam Lias................ 26 26 --
Michael Limberg......... 5,500 5,500 --
Jamo Lo................. 52,500 52,500 --
William Locke........... 65 65 --
Andy Lovsted............ 52 52 --
Morris Macy............. 3,713 3,713 --
Martin Madorsky & Judith
Richard................ 6,188 6,188 --
Dante & Jeanine Maffeo.. 1,238 1,238 --
Tom Manz................ 10,000 10,000 --
Judy Marcucilli......... 3,300 3,300 --
Robert Margolin......... 2,063 2,063 --
James A. Martens........ 9,900 9,900 --
Lewis Mason............. 20,950 20,950 --
Raina Massand........... 1,650 1,650 --
Robert Mattei........... 1,238 1,238 --
Adam McAfee(8).......... 28,050 28,050 --
George McDonnell........ 3,713 3,713 --
John McMains............ 5,000 5,000 --
John McNierney.......... 3,713 3,713 --
Chris Meiklejohn........ 9,600 9,600 --
Aris Melissarratos...... 6,188 6,188 --
James Milgard........... 13,613 13,613 --
Allen Moore............. 4,400 4,400 --
Stuart Morrice.......... 2,500 2,500 --
Samuel Morse............ 3,300 3,300 --
Dave Mosenson........... 2,888 2,888 --
Peter Moser............. 11,000 11,000 --
Nancy Murdocco.......... 600 600 --
Robert & Barbara
Myerson................ 3,713 3,713 --
Namax Corp.............. 25,000 25,000 --
Irl Nathan.............. 25,000 25,000 --
Barry F. Nathanson...... 12,375 12,375 --
Jules Ness.............. 2,475 2,475 --
Allen Notowitz.......... 3,713 3,713 --
Jerry Novack............ 4,400 4,400 --
Adam & Sherri Ocner..... 9,625 9,625 --
Elizabeth Olander....... 1,000 1,000 --
Jeffrey R. Olander...... 30,000 30,000 --
Peter O'Neill........... 2,564 2,564 --
</TABLE>

41
<PAGE>

<TABLE>
<CAPTION>
Shares Owned
Prior to Shares Being Shares Owned
this Offered Pursuant After the
Name of Selling Stockholder(1) Offering(2) to this Prospectus Offering(3)
------------------------------ ------------ ------------------ ------------
<S> <C> <C> <C>
Peter & Rosemary O'Neill......... 11,000 11,000 --
Walter O'Neill................... 3,713 3,713 --
Bertram Ordan.................... 1,238 1,238 --
KarenAnn Orlando................. 600 600 --
Katy Ott......................... 26 26 --
Anthony Pasco.................... 688 688 --
Simon & Adina Pelman............. 3,713 3,713 --
Robert Petersen.................. 39 39 --
Jonathan Plate................... 3,713 3,713 --
Gabriel Plaut.................... 127 127 --
Donald Poinsette................. 3,713 3,713 --
Point West Ventures.............. 34,375 34,375 --
Paul Potamianos.................. 6,600 6,600 --
John & Norma Price............... 2,200 2,200 --
Privet Row, Inc.................. 34,375 34,375 --
Sheldon Rabin.................... 9,213 9,213 --
Sol Rabinipour................... 5,500 5,500 --
Edward Raskin.................... 11,000 11,000 --
David Raven...................... 37 37 --
Marsha & Barry Reiss............. 2,200 2,200 --
Stacey Richards.................. 1,650 1,650 --
Edwin W. Richardson.............. 3,300 3,300 --
Kevin Riegelsberger.............. 6,875 6,875 --
Ed Roberts....................... 5,000 5,000 --
Margaret Rogers.................. 13,750 13,750 --
Romar Fabrics Corp............... 3,300 3,300 --
John Rose........................ 6,875 6,875 --
David Rosensaft & Debra
Braverman....................... 22,000 22,000 --
Steven Rubel..................... 6,188 6,188 --
Pairoj Ruktanonichai............. 6,188 6,188 --
Richard Santulli c/o Executive
Jet............................. 11,000 11,000 --
David Schneider.................. 3,713 3,713 --
Thomas Schoenauer................ 2,475 2,475 --
Joel Schoenfeld.................. 3,713 3,713 --
Howard Shapiro................... 2,475 2,475 --
James Shen....................... 2,593 2,593 --
Michael L. Shinn................. 6,188 6,188 --
Alexander Slobin................. 3,300 3,300 --
Glenn H. Spears.................. 12,375 12,375 --
Jerold Stern..................... 13,200 13,200 --
Cindy Stewart.................... 16,775 16,775 --
Joseph & Sandra Stewart.......... 3,713 3,713 --
Melissa Stewart.................. 16,775 16,775 --
Sandra Stewart................... 3,438 3,438 --
Ronit Sucoff..................... 92,141 92,141 --
Iris Sultan...................... 325 325 --
Ronald Sumner.................... 4,400 4,400 --
Brad Syth & Michele Syth JT Ten.. 130 130 --
David J. Tadych.................. 3,300 3,300 --
Trude Taylor..................... 6,875 6,875 --
</TABLE>

42
<PAGE>

(2) The Shares listed herein include only the shares issuable upon conversion
of the Series B convertible preferred stock and upon exercise of the Series
B warrants and options, and common stock issued in a prior private
placement.

(3) Assumes all of the Shares of common stock beneficially owned by the selling
stockholders and registered hereunder are sold.

(4) Prior to this offering, @ONEX LLC beneficially owns 5.2% of our outstanding
common stock. John Troiano, a managing director @ONEX LLC, is a member of
our board of directors.

(5) Prior to this offering, Alignment Capital beneficially owns 1.3% of our
outstanding common stock.

(6) Prior to this offering, Robert Ganz beneficially owns 1% of our outstanding
common stock.

(7) Prior to this offering, Mark Grundy beneficially owns 2.0% of our
outstanding common stock.

(8) Adam McAfee is a brother of Eric McAfee, a director and significant
stockholder.

(9) Prior to this offering, Adrian F. Turcotte, III and Susan Berzon Turcotte,
together beneficially own 5.7% of our outstanding common stock.

43
<PAGE>

DESCRIPTION OF SECURITIES

We are authorized to issue up to 30,000,000 shares of common stock, par
value $.001 per share, and 10,000,000 shares of preferred stock, par value
$.001 per share. We have designated 1,750,000 shares as Series B preferred
stock and 3 million shares as Series C preferred stock. As of August 4, 2000,
there were issued and outstanding 10,139,651 shares of common stock, 1,513,073
shares of Series B preferred stock, 725,775 shares of Series C preferred stock,
options to purchase 1,980,332 shares of common stock and warrants to purchase
1,978,797 shares of common stock.

Common Stock

Common stockholders are entitled to one vote per share. Subject to the
preferences of outstanding preferred stock, common stockholders are entitled to
receive dividends, if and when they are declared by our Board of Directors. If
we go out of business and are liquidated, common stockholders will receive
their proportionate share of our assets that are available to be distributed,
after all other debts have been paid and the preferred stockholders receive
their distribution. The common shares have no preemptive, subscription or
conversion rights nor may we redeem them.

Series A Preferred Stock

All shares of Series A preferred stock issued by our predecessor, Wireless
Netcom, were converted into shares of common stock upon the merger with
eCommercial California.

Series B and Series C Preferred Stock

The following is a brief summary of the rights, preferences, privileges and
restrictions and limitations of the Series B and Series C preferred stock (the
"Series B and Series C preferred") as more completely set forth in the
respective Certificates of Designation of the Company:

Dividends. Dividends will be payable with respect to the holders of Series B
and Series C preferred when and if declared by our Board of Directors and will
be non-cumulative. No dividends (other than those payable solely in common
stock) will be declared or paid with respect to shares of common stock for any
fiscal year until dividends in the aggregate amount of at least $0.90 and $2.25
per share, respectively, (as adjusted for any stock splits or
recapitalizations) have been paid or declared and set apart with respect to the
Series B and Series C preferred during such fiscal year.

Optional Conversion. The shares of Series B and Series C preferred held by
any holder may be converted into shares of common stock at any time upon the
stockholder's election. The total number of shares of common stock into which a
share of Series B and Series C preferred may be converted shall be determined
by dividing the purchase price by the conversion price applicable to the
conversion of the Series B and Series C preferred (the "Conversion Price"). The
Conversion Price for the Series B preferred is currently equal to the purchase
price, resulting in a conversion ratio of one-to-one, and the Conversion Price
for the Series C is equal to half the purchase price, resulting in a conversion
ratio of one-to-two. See discussion below, "Amendment of Series C Conversion
Price." However, the Conversion Price for both the Series B and Series C
preferred will be adjusted in the event of stock splits, stock dividends,
recapitalizations and similar events occurring with respect to our capital
stock. The Conversion Price will also be subject to adjustment in the event of
issuances of common stock, or securities convertible into common stock, at less
than the Conversion Price, as discussed in more detail below under
"Antidilution Protection."

Amendment of Series C Conversion Price. In response to a decline in the
market price of our common stock following the issuance of the Series C
preferred, in August 2000 we reduced the Conversion Price of the Series C
preferred from $25 to $12.50 per share. In consideration for such reduction of
the Conversion Price, holders of our Series C preferred stock executed a
general release of all claims. Although the Series C shareholders executed a
general release, no actual claims have been asserted against us, and we do not
believe

44
<PAGE>

that any claims released have merit or that we have any liability with respect
to the Series C offering. The amendment of the Series C Conversion Price became
effective upon the filing of an amendment to the Series C Certificate of
Designation with the Delaware Secretary of State, which required the
affirmative vote of a majority of outstanding stock.

Automatic Conversion. The shares of Series B preferred will be automatically
converted into shares of common stock at the then-effective Conversion Price
upon:

. the effective date of a firm commitment, underwritten offering of common
stock pursuant to an effective registration statement under the
Securities Act, other than a registration relating solely to a
transaction under Rule 145 of the Securities Act (or any successor
thereto) or to any of our employee benefit plans, generating aggregate
proceeds to the Company of not less than $15,000,000 (after deducting
underwriters' discounts and all expenses relating to the offering) and
with a per share offering price (prior to underwriters' discounts and
expenses) of not less than $15.00 per share, as such per share price may
be adjusted to reflect stock subdivisions, combinations or dividends
with respect to such shares; or

. the date specified by affirmative vote or written consent or agreement
of the holders of not less than two-thirds of the then-outstanding
shares of Series B preferred.

The shares of Series C preferred will be automatically converted into shares
of Common Stock at the then-effective Conversion Price upon:

. the effective date of a firm commitment, underwritten offering of Common
Stock pursuant to an effective registration statement under the
Securities Act, other than a registration relating solely to a
transaction under Rule 145 of the Securities Act (or any successor
thereto) or to any employee benefit plan of the Company, generating
aggregate proceeds to the Company of not less than $25,000,000 (after
deducting underwriters' discounts and expenses) of not less than $40.00
per share, as such per share price may be adjusted to reflect stock
subdivisions, combinations or dividends with respect to such shares; or

. the date specified by affirmative vote or written consent or agreement
of the holder of not less than two-thirds of the then-outstanding shares
of Series C preferred.

Antidilution Protection. If, while any Series B or Series C preferred shares
are outstanding, the Company issues any common stock or securities convertible
into common stock for a price that is less than the Conversion Price of either
the Series B or Series C preferred shares at that time (currently $8 and $12.50
per share, respectively), then the Conversion Price of the Series B and Series
C preferred shares shall be adjusted downward. The amount by which the
respective Conversion Prices will be adjusted downward depends upon how many
securities are subsequently issued at below the respective Conversion Prices,
and how far below those Conversion Prices those additional securities are
issued: the more securities issued, and the lower the price at which they are
issued, the greater downward adjustment will be made in the respective
Conversion Prices. Specifically, the adjusted Conversion Price will be
determined by multiplying the existing Conversion Price by a fraction, the
numerator of which shall be the total number of shares outstanding on a fully
diluted basis, plus the total number of additional shares that could be
purchased at the Conversion Price with the aggregate consideration paid for the
additional shares, and the denominator of which shall be the total number of
shares outstanding on a fully diluted basis, plus the number of additional
shares of common stock so issued.

For example, if the Company in the future were to issue 1 million additional
shares at $10 per share, and 10 million shares were then outstanding on a fully
diluted basis, no adjustment would be made to the Series B Conversion Price
since the new share price of $10 exceeds the $8 Conversion Price for the Series
B shares, and the adjustment to the Series C Conversion Price would be
calculated as follows: $12.50 x (10,000,000 + ($10,000,000/$12.50) / 10,000,000
+ 1,000,000) = $12.50 x .98 = $12.25.

45
<PAGE>

No such adjustment to the respective Conversion Price shall be made with
respect to:

. issuances to our employees, consultants, officers and directors pursuant
to stock purchase or stock option plans or agreements or other incentive
stock arrangements approved by our Board of Directors;

. issuances as consideration in connection with mergers, acquisitions or
other business combinations; or

. issuances in connection with strategic investments, licensing
arrangements or debt or equipment financings approved by our Board of
Directors.

Voting Rights. Holders of shares of Series B and Series C preferred are
entitled to vote on all matters submitted to a vote of our stockholders. Each
share of Series B and Series C preferred entitles the holder to that number of
votes equal to the number of shares of common stock into which such share of
Series B and Series C preferred is convertible as of the record date
established for the vote of our stockholders. Fractional votes will not,
however, be permitted, and any fractional voting rights resulting from the
above formula (after aggregating all shares of Common Stock into which shares
of Series B and Series C preferred held by each holder could be converted) will
be rounded to the nearest whole number (with one-half being rounded upward).
Except with respect to the seat on the Board of Directors allocated to the
purchasers of the Series B preferred or as required by law, the Series B
preferred will vote together with the common stock and not as a separate class.
Except with respect to the two seats on the Board of Directors allocated to the
purchasers of the Series C preferred or as required by law, the Series C
preferred will vote together with the common stock and not as a separate class.

Board Seats. The Company's Certificates of Designation provides for a Board
of Directors that consists of a minimum of three and up to seven members.
Promptly following the Offering Termination Date, the holders of the Series B
preferred will be entitled to elect one person to serve on the Company's Board
of Directors, and holders of the Series C preferred will be entitled to elect
two persons to serve on the Company's Board of Directors, upon the terms and
conditions set forth in the Investors' Rights Agreement that is to be entered
into between the Company and the purchasers of the Securities and that is a
part of the Subscription Booklet.

Protective Covenants. So long as shares of Series B and Series C preferred
remain outstanding and for such further period as may be required by law, we
will not, without first obtaining the affirmative vote or written consent of
the holders of at least a majority of the then outstanding Series B and Series
C preferred voting separately as a class:

. sell, convey or otherwise dispose of all or substantially all of our
assets, merge with or consolidate the Company into another entity, or
engage in any other form of corporate reorganization or recapitalization
that would require the vote of our shareholders under applicable law;

. increase the number of authorized shares of Series B and Series C
preferred (except as a result of a stock split or combination);

. effect an exchange, reclassification or cancellation of all or a part of
the shares of Series B and Series C preferred (except as a result of a
stock split or combination);

. effect an exchange, or create a right of exchange, of all or part of the
shares of another class into shares of Series B and Series C preferred;

. alter or change the rights, preferences, privileges and restrictions of
the Series B and Series C preferred;

. authorize or issue shares of any class of stock having any rights,
preferences or privileges superior to any such right, preference or
privilege of the Series B and Series C preferred;

. authorize or issue shares of stock of any class or any bonds,
debentures, notes or other obligations convertible or exchangeable for,
or having option rights to purchase, any shares of our stock having any
rights, preferences or privileges superior to any right, preference or
privilege of the Series B and Series C preferred; or

46
<PAGE>

. reclassify any other outstanding shares of stock into shares having any
right, preference or privilege superior to any such preference or
priority of the Series B and Series C preferred.

Stock Dividends, Subdivisions and Consolidations. In the event we declare or
pay any dividend on the common stock payable in shares of common stock, or
effect a subdivision or consolidation of the outstanding shares of common stock
into a greater or lesser number of shares of common stock, then the number of
shares of common stock issuable upon conversion of the Series B and Series C
preferred shall be adjusted accordingly.

Notices of Record Date. In the event that the Company shall propose at any
time to:

. declare any dividend or distribution upon the Common Stock other than
the distributions to shareholders in connection with the repurchase of
shares of former employees or consultants to which at least a majority
of the holders of Series B and Series C preferred have consented;

. to offer for subscription to the holders of any class or series of its
capital stock any additional shares of stock of any class or series or
any other rights;

. to effect any reclassification or recapitalization; or

. to merge or consolidate with or into any other corporation, or sell,
lease or convey all or substantially all its property or business, or to
liquidate, dissolve or wind up; then the Company will send to the
holders of the Series B and Series C preferred, at least ten days prior
written notice of the date on which a record shall be taken for such
dividend, distribution, or subscription rights and on which such even
shall take place.

No Impairment. We will not, by amendment of the Certificate of Designation
or through any reorganization, transfer of assets, consolidation, merger,
dissolution, issuance or sale of securities or any other voluntary action,
avoid or seek to avoid the observance or performance of any of the terms to be
observed or performed by us with respect to the Series B and Series C preferred
but will at all times in good faith assist in the carrying out of all the
provisions of the Certificate of Designation relating to conversion and in the
taking of all such action as may be necessary or appropriate in order to
protect the conversion rights of the holders of the Series B preferred and
Series C preferred against impairment.

Redemption. Shares of Series B and Series C preferred are not redeemable by
us.

Liquidation Preference. In the event of any liquidation, dissolution or
winding up of the Company for an aggregate value of less than $40.00 per share,
either voluntary or involuntary, the holders of the Series B and Series C
preferred shall be entitled to receive, prior and in preference to any
distribution to the holders of the common stock, the amount of $8.00 and
$25.00, respectively, per share (or as such amount shall be adjusted to reflect
subdivisions and combinations of shares and stock dividends) for each share of
Series B and Series C preferred then held by them plus an amount equal to all
accrued and unpaid dividends (the "Liquidation Amount"). If upon occurrence of
any such liquidation, dissolution or winding up the assets and funds available
for distribution among the holders of the Series B and Series C preferred shall
be insufficient to permit the payment of the full Liquidation Amount, then such
assets and funds shall be distributed ratably among the holders of the Series B
preferred in proportion to their respective holdings of Series B and Series C
preferred. After full payment of the Liquidation Amount has been made to the
holders of the Series B and Series C preferred, the remaining assets of the
Company, if any, shall be distributed ratably among the holders of the common
stock.

A liquidation, dissolution or winding up of the Company shall be deemed to
be occasioned by, or to include, a consolidation, merger or reorganization of
the Company with or into any other corporation or entity in which the holders
of our outstanding capital stock immediately before that consolidation, merger
or reorganization do not retain a majority of the voting power in the surviving
corporation immediately thereafter, or a sale, conveyance or disposition of all
or substantially all of our assets.

47
<PAGE>

Registration Rights. Subject to certain restrictions set forth in the
Investors' Rights Agreement, if at any time after the Offering Termination Date
the Company files a registration statement, other than a registration solely to
a corporate reorganization or other transaction on Form S-4 (or any successor
thereto) or to any employee benefit plan of the Company or a registration on
any registration form that does not permit secondary sales, with the
Commission, the holder of the Shares and the holders of Registrable Securities
will be entitled to include any of the Registrable Securities held by such
persons in such registration up to a maximum of three such "piggy-back"
registrations and no more than one such registration in any twelve-month
period. In the event that any of such registrations are underwritten, the
number of shares of Registrable Securities that the holders thereof may include
in such a piggyback registration may be reduced in the underwriters of such
registration determine that market factors require such a reduction.

Subject to certain restrictions set forth in the Investors' Rights
Agreement, at any time after the expiration of one year following the closing
of the initial underwritten offering of our common stock, the holders of
Registrable Securities will be entitled to request that we file a registration
statement on Form S-3 with the Commission covering the shares of Registrable
Securities held by such holders, provided that the aggregate amount of
Registrable Securities to be registered on such Form S-3 shall have an
aggregate price to the public of not less than $1,000,000. In the event that
any of such registrations are underwritten, the number of shares of Registrable
Securities that the holders thereof may include in such a Form S-3 registration
may be reduced if the underwriters of such registration determine that market
factors require such a reduction.

In the event that all Registrable Securities are not sold in our
underwritten offering, the holders of Registrable Securities not sold may be
required to execute "lock-up" agreements pursuant to which they will agree not
to transfer or otherwise dispose of any Registrable Securities for a period of
up to 180 days from the date of commencement of such underwritten offering
without the prior written consent of the managing underwriter of such offering.

Warrants

We have outstanding warrants to purchase common stock prices ranging from $5
to $30 per share, expiring at various dates through October 2004. The warrants
for shares registered under this Registration Statement include warrants for
396,941 shares issuable at $8 per share expiring at various dates from
August 2001 through March 2002, 250,000 shares issuable at $7 per share
expiring in October 2004, and 15,000 shares issuable at $11.25 per share
expiring in 2001.

Shares Eligible for Sale

Sales of a substantial number of shares of common stock in the public market
could adversely affect the market price for our common stock. The number of
shares of common stock available for sale in the public market is limited by
restrictions under the Securities Act of 1933, as amended (the "Securities
Act"). As of July 31, 2000, there were 10,139,651 shares of common stock
outstanding, of which 6,354,177 were "restricted shares" under the Securities
Act and 3,785,474 were freely tradable subject to the restrictions and
conditions of SEC Rule 144. In addition, as of August 4, 2000, there were
outstanding warrants to purchase 1,978,797 shares of our common stock and
options to purchase 1,980,332 shares of our common stock.

Transfer Agent and Registrar

The transfer agent and registrar for our common stock is RTT Transfers, Inc.

LEGAL MATTERS

The validity of the issuance of our securities will be passed upon for us by
Gray Cary Ware & Freidenrich, LLP, Sacramento, California. Certain partners of
Gray Cary Ware & Freidenrich, LLP own an aggregate of 1,500 shares of our
stock.

48
<PAGE>

EXPERTS

The financial statements of MindArrow Systems, Inc. appearing in this
prospectus have been audited by Grant Thornton LLP, independent certified
public accountants, to the extent and for the periods set forth in their report
appearing elsewhere herein, and are included in reliance upon such report given
upon the authority of said firm as experts in accounting and auditing.

The financial statements of Fusionactive.com Limited appearing in this
prospectus have been audited by Grant Thornton, Hong Kong, independent
certified public accountants, to the extent and for the periods set forth in
their report appearing elsewhere herein, and are included in reliance upon such
report given upon the authority of said firm as experts in accounting and
auditing.

WHERE YOU CAN FIND MORE INFORMATION

We have filed, with the Securities and Exchange Commission, a registration
statement on Form S-1 under the Securities Act with respect to the common stock
offered hereby. This prospectus does not contain all of the information in the
registration statement, the exhibits and schedules. For more information about
our common stock and us, please refer to the registration statement, exhibits
and schedules. Statements made in this prospectus as to the contents of any
contract, agreement or other documents filed as an exhibit are not necessarily
complete. With respect to each such contract, agreement or other document filed
as an exhibit to the registration statement, reference is made to the exhibit
for a more complete description of the matter involved.

The registration statement, exhibits and schedules may be inspected without
charge and copied at the public reference facilities maintained by the SEC in
Room 1024, 450 Fifth Street, NW, Washington, D.C. 20549, and at the SEC's
regional offices located at Citicorp Center, 500 West Madison, Suite 1400,
Chicago, Illinois 60661 and 7 World Trade Center, 13th Floor, New York, New
York 10048. Copies of such material may be obtained from such offices upon the
payment of the fees prescribed by the SEC. The SEC phone number is 1-800-SEC-
0330.

In addition, the SEC maintains a website that contains registration
statements, reports, proxy and other information regarding registrants that
file electronically with the Securities and Exchange Commission. The address
for the website is http://www.sec.gov.

49
<PAGE>

MindArrow Systems, Inc. and Subsidiaries

INDEX TO FINANCIAL STATEMENTS

MINDARROW SYSTEMS, INC. AND SUBSIDIARIES:

<TABLE>
<S> <C>
Report of Independent Certified Public Accountants........................ F-2
Consolidated Balance Sheets............................................... F-3
Consolidated Statements of Operations..................................... F-4
Consolidated Statements of Changes in Stockholders' Equity................ F-5
Consolidated Statements of Cash Flows..................................... F-6
Notes to Consolidated Financial Statements................................ F-7

FUSIONACTIVE.COM LIMITED AND SUBSIDIARIES:

Report of Independent Certified Public Accountants........................ F-20
Consolidated Balance Sheets............................................... F-21
Consolidated Statements of Operations..................................... F-22
Consolidated Statements of Changes in Stockholders' Equity................ F-23
Consolidated Statements of Cash Flows..................................... F-24
Notes to Consolidated Financial Statements................................ F-25

MINDARROW SYSTEMS, INC. AND SUBSIDIARIES:

Unaudited Pro Forma Combined Financial Statements Basis of Presentation... F-29
Unaudited Pro Forma Combined Statements of Operations..................... F-30
</TABLE>

F-1
<PAGE>

Report of Independent Certified Public Accountants

Board of Directors
MindArrow Systems, Inc. and Subsidiaries

We have audited the accompanying consolidated balance sheet of MindArrow
Systems, Inc. and Subsidiaries as of September 30, 1999, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the period from inception (March 26, 1999) through September 30, 1999. 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 of America. 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 consolidated financial position of MindArrow
Systems Inc. and Subsidiaries as of September 30, 1999, and the consolidated
results of their operations and their consolidated cash flows for the period
from inception (March 26, 1999) through September 30, 1999 in conformity with
accounting principles generally accepted in the United States of America.

Grant Thornton LLP
Reno, Nevada
October 25, 1999 (Except for the second paragraph of
Note I-1, as to which the date is November 5, 1999,
and the third paragraph of Note I-1, as to which the
date is March 31, 2000)

F-2
<PAGE>

MindArrow Systems, Inc. and Subsidiaries

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
September 30, June 30,
1999 2000
------------- -----------
(Unaudited)
ASSETS
<S> <C> <C>
Current Assets:
Cash............................................... $ 4,744,741 $14,936,378
Accounts receivable................................ 25,500 605,211
Prepaid expenses................................... 108,961 123,769
Other current assets............................... 14,941 713,408
----------- -----------
Total current assets.............................. 4,894,143 16,378,766
Cash, pledged....................................... 233,890 2,263,820
Fixed Assets, net .................................. 936,336 2,727,754
Intangible Assets, net ............................. 678,892 2,852,656
Investments......................................... -- 100,000
Deposits............................................ 76,975 90,619
----------- -----------
Total assets...................................... $ 6,820,236 $24,413,615
=========== ===========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued liabilities........... $ 312,178 $ 1,668,778
Customer deposits.................................. 30,500 215,749
Judgement payable from acquired company............ 1,800,000 1,800,000
Accounts payable remaining from acquired
companies......................................... 400,412 228,645
----------- -----------
Total current liabilities......................... 2,543,090 3,913,172
----------- -----------

Minority Interest in Subsidiary Company -- 3,564
----------- -----------

Stockholders' Equity:
Series B Convertible Preferred Stock, $0.001 par
value; 2,000,000 shares authorized; 1,085,573 and
1,513,073 shares issued and outstanding as of
September 30, 1999 and June 30, 2000; $8,684,584
and $12,104,584 aggregate liquidation preference
as of September 30, 1999 and
June 30, 2000 .................................... 1,086 1,513
Series C Convertible Preferred Stock, $0.001 par
value; 3,000,000 shares authorized; 0 and 725,775
shares issued and outstanding as of September 30,
1999 and June 30, 2000; $0 and $18,144,375
aggregate liquidation preference as of September
30, 1999 and June 30, 2000........................ -- 726
Common Stock, $0.001 par value; 20,000,000 and
30,000,000 shares authorized as of September 30,
1999 and June 30, 2000; 9,536,623 and
10,139,651 shares issued and outstanding as of
September 30, 1999 and June 30, 2000 ............. 9,537 10,141
Additional paid-in capital......................... 8,254,591 48,061,781
Accumulated deficit................................ (3,393,593) (27,225,929)
Unearned stock-based compensation.................. (594,475) (351,353)
----------- -----------
Total stockholders' equity........................ 4,277,146 20,496,879
----------- -----------
$ 6,820,236 $24,413,615
=========== ===========
</TABLE>

The accompanying notes are an integral part of these statements.

F-3
<PAGE>

MindArrow Systems, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
For the period For the period
from inception For the from inception
(March 26, 1999) nine months (March 26, 1999)
to September 30, ended June to June 30,
1999 30, 2000 1999
---------------- ------------ ----------------
(Unaudited) (Unaudited)
<S> <C> <C> <C>
Revenues...................... $ 6,250 $ 921,148 $ --
------------ ------------ ----------
Operating expenses:
Development.................. 320,766 1,440,723 115,751
Production................... 139,674 664,785 52,277
Sales and marketing.......... 1,060,795 5,241,520 267,073
General and administration... 684,343 4,442,542 307,644
Depreciation and
amortization................ 173,797 931,477 58,087
------------ ------------ ----------
2,379,375 12,721,047 800,832
------------ ------------ ----------
Operating loss................ (2,373,125) (11,799,899) (800,832)
Interest income............... 24,274 300,682 2,670
Provision for income taxes.... (1,600) (1,628) (1,600)
Minority interest............. -- 14,949 --
------------ ------------ ----------
Net loss.................... $ (2,350,451) $(11,485,896) (799,762)
Beneficial conversion feature
on preferred stock........... 1,043,142 12,346,440 --
------------ ------------ ----------
Net loss available to common
stockholders............... $ (3,393,593) $(23,832,336) (799,762)
============ ============ ==========
Basic and diluted loss per
share........................ $ (0.39) $ (2.45) $ (0.10)
============ ============ ==========
Shares used in computation of
basic and diluted loss per
share........................ 8,751,760 9,739,023 8,082,128
============ ============ ==========
</TABLE>

The accompanying notes are an integral part of these statements.

F-4
<PAGE>

MindArrow Systems, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
Series C
Series B Preferred
Preferred Stock Stock Common Stock Additional Unearned
---------------- -------------- ------------------- Paid-In Subscriptions Accumulated Stock-Based
Shares Amount Shares Amount Shares Amount Capital Receivable Deficit Compensation
--------- ------ ------- ------ ---------- ------- ----------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, March
26, 1999........ -- $ -- -- $ -- -- $ -- $ -- $ -- $ -- $ --
Sale of common
stock, net of
issuance costs.. -- -- -- -- 4,000,000 4,000 595 -- -- --
Issuance of
common stock for
acquisition of
Zap
International,
Inc. ........... -- -- -- -- 2,640,000 2,640 -- -- -- --
Reclassifications
of $.001 common
stock........... -- -- -- -- (6,640,000) (6,640) (595) -- -- --
Issuance of
$.001 common
stock in
connection with
reclassification
of equity....... -- -- -- -- 8,758,033 8,758 595 -- -- --
Assumption of
liabilities and
subscription
receivable in
connection with
recapitalization.. -- -- -- -- -- -- (2,570,000) (47,000) -- --
Sale of common
stock, net of
issuance costs.. -- -- -- -- 475,118 475 941,929 -- -- --
Issuance of
common stock
pursuant to
exercise of
warrants........ -- -- -- -- 233,613 234 23,123 -- -- --
Issuance of
common stock at
a discount as
compensation for
services........ -- -- -- -- 39,859 40 54,028 -- -- --
Issuance of
common stock as
compensation for
services........ -- -- -- -- 30,000 30 239,970 -- -- --
Sales of
preferred stock,
net of issuance
costs........... 1,085,573 1,086 -- -- -- -- 7,759,406 -- -- --
Compensation
expense on
option and
warrant grants.. -- -- -- -- -- -- 167,923 -- -- --
Unearned
compensation on
option and
warrant grants.. -- -- -- -- -- -- 594,475 -- -- (594,475)
Collection of
subscriptions
receivable...... -- -- -- -- -- -- -- 47,000 -- --
Beneficial
conversion
feature on
Series B
preferred
stock........... -- -- -- -- -- -- 1,043,142 -- (1,043,142) --
Net loss........ -- -- -- -- -- -- -- -- (2,350,451) --
--------- ------ ------- ------ ---------- ------- ----------- -------- ------------ ---------
Balance,
September 30,
1999............ 1,085,573 1,086 -- -- 9,536,623 9,537 8,254,591 -- (3,393,593) (594,475)
Sales of
preferred stock,
net of issuance
costs........... 427,500 427 725,775 726 -- -- 21,536,203 -- -- --
Issuance of
common stock
pursuant to
exercise of
options and
warrants........ -- -- -- -- 453,028 454 314,964 -- -- --
Issuance of
common stock for
acquisition of
Fusionactive.com,
Ltd............. -- -- -- -- 150,000 150 2,624,850 -- -- --
Compensation
expense on
option and
warrant grants.. -- -- -- -- -- -- 2,984,733 -- -- 243,122
Beneficial
conversion
feature on
Series B
preferred
stock........... -- -- -- -- -- -- 2,131,466 -- (2,131,466) --
Beneficial
conversion
feature on
Series C
preferred
stock........... -- -- -- -- -- -- 10,214,974 -- (10,214,974) --
Net loss........ -- -- -- -- -- -- -- -- (11,485,896) --
--------- ------ ------- ------ ---------- ------- ----------- -------- ------------ ---------
Balance, June
30, 2000
(Unaudited)..... 1,513,073 $1,513 725,775 $ 726 10,139,651 $10,141 $48,061,781 $ -- $(27,225,929) $(351,353)
========= ====== ======= ====== ========== ======= =========== ======== ============ =========
<CAPTION>
Total
------------
<S> <C>
Balance, March
26, 1999........ $ --
Sale of common
stock, net of
issuance costs.. 4,595
Issuance of
common stock for
acquisition of
Zap
International,
Inc. ........... 2,640
Reclassifications
of $.001 common
stock........... (7,235)
Issuance of
$.001 common
stock in
connection with
reclassification
of equity....... 9,353
Assumption of
liabilities and
subscription
receivable in
connection with
recapitalization.. (2,617,000)
Sale of common
stock, net of
issuance costs.. 942,404
Issuance of
common stock
pursuant to
exercise of
warrants........ 23,357
Issuance of
common stock at
a discount as
compensation for
services........ 54,068
Issuance of
common stock as
compensation for
services........ 240,000
Sales of
preferred stock,
net of issuance
costs........... 7,760,492
Compensation
expense on
option and
warrant grants.. 167,923
Unearned
compensation on
option and
warrant grants.. --
Collection of
subscriptions
receivable...... 47,000
Beneficial
conversion
feature on
Series B
preferred
stock........... --
Net loss........ (2,350,451)
------------
Balance,
September 30,
1999............ 4,277,146
Sales of
preferred stock,
net of issuance
costs........... 21,537,356
Issuance of
common stock
pursuant to
exercise of
options and
warrants........ 315,418
Issuance of
common stock for
acquisition of
Fusionactive.com,
Ltd............. 2,625,000
Compensation
expense on
option and
warrant grants.. 3,227,855
Beneficial
conversion
feature on
Series B
preferred
stock........... --
Beneficial
conversion
feature on
Series C
preferred
stock........... --
Net loss........ (11,485,896)
------------
Balance, June
30, 2000
(Unaudited)..... $20,496,879
============
</TABLE>

The accompanying notes are an integral part of these statements.

F-5
<PAGE>

MindArrow Systems, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
For the For the
period from period from
inception For the inception
(March 26, nine months (March 26,
1999) to ended 1999) to
September 30, June 30, June 30,
1999 2000 1999
------------- ------------ -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss............................. $(2,350,451) $(11,485,896) $ (799,762)
Adjustments to reconcile net loss to
net cash used in operations:
Depreciation and amortization....... 173,797 931,477 58,087
Non-cash charges due to stock
issuances.......................... 294,068 -- 54,068
Non-cash charges due to stock option
and warrant grants................. 167,923 3,227,855 106,458
Minority interest................... -- (14,949) --
Increase in accounts receivable..... (24,500) (274,332) (16,500)
Increase in prepaid expenses........ (98,743) (14,808) (19,327)
Increase in other current assets.... (14,941) (698,467) (3,001)
Increase in deposits................ (76,975) (13,644) (58,210)
Increase in bank overdraft.......... -- -- 39,704
Increase in accounts payable and
accrued liabilities................ 400,412 1,090,158 368,426
Decrease in accounts payable from
acquired companies................. (514,278) (171,767) (212,382)
Increase in customer deposits....... 30,500 185,249 17,500
----------- ------------ -----------
Net cash used in operations........ (2,013,188) (7,239,124) (464,939)
----------- ------------ -----------
Cash flows from investing activities:
Increase in cash--pledged............ (233,890) (2,029,930) (230,400)
Cash acquired in acquisition......... 2,898 122,415 2,898
Purchases of fixed assets............ (987,915) (2,305,631) (136,833)
Purchases of patents and trademarks.. (44,226) (108,867) (4,500)
Increase in investments.............. -- (100,000) --
----------- ------------ -----------
Net cash used in investing
activities........................ (1,263,133) (4,422,013) (368,835)
----------- ------------ -----------
Cash flows from financing activities:
Principal payments on notes payable.. (756,786) -- (81,786)
Payment received on subscriptions
receivable.......................... 47,000 -- 2,000
Proceeds from issuance of preferred
stock............................... 7,760,492 21,537,356 --
Proceeds from issuance of common
stock............................... 970,356 315,418 946,789
----------- ------------ -----------
Net cash provided by financing
activities........................ 8,021,062 21,852,774 867,003
----------- ------------ -----------
Net increase in cash.................. 4,744,741 10,191,637 33,229
Cash, beginning of period............. -- 4,744,741 --
----------- ------------ -----------
Cash, end of period................... $ 4,744,741 $ 14,936,378 $ 33,229
=========== ============ ===========
Cash paid for income taxes............ $ -- $ -- $ --
=========== ============ ===========
Cash paid for interest................ $ -- $ -- $ --
=========== ============ ===========
Supplemental disclosure of noncash
investing and financing activities:
The Company acquired Zap
International, Inc. for 2,640,000
shares of common stock and
Fusionactive.com, Ltd for 150,000
shares of common stock.............. $ 2,640 $ 2,625,000 $ 2,640
=========== ============ ===========
Assumption of liabilities in
connection with recapitalization.... $(2,570,000) $ -- $(2,570,000)
=========== ============ ===========
</TABLE>

The accompanying notes are an integral part of these statements.

F-6
<PAGE>

MindArrow Systems, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 1999 (data relating to June 30, 2000 is unaudited)

Note A--The Company and Summary of Significant Accounting Policies

MindArrow Systems, Inc. is in the business of creating and delivering, via
the Internet, electronic presentations called eCommercials , then tracking and
reporting the responses they generate.

The Company was founded on March 26, 1999 and incorporated as
eCommercial.com, Inc., a California corporation, on April 9, 1999.

On April 16, 1999, the Company acquired all of the outstanding common stock
of Zap International, ("Zap"), in exchange for 2,640,000 shares of our common
stock. The transaction was recorded using the purchase method of accounting
(see Note G). Pro forma disclosures are not meaningful as Zap did not have
significant operations.

On April 19, 1999, Wireless Netcom, Inc. (a non-operating Nevada
corporation) acquired all of the outstanding shares of the Company. For
accounting purposes, the acquisition is treated as a recapitalization with the
Company as the acquirer (a reverse acquisition). Pro forma information is not
presented since the transaction is not a business combination (see Note G).

Effective March 31, 2000, the Company changed its name from eCommercial.com,
Inc. to MindArrow Systems, Inc. and its state of incorporation from Nevada to
Delaware. There was no impact to the Company's financial condition or results
of operations as a result of the reincorporation and name change.

On April 24, 2000, we acquired 90% of Fusionactive.com, Ltd.
("Fusionactive.com") in exchange for 150,000 shares of our common stock. The
transaction was recorded using the purchase method of accounting (see Note G).
Unaudited pro forma condensed statements of operations for the most recently
completed fiscal year and for the nine months ended June 30, 2000 follow the
accompanying financial statements for Fusionactive.com Ltd.

1. Principles of Consolidation

The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany balances and transactions
have been eliminated. The results of operations of Fusionactive.com have been
included in the consolidated financial statements commencing April 1, 2000. The
results of operations of Fusionactive.com from April 1 through April 23 are
immaterial to the overall consolidated results.

2. Interim Financial Statements

The financial statements as of and for the nine months ended June 30, 2000
are unaudited; however, in the opinion of management, all adjustments,
consisting of normal recurring adjustments necessary for a fair presentation of
the Company's financial position and results of operations for such period have
been included. The results for the nine months ended June 30, 2000 are not
necessarily indicative of the results that may be expected for the year ending
September 30, 2000.

3. Revenue Recognition

The Company's revenues are derived from the production and delivery of
eCommercials as a part of comprehensive direct-response advertising campaigns
developed for each of its customers. eCommercials are delivered to targeted
email subscribers through email subscriber programs utilizing the Company's
unique personalization technology. The Company's eCommercial production
services include theme development,

F-7
<PAGE>

MindArrow Systems, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

eCommercial design and layout, video production, special effects, link
recommendations, hyperlink page design and creation, reporting and sales cycle
consultation. Revenue for consultation and production services is recognized
when the services are rendered. Revenue for delivery services is recognized
when the eCommercials are delivered. Revenues from sponsorship arrangements
will be recognized at the time of delivery. Revenues from revenue-sharing
arrangements will be recognized as transactions are completed.

Through the Company's subsidiary, Fusionactive.com, Ltd, revenue from media
is recognized upon placing of advertisements with the media. Revenue from
consulting services is recognized as the services are rendered.

Customers are generally billed in advance of production and delivery of
eCommercials. Accordingly, customer deposits include the customer prepayments
less the portion of service that has been completed.

In December 1999, the U.S. Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin 101, "Revenue Recognition" ("SAB 101"), which
provides guidance on the recognition, presentation, and disclosure of revenue
in financial statements filed with the SEC. SAB 101 outlines the basic criteria
that must be met to recognize revenue and provides guidance for disclosure
related to revenue recognition policies. The Company believes its revenue
recognition practices are in conformity with the guidelines prescribed in SAB
101.

4. Product Development

In accordance with Statement of Position ("SOP") 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use," the Company
expenses costs associated with software developed or obtained for internal use
in the preliminary project stage and, thereafter, capitalizes costs incurred in
the developing or obtaining of internal use software. Capitalized costs are
amortized over their useful life. Whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable,
management evaluates the estimated useful life of intangible assets based upon
projected future undiscounted cash flows. Other costs incurred in the research
and development of new products and enhancements to existing products are
charged to expense as incurred.

5. Depreciation and Amortization

Property and equipment, including leasehold improvements, are stated at cost
and depreciated using the straight-line method over the estimated useful lives
of the assets, generally two to five years. Goodwill, patents, and trademarks
are included in intangible assets and carried at cost less accumulated
amortization, which is being provided on a straight-line basis over the
economic lives of the respective assets, generally three years for goodwill and
seven years for patents and trademarks. The Company periodically evaluates the
recoverability of its long-lived assets based on expected undiscounted cash
flows and recognizes impairments, if any, based on expected discounted future
cash flows.

6. Income Taxes

Income taxes are computed using the asset and liability method. Under the
asset and liability method, deferred income tax assets and liabilities are
determined based on the differences between the financial reporting and tax
bases of assets and liabilities and are measured using the currently enacted
tax rates and laws. A valuation allowance is provided for the amount of
deferred tax assets that, based on available evidence, are not expected to be
realized.

At September 30, 1999 and June 30, 2000, the Company had a deferred tax
asset of approximately $353,000 and $2,075,000, respectively, resulting from
net operating losses for the period March 26, 1999 through September 30, 1999
and March 26, 1999 through June 30, 2000. The Company has provided for a

F-8
<PAGE>

MindArrow Systems, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

valuation allowance of $353,000 and $2,075,000 at September 30, 1999 and June
30, 2000, respectively. The Provision for Income taxes on the accompanying
Consolidated Statement of Operations represents the minimum California
franchise tax.

7. Stock-Based Compensation

The Company accounts for stock-based employee compensation arrangements in
accordance with the provisions of Accounting Principles Board Opinion ("APB")
No. 25, "Accounting for Stock Issued to Employees," and complies with the
disclosure provisions of Statement of Financial Accounting Standards ("SFAS")
No. 123, "Accounting for Stock-Based Compensation." Under APB 25, compensation
expense is recognized over the vesting period based on the difference, if any,
on the date of grant between the fair value of the Company's stock and the
amount an employee must pay to acquire the stock.

The Company accounts for non-employee stock-based awards in which goods or
services are the consideration received for the equity instruments issued in
accordance with provisions of SFAS No. 123 and Emerging Issues Task Force No.
96-18, "Accounting for Equity Instruments that are Issued to other than
Employees for Acquiring, or in Conjunction with Selling, Goods or Services."

8. Basic and Diluted Net Income (Loss) Per Share

Basic net income (loss) per share is computed using the weighted average
number of common shares outstanding during the period. Diluted net income
(loss) per share is computed using the weighted average number of common and
common equivalent shares outstanding during the period. Common equivalent
shares consist of the incremental common shares issuable upon conversion of
convertible preferred stock (using the if-converted method) and shares issuable
upon the exercise of stock options and warrants (using the treasury stock
method). Common equivalent shares were excluded from the computation as their
effect was anti-dilutive (see Note I).

9. Use of Estimates

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

10. Cash and Cash Equivalents

All highly liquid instruments with an original maturity of three months or
less are considered cash equivalents, those with original maturities greater
than three months and current maturities less than twelve months from the
balance sheet date are considered short-term investments, and those with
maturities greater than twelve months from the balance sheet date are
considered long-term investments.

As of September 30, 1999, the Company had a Certificate of Deposit account
that was pledged to collateralize an irrevocable letter of credit related to
the lease for the Company's headquarters. The letter of credit amount will
decrease by 50% in December 2000 and expire in December 2001. Additionally in
December 1999 a second Certificate of Deposit was pledged related to the New
York office space. In January 2000 the Company pledged a $2 million Certificate
of Deposit with the court related to the Voxel claim (see Note F-2). The
pledged cash is carried as a long-term asset on the accompanying consolidated
balance sheet.

11. Concentration of Credit Risk

Financial instruments that potentially subject the Company to significant
concentration of credit risk consist primarily of cash, cash equivalents, and
accounts receivable. Substantially all of the Company's cash and cash
equivalents are held in one financial institution. As of September 30, 1999 and
June 30, 2000, the carrying

F-9
<PAGE>

MindArrow Systems, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

amount of cash in bank was $4,978,631 and $15,200,198, and the bank balance was
$5,239,321 and $15,561,723, of which $100,000 was FDIC insured. Accounts
receivable are typically unsecured and are derived from revenues earned from
customers primarily located in the United States and Hong Kong. The Company
performs ongoing credit evaluations of its customers and will maintain reserves
for potential credit losses as the need arises.

12. Comprehensive Income

In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
130, "Reporting Comprehensive Income," which has been adopted by the Company.
SFAS 130 establishes standards for reporting comprehensive income and its
components in a financial statement. Comprehensive income as defined includes
all changes in equity (net assets) during a period from non-owner sources.
Examples of items to be included in comprehensive income, which are excluded
from net income, include foreign currency translation adjustments and
unrealized gains and losses on available-for-sale securities. As none of these
components have impacted the Company, adjustments for comprehensive income have
not been made to the accompanying consolidated financial statements.

13. Segments

The Company has adopted Statement of Financial Accounting Standards No. 131
"Disclosures about Segments of an Enterprise and Related Information" (SFAS
131). SFAS 131 establishes standards for reporting information regarding
operating segments in annual financial statements and requires selected
financial information for those segments to be presented in interim financial
reports. SFAS 131 also establishes standards for related disclosures about
products and services, and geographic areas. To date the Company has viewed
their operations as principally one segment. The Company has not yet determined
if, as the result of the acquisition of Fusionactive.com, Ltd., it will operate
in more than one segment. The following is a summary of significant geographic
markets:

<TABLE>
<CAPTION>
North Asia
America Pacific
---------- ---------
<S> <C> <C>
For the year ended September 30, 1999:
Net revenues........................................ $ 6,250 --
Long lived assets................................... 1,789,025 --
For the period ended June 30, 2000:
Net revenues........................................ 761,968 159,180
Long lived assets................................... 4,173,565 2,693,499
</TABLE>

14. Investments

Investments in companies in which the Company has less than a 20% interest
are carried at cost (see Note E). Dividends received from those companies are
included in other income. Dividends received in excess of the Company's
proportionate share of accumulated earnings are applied as a reduction of the
cost of the investment.

15. Fair Value of Financial Instruments

The fair value of financial instruments approximates their carrying amounts.

In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (SFAS 133), and in July 1999 issued Financial
Accounting Standard No. 137,"Accounting for Derivative Instruments and Hedging

F-10
<PAGE>

MindArrow Systems, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Activities--Deferral of the Effective Date of FASB Statement No. 133, an
Amendment of FASB Statement No. 133" (SFAS 137). SFAS 137 delayed the effective
date for SFAS 133 to fiscal years beginning after June 15, 2000. The Company
does not believe that this statement will have a material effect on its
financial position or results of operations.

Note B--Development Stage

From inception (March 26, 1999) to December 31, 1999, the Company was a
development-stage company. In January 2000, significant principal operations
commenced. As shown in the accompanying financial statements, the Company has
recorded a cumulative net loss of $13,836,347 through June 30, 2000. The future
of the Company is dependent upon its ability to generate sufficient cash flows
from revenues to cover operating costs. Until such time, however, the Company
expects to seek financing through a combination of private placements and/or
public offerings. The Company anticipates that its existing capital resources
and private placements will be sufficient to satisfy contemplated cash
requirements for at least twelve months.

Note C--Fixed Assets

Fixed assets, at cost, consist of the following:

<TABLE>
<CAPTION>
September 30, June 30,
1999 2000
------------- -----------
(Unaudited)
<S> <C> <C>
Computer equipment................................... $668,361 $2,034,615
Office equipment..................................... 10,723 74,076
Furniture and fixtures............................... 118,246 496,025
Leasehold improvements............................... -- 449,576
Production equipment................................. -- 177,600
Software............................................. 21,451 273,693
-------- ----------
818,781 3,505,585
Less accumulated depreciation........................ (58,463) (777,831)
-------- ----------
760,318 2,727,754
Construction in progress............................. 176,018 --
-------- ----------
$936,336 $2,727,754
======== ==========
</TABLE>

Note D--Intangible Assets

Intangible assets consist of the following:

<TABLE>
<CAPTION>
September 30, June 30,
1999 2000
------------- -----------
(Unaudited)
<S> <C> <C>
Patents and trademarks............................... $ 44,226 $ 153,093
Goodwill............................................. 750,000 3,208,387
--------- ----------
794,226 3,361,480
Less accumulated amortization........................ (115,334) (508,824)
--------- ----------
$ 678,892 $2,852,656
========= ==========
</TABLE>

Goodwill is being amortized on a straight-line basis over three years.
Amortization expense of goodwill was $114,583 for the period from inception
(March 26, 1999) to September 30, 1999 and $392,366 for the nine months ended
June 30, 2000.

F-11
<PAGE>

MindArrow Systems, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Note E--Investments

In January 2000, the Company made an equity investment of $100,000 into
eContributor.com. eContributor.com is an Internet-based fundraising management
and donation processing firm. The Company intends to share revenues generated
from projects in common.

Note F--Commitments and Contingencies

1. Operating Leases

In June 1999, the Company entered into a non-cancelable five-year operating
lease for its primary facilities in Aliso Viejo, California and took occupancy
in December 1999. Rent expense increased to $29,642 per month through May 2002
and $30,878 per month through the remaining term of the lease, which expires in
November 2004. The lease contains a five-year renewal option from the date of
expiration.

In September 1999, the Company entered into a non-cancelable five-year
sublease for a satellite office in Cupertino, California. The lease calls for
minimum monthly rental payments ranging from $10,091 per month at the start of
the lease and gradually increasing to $13,358 per month by the end of the
lease. The sublessor is a company related to two significant stockholders, one
of whom is a director of the Company. The sublease terms are identical to the
terms of the sublessor's lease with the landlord, and are favorable to the
terms the Company would have been able to acquire on its own. Effective July
31, 2000, the Company closed the Cupertino office and was permitted to cancel
the lease without penalty.

The minimum lease payments for operating leases for the years ending
September 30 are as follows:

<TABLE>
<CAPTION>
Year ending September 30,
-------------------------
<S> <C>
2000............................................................. $ 459,896
2001............................................................. 506,972
2002............................................................. 518,305
2003............................................................. 529,629
2004............................................................. 519,668
Thereafter....................................................... 61,755
----------
$2,596,225
==========
</TABLE>

Rent expense for the period from inception (March 26, 1999) to September 30,
1999 amounted to $43,148. Rent expense for the nine months ended June 30, 2000
amounted to $476,326.

In June 2000, the Company entered into a non-cancelable 22-month lease for a
satellite office in Aliso Viejo, California. The lease calls for monthly rental
payments of $3,895 through March 2002.

2. Legal Proceedings

From time to time the Company is subject to legal proceedings and claims in
the ordinary course of business, including claims of alleged infringement of
trademarks, copyrights and other intellectual property rights. Except as
described below, the Company is not currently aware of any legal proceedings or
claims that the Company believes will have, individually or in the aggregate, a
material adverse effect on the Company's consolidated financial position or
results of operations.

The Company has been named as a defendant in an action seeking damages, (the
"Voxel Claim") in connection with an Asset Purchase Agreement, dated as of
November 25, 1998, pursuant to which Wireless Netcom, Inc. had proposed to
acquire the assets of Voxel, Inc. Wireless Netcom, Inc. had accrued $1.8
million in estimated damages, a liability the Company assumed in the
recapitalization (see Note G). Pursuant to an

F-12
<PAGE>

MindArrow Systems, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

indemnity agreement, a significant shareholder, who is also a director, has
agreed to reimburse the Company in common stock or cash, at his option, any
amounts paid to the plaintiffs. Any reduction in the amount due or any amounts
received in reimbursement will be recorded as additional paid-in capital at the
time such amounts are received.

In October 1999, the court ruled in favor of the plaintiffs and awarded them
$1.8 million in damages. In January 2000 the Company appealed the judgement and
pledged a $2 million Certificate of Deposit with the court. In July 2000, the
bankruptcy trustee accepted the Company's offer to settle the dispute for $1.5
million. If the bankruptcy judge approves the settlement in August 2000, as is
expected, the balance of the deposit we made with the court will be returned to
the Company.

Note G--Acquisition

1. Acquisition of Zap International, Inc.

On April 16, 1999, the Company completed the acquisition of all outstanding
shares of Zap International, Inc. ("Zap"), for 2,640,000 shares of Common
Stock. Zap was a software company which had developed technology that enabled
generation of highly compressed multimedia files that combine audio, video,
graphics and hypertext links, and form the foundation of eCommercials. The
acquisition was accounted for as a purchase. Under the purchase method of
accounting, the purchase price is allocated to the assets acquired and
liabilities assumed based on their estimated fair values at the date of the
acquisition. Zap is now a wholly owned subsidiary of the Company.

The total purchase price of the acquisition was $2,640, which is 2,640,000
shares at a value of $.001. The purchase price was allocated to the assets
acquired and liabilities assumed based on their estimated fair values. Goodwill
has resulted from the excess costs over fair value of net assets acquired.

<TABLE>
<S> <C>
Goodwill.......................................................... $ 750,000
Tangible assets acquired.......................................... 1,000
Liabilities assumed............................................... (748,360)
---------
$ 2,640
=========
</TABLE>

2. Recapitalization

On April 19, 1999, Wireless Netcom, Inc. (a Nevada corporation) acquired all
of the outstanding common stock of the Company. For accounting purposes, the
acquisition is treated as a recapitalization with the Company as the acquirer
(a reverse acquisition). Pro forma information is not presented since the
transaction is not a business combination. The founding stockholders of
eCommercial.com., Inc. exchanged their common stock for 6,640,000 shares of
common stock (approximately 76% of the outstanding common stock) of Wireless
Netcom, Inc. In connection with the recapitalization, Wireless Netcom, Inc.
changed its name to eCommercial.com, Inc., and the Company assumed liabilities
of $2,570,000.

At the time of the recapitalization described above, Wireless Netcom had
178,502 common stock warrants outstanding. The exercise price of the warrants
was $0.10 per share, and they generally expire on May 15, 2000.

3. Acquisition of Fusionactive.com Ltd.

On April 24, 2000, the Company completed the acquisition of 90% of the
outstanding shares of Fusionactive.com Ltd., an advertising company based in
Hong Kong, through which the Company intends to serve Southeast Asia. The
acquisition was accounted for as a purchase. Under the purchase method of
accounting, the purchase price is allocated to the assets acquired and
liabilities assumed based on their estimated fair values at the date of the
acquisition.

F-13
<PAGE>

MindArrow Systems, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The total purchase price of the acquisition was $2,625,000 for which the
Company issued 150,000 shares of common stock at $17.50 per share. The purchase
price was allocated to the assets acquired and liabilities assumed based on
their estimated fair values. Goodwill has resulted from the excess costs over
fair value of net assets acquired.

<TABLE>
<S> <C>
Goodwill ........................................................ $2,458,387
Tangible assets acquired ........................................ 451,568
Liabilities assumed.............................................. (266,442)
Minority Interest in Subsidiary Company.......................... (18,513)
----------
$2,625,000
==========
</TABLE>

The following unaudited pro forma results of operations assume the
acquisition discussed above occurred on January 1, 1999. The pro forma results
have been prepared using the historical financial statements of the Company and
Fusionactive.com. The unaudited pro forma results give effect to amortization
of goodwill arising from the transaction.

<TABLE>
<CAPTION>
For the For the nine
period ended months ended
September 30, June 30,
1999 2000
------------- ------------
<S> <C> <C>
Revenues....................................... $ 932,835 $ 1,516,262
Net loss....................................... (3,265,550) (11,906,043)
Beneficial conversion feature on preferred
stock......................................... 1,043,142 12,346,440
Net loss available to common stockholders...... (4,308,692) (24,252,483)
Basic and diluted loss per share............... $ (0.48) $ (2.49)
</TABLE>

The above pro forma financial information does not purport to be indicative
of the results of operations had the acquisition of Fusionactive.com actually
taken place on January 1, 1999, nor is it intended to be a projection of future
results or trends.

Note H--Cross-Marketing Agreement

In July 1999, the Company entered into an agreement with Lockheed Martin
("Lockheed"), whereby, Lockheed and the Company will work together to serve
mutual customers. Lockheed was issued 30,000 shares of common stock as part of
the agreement, for which the Company recognized a non-cash expense of $240,000.

Note I--Stockholders' Equity

1. Series B and C Convertible Preferred Stock

As of December 31, 1999, the Company had issued 1,388,073 shares of Series B
Preferred Stock for $8 per share in a private placement which closed in
December 1999. Net proceeds were $10,153,473.

In October 1999, the Company entered into a strategic investment agreement
with @ONEX LLC, ("Onex"). Under the terms of the agreement, Onex made a
$1,000,000 investment into the private placement of Series B Convertible
Preferred Stock, and had the option to invest another $1,000,000 under the same
terms. The option was exercised on March 24, 2000. Further, Onex received
warrants to purchase 250,000 shares of common stock at the price of $7 per
share.

As of June 30, 2000, the Company had issued 725,775 shares of Series C
preferred stock for $25 per share. Proceeds were $18,144,375. Dividends are
payable to holders of Series B and C preferred stock when and if

F-14
<PAGE>

MindArrow Systems, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

declared by the Company and will be non-cumulative. No dividends (other than
those payable solely in common stock) will be declared or paid with respect to
shares of common stock until dividends in the aggregate amount of at least
$0.90 and $2.25 per share, have been paid or declared on the Series B and C
preferred, respectively.

Holders of shares of Series B and C preferred are entitled to vote on all
matters submitted to a vote of the stockholders. Each share of Series B and C
preferred entitles the holder to the number of votes equal to the number of
shares of common stock into which the Series B and C preferred is convertible
as of the record date established for the vote of the stockholders.

Each share of Series B preferred may be converted into one share of common
stock at any time upon the stockholder's election. The shares of Series B
preferred will be automatically converted into shares of common stock upon (i)
the effective date of a firm commitment, underwritten public offering of common
stock pursuant to an effective registration statement under the Securities Act,
other than a registration relating solely to a transaction under Rule 145 of
the Securities Act or to any employee benefit plan of the Company, generating
aggregate proceeds to the Company of not less than $15,000,000 (after deducting
underwriters' discounts and all expenses relating to the offering) and with a
per share offering price (prior to underwriters' discounts and expenses) of not
less than $15.00 per share, as such per share price may be adjusted to reflect
stock subdivisions, combinations or dividends with respect to such shares, or
(ii) the date specified by affirmative vote or written consent or agreement of
the holders of not less than two-thirds ( 2/3) of the then outstanding shares
of Series B preferred.

In connection with the issuance of the Series B preferred stock for the
period ended September 30, 1999, the Company evaluated whether a beneficial
conversion feature existed on the date of issuance, as defined in the Emerging
Issues Task Force (EITF) 98-5 "Accounting for Convertible Securities with
Beneficial Conversion Features or Contingently Adjustable Conversion Ratios".
The proceeds received in conjunction with the issuance were first allocated to
the $307,852 fair value of the warrants, as calculated using the Black-Scholes
model. The remaining proceeds of $8,387,271 were allocated to the preferred
stock. This amount was then compared to the fair market value of the shares
determined by the market price on the date of issuance. The difference of
$1,043,142 has been recognized as a beneficial conversion feature on the Series
B preferred stock and recorded as a non-operating non-cash charge directly to
accumulated deficit and an increase in additional paid in capital.

In connection with the issuance of the Series B preferred stock for the
period ended June 30, 2000 the Company evaluated whether a beneficial
conversion feature existed on the date of issuance, as defined in the EITF 98-
5. The proceeds received in conjunction with the issuance were first allocated
to the $2,067,492 fair value of the warrants, as calculated using the Black-
Scholes model. The remaining proceeds of $2,131,466 were allocated to the
preferred stock. This amount was then compared to the fair market value of the
shares determined by the market price on the date of issuance. The difference
of $2,131,466 has been recognized as a beneficial conversion feature on the
Series B preferred stock which increases the net loss available to common
stockholders and increases additional paid in capital.

In response to a decline in the market price of its common stock following
the issuance of the Series C preferred, the Company reduced the conversion
price of the Series C preferred from $25 to $12.50 per share. In consideration
for such reduction of the conversion price, holders of Series C preferred stock
executed a general release of all claims. Although the Series C shareholders
executed a general release, no actual claims have been asserted against the
Company, and the Company does not believe that any claims released are
meritorious or that the Company has any liability with respect to the Series C
offering.

The change in conversion terms on the Series C preferred stock had no impact
on the financial statements since the conversion feature on the date of the
change was in excess of the fair market value of the underlying common stock.
The shares of Series C preferred will be automatically converted into shares of
common stock upon (i) the effective date of a firm commitment, underwritten
public offering of common stock pursuant to an

F-15
<PAGE>

MindArrow Systems, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

effective registration statement under the Securities Act, other than a
registration relating solely to a transaction under Rule 145 of the Securities
Act or to any employee benefit plan of the Company, generating aggregate
proceeds to the Company of not less than $25,000,000 (after deducting
underwriters' discounts and all expenses relating to the offering) and with a
per share offering price (prior to underwriters' discounts and expenses) of not
less than $40.00 per share, as such per share price may be adjusted to reflect
stock subdivisions, combinations or dividends with respect to such shares, or
(ii) the date specified by affirmative vote or written consent or agreement of
the holders of not less than two-thirds ( 2/3) of the then outstanding shares
of Series C preferred.

In connection with the issuance of the Series C preferred stock for the
period ended June 30, 2000 the Company evaluated whether a beneficial
conversion feature existed on the date of issuance, as defined in the EITF 98-
5. The proceeds received in conjunction with the issuance were first allocated
to the $1,234,346 fair value of the warrants, as calculated using the Black-
Scholes model. The remaining proceeds of $16,997,434 were allocated to the
preferred stock. This amount was then compared to the fair market value of the
shares determined by the market price on the date of issuance. The difference
of $10,214,974 has been recognized as a beneficial conversion feature on the
Series C preferred stock which increases the net loss available to common
stockholders and increases additional paid in capital.

In the event of liquidation, the holders of the Series B and C preferred
shall be entitled to receive, prior to and in preference to any distributions
to the holders of common stock, $8.00 per share of Series B and $25.00 per
share of Series C preferred plus any accrued but unpaid dividends if and when
declared by the Board of Directors.

In connection with the private placement of Series B preferred stock,
warrants to purchase 397,591 shares of common stock at $8 per share were
granted to investors and the placement agent. These warrants expire in August
to December 2001.

In connection with the private placement of Series C preferred stock,
warrants to purchase 145,156 shares of common stock at $12.50 per share were
granted to investors. These warrants expire in March 2002.

2. Common Stock

Upon initial incorporation, the Company issued 4,000,000 shares of common
stock with a par value of $0.001 to its founders at par. It subsequently issued
475,118 shares in a private placement. Net proceeds from both transactions were
$946,999.

During the period from inception (March 26, 1999) to September 30, 1999, a
total of 233,613 shares of common stock were issued upon warrant exercises.
Total proceeds amounted to $23,357. During the nine months ended June 30, 2000,
453,028 shares were issued upon warrant and option exercises. Total proceeds
amounted to $315,418.

During the period from inception (March 26, 1999) to September 30, 1999, a
total of 69,859 shares were issued as compensation for services. The Company
recorded compensation expense in the amount of $294,068. Such amounts are
inclusive of the shares issued to Lockheed (see Note H).

3. Warrants

At the time of the Company's acquisition of Zap, warrants to purchase 5,200
shares of common stock at $5 per share were granted to a former Zap creditor.
These warrants expire in April 2004. In connection with the issuance of the
warrants, the Company recognized an expense of $1,508, which was the fair value
of the warrants at the time of issuance.

F-16
<PAGE>

MindArrow Systems, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

In connection with the private placement of common stock, warrants to
purchase 183,500 shares were granted at exercise prices ranging from $0.10 per
share to $0.50 per share, all of which had been exercised as of June 30, 2000.

Warrants to purchase 15,000 shares of common stock at $11.25 per share have
been granted to a customer. They expire in May 2001. In connection with the
issuance of the warrants, the Company recognized an expense of $25,950, which
was the fair value of the warrants at the time of issuance.

Warrants to purchase 250,000 and 397,591 shares of common stock at $7 and $8
per share were issued in connection with the placement of the Series B
preferred stock. In addition, warrants to purchase 145,156 shares of common
stock at $12.50 per share were issued in connection with the placement of the
Series C preferred stock.

The fair value of the warrants issued with the Series B preferred stock was
estimated at $307,852 as of the grant date using the Black-Scholes option
pricing model with the following weighted average assumptions for the period
ended September 30, 1999: dividend yield of 0.0%, expected volatility of 50%,
risk free interest rate of 6.5%, and an expected holding period from 1 to 3
years.

The fair value of warrants issued with the Series B and Series C preferred
stock was estimated at $2,067,492 and $1,234,346, respectively, as of the grant
date using the Black-Scholes option pricing model with the following weighted
average assumptions for the period ended June 30, 2000: dividend yield of 0.0%,
expected volatility of 50%, risk free interest rate of 6.5%, and an expected
holding period from 1 to 3 years.

During the period ended September 30, 1999, the Company issued warrants to
purchase 231,000 shares of common stock to several consultants. The warrants
are exercisable at prices ranging from $1 per share to $8 per share, vest based
on achieving various performance criteria and expire at various dates through
April 2005. At September 30, 1999 and June 30, 2000, 131,000 and 201,000 of
these warrants had vested. The Company recognizes compensation expense based on
the fair value of the warrants as computed using the Black-Scholes option
pricing model. The Company recognized compensation expense of $132,028 for the
period ended September 30, 1999 and $1,772,600 for the nine months ended June
30, 2000. At June 30, 2000, 20,000 of the warrants had been forfeited and
10,000 remained unvested.

During the nine months ended June 30, 2000, the Company issued warrants to
purchase 816,000 shares of common stock to several consultants. The warrants
are exercisable at various prices ranging from $8 per share to $30 per share,
vest generally over three years and expire at various dates through February
2006. At June 30, 2000, 291,000 of these warrants had vested. The Company
recognizes compensation expense based on the fair value of the warrants, as
computed using the Black-Scholes option pricing model. The Company recognized
compensation expense of $1,332,343 for the nine months ended June 30, 2000. At
June 30, 2000, the remaining 525,000 warrants remained unvested and
outstanding.

As of September 30, 1999 and June 30, 2000, a total of 470,987 and 1,739,297
warrants were outstanding, with exercise prices ranging from $0.10 to $30.00
and expiring at various times through February 2006.

4. Options

In April 1999, the Company adopted the 1999 Stock Option Plan (the "Plan").
As amended, the Plan reserves 3,000,000 shares of common stock for grants to
employees.

Pursuant to the consummation of the reverse merger of Wireless Netcom, the
Company assumed and discontinued the Wireless Netcom 1997 Stock Option Plan
(the "Wireless Plan"). There were no outstanding options under the Wireless
Plan.

F-17
<PAGE>

MindArrow Systems, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Under the Plan, incentive stock options may be granted to employees,
directors, and officers of the Company and non-qualified stock options and
stock purchase rights may be granted to consultants, employees, directors, and
officers of the Company. Options granted under the Plan are for periods not to
exceed ten years and must be issued at prices not less than 100% and 85%, for
incentive and nonqualified stock options, respectively, of the fair market
value of the stock on the date of grant, as determined by the Board of
Directors. Options granted to shareholders who own greater than 10% of the
outstanding stock are for periods not to exceed five years and must be issued
at prices not less than 110% of the fair market value of the stock on the date
of grant, as determined by the Board of Directors. Options granted under the
Stock Plan generally vest 33% after the first year of service and ratably each
quarter over the remaining twenty-four month period.

The Company has adopted the disclosure-only provisions of SFAS No. 123,
Accounting for Stock-Based Compensation, but applies Accounting Principles
Board Opinion No. 25 and related interpretations in accounting for its plans.
If the Company had elected to recognize compensation cost on the fair market
value at the grant dates for awards under the stock option plan, consistent
with the method prescribed by SFAS No. 123, net income and income per share
would have been changed to the pro forma amounts indicated below:

<TABLE>
<CAPTION>
Period ended
September 30, 1999
------------------
<S> <C>
Net loss--
As reported............................................. $(2,350,451)
Pro forma............................................... (2,499,968)
Net loss available to common stockholders--
As reported............................................. $(3,393,593)
Pro forma............................................... (3,543,110)
Basic and diluted loss per share--
As reported............................................. $ (0.39)
Pro forma............................................... (0.40)
</TABLE>

The fair value of the Company's stock options was estimated as of the grant
date using the Black-Scholes option pricing model with the following weighted
average assumptions for the period ended September 30, 1999 and June 30, 2000:
dividend yield of 0.0%, expected volatility of 50%, risk free interest rate of
6.5%, and an expected holding period from 1 to 3 years. The following table
summarizes activity under the Company's stock option plan:

<TABLE>
<CAPTION>
Nine months ended
Period ended June 30, 2000
September 30, 1999 (Unaudited)
--------------------------- ---------------------------
Weighted Average Weighted Average
Shares Exercise Price Shares Exercise Price
--------- ---------------- --------- ----------------
<S> <C> <C> <C> <C>
Outstanding at beginning
of period.............. -- -- 1,839,500 $ 2.70
Granted................. 1,900,500 $2.65 767,600 12.33
Exercised............... -- -- (259,668) 1.00
Forfeited/expired....... (61,000) 1.11 (358,600) 6.50
--------- ---------
Outstanding at end of
period................. 1,839,500 $2.70 1,988,832 $ 5.92
========= =========
Weighted average fair
value of options
granted during period.. $1.06
=========
</TABLE>

F-18
<PAGE>

MindArrow Systems, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

<TABLE>
<CAPTION>
Stock Options
Stock Options Outstanding at Exercisable at
September 30, 1999 September 30, 1999
--------------------------------- ------------------------
Range of Weighted Average Weighted Average Weighted Average
Exercise Prices Shares Contractual Life Exercise Price Shares Exercise Price
--------------- --------- ---------------- ---------------- ------- ----------------
<S> <C> <C> <C> <C> <C>
$1.00 to $4.00 1,403,000 5.0 $ 1.11 259,666 $ 1.00
$7.00 to $10.00 436,500 5.9 7.83 -- --
--------- -------
1,839,500 5.2 $ 2.70 259,666 $ 1.00
========= =======

<CAPTION>
Stock Options
Stock Options Outstanding at Exercisable at June 30,
June 30, 2000 2000
(Unaudited) (Unaudited)
--------------------------------- ------------------------
Range of Weighted Average Weighted Average Weighted Average
Exercise Prices Shares Contractual Life Exercise Price Shares Exercise Price
--------------- --------- ---------------- ---------------- ------- ----------------
<S> <C> <C> <C> <C> <C>
$1.00 to $4.00 1,061,332 4.2 $ 1.14 652,003 $ 1.03
$7.00 to $10.00 599,500 5.4 7.87 50,000 8.00
$12.00 to $15.00 192,000 5.3 12.88 50,000 12.88
$23.00 to $25.00 136,000 5.7 24.81 -- --
--------- -------
1,988,832 $ 5.92 752,003 $ 2.28
========= =======
</TABLE>

The Company recorded compensation expense in the amount of $35,895 related
to stock options for the period ended September 30, 1999, and $122,912 for the
nine months ended June 30, 2000. As of June 30, 2000 $351,353 remains to be
amortized over the remaining vesting periods of the options.

Note J--Employment Contracts

The Company has employment agreements and arrangements with three executive
officers. The agreements generally continue until terminated by the executive
or the Company, and provide for severance payments under certain circumstances.
As of September 30, 1999 and June 30, 2000, if all of the employees
under these contracts were to be terminated by the Company, the Company's
liability would be approximately $1.3 million. During June 2000, two of the
employment contracts were converted to consulting agreements with substantially
the same terms.

Note K--Profit Sharing Plan

Effective October 1, 1999, the Company implemented a 401(k) Profit Sharing
Plan (the "Plan") for its full-time employees. Each participant in the Plan may
elect to contribute from 1% to 17% of his or her annual compensation to the
Plan. The Company does not yet make matching contributions. However, at its
option, the Company may match employee contributions at a rate of 25%, up to 6%
of the Employee's salary. Employee contributions are fully vested, whereas
vesting in matching Company contributions occurs at a rate of 33.3% per year of
employment.

F-19
<PAGE>

Report of Independent Certified Public Accountants

To the Board of Directors and the Stockholders of Fusionactive.com Limited and
Subsidiaries:
(formerly Fusion Advertising Limited)

We have audited the accompanying consolidated balance sheets of
Fusionactive.com Limited and Subsidiaries as of December 31, 1999 and 1998, and
the related consolidated statements of operations and cash flows for the years
ended December 31, 1999 and 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Fusionactive.com Limited and Subsidiaries (formerly Fusion Advertising
Limited) as of December 31, 1999 and 1998, and the consolidated results of
their operations and cash flows for the years ended December 31, 1999 and 1998,
in conformity with accounting principles generally accepted in the United
States of America.

As more fully explained in footnote A, Fusionactive.com Limited was
incorporated for the purpose of acquiring an interest in two subsidiaries on
February 23, 2000. One of these subsidiaries had no substantial operations up
to December 31, 1999 and accordingly our audit reports include only the results
of the other subsidiary, Fusion Advertising Limited.

Grant Thornton
Certified Public Accountants
Hong Kong
August 11, 2000

F-20
<PAGE>

Fusionactive.com Limited and Subsidiaries

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
December 31, December 31, March 31,
1999 1998 2000
------------ ------------ -----------
(Unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash.................................... $ 129,509 $ 326,750 $ 122,415
Accounts receivable, net of allowance
for doubtful accounts of $61,538, $0
and $61,538 at December 31, 1999, 1998
and March 31, 2000 respectively........ 314,975 263,261 305,379
Amount due from a director.............. 51,734 -- --
--------- --------- ---------
Total current assets................... 496,218 590,011 427,794
Property, plant and equipment, net....... 25,581 86,653 23,774
Other investment......................... 20,769 20,769 --
--------- --------- ---------
Total assets........................... $ 542,568 $ 697,433 $ 451,568
========= ========= =========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses... $ 187,745 $ 236,347 $ 113,428
Amount due to a director................ -- -- 24,809
Accrued dividends....................... -- -- 128,205
--------- --------- ---------
Total current liabilities.............. 187,745 236,347 266,442
--------- --------- ---------

Stockholders' equity:
Authorized 5,000 ordinary shares
@HK$100 each
Issued and fully paid 1,200 ordinary
shares................................ 15,385 15,385 --
Authorized 66,250 ordinary shares
@US$1 each
Issued and fully paid 50,000 ordinary
shares................................ -- -- 50,000
Additional paid-in capital.............. -- -- 15,385
Retained earnings....................... 339,438 445,701 119,741
--------- --------- ---------
Total stockholders' equity............. 354,823 461,086 185,126
--------- --------- ---------
Total liabilities and stockholders'
equity................................ $ 542,568 $ 697,433 $ 451,568
========= ========= =========
</TABLE>

The accompanying notes are an integral part of these statements.

F-21
<PAGE>

Fusionactive.com Limited and Subsidiaries

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
For the year For the year For the three For the three
ended ended months ended months ended
December 31, December 31, March 31, March 31,
1999 1998 2000 1999
------------ ------------ ------------- -------------
(Unaudited)
<S> <C> <C> <C> <C>
Revenues................. $ 926,585 $1,542,134 $199,060 $ 161,582
---------- ---------- -------- ---------
Operating expenses:
Production............. 410,229 614,648 112,627 55,542
General and
administration........ 605,910 970,240 155,693 205,091
Depreciation........... 42,307 115,943 5,999 10,577
---------- ---------- -------- ---------
1,058,446 1,700,831 274,319 271,210
---------- ---------- -------- ---------
Operating loss........... (131,861) (158,697) (75,259) (109,628)
Interest income.......... 5,892 11,892 -- 8
Miscellaneous income..... 16,881 48,873 4,536 9,522
Income tax credit........ 2,825 15,513 -- --
---------- ---------- -------- ---------
Net loss............. $ (106,263) $ (82,419) $(70,723) $(100,098)
========== ========== ======== =========
</TABLE>

The accompanying notes are an integral part of these statements.

F-22
<PAGE>

Fusionactive.com Limited and Subsidiaries

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
Additional
Common Paid-in Retained
Stock Capital Earnings Total
-------- ---------- --------- ---------
<S> <C> <C> <C> <C>
Balance as of January 1, 1998....... $ 15,385 $ -- $ 528,120 $ 543,505
Net loss for the year............... -- -- (82,419) (82,419)
-------- -------- --------- ---------
Balance as of December 31, 1998..... 15,385 -- 445,701 461,086
Net loss for the year............... -- -- (106,263) (106,263)
-------- -------- --------- ---------
Balance as of December 31, 1999..... 15,385 -- 339,438 354,823
Dividend declared................... -- -- (128,205) (128,205)
Property dividend................... -- -- (20,769) (20,769)
Issuance of US$1 common stock....... 50,000 -- -- 50,000
Reclassification of HK$100 common
stock.............................. (15,385) 15,385 -- --
Reclassification of US$1 common
stock.............................. (50,000) 50,000 -- --
Reclassification of US$1 common
stock in connection with the
investments in subsidiaries........ 35,000 (35,000) -- --
Reclassification of US$1 common
stock to founders for services..... 15,000 (15,000) -- --
Net loss of the period.............. -- -- (70,723) (70,723)
-------- -------- --------- ---------
Balance as of March 31, 2000
(unaudited)........................ $ 50,000 $ 15,385 $ 119,741 $ 185,126
======== ======== ========= =========
</TABLE>

The accompanying notes are an integral part of these statements.

F-23
<PAGE>

Fusionactive.com Limited and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
For the For the
For the year For the year three months three months
ended ended ended ended
December 31, December 31, March 31, March 31,
1999 1998 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Cash flows from operating
activities:
Net loss.................. $ (106,263) $ (82,419) $ (70,723) $(100,098)
Adjustments to reconcile
net loss to net cash
(used in)/provided by
operating activities:
Depreciation and
amortization............ 42,307 115,943 5,999 10,577
Loss on disposal of
equipment............... 25,041 -- -- --
Decrease in deferred
income taxes............ -- (19,017) -- --
Provision for bad debt... 61,538 -- -- --
Change in assets and
liabilities:
(Increase) Decrease in
accounts receivable..... (113,252) 511,071 9,596 117,965
(Increase) Decrease in
amount due from a
director................ (51,734) 32,707 76,543 25,334
Increase in prepaid
income taxes............ -- (7,967) -- --
Decrease in accounts
payable and accrued
expenses................ (48,602) (500,070) (74,317) (216,621)
---------- --------- --------- ---------
Net cash (used
in)/provided by
operating activities... (190,965) 50,248 (52,902) (162,843)
---------- --------- --------- ---------
Cash flows from investing
activities:
Proceeds from sales of
equipment................ 847 -- -- --
Purchases of property,
plant and equipment...... (7,123) (872) (4,192) (731)
---------- --------- --------- ---------
Net cash used in investing
activities................ (6,276) (872) (4,192) (731)
---------- --------- --------- ---------
Cash flows from financing
activities:
Proceeds from issuance of
common stock............. -- -- 50,000 --
---------- --------- --------- ---------
(Decrease) Increase in
cash...................... (197,241) 49,376 (7,094) (163,574)
Cash at beginning of year.. 326,750 277,374 129,509 326,750
---------- --------- --------- ---------
Cash at end of year........ $ 129,509 $ 326,750 $ 122,415 $ 163,176
========== ========= ========= =========
Supplemental disclosure of
non cash financing
activities:
</TABLE>

Fusionactive acquired 100% common stock of FAL and CTL by using the
recapitalization accounting method, and the common stock of FAL and CTL were
reclassified as the common stock of Fusionactive accordingly. FAL's investments
in a golf club debenture and a vessel with book values of $20,769 in total were
distributed as dividends to the sole stockholder of FAL.

The accompanying notes are an integral part of these statements.

F-24
<PAGE>

Fusionactive.com Limited and Subsidiaries

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Note A--Background

On February 23, 2000 Fusionactive.com Limited ("Fusionactive") acquired 100%
of the common stock of Fusion Advertising Limited ("FAL"). The acquisition was
accounted for as a recapitalization of FAL. Accordingly, the historical
financial statements of Fusionactive are those of FAL. Concurrently with the
recapitalization, Fusionactive acquired 100% of Cambridge Technologies Limited
("CTL"). CTL had no significant operations or monetary assets and accordingly
the transaction was accounted for as a purchase of an asset. Fusionactive had
no operations or significant monetary assets prior to the acquisition.

Subsequent to the acquisitions FAL and CTL have continued to be 100%
subsidiaries of Fusionactive for legal purposes.

Consolidated balance sheets as at March 31, 2000 and Statements of
Operations for the period from January 1, 2000 to March 31, 2000 have been
prepared by using the recapitalization accounting method to incorporate FAL and
CTL. Pro forma prior period financial statements have not been prepared since
these would not be meaningful as Fusionactive was formed specifically to
facilitate the combination of FAL and CTL. Accordingly the comparative interim
results for the period ended March 31, 1999 reflect the financial position of
FAL alone.

On April 24, 2000, MindArrow Systems Inc. ("MindArrow"), a company
incorporated in the United States of America, acquired 90% of Fusionactive in a
stock transaction.

Note B--Summary Of Significant Accounting Policies

(a) Principles of Consolidation

As explained in footnote A above, Fusionactive acquired its interest in FAL
and CTL in February 2000. The audited financial statements for the years ended
December 31, 1998 and 1999 and the unaudited results for the period ended March
31, 1999 reflect only the results of FAL. CTL had no substantial operations
since its incorporation up to December 31, 1999.

The consolidated financial statements for the period ended March 31, 2000
include the accounts of Fusionactive and its wholly owned subsidiaries prepared
under the recapitalization accounting method. All significant intercompany
balances and transactions have been eliminated on consolidation.

(b) Interim Financial Statements

The financial statements as of and for the three months ended March 31, 2000
and for the three months ended March 31, 1999 are unaudited; however, in the
opinion of management, all adjustments, consisting of normal recurring
adjustments necessary for a fair presentation of the group's financial position
and results of operations for such periods have been included. The results for
the three months ended March 31, 2000 are not necessarily indicative of the
results that may be expected for the year ending December 31, 2000.

FAL's revenue from media sales is recognized upon the placing of
advertisements in the media. Revenue from production sales is recognized upon
delivery of goods and services to customers. Revenue from consulting services
is recognized as the services are rendered.

(d) Comprehensive Income

In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 130, "Reporting
Comprehensive Income," which has been adopted by the

F-25
<PAGE>

Fusionactive.com Limited and Subsidiaries

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Company. SFAS No. 130 establishes standards for reporting comprehensive income
and its components in a financial statement. Comprehensive income as defined
includes all changes in equity (net assets) during a period from non-owner
sources. Examples of items to be included in comprehensive income, which are
excluded from net income, include foreign currency translation adjustments and
unrealized gains and losses on available-for-sale securities. As none of these
components have impacted the Company, adjustments for comprehensive income have
not been made to the accompanying consolidated financial statements.

(e) Property, Plant and Equipment

Property, plant and equipment are stated at cost less depreciation. The cost
of an asset comprises its purchase price and any directly attributable costs of
bringing the assets to working condition and location for its intended use.
Subsequent expenditure relating to property, plant and equipment is added to
the carrying amount of the assets if it can be demonstrated that such
expenditure has resulted in an increase in the future economic benefits
expected to be obtained from the use of the assets. All ordinary repair and
maintenance costs are expensed as incurred.

The carrying amount of property, plant and equipment is reviewed
periodically in order to assess whether the recoverable amount has declined
below the carrying amount. When such a decline has occurred, the carrying
amount is reduced to the recoverable amount. The amount of the reduction is
recognized as an expense in the statements of operations.

Gains or losses arising from the retirement or disposal of property, plant
and equipment are determined as the difference between the net disposal
proceeds and the carrying amount of the assets and are recognized in the
statements of operations on the date of retirement or disposal.

Depreciation and amortization are provided for in the amounts sufficient to
relate the cost of depreciable assets to operations by using the straight-line
method over their estimated useful lives. The estimated useful lives of the
major classifications of property, plant and equipment are as follows:

<TABLE>
<S> <C>
Furniture........................................................ 5 years
Fixtures and fittings............................................ 5 years
Office equipment................................................. 5 years
</TABLE>

(f) Income Taxes

Income taxes are computed using the asset and liability method. Under the
asset and liability method, deferred income tax assets and liabilities are
determined based on the differences between the financial reporting and tax
bases of assets and liabilities and are provided on assessable profits in
accordance with the prevailing local tax revenue rules. Certain charges to
earnings differ as to timing from those deducted for tax purposes. These relate
primarily to accelerated depreciation.

(g) Foreign Currencies

The company considers the Hong Kong Dollar ("HK$") as its functional
currency as most of the group's business activities are based in Hong Kong. The
group's accounting records are maintained in Hong Kong Dollars.

Transactions in foreign currencies are translated into Hong Kong Dollars at
the rates of exchange ruling at the dates of transactions. Monetary assets and
liabilities denominated in foreign currencies at the balance sheet date are
translated into Hong Kong Dollars at the rates of exchange ruling at that date.

F-26
<PAGE>

Fusionactive.com Limited and Subsidiaries

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

(h) Translation into Reporting Currency

Since the reporting currency is the United States Dollar ("US$"), all
transactions, assets and liabilities have been translated into United States
Dollars at the rate of US$1=HK$7.8.

(i) Other Investment

The investment represents an unlisted golf club debenture and is considered
available-for-sale. The investment is stated at cost since management has
determined that the difference between cost and market value is not material.

(j) Fair value of Financial Instruments

The fair value of financial instruments approximates their carrying amounts.

In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", and in July 1999 issued Financial
Accounting Standard No. 137, "Accounting for Derivative Instruments and Hedging
Activities--Deferral of the Effective Date of FASB Statements No. 133, an
Amendment of FASB Statement No. 133" (SFAS No. 137). SFAS No. 137 delayed the
effective date for SFAS 133 to fiscal years beginning after June 15, 2000. The
Company does not believe that this statement will have a material effect on its
financial position or results of operations.

(k) Operating leases

Operating leases represents those leases under which substantially all the
risk and rewards of ownership of the assets remain with the lessors. Rental
payments under operating leases are charged to expense on a straight-line basis
over the period of the relevant leases.

(l) Use of Estimates

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities at the date of the financial statements, 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.

(m) Cash and Cash Equivalents

All highly liquid instruments with an original maturity of three months or
less are considered cash equivalents; those with original maturities greater
than three months and current maturities less than twelve months from the
balance sheet date are considered short-term investments; and those with
maturities greater than twelve months from the balance sheet date are
considered long-term investments.

Note C--Other Investment

<TABLE>
<CAPTION>
December 31, December 31, March 31,
1999 1998 2000
------------ ------------ -----------
(Unaudited)
<S> <C> <C> <C>
Golf club debenture.................... $20,769 $20,769 $ --
======= ======= =====
</TABLE>

In the opinion of the management and directors, the investment has suffered
no impairment loss.

F-27
<PAGE>

Fusionactive.com Limited and Subsidiaries

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

As part of the recapitalization of the group in February, 2000 the
debenture was distributed as a dividend to the sole stockholder of FAL.

Note D--Amount Due to a Director

The amount due to a director is unsecured, interest free and has no fixed
terms of repayment.

Note E--Property, Plant and Equipment

Property, plant and equipment is comprised of the following:

<TABLE>
<CAPTION>
December 31, December 31, March 31,
1999 1998 2000
------------ ------------ -----------
(Unaudited)
<S> <C> <C> <C>
Furniture.............................. $ 20,035 $ 20,318 $ 20,286
Fixtures and fittings.................. 40,685 39,744 41,133
Office equipment....................... 340,977 483,138 344,470
Vessel................................. 77,949 77,949 --
-------- -------- --------
479,646 621,149 405,889
Less: accumulated depreciation......... (454,065) (534,496) (382,115)
-------- -------- --------
$ 25,581 $ 86,653 $ 23,774
======== ======== ========
</TABLE>

As part of the recapitalization of the group in February, 2000 the vessel
was distributed as a dividend to the sole stockholder of FAL.

Note F--Income Taxes

<TABLE>
<CAPTION>
For the
For the year For the year three months
ended ended ended
December 31, December 31, March 31,
1999 1998 2000
------------ ------------ ------------
(Unaudited)
<S> <C> <C> <C>
Tax rebate of prior year.............. $(2,825) $ -- $ --
Deferred.............................. -- (15,513) --
------- -------- -----
$(2,825) $(15,513) $ --
======= ======== =====
</TABLE>

No provision has been made for Hong Kong profits tax in the years ended
December 31, 1998 and 1999, nor in the periods ended March 31, 1999 and 2000
as FAL did not derive any assessable profit for these periods.

No deferred tax has been provided in the financial statements as there are
no material timing differences.

Note G--Subsequent Event

On April 24, 2000, MindArrow Systems Inc., a company incorporated in the
United States of America acquired 90% of Fusionactive's issued stock in a
stock transaction.

F-28
<PAGE>

UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS

BASIS OF PRESENTATION

The following Unaudited Pro Forma Combined Financial Statements and related
notes contain forward-looking statements that involve risks and uncertainties.
Our actual results may differ materially from those discussed herein. We
undertake no obligation to publicly release the result of any revisions to
these forward-looking statements that may be made to reflect any future events
or circumstances.

In the opinion of our management, all adjustments necessary to fairly
present this pro forma information have been made. The Unaudited Pro Forma
Combined Financial Statements are based upon, and should be read in conjunction
with, the historical financial statements of MindArrow Systems, Inc. and
Fusionactive.com Limited, and the respective notes to such financial statements
presented elsewhere in this Prospectus. The pro forma information is based upon
tentative allocations of purchase price for the acquisitions and may not be
indicative of the results that would have been reported had such events
actually occurred on the dates specified, nor is it indicative of the Company's
future results. Purchase accounting is based upon preliminary asset valuations,
which are subject to change. The Unaudited Pro Forma Combined Statements of
Operations for the most recently completed fiscal year are presented as if
MindArrow had completed the acquisition as of January 1, 1999 and both
companies had the same fiscal year-end. The Unaudited Pro Forma Combined
Statements of Operations for the nine months ended June 30, 2000 are presented
as if MindArrow had completed the acquisition as of September 30, 1999. You
should read "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources."

F-29
<PAGE>

MindArrow Systems, Inc. and Subsidiaries

UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS

<TABLE>
<CAPTION>
Nine Months Ended June 30, 2000
-----------------------------------------------------------
MindArrow
Systems, Fusionactive.com, Pro Forma Pro Forma
Inc. Ltd(a) Adjustments Combined
------------ ----------------- ----------- ------------
<S> <C> <C> <C> <C>
Revenues................ $ 761,968 $ 754,294 $ -- $ 1,516,262
------------ --------- --------- ------------
Operating Expenses:
Development........... 1,440,723 -- -- 1,440,723
Production............ 481,485 440,863 -- 922,348
Sales and marketing... 5,191,381 50,139 -- 5,241,520
General and
administration....... 4,372,396 412,924 -- 4,785,320
Depreciation and
amortization......... 718,172 25,015 614,597 (b) 1,357,784
------------ --------- --------- ------------
12,204,157 928,941 614,597 13,747,695
------------ --------- --------- ------------
Operating loss.......... (11,442,189) (174,647) (614,597) (12,231,433)
Interest income......... 297,324 5,693 -- 303,017
Benefit (provision) for
income taxes........... (1,628) 7,895 -- 6,267
Minority interest....... -- -- 16,106 16,106
------------ --------- --------- ------------
Net loss.............. (11,146,493) (161,059) (598,491) (11,906,043)
Beneficial conversion
feature on preferred
stock.................. 12,346,440 -- -- 12,346,440
------------ --------- --------- ------------
Net loss available to
common stockholders.. $(23,492,933) $(161,059) $(598,491) $(24,252,483)
============ ========= ========= ============
Basic and diluted loss
per share.............. $ (2.49)
============
Shares used in
computation of basic
and diluted net loss
per share.............. 9,739,023
============
</TABLE>

(a) Fusionactive.com, Ltd. was acquired by MindArrow Systems, Inc. on April 24,
2000, in a purchase-type transaction. MindArrow issued 150,000 shares of
common stock to acquire 90% of the common stock of Fusionactive.com. The
results of operations of Fusionactive.com will be included in our
consolidated results commencing April 1, 2000. The results of operations of
Fusionactive.com from April 1 through April 23, 2000 are immaterial to our
consolidated results. This presentation shows the pro forma effects of the
operations of Fusionactive.com as if the acquisition occurred on October 1,
1999.

(b) Represents the amortization of the $2.4 million goodwill that would have
been recorded for the period ended June 30, 2000, if the acquisition had
occurred on October 1, 1999. Goodwill is amortized on a straight-line basis
over three years. No other significant fair value purchase price
adjustments were recorded in conjuntion with the acquisition of
Fusionactive.com.

F-30
<PAGE>

MindArrow Systems, Inc. and Subsidiaries

UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS

<TABLE>
<CAPTION>
September 30,
1999 December 31, 1999
------------- -----------------
MindArrow Fusionactive.com, Pro Forma Pro Forma
Systems, Inc. Ltd(a) Adjustments Combined
------------- ----------------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues................ $ 6,250 $ 926,585 $ -- $ 932,835
----------- ---------- --------- -----------
Operating Expenses:
Development........... 320,766 -- -- 320,766
Production............ 139,674 410,229 -- 549,903
Sales and marketing... 1,060,795 -- -- 1,060,795
General and
administration....... 684,343 605,910 -- 1,290,253
Depreciation and
amortization......... 173,797 42,307 819,462 (b) 1,035,566
----------- ---------- --------- -----------
2,379,375 1,058,446 819,462 4,257,283
----------- ---------- --------- -----------
Operating loss.......... (2,373,125) (131,861) (819,462) (3,324,448)
Interest income &
other.................. 24,274 22,773 -- 47,047
Benefit (provision) for
income taxes........... (1,600) 2,825 -- 1,225
Minority interest....... -- -- 10,626 10,626
----------- ---------- --------- -----------
Net loss.............. (2,350,451) (106,263) (808,836) (3,265,550)
Beneficial conversion
feature on preferred
stock.................. 1,043,142 -- -- 1,043,142
----------- ---------- --------- -----------
Net loss available to
common stockholders.... $(3,393,593) $ (106,263) $(808,836) $(4,308,692)
=========== ========== ========= ===========
Basic and diluted loss
per share.............. $ (0.48)
===========
Shares used in
computation of basic
and diluted net loss
per share.............. 8,901,760
===========
</TABLE>

(b) Represents the amortization of the $2.4 million goodwill that would have
been recorded for the period ended December 31, 1999, if the acquisition
had occurred on January 1, 1999. Goodwill is amortized on a straight-line
basis over three years. No other significant fair value purchase price
adjustments were recorded in conjuntion with the acquisition of
Fusionactive.com.

F-31
<PAGE>

[LOGO OF MINDARROW APPEARS HERE]
<PAGE>

PART II:

INFORMATION NOT REQUIRED IN PROSPECTUS

Item 13: Other Expenses of Issuance and Distribution

The estimated expenses payable in connection with the issuance and
distribution of the securities being registered are as follows:

<TABLE>
<S> <C>
SEC registration fee............................................... $ 26,486
Legal fees and expenses............................................ 150,000
Accounting fees and expenses....................................... 85,000
Printing and engraving expense..................................... 100,000
Transfer agent fees and expenses................................... 5,000
Miscellaneous...................................................... 2,500
--------
TOTAL............................................................ $368,986
========
</TABLE>

Except for the SEC registration fee, the above amounts are estimated.

Item 15: Recent Sales of Unregistered Securities

Transactions prior to April 1999 were initiated by Wireless Netcom and its
predecessor company, Rubicon Sports. As described in the following paragraphs,
all preferred shares and convertible debt balances were converted into common
stock upon the merger of Wireless Netcom and eCommercial California in April
1999. As of August 4, 2000, we had only Series B and Series C preferred stock
and common stock outstanding.

In June 1998, we undertook a private offering of non-interest bearing
Promissory Notes (the "Notes") maturing twelve months from the date of
issuance. Originally, the Notes were convertible into common stock by each
investor no earlier than thirty days following commencement of trading of our
common stock on the OTC Bulletin Board. We received subscriptions totaling
$500,000 from 11 individual and 3 institutional accredited investors. The
investors were Dallas Self, Rick Self, Richard Hennig, Sport of Kings, Carolyn
Peterson, IRA, Peterson Family Trust, Marta Modine Solomon, Wilson Peterson,
IRA, ICB, Anthony Romano, III, Kirk Olson, Grant Weststeyn, Wagnon and
Marguerite Rogers. Concurrent with the merger of Wireless Netcom and
eCommercial California, these Notes were converted into 166,667 shares of our
common stock.

In July 1998, we undertook a $500,000 private offering of 6% Convertible
Promissory Notes to six individual accredited investors. The investors were
Richard Self, Kirk Rand Olson, Anthony N. Romano, III, Pablo & Rhonda
Fernandez, Barry & Mrs. Cheryl Christian and Larry W. Fuqua. Originally, the
Notes matured twelve months from the date of issuance and were convertible into
common stock thirty days following commencement of trading of our common stock
on the OTC Bulletin Board. The number of shares into which the Notes were
convertible was determined by dividing the dollar amount of such amount by the
preceding five day average closing bid price of the Shares, discounted by
twenty percent, as quoted on the OTC Bulletin Board. Concurrent with the merger
of Wireless Netcom and eCommercial California, these Notes were converted into
166,667 shares of our common stock.

In April 1999, we undertook a private placement of our common stock, at
prices from $1 to $4 per share to 2 institutional and 22 individual accredited
investors, all of whom are included in the selling Shareholders section of the
prospectus. ("April 1999 Offering"). The April 1999 Offering was made pursuant
to the exemptions from registration provided by Section 4(2) of the Act, and
Rule 506 promulgated thereunder, and the applicable blue sky laws. We received
proceeds of $942,404 and issued 475,118 shares of common stock thereunder. The
April 1999 Offering closed in May 1999.

In April 1999, we issued warrants to purchase 5,200 shares of our common
stock to Comerica Bank, in exchange for extended repayment terms related to
liabilities we acquired in the acquisition of Zap International.

II-1
<PAGE>

The warrants are exercisable at $5 per share, expire in April 2004, and were
issued pursuant to the exemptions from registration provided by Section 4(2) of
the Act. At the date of grant, the fair value of the warrants was $1,508.

In May 1999, we issued warrants to purchase 15,000 shares of our common
stock to Zachary Hanson, Jordan Hanson, and Clarke Hanson, as an inducement to
become an early customer. The warrants are exercisable at $11.25 per share,
expire in May 2001, and were issued pursuant to the exemptions from
registration provided by Section 4(2) of the Act. At the date of grant, the
fair value of the warrants was $25,950.

From April through July 1999, we issued 69,859 shares of our common stock to
Lockheed Martin Corporation, Four Winds Trading Corp. and eight individuals in
exchange for consulting and advisory services. The consultants include Adrian
Turcotte, Robert Petersen, Barry Gott, David Jackson, Jeff Olander, Ed Roberts,
David Hodkinson and John McMains. The shares were issued pursuant to the
exemptions from registration provided by Section 4(2) of the Act. Compensation
expense of $294,068 was recognized upon issuance of the shares.

From April 1999 through September 1999, we issued warrants for the purchase
of 231,000 shares of our common stock to nine accredited investors in exchange
for financial consulting and advisory services. The warrants have prices
ranging from $1 to $10 per share, vesting terms based on achieving various
performance criteria and expire at various dates through July 2005. The
warrants were issued to Jeff Gold, Mark Rice, Irl Nathan, Laird Kagan, Jim
Kaplan, Eric Eisenberg, David Jackson, Kathy Rocklen and Richard Brown. The
warrants were issued pursuant to the exemptions from registration provided by
Section 4(2) of the Act. We recognize compensation expense based on the fair
value of the warrants as computed using the Black-Scholes option pricing model.
The Company has recognized compensation expense of $1,904,628 for these
warrants. At June 30, 2000, 20,000 of these warrants had been forfeited.

In July 1999, we undertook a private placement of our Series B preferred
stock, at a price of $8 per share to 26 institutional and 161 individual
accredited investors, all of whom are included in the selling Shareholders
section of the prospectus. ("July 1999 Offering"). The July 1999 Offering was
made pursuant to the exemptions from registration provided by Section 4(2) of
the Act, and Rule 506 promulgated thereunder, and the applicable Blue Sky laws.
We received proceeds of $10,153,473 and issued 1,388,073 shares of Series B
preferred stock and 635,091 warrants thereunder. We also issued an option to
purchase an additional 125,000 shares of Series B preferred at $8.00 per share
and receive an additional 12,500 warrants, expiring March 31, 2000. The option
was exercised on March 24, 2000. The July 1999 Offering closed in December
1999.

From October 1999 through August 2000, we issued warrants for the purchase
of 1,055,500 shares of our common stock to 23 accredited investors in exchange
for financial consulting and advisory services. The warrants bear prices
ranging from $5.25 to $30 per share, have vesting terms of up to three years
and expire at various dates through August 2006. The warrants were issued to
Robert Keefe, Robert Smith, Jack Hazzard, Michael Levy, Ken Mullins, Robert
Fish, Anthony Cosentino, Netimpact, The Gingrich Group, Daniel Tellup, Ruffin
Cordell, Charles Preston, Pierre Stroh, Andrew Whitmark, John Ratzenberger, Tim
McMullen, Kevin Temple, Octane Partners, Online Research Partners, Dan Shapero,
KSH Investments, Privet Row, LP, and Highline Capital. The warrants were issued
pursuant to the exemptions from registration provided by Section 4(2) of the
Act. We recognize compensation expense based on the fair value of the warrants
as computed using the Black-Scholes option pricing model. The Company has
recognized compensation expense of $1,332,343 for these warrants.

In March 2000, we undertook a private placement of our Series C preferred
stock, at a price of $25 per share to 11 institutional and 6 individual
accredited investors ("March 2000 Offering"). The investors were Patricia
Quick, Highline Capital International, Ltd., Highline Capital Partners, LP,
Thomas C. Quick and Leslie C. Quick, Jr., Lorenzo Bettino, Cahan Family
Holdings, LLC, Point West Ventures, L.P., International Network Group, Inc.,
Gregory P. Shlopak, Privet MindArrow Partners, LP, Kevin & Ulla Parker JT WROS,

II-2
<PAGE>

Timothy J. McMullen, The Gabelli Global Growth Fund, The Gabelli Westwood
Mighty Mites Fund, Metamor Worldwide, Inc., United Investors Group, Ltd., and
Alignment Capital. The March 2000 Offering was made pursuant to the exemptions
from registration provided by Section 4(2) of the Act, and Rule 506 promulgated
thereunder, and the applicable Blue Sky laws. Through June 30, 2000, we
received proceeds of $18,144,375 and issued 725,775 shares of Series C
preferred stock and 145,156 warrants thereunder.

In April 2000, we issued 150,000 shares of our common stock in connection
with our acquisition of 90% of the outstanding common stock of Fusionactive.com
Limited, our Hong Kong-based subsidiary. The shares were issued to Arch
International Group Limited, Jamo Lo Ka Chue, Tracy Yau Yuet Ling, Intellectual
Partners Limited, Alex Lee Ping Kee and Xiao Feng Group Limited, who were the
shareholders of Fusionactive. The shares were issued pursuant to the exemptions
from registration provided by Section 4(2) of the Act. The shares were valued
at $2,625,000 at the time of issuance.

Item 16: Index To Exhibits and Financial Statement Schedules

<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S>
2.1* Agreement and Plan of Merger between MindArrow Systems, Inc. (DE)
and eCommercial.com, Inc. (NV)
2.2* Stock Purchase Agreement--Fusionactive.com, Ltd.
3.1* Amended and Restated Certificate of Incorporation of the
Registrant
3.2* Bylaws of the Registrant
4.1* Investor Rights Agreement
4.2* Form of Registrant's Specimen Common Stock Certificate
4.3* Form of Registrant's Series B Preferred Stock Certificate
4.4* Form of Common Stock Warrants
5.1* Opinion on Legality
9.1* Voting Agreement
10.1* Stock Purchase Agreement, dated as of April 16, 1999 between the
Company and Shareholders of Zap International
10.2* Merger Agreement, dated as of April 19, 1999, between Wireless
Netcom, Inc. and the shareholders of eCommercial.com, Inc.
10.3* Consulting Agreement--Thomas Blakeley
10.4* Employment Agreement--Robert Webber
10.5* Consulting Agreement--Eric A. McAfee
10.6* Form of Change in Control Executive Retention Agreement
10.7* Registrant's 1999 Stock Option Plan
10.8* Agreement between Registrant and Eric McAfee regarding Voxel
10.9* Form of Indemnification Agreement between Registrant and each of
its directors
10.10* Lease Agreement--Aliso Viejo, CA
10.11* Sublease Agreement--Cupertino, CA
10.12* Strategic Relationship Agreement between Registrant and ONEX
Ventures LLC
10.13* Strategic Relationship Agreement between Registrant and Lockheed
Martin Corporation
10.14* Strategic Relationship Agreement between Registrant and
eContributor.com
23.1 Consent of experts (Grant Thornton LLP)
23.2 Consent of experts (Grant Thornton, Hong Kong)
23.3* Consent of Counsel (see Exhibit 5.1)
24.1* Power of Attorney (included on signature page)
27.1* Financial Data Schedule
</TABLE>
--------
* Previously filed
** To be filed by amendment

II-3
<PAGE>

Item 17: Undertakings

We hereby undertake to:

1. File, during any period in which we offer or sell securities, a post-
effective amendment to this Registration Statement to:

(a) Include any prospectus required by Section 10(a)(3) of the
Securities Act;

(b) Reflect in the prospectus any facts or events which, individually
or together, represent a fundamental change in the information set
forth in the Registration Statement; and

2. For determining liability under the Act, treat each post-effective
amendment as a new registration of the securities offered, and the
offering of such securities at that time to be the initial bona fide
offering;

3. File a post effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering; and

4. Provide certificates in such denominations and registered in such names
to permit prompt delivery to each purchaser.

Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the company
pursuant to the foregoing provisions, or otherwise, the company has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable.

In the event that a claim for indemnification against such liabilities
(other than the payment by the company of expenses incurred or paid by a
director, officer or controlling person of the company in the successful
defense of any action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities being
registered, the company will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.

For the purpose of determining any liability under the Securities Act, the
company will treat the information omitted from the form of prospectus filed as
part of this Registration Statement in reliance upon Rule 430A and contained in
a form of Prospectus filed by the Company pursuant to Rule 424(b)(1), or (4),
or 497(h) under the Securities Act as part of this Registration Statement as of
the time the Securities and Exchange Commission declares it effective.

For the purpose of determining any liability under the Securities Act, we
will treat such post-effective amendment that contains a form of prospectus as
a new Registration Statement for the securities offered therein, and treat the
offering of the securities at that time as the initial bona fide offering of
those securities.

II-4
<PAGE>

SIGNATURES

In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form S-1 and authorized this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Aliso Viejo, State of California, on August 17,
2000.

MindArrow Systems, Inc.

/s/ Robert I. Webber
By___________________________________
Robert I. Webber
Chief Executive Officer

IN WITNESS WHEREOF, each of the undersigned has exercised this power of
attorney as of the date indicated.

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

<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----

<S> <C> <C>
* Co-Chairman of the Board August 17, 2000
____________________________________
Thomas J. Blakeley

* Co-Chairman of the Board August 17, 2000
____________________________________
Eric A. McAfee

/s/ Robert I. Webber Chief Executive Officer, August 17, 2000
____________________________________ President, Director
Robert I. Webber

* Director August 17, 2000
____________________________________
John Troiano

Director
____________________________________
Joel Schoenfeld

/s/ Michael R. Friedl Chief Financial Officer, August 17, 2000
____________________________________ Treasurer (Principal
Michael R. Friedl Finance and Accounting
Officer)

/s/ Michael R. Friedl
____________________________________
Michael R. Friedl
Power of Attorney
</TABLE>

II-5
<PAGE>

<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S>
2.1* Agreement and Plan of Merger between MindArrow Systems, Inc. (DE)
and eCommercial.com, Inc. (NV)
2.2* Stock Purchase Agreement--Fusionactive.com, Ltd.
3.1* Amended and Restated Certificate of Incorporation of the
Registrant
3.2* Bylaws of the Registrant
4.1* Investor Rights Agreement
4.2* Form of Registrant's Specimen Common Stock Certificate
4.3* Form of Registrant's Specimen Series B Preferred Stock Certificate
4.4* Form of Common Stock Warrants
5.1* Opinion on Legality
9.1* Voting Agreement
10.1* Stock Purchase Agreement, dated as of April 16, 1999 between the
Company and Shareholders of Zap International
10.2* Merger Agreement, dated as of April 19, 1999, between Wireless
Netcom, Inc. and the shareholders of eCommercial.com, Inc.
10.3* Consulting Agreement--Thomas Blakeley
10.4* Employment Agreement--Robert Webber
10.5* Consulting Agreement--Eric A. McAfee
10.6* Form of Change in Control Executive Retention Agreement
10.7* Registrant's 1999 Stock Option Plan
10.8* Agreement between Registrant and Eric McAfee regarding Voxel
10.9* Form of Indemnification Agreement between Registrant and each of
its directors
10.10* Lease Agreement--Aliso Viejo, CA
10.11* Sublease Agreement--Cupertino, CA
10.12* Strategic Relationship Agreement between Registrant and ONEX
Ventures LLC
10.13* Strategic Relationship Agreement between Registrant and Lockheed
Martin Corporation
10.14* Strategic Relationship Agreement between Registrant and
eContributor.com
23.1 Consent of experts (Grant Thornton LLP)
23.2 Consent of experts (Grant Thornton, Hong Kong)
23.3* Consent of Counsel (see Exhibit 5.1)
24.1* Power of Attorney (included on signature page)
27.1* Financial Data Schedule
</TABLE>
--------
* Previously filed
** To be filed by amendment