CYBER DIGITAL INC, 10KSB, 1999-07-14

CYBER DIGITAL INC
10KSB, 1999-07-14
TELEPHONE & TELEGRAPH APPARATUS

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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-KSB

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

For the Fiscal Year Ended March 31, 1999

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

For the transition period from to

Commission File No.: 0-13992

CYBER DIGITAL, INC.
----------------------------------------------
(Name of small business issuer in its charter)

New York 11-2644640
------------------------------- ----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

400 Oser Avenue, Hauppaupge, New York 11788
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(Address of principal executive offices) (Zip Code)

Issuer's telephone number: (516) 231-1200

Securities registered under Section 12(b) of the Exchange Act:
Name of Each Exchange
Title of Classes on Which Registered
- ---------------- -------------------

Common Stock, $.01 par value N/A

Securities registered under Section 12(g) of the Exchange Act: NONE

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Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the Registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.

Yes X No

Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this Form 10-KSB, and no disclosure will be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]

Issuer's revenues for its most recent fiscal year: $279,926

As of June 25, 1999, Registrant had 12,374,529 shares of Common Stock
outstanding ($.01 par value). On that Date, the aggregate market value of the
Common Stock held by persons other than those who may be deemed affiliates of
Registrant was $49,498,116 (based on the the last sale price reported on
Nasdaq's over-the-counter market on such date).

Transitional Small Business Disclosure Format (check one):

Yes No X

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PART I

ITEM 1 - DESCRIPTION OF BUSINESS

We have provided a glossary of terms for your convenience beginning on
page 22.

The Company

Cyber Digital, Inc. (the "Company") was incorporated under the laws of the
State of New York in 1983. We design, develop, manufacture, market and service
our Internet Protocol (IP) Frame Relay infrastructure equipment for the high
speed internet applications. We also design, develop, manufacture, market and
service our high performance distributed, integrated packet and circuit digital
switching systems, employing SS7 or C7 signaling, for both private and public
switch data and voice network operators worldwide. Our systems enable network
operators to provide cost effective internet access, data and voice
communication services with minimal or no infrastructure cabling. Our systems
are based on our proprietary software technology.

Cyber Digital, Inc. has forged an alliance with AT&T Corporation ("AT&T")
to provide high-speed internet access and to create Virtual Private Networks
(VPN) for businesses using the Company's Internet Protocol (IP) Frame Relay
based "broadband" technology. We have recently developed our Internet Protocol
(IP) Frame Relay infrastructure equipment to piggyback on AT&T's rapid
deployment of Internet Protocol (IP) Frame Relay based "broadband" internet
backbone. In contrast, competing networks are constructed around "narrowband"
technologies such as digital subscriber lines (DSL) modems and dial-up modems,
which use the Incumbent Local Exchange Carrier's (ILEC) voice grade lines. We
have designed our network to give our customers a high-speed broadband
connection to the internet. We offer "modem-less" end-to-end Internet Protocol
(IP) Frame Relay connectivity and data integrity using our proprietary Cyber
Business Internet Gateway (CBIG) located on the customer's premises. We believe
that our systems are the only ones available with this capability.

Cyber Business Internet Gateway (CBIG) delivers Internet Protocol (IP)
Frame Relay based high-speed symmetrical data transfer rates ranging from 64
Kbps to 1.5 Mbps compatible with AT&T's Internet Protocol (IP) Frame Relay
backbone. Since Internet Protocol (IP) Frame Relay packet switched technology is
at least twenty times more efficient and many million times more reliable than
modem based technologies, a 64 Kbps Internet Protocol (IP) Frame Relay can out
perform any digital subscriber lines (DSL) modem intended to operate at 1.0 Mbps
and is twenty times faster than any 56Kbps dial-up modem. For customers that
subscribe at the 1.5 Mbps rate, our network provides symmetrical "true" transfer
speeds at approximately 500 times the speed of the fastest dial-up modem and
over 60 times the speed of integrated services digital network (ISDN) lines.
Through our packet-based network and Cyber Internet Access Network (CIAN)
switch, multiple business users can simultaneously access the internet at a
fixed committed bandwidth rate (CBR) and an "always on" basis. Beyond "true"
high-speed access, our Internet Protocol (IP) Frame Relay based gateway, Cyber
Business Internet Gateway (CBIG), offers an ideal solution for virtual

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private networks (VPN) applications that require "firewall" capability. Cyber
Business Internet Gateway's (CBIG) firewalls are created by use of Internet
Protocol (IP) packet filtering, Internet Protocol (IP) masquerading and Internet
Protocol (IP) tunneling. Such firewall capabilities cannot be offered by "modem"
based technologies.

We believe our network solutions will permit users to distribute and
receive enterprise-wide, inter-networked communications and corporate materials,
conduct electronic transactions and access information resources all from the
convenience of their desktop and with the immediacy of the internet. We also
believe our network solutions can be used to increase remote office and worker
productivity and to reduce the complexity of communications for businesses.

We made a strategic shift to the high speed internet access and Virtual
Private Network (VPN) service provision business in November 1998. In April
1999, we proceeded with this shift in business by forging an alliance with AT&T.
In conjunction with AT&T, we will begin marketing our high speed broadband
internet service for businesses as part of a package of services that includes
AT&T's internet backbone, which is provided through AT&T's Managed Internet
Service. Under the terms of our agreement with AT&T, we will resell AT&T's
Managed Internet Service bundled with our own 1.5 Mbps Internet Protocol (IP)
Frame Relay based internet gateway i.e. Cyber Business Internet Gateway (CBIG)
and Cyber Internet Access Network (CIAN). According to our agreement, AT&T will
bring the internet backbone to commercial buildings that we mutually serve.
Cyber Digital will build, operate and own the internet facilities in such
buildings using its proprietary Cyber Business Internet Gateway (CBIG) and Cyber
Internet Access Network (CIAN). We believe that Cyber Digital is the first
company to have signed such an agreement with AT&T.

We intend to implement a scalable nationwide network. We expect to begin
offering commercial services in New York and Boston in August 1999, and
subsequently to begin service in six additional markets: Washington DC, Atlanta,
Chicago, Philadelphia, Miami and Dallas. We intend to continue our network
rollout into 31 additional markets in the year 2000. Upon completion of this
network expansion, we anticipate providing services in 39 of the nation's
largest metropolitan areas, which we believe, contain 60% of the nation's local
area networks. Our agreement with AT&T provides that AT&T will make its internet
backbone available to us anywhere in the United States including the
Commonwealth of Puerto Rico and the U.S. Virgin Islands.

Unlike digital subscriber line (DSL) modem technology, our services do not
use Incumbent Local Exchange Carriers (ILEC) in any way. We expect the customer
to deal only with us and AT&T. We expect AT&T to handle all regulatory
compliance issues. Our Cyber Business Internet Gateway (CBIG) and Cyber Internet
Access Network (CIAN) combination gives us the freedom to deploy internet access
rapidly in alliance with AT&T. We believe that we will recognize significant
savings from our bypass of the Incumbent Local Exchange Carrier's (ILEC)
"narrowband" local loop. Based on these favorable factors, we believe will be
able to achieve our goals of providing high-speed digital "broadband" internet
service nationwide as planned. We believe that the digital broadband services
will be the predominant services of the future.

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In addition, we have designed and developed a family of digital voice
switches which we believe, by interfacing with appropriate methods of wireless
transmission, can easily and rapidly provide telecommunications services to
consumers who are under-served or have no service at all, as in the case of many
developing countries. The Company's products are suitable for both
densely-packed urban areas as well as sparsely populated rural areas. In the
United States, we believe that the enactment of the Telecommunications Act of
1996 (the "Telecommunications Act") has resulted in the creation of a large
market for our voice products since such products are capable of meeting the
requirements of Competitive Local Exchange Carriers (CLEC) who are now
attempting to bypass the ILECs.

Industry Background

In technologically advanced countries such as the United States, extensive
public voice telephone networks are already in place. Therefore, innovation and
change in internet access and data communications are now taking place in the
domain serviced by private network operators. Private networks providing new
types of internet and data services are, therefore, growing at a much faster
rate than public voice networks. On the other hand, in the developing world
(Eastern Europe, China, India, Latin America and Africa), there is demand for
voice-only public networks to serve individual and business subscribers in
cities, towns and villages. We have designed our systems to meet the
sophisticated high speed internet and data needs of private networks in the
United States and the basic voice-only needs of public networks in developing
countries.

We believe that a substantial market opportunity exists as a result of the
convergence of seven factors in the United States:

o The growing demand for high-speed access to the internet and Virtual
Private Networks;

o The inherent limitations of modems as a connection to data networks;

o The need for large companies to create enterprise-wide networks to
improve the productivity of their branch office workers;

o The need for small and medium sized businesses to have an integrated
gateway solution for their networking requirements;

o The increasing adoption of Internet Protocol (IP) Frame Relay packet
switched "broadband" technology;

o The need for "firewall" or data security by businesses; and

o The 1996 Telecommunications Act, as amended.

Growing Demand for High-Speed Access to the Internet and Virtual Private
Networks

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The value of goods and services sold through the internet will grow from
$2.6 billion in 1996 to $400 billion in 2002, according to analysts'
projections. Currently, business spending for connecting remote workers, branch
offices and corporate headquarters to each other and to customers, suppliers and
partners - either through the internet or VPN - is large and growing. Industry
analysts estimate that the U.S. market for remote internet and local area
network access will grow from $5.9 billion in 1997 to $11.7 billion by 2002.
Industry sources estimate that spending in the United States on distributed
networking and network services and applications will grow from $54.2 billion in
1998 to $173 billion in 2002. Much of that growth is expected to result from
increased demand for e-mail, web hosting services, e-commerce, collaboration and
real-time video services and applications. Industry sources expect spending on
distributed networking and network services and applications to encompass 57% of
a company's total annual information technology spending by 2002.

Limitations of Dial-up and DSL Modems and Integrated Services Digital Networks
(ISDN)

Only five percent of buildings in the United States are currently
connected to high-speed fiber rings, typically large buildings in metropolitan
areas or clusters of buildings in regional campus parks. The vast majority of
internet users access data networks through slow dial-up modems connected to the
traditional circuit-switched public telephone network. These traditional dial-up
modems create a bottleneck in data communications because the data-carrying
capacity of the fastest commercially available dial-up modem is only 56 Kbps
(and operates on the average at only 2.8 Kbps). The capacity of another
alternative, an integrated services digital network (ISDN) line, is only 128
Kbps (and operates on the average at only 25.6 Kbps). While integrated services
digital network (ISDN) technology provides improved capacity relative to dial-up
modems, the cost of an ISDN solution is often prohibitive. The experimental
capacity of another alternative, a digital subscriber line (DSL) modem-based
technology, ranges from 128 Kbps to 7.1 Mbps downstream and 64 Kbps upstream, in
a laboratory environment. When implemented in the field, however, the fastest
DSL modem offers bandwidth as low as 16 Kbps downstream. DSL technology is
unproven and is very sensitive to the quality of the voice grade existing lines.
DSL is based on analog voice modem technology and is therefore severely limited
by the length of wire from an Incumbent Local Exchange Carrier's (ILEC) central
office to a subscriber location; generally less than a few thousand feet. DSL
lines require precision fine tuning of the voice grade lines. Since both dial-up
and DSL modem technologies are inherently analog based transmission
technologies, they cannot support packet switched data nor can they provide the
mandatory "firewalls" for virtual private network (VPN) applications. These
impairments are created by the Incumbent Local Exchange Carrier's (ILEC)
existing voice grade lines and are incurable.

Need for Large Businesses to Create Enterprise-wide Network to Improve Branch
Office Worker Productivity

Many large companies are currently interconnecting increasing numbers of
branch and remote offices by point-to-point high-speed T1 carrier grade lines to
their local area networks. This approach is very expensive and unaffordable by
many companies. At present, some other large businesses are incurring
significant capital expenditures to purchase equipment to support integrated
services digital network (ISDN) connections and experimenting with digital

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subscriber line (DSL) modems, and paying for expensive technical support
personnel only to implement networking solutions that may fail to optimize their
worker productivity. These companies face the challenge of finding a cost
effective way to make their branch and remote office workers as productive as
those who have access to all of the high performance communications and
networking resources available to workers located at corporate headquarters. A
high-speed VPN solution, such as Cyber Virtual Private Network (CVPN) that
encompasses access to the corporate local area network, the internet, the
corporate video conferencing system, customers, suppliers and partners could
substantially increase branch office worker productivity.

Need for Small and Medium Businesses to have an Integrated Gateway Solution

A significant number of small and medium sized businesses have no
practical alternative to dial-up modems or ISDN or experimental DSL modems for
their workers to access the internet. As a result, these businesses suffer
productivity limitations associated with slow transmission speeds. In addition,
these companies have to pay heavy monthly subscription rates for each e-mail
address that is maintained by an Internet Service Provider (ISP) on its e-mail
servers. These businesses must contend with the cost and complexity of retaining
multiple vendors for their internet needs, such as an Incumbent Local Exchange
Carrier (ILEC) for dial-up modem or DSL modem or ISDN connection, Internet
Service Providers for internet access, and equipment integrators for on-premises
systems. We believe that these businesses can benefit from working with a single
service provider that offers an on-premise integrated gateway solution with
high-speed internet access and built-in e-mail server with automatic messaging
flags, such as CBIG.

Emergence of Internet Protocol (IP) Frame Relay Packet Switched "broadband"
Technology

Internet Protocol (IP) Frame Relay is a packet switching based "broadband"
technology that dramatically increases the data-carrying capacity over standard
T1 carrier grade copper lines. It also dramatically increases the reliability of
packet data transmission because of end-to-end Internet Protocol (IP) Frame
Relay data integrity and connectivity. AT&T's massive long distance network is a
digital "broadband" network. AT&T has decided to deploy Internet Protocol (IP)
Frame Relay over carrier grade T1 lines as the only solution for businesses
desiring to have high-speed internet access and to create enterprise-wide VPN.
Since AT&T has already massively deployed T1 carrier grade network in all major
cities nationwide, a broad network deployment can be implemented rapidly based
on Internet Protocol (IP) Frame Relay internet gateways, such as Cyber Business
Internet Gateway (CBIG). This requires a lower fixed investment than some
existing alternative technologies, such as fiber, cable modems and satellite
communications systems. We believe Internet Protocol (IP) Frame Relay
packet-based networks are significantly more efficient than traditional
point-to-point networks, and allow end users to connect to any location that can
be assigned an Internet Protocol address. Traditional point-to-point networks,
including the traditional telephone network and private line networks, are less
efficient because they require a dedicated connection between two locations. IP
Frame Relay packet-based networks allow multiple users to share connections
between locations.

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Need for "Firewall" or Data Security for Businesses

Security of data transmission over the public internet is of paramount
importance to businesses and is referred to in the industry as "Firewall". This
Firewall must exist at the customer's premises. It can only be supported by
packet switching technology and not by dial-up modems, DSL modems or ISDN
technologies. Among the packet switching technologies such as X.25, IP Frame
Relay and Asynchronous Transmission Mode (ATM), Internet Protocol (IP) Frame
Relay has been selected by AT&T as the most cost effective choice for customer
end equipment interface to AT&T's internet backbone network. CBIG provides the
"Ultimate Firewall" by Internet Protocol (IP) Packet Filtering, Internet
Protocol (IP) Masquerading, and Internet Protocol (IP) Tunneling. This Firewall
capability makes an enterprise-wide VPN a reality.

1996 Telecommunications Act

The 1996 Telecommunications Act, as amended, allows competitive carriers
to leverage the existing Incumbent Local Exchange Carrier (ILEC) infrastructure,
as opposed to building a competing infrastructure at significant cost. The 1996
Telecommunications Act requires all ILECs to allow competitive carriers to
co-locate their equipment along with ILEC's equipment in ILEC's central offices,
which enables competitive carriers to access end users through existing
telephone line connections. ILEC's existing telephone line infrastructure is a
"narrowband" network, however, and suitable for analog voice transmission only.
The infrastructure limitation of (a) low bandwidth and (b) lack of integrated
packet switching imposed by the current ILEC's network does not make economic or
technical justification for long distance carriers (LDC), such as AT&T to enter
the internet market using ILEC's network. AT&T has announced that AT&T will
enter the lucrative internet market by building its own digital "broadband"
network based on Internet Protocol (IP) Frame Relay technology. As AT&T rolls
out this internet backbone service nationwide, the end customers need a suitable
internet gateway with Firewall and e-mail server capabilities, such as Cyber
Business Internet Gateway (CBIG), to connect to AT&T's internet backbone.

Unlike technologically advanced countries, where the existing public voice
telephone network consists of monolithic centralized digital switches,
developing countries are seeking an alternative cost-effective approach, such as
our distributed digital switching systems. We believe that the trend in the
telecommunications industry towards distributed switching from monolithic
centralized switching is similar to the trend in the computer industry towards
distributed networking personal computers from monolithic centralized mainframe
computers. Similar to the computer industry where personal computing has been
brought closer to the users, our distributed switching systems are also being
installed closer to groups of subscribers, thereby dramatically reducing the
cost of cabling. We believe that with our distributed switching system, the
public telephone operating companies in developing countries can rapidly provide
telephone services to their customers. It is substantially easier to install
small, distributed switches than large monolithic centralized switches with
their corresponding long cabling infrastructure. We believe that our digital
voice switches are well suited for developing countries.

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The Cyber Digital Solutions for Internet Services

We believe our network solutions effectively address many of the unmet
enterprise-wide inter-networked communications needs of today's businesses by
offering an appealing combination of quality, performance, price and service.
Our network consists of:

o High-Speed, "Always On" End-to-End IP Connectivity to AT&T Internet
Backbone. Our network delivers high-speed, "always on" connectivity to
AT&T internet backbone. Using our Cyber Business Internet Gateway's (CBIG)
Internet Protocol (IP) Frame Relay based "broadband" technology over
standard copper telephone lines, out network is capable of delivering
"true" data transfer rates at speeds ranging from 64 Kbps to 1.5 Mbps. For
customers that subscribe at the 1.5 Mbps rate, our network provides
symmetrical data transfer speeds of approximately 500 times the speed of
the fastest dial-up modem and over 60 times the speed of ISDN lines.
Moreover, unlike dial-up modems and integrated services digital network
(ISDN) lines, our CBIG's IP Frame Relay packet switched based solution is
"always- on" - it does not require users to dial-up to connect to the
internet or their local area network for each use.

o Simple Network. We have designed our network elements, Cyber Business
Internet Gateway (CBIG) and Cyber Internet Access Network (CIAN), to
provide "direct" IP Frame Relay based "broadband" connectivity to AT&T
internet backbone. There are no intermediate Incumbent Local Exchange
Carriers (ILEC), Internet Service Providers (ISP) or Long Distance
Carriers (LDC) networks to create traffic bottle- necks. Our customer
premises equipment, Cyber Business Internet Gateway (CBIG) and Cyber
Internet Access Network (CIAN), can be remotely maintained over the
internet as well as ordinary telephone lines. We manage our network and
monitor service levels on a nationwide basis from our Network Operations
Center in Hauppauge, NY.

o Virtual Private Network Applications. Our Cyber Business Internet Gateway
(CBIG) offers built-in standard security features and enhanced security
options, making it what we believe to be an ideal enterprise-wide VPN. The
Firewalls are provided by Internet Protocol (IP) filtering, Internet
Protocol (IP) masquerading and Internet Protocol (IP) tunneling. We
believe that our VPN offering is the most advanced in the industry.

o Productivity Enhancing Features. We offer a personal e-mail service, that
is custom e-mail delivery with automatic message-waiting flags. Whenever a
user receives e-mail, it is shown as a flag on their personal computer.

o Service Flexibility. We have designed our network so that we are able to
individually configure each network user's features and applications.

o End-to-End Solution & Support. We intend to provide "hassle-free"
connections to the AT&T internet backbone. We perform all circuit
ordering, on-site cabling and

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customer premised hardware installation. The equipment and infrastructure
will remain our property and therefore will be entirely our
responsibility.

o Customer Premised Equipment. Our high speed internet access platform
consists of the Cyber Internet Access Network (CIAN) switch (usually
located in a switch-room) and a Cyber Business Internet Gateway (CBIG)
located in each customer's office. Customers connect their local area
networks (LAN) to our Cyber Business Internet Gateway (CBIG) via either a
personal computer Network Interface Card (NIC) or a network hub for
multiple personal computer connectivity.

Our Business Strategy

Our goal is to become a leading national service provider of high speed
internet access and enterprise-wide inter-networked Virtual Private Networks
(VPN) in alliance with AT&T. We intend to implement the following strategies to
achieve our goal:

Exploit Early Mover Advantage

We intend to exploit our early market entrance to deploy our Internet
Protocol (IP) Frame Relay based network in conjunction with AT&T. We believe
that we are one of the first companies to implement Internet Protocol (IP) Frame
Relay technology without using Incumbent Local Exchange Carrier's (ILEC) local
loop facilities. In addition, we have the advantage that we develop and
manufacture our own Cyber Business Internet Gateway (CBIG), a fully integrated
internet gateway for business applications. Cyber Business Internet Gateway
(CBIG) is a very powerful integrated internet gateway equipment that replaces
many single function equipment such as router, network address translator,
Ethernet-to-T1 converter, Internet Protocol (IP) Frame Relay equipment, CSU/DSU,
Firewall equipment and e-mail servers. Since our network is simple installation
is not time consuming nor demanding on our resources. We will streamline the
construction of our network. We expect to construct our network rapidly and be
an early mover in our target markets. We intend to exploit our early mover
advantage to gain significant market share in our target markets.

Focus on Performance-Driven Business Customers

We believe that the under-served segment of the business networking market
that demands high performance is currently relying on dial-up modems or ISDN for
network access. Many large businesses have workers at branch offices that are
not able to take advantage of the full array of communications and networking
resources available to workers at the main office. In addition to offering these
businesses high-speed access to the internet, we intend to offer them the
ability to enjoy the cost and productivity benefits from their enterprise-wide
inter-networked Virtual Private Network. Further, we believe that small and
medium businesses are also looking for integrated gateway equipment to reduce
their monthly costs and reliance on multiple vendors. Our Cyber Business
Internet Gateway (CBIG) is ideal for all performance-driven businesses.

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Expand e-commerce Applications

While we seek to have our network facilitate the delivery of
productivity-enhancing applications to businesses and their employees, AT&T will
offer e-commerce software and applications to our mutual end-customers. By
collaborating with AT&T, we believe that our end customers will have the best
e-commerce content and software technologies. Although AT&T develops and markets
its e-commerce applications directly to our mutual end-customers, AT&T pays us a
certain percent of their gross revenue for using our Internet Protocol (IP)
Frame Relay network. Since our products and services are co-branded with AT&T,
we expect customer loyalty will be strengthened and revenue per user will be
increased.

Establish Strong Distribution Channels

We intend to build strong distribution channels. As an alliance member
with AT&T, we regularly receive qualified sales leads from AT&T for businesses
that want our services. In order to serve these businesses, we intend to
establish a strong team of independent sales agents exclusive to specific
properties or commercial buildings that they will serve locally. We will
coordinate the efforts of our local independent sales agent and AT&T sales
personnel who will sell e-commerce applications and promote our Internet
Protocol (IP) Frame Relay based "broadband" technology. We have already
established strong distribution channels in Boston and New York City by
appointing independent sales agents in those cities. Instead of a direct sales
force, we intend to grow rapidly through aggressive recruitment of independent
sales agents nationwide. We intend to build a strong marketing, sales support
and customer care team working in harmony with AT&T. Over time, we expect to
develop additional strategic alliances, focusing on partners that can add value
to our network and give us additional meaningful distribution channels.

Provide Superior Customer Service

As part of our strategy to obtain and retain business customers, we intend
to provide superior service and customer care. We expect to deliver high-quality
service by providing T1 carrier-grade IP Frame Relay based networking solutions
and superior customer service. Our carrier-grade networking solutions include
end-to-end proactive network monitoring and management through our Network
Operations Center, 24 hours a day, seven days a week. We also intend to offer
multiple security features and a network that we can scale to meet demand. Our
customer service includes a personal and web-based single point of contact, a
complete packaged solution including Cyber Business Internet Gateway (CBIG) and
Cyber Internet Access Network (CIAN) installation, activation and network
management, and specific customer service objectives against which we measure
our performance. Our objective in providing outstanding customer service is to
provide a high level of customer satisfaction, achieve customer loyalty and
accelerate the adoption rate of our service.

Our Alliance With AT&T

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In April 1999, we entered into an alliance with AT&T, pursuant to which,
among other things:

Reseller Agreement. Under the terms of our agreement with AT&T, we will
resell AT&T's Managed Internet Service bundled or repackaged with our own 1.5
Mbps Internet Protocol (IP) Frame Relay based internet gateway i.e. Cyber
Business Internet Gateway (CBIG) and Cyber Internet Access Network (CIAN). We
believe our alliance with AT&T is unique with respect to high speed internet
access and virtual private network (VPN) markets. AT&T will bring the internet
backbone to commercial buildings that we mutually serve. Cyber Digital will
build, operate and own the internet facilities in the building using its
proprietary Cyber Business Internet Gateway (CBIG) and Cyber Internet Access
Network (CIAN). We believe that Cyber Digital is the first company to have
signed such a unique agreement with AT&T.

Managed Internet Service Agreement. Under the terms of our agreement, AT&T
will provide its internet backbone network at 1.5 Mbps to us on a nationwide
basis. AT&T has waived all installation charges as well as moving fees for
re-installation at another location for a period of sixteen months from the
initial contract term.

Market Development Fund Program. Under this program AT&T will fund our
cooperative advertising in local and trade publications, collateral marketing
and sales brochures, trade shows, end user seminars and training.

Co-branded with AT&T. Our products and services (CBIG and CIAN) are
co-branded with AT&T leveraging our ability to market our services to our mutual
end customers. All our product brochures and services reveal AT&T logo along
with ours. Our Web site is hosted by AT&T WorldNet at www.cyberatt.com, which
includes AT&T logo along with ours.

AT&T Alliance Program Member. As an AT&T Alliance Program Member we
receive regular sales leads. We will also receive a certain percent of their
e-commerce gross revenue for using our Internet Protocol (IP) Frame Relay
network.

Our Network Architecture of Internet Technologies

Network Technology

The key design features allowing us to be a business-class network are:

o Carrier-Class Network Management. Our network is designed to be
carrier-class throughout. For example, it has been designed with redundant
network electronics and transmission paths. We have the ability to
electronically view our entire network including the CBIG and CIAN at the
customer's premises from our Network Operations Center in Hauppauge, NY.
We provide our business customers with service level agreements that
guarantee specific levels of network performance.

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o Scalable Systems. We use industry standard, off-the-shelf software to
support preordering, ordering, provisioning, billing, network monitoring
and trouble management. We have implemented these systems using
distributed client-server systems architecture that operates using a
single, integrated database. This approach allows us to increase our
customer support and network management capabilities as customer demand
increases by giving our personnel faster, more accurate access to a fully
integrated business information system.

o Network Security. Non-dedicated access, such as dial-up or digital
subscriber line (DSL) modem or integrated services digital network (ISDN)
lines, represents security risks for business networks. These security
risks may be mitigated through the use of Virtual Private Network
technologies such as authentication, tunneling, encryption, and through
the use of permanent virtual circuits that define a logical dedicated
connection between the end user and the corporate network. We believe our
network enables businesses to fully employ these Virtual Private Network
technologies by using our Cyber Business Internet Gateway (CBIG) or Cyber
Virtual Private Network (CVPN).

Network Components

The primary components of our network are customer end equipment, local
transport, AT&T internet backbone and our Network Operations Center.

o Customer End Equipment. We currently offer our Cyber Business Internet
Gateway (CBIG) as customer end equipment. We configure and install our
CBIG with the end user's computer or local area network. CBIG is a
powerful Internet Protocol (IP) Frame Relay based gateway that can replace
many single function equipment such as router, network address translator,
Ethernet-to-T1 converter, Internet Protocol (IP) Frame Relay equipment,
CSU/DSU, Firewall equipment and e-mail server.

o Local Transport. Our local transport consists of our in-building cabling.
It connects customer end equipment, our Cyber Business Internet Gateway
(CBIG), to our Cyber Internet Access Network (CIAN) switch located within
the building.

o AT&T Internet Backbone. Our Cyber Internet Access Network (CIAN) switch
connects to AT&T's internet backbone.

o Network Operations Center. Our entire network is managed from the Network
Operations Center located in Hauppauge, NY. From this center, we provide
end-to- end network monitoring and management using advanced network
management tools 24 hours a day, seven days a week. This enhances our
ability to address performance or connection issues before they affect our
end user. From the Network Operations Center, we monitor each Cyber
Business Internet Gateway (CBIG), local transport and Cyber Internet
Access Network (CIAN) switch as well as connectivity to AT&T internet
backbone.

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Our Range of Digital Voice Switches

We intend to constantly develop additional new technologies and software.
Our commitment to research and development has enabled us to create new systems
employing SS7 and C7 signaling such as Cyber Distributed Central Office (CDCO),
Cyber Tandum Exchange (CTSX) and Cyber Rural Exchange (CRX) for various
applications, primarily for use in developing countries and for domestic
Competitive Local Exchange Carriers (CLEC) attempting to bypass Incumbent Local
Exchange Carriers (ILEC). We believe that these systems are capable of providing
the functions for which they have been designed.

Cyber Distributed Central Office

We have developed and intend to market the Cyber Distributed Central
Office (CDCO) which is designed to provide digital voice communications to
subscribers in densely populated urban areas. The Cyber Distributed Central
Office (CDCO) is a digital switch with trunk and tandem exchange capabilities
enabling it to connect subscribers served by other exchanges. The Cyber
Distributed Central Office (CDCO) system is designed to interface with both
modern digital telecommunications networks and older analog telephone networks.
The Cyber Distributed Central Office (CDCO) system consists of nodes connected
by standard digital links which permit optimization of the network with respect
to specific size, required traffic capacity and desired applications. We believe
the modular nature of the nodal structure of the Cyber Distributed Central
Office (CDCO) will provide an economical digital switching exchange from as
little as a few hundred lines to as many as 1,000,000 lines of capacity.

We expect the nodal structure of the system to permit changes to the
function of the system simply by the use of different software with the same
common hardware. The expected flexibility of Cyber Distributed Central Office
(CDCO) will offer a vast array of system configurations to telephone operating
companies and administrations to fulfill a wide range of applications, including
the following:

o Local Cyber Distributed Central Office (CDCO) exchange serves
subscribers in cities and towns.

o Cyber Tandem Exchange (CTSX), a regional exchange connecting to
various local exchanges.

o Toll and transit Cyber Distributed Central Officer (CDCO) exchanges
for long distance national service and international gateway.

o Integrated local and tandem exchanges.

o Integrated local, tandem and toll exchanges.

o Integrated local, tandem, toll and transit exchanges.

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o Cyber Digital Access Cross-connect (CDAC), a network management
system providing optimal routing and control of heavy traffic
through software.

o Cyber Multi-tenant exchange (CMT) for subscribers in large office
complexes and buildings where many business tenants can be served by
a resident exchange.

The control functions of the Cyber Distributed Central Office (CDCO)
system are totally distributed in autonomous processing sub-systems (nodes).
Node processors are loosely coupled and exchange information through
standardized inter-nodal communication digital links. We believe the distributed
approach will permit switching systems to be located closer to groups of
subscribers or at subscribers' premises which could dramatically reduce the cost
of wiring and cabling and should result in instant installation. Moreover, a
failure in one node should not affect other nodes. In addition, the distributed
approach should eliminate bottlenecks as the system offers multiple routes for
call completion.

Cyber Rural Exchange

We have developed and marketed the Cyber Rural Exchange (CRX), which is a
specialized version of Cyber Distributed Central Office (CDCO). Cyber Rural
Exchange (CRX) is designed to handle the traffic requirements of widely
dispersed single-line users, such as users in a small town or rural area

Cyber Switch Exchange

We have developed and marketed the Cyber Switch Exchange (CSX), which is a
digital switching system designed for use as a private branch exchange (PBX) for
offices, universities, hospitals and other large organizations.

Customer, Sales and Marketing

Internet Services

We offer our internet services to large, medium and small businesses in
alliance with AT&T.

Indirect Sales Channels

We market our internet services to businesses through indirect sales force
consisting of independent sales agents and in conjunction with AT&T. Our target
account profile is an information-intensive enterprise with multiple locations
and large numbers of distributed workers. We have appointed independent sales
agents in Boston and New York City. We intend to appoint sales agents in six
additional markets soon: Washington DC, Atlanta, Chicago, Philadelphia, Miami
and Dallas.

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<PAGE>

Our relationship with large business customers can involve multiple
phases. A customer typically initially agrees to a first phase commitment for a
specific bandwidth at a fixed price and a one year contract term. Thereafter, a
customer may request a Virtual Private Network (VPN) set-up or an increase in
bandwidth. We anticipate that upon receipt of an order a customer can be served
within eight weeks. It takes AT&T about six weeks after receipt of an order to
bring its internet backbone to the customer's premises. We believe this time
interval is quite short compared to industry standards and will help us to
market and build our network.

We supplement our sales effort to our sales agents by offering marketing
support services including training, Property Manager Agreements, customer
proposal development, sales lead generation, product support materials, web
promotion, joint participation in regional customer events and press
announcements. We also offer additional sales incentives to those sales agents
who recommend other sales agents. Additionally, we support our customers by
ordering connections, installing equipment on the customer's premises,
monitoring the network, troubleshooting, making repairs and invoicing the
customer on a single bill.

Customer Care Internet Services

We offer our business customers a single point of contact for
implementation, maintenance and billing. Our Network Operations Center provides
both proactive and customer initiated maintenance services 24 hours a day, seven
days a week. We also provide a broad range of customer service and Network
Operations Center services through our Web interface.

o Implementation. Our customer service technicians and sales engineers
develop an implementation plan for each customer. The plan includes
qualifying the customer for our service offerings, placing orders
for the connection facilities and coordinating the delivery of the
connection and installation.

o Maintenance. Our Network Operations Center in Hauppauge, NY provides
network surveillance through standard Simple Network Management
Protocol tools for all equipment in our network. Because we have
complete end-to-end visibility of our network, we are able to
proactively detect and correct the majority of our customer's
maintenance problems remotely. Our goal is to proactively detect and
repair 90% of our customer's maintenance problems before our
customer is aware of a problem. Customer initiated maintenance and
repair requests are managed and resolved primarily through the
Customer Service Center. We utilize a trouble ticket management
system to communicate customer maintenance problems from the
Customer Service Center to the Network Operations Center engineers
and the field services engineers. Because our Network Operations
Center is fully staffed 24 hours a day, seven days a week, we
believe our ability to provide superior proactive maintenance is
significantly enhanced.

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<PAGE>

o Billing. Customer bills are currently issued on a monthly basis
through an internal billing system. Customer billing inquiries are
managed by our Customer Service Center. In the future, we intend
also to support billing inquiries through our web interface.

o Customer Support Systems. We designed our system architecture to
facilitate rapid service responsiveness and reduce the cost of
customer support. We use an integrated set of standard,
off-the-shelf systems to support our business processes. We have
designed all business functions, including sales, ordering,
provisioning, maintenance and repair, billing, accounting and
decision support to use a single database, ensuring that every
function has accurate, up-to-date information.

Digital Voice Switches

Customers

To date, we have sold approximately 76 digital voice switches,
substantially all of which have been Cyber Switch Exchange (CSX). We have
previously sold our CSX systems to the defense agencies of the U.S. federal
government and to Tianchi Telecommunications Company ("TTC") in China. Due to
massive cut backs in defense program procurement and constrained financial
resources of TTC, we do not anticipate any further sales of our CSX to these
customers.

In December 1995, we signed a manufacturing licensing contract with the
National Telecommunications Company (NTC) of Egypt, pursuant to which NTC will
assemble the systems in Egypt with electronic circuit cards provided by us. In
addition, NTC will market, install, maintain and service our digital voice
switches in Egypt, Kenya, Tanzania, Uganda, Sudan, Yemen, United Arab Emirates
and Qatar. Sales of our products to NTC have not yet commenced. As at present,
NTC has trained its personnel to fulfill its obligations under the contract. NTC
has been delayed in its performance for a variety of reasons, such as a lack of
a suitable assembly facility in Egypt at this time. There can be no assurance as
to when or if such an assembly facility will be available to NTC.

Public and private telecom companies in several other developing countries
have taken an interest in our products. It is not possible to estimate the sales
revenues, which may eventually be generated from the international market and
the timing thereof since substantially long lead times are involved even after a
contract has been executed.

In the year ended March 31, 1998, we assembled a direct sales and
marketing team to explore domestic opportunities and in the year ended March 31,
1999. We dismantled this team as our target markets failed to materialize. We
had anticipated that our target markets would be open for competition pursuant
to the Telecommunications Act of 1996. These target markets still remain closed
with significant regulatory restrictions imposed by Incumbent Local Exchange
Carriers (ILEC). Potential target markets in the United States for our digital
voice switches may be categorized as follows:

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<PAGE>

(i) Existing national inter-exchange carriers such a AT&T, MCI and Sprint
which will be building local networks both to compete with the incumbent local
exchange carriers and also to protect their long distance market share.

(ii) Newly formed telecommunications companies, such as ICG Communications
and GST Telecom, which are building local networks and offering both local
and long distance service.

(iii) Start-up Competitive Local Exchange Carriers (CLEC) which we
anticipate may build local telephone networks and offer long distance service to
their customers by resale of other companies' long distance network offerings.

(iv) Large companies such as electric utilities with certain rights-of-way
and other capabilities in place which are studying whether and where to enter
the telephone business.

(v) Independent telephone companies that must upgrade their networks
rapidly or risk losing their franchise to aggressive competition.

Competition

Internet Services

We expect to face competition from many competitors with significantly
greater financial resources and established brand names and reputations. We
expect to benefit from co-branding our products and services with AT&T. We
expect the level of competition to intensify in the future. We expect
significant competition from:

o Traditional Inter-exchange Carriers. We believe that many of the
leading traditional inter-exchange carriers, such as MCI WorldCom
and Sprint, are expanding their capabilities to support high-speed
end-to-end networking services. Increasingly, their bundled services
include high-speed local access combined with metropolitan and wide
area networks, and a full range of internet services and
applications. We expect them to offer combined data, voice and video
services over these networks.

These carriers have deployed large-scale networks, have large
numbers of existing business and residential customers and enjoy
strong brand recognition, and as a result represent significant
competition. For instance, they have extensive fiber networks in
many metropolitan areas that primarily provide high-speed data and
voice communications to large companies. They could deploy Internet
Protocol (IP) Frame Relay based services.

o Newer Inter-exchange Carriers. The newer inter-exchange carriers,
such as Williams, Qwest Communications International and Level 3
Communications, are building and managing high bandwidth,
packet-based networks nationwide.

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<PAGE>

They are also building direct sales forces and partnering with
Internet Service Providers to offer services directly to business
customers. They could extend their existing networks to include
fiber metropolitan area networks and high-speed, off-net services
using IP Frame Relay, either alone, or in partnership with others.

o Cable Modem Service Providers. Cable modem service providers, like
AT&T and @Home Networks and its cable partners, are offering or
preparing to offer high-speed internet access over hybrid fiber
coaxial cable networks to consumers. @Home Networks has positioned
itself to do the same for businesses. Where deployed, these networks
provide local access services similar to our services. They
typically offer these services at lower prices than our services, in
part by sharing the bandwidth available on their cable networks
among multiple end users. Neither can they offer Internet Protocol
(IP) Frame Relay based technology nor can they provide the requisite
Firewalls. Their network is more suitable for residential users, as
it resembles a party line.

o Wireless and Satellite Data Service Providers. Several new companies
are emerging as wireless and satellite-based data service providers,
over a variety of frequency allocations. These include:

o WinStar Communications, Inc.
o Teligent, Inc.
o Teledesic LLC.
o Hughes Space Communications, and
o Iridium World Communications Ltd.

These companies use a variety of new and emerging technologies, such as
terrestrial wireless services, point-to-point and point-to-multi-point
fixed wireless services, satellite-based networking and high-speed
wireless digital communications.

o Internet Service Providers. Internet Service Providers provide
internet access to residential and business customers. These
companies generally provide such internet access over the incumbent
carriers' circuit switched networks at integrated services digital
network (ISDN) speeds or below. Some Internet Service Providers have
significant and even nationwide marketing presence, such as
Concentric Network Corporation, Mindspring Enterprises, Inc., PSINet
Inc. and Verio.

o Competitive Carriers. Certain competitive carriers, including Covad
Communications Group, Inc. and NorthPoint Communications, Inc., MGC
Communications, Rythms NetConnections, Inc., have begun offering
DSL-based data services piggybacking on "narrowband" ILEC telephone
lines; but with not much success as DSL is extremely hard to
implement and is totally unreliable.

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<PAGE>

Digital Voice Switches

The telecommunications and related networking industries are characterized
by intense competition. We compete with numerous well-established foreign and
domestic companies, many of which possess substantially greater financial,
marketing, personnel and other resources than us. These companies have
established reputations for success in the development, sale and service of
high-speed digital switching and networking and related products.

Products that perform many of the functions similar to our digital voice
switches are readily available from several competitors, including Lucent
Technologies, Nortel, Ericsson, DSC, Alcatel, Siemens, Fujitsu and NEC. These
competitors also have the research and development capabilities and financial
and technical resources necessary to enable them to respond to technical
advances as well as evolving industry requirements and standards.

We believe that our products have the following three strengths in the
United States marketplace: (a) the installed cost of our digital voice switches
is less than those of the competition; (b) our switches can be engineered,
installed and put into service much more quickly; and (c) our distributed
architecture fits with the marketing strategy of the competitive local exchange
carriers who will target specific customers rather than entire geographic areas;
our switch architecture will allow these carriers to tailor their local networks
to their marketplace successes without stranding capacity and capital.

Proprietary Technology

The Company does not hold any patents or copyrights and has no patent or
copyright applications pending. The Company regards its software technology and
certain components of its system hardware as proprietary and relies for
protection upon copyright and trade secret laws and confidentiality agreements
with its employees. In addition, the Company requires customers to enter into a
license and confidentiality agreement permitting the customer the exclusive use
of the system operating software, which is furnished to the customer in object
or binary form.

The Company believes that these protections are sufficient to protect the
Company's rights to its systems and software. Despite these protections,
however, it is possible that competitors, employees, licensees or others may
copy one or more of the Company's products or its technology or obtain
information that the Company regards as proprietary. In addition, there can be
no assurance that others will not independently develop products or technologies
similar to those of the Company, that confidentiality agreements will not be
breached or that the Company will have adequate resources to protect its
proprietary technology. The Company believes that because of the rapid pace of
technological change in the digital switching and networking industries,
protection for its systems is less significant than the knowledge, ability and
experience of the Company's employees, the frequency of product enhancements and
the level of service and support provided to customers by the Company.

20
<PAGE>

Government Regulation and Industry Standards

The telecommunications and related networking industries in which the
Company competes are highly regulated in both the United States and
internationally. Imposition of public carrier tariffs and taxation of
telecommunications services could materially adversely affect demand for the
Company's products. Furthermore, regulation or deregulation of public carrier
services by the United States and other governments, including permitting local
carriers to manufacture switching equipment, may determine the extent to which
the Company will be able to penetrate markets in the United States and
internationally and may result in significantly increased competition, which
would significantly impact the Company's future operating results. In addition,
the Company's products must comply with equipment, interface and installation
standards promulgated by communications regulatory authorities, including the
Federal Communications Commission.

The Company is required to obtain a license from the Department of
Commerce prior to exporting to certain countries. A denial of an export license
to the Company, however, would probably be based upon a policy which would also
affect other U.S. companies exporting similar products.

Industry standards organizations, such as International Telephone Union
("ITU") and Bellcore in the U.S., have created committees to address the matter
of standards within the telecommunications industry. The purpose of such
standards is to facilitate the inter-operability of products from various
vendors and, through standardization, create a competitive environment, which is
anticipated to result in lower product costs. During the past few years, many
new standards have been adopted and more are pending. The International
Standards Organization (ISO), one of the primary standard setting bodies in the
communications industry, has developed a framework for network standards called
the Open System Interconnection Reference Model (the "OSI Model"). The OSI Model
represents a standard approach by which information can be communicated
throughout a network, so that a variety of independently developed computer and
communications devices can inter-operate. The design of the Company's products
incorporates the OSI Model and accommodates most existing and pending ISDN
standards, including applicable BELLCORE and ITU specifications. In most foreign
countries, government departments or ministries set industry standards.

Changes in government policies, regulations and interface and installation
standards or industry standards imposed by domestic and foreign carriers in the
future could require the Company to alter methods of operation, resulting in
additional costs, which could have a material adverse effect on the Company.

Production and Supply

The Company engages in manufacturing, software programming, assembly,
system testing and quality assurance operations at its facility in Hauppauge,
New York. The Company's operations involve the creation of the required system
software, the inspection of system components manufactured by third parties,
programming of microchips and

21
<PAGE>

microprocessors, assembly of the components of the system hardware and quality
control and testing to certify final performance specification. The Company
believes that it has sufficient excess production capacity to satisfy any
increased demand for the Company's systems in the foreseeable future.

The Company is dependent on third-party manufacturers for the production
of all of the component parts incorporated into the Company's systems. The
Company purchases its component parts from numerous third-party manufacturers
and believes that numerous alternative sources of supply for most componet parts
are readily available, except for a few semiconductor components purchased from
single source vendors, such as Pentium processors manufactured by Intel
Corporation and ISDN chips manufactured by Motorola, Inc. If such semiconductor
components are discontinued by their respective manufacturers, the Company would
be required to redesign some of its products by using other vendors components,
which could cause delays in product delivery. The Company currently purchases
all of its requirements for specially designed plastic parts for the iST, the
Company's ISDN telephone, from a single source supplier. The Company believes
that alternative sources of supply for such components are available. The
Company is substantially dependent on the ability of its suppliers, among other
things, to satisfy performance and quality specifications and dedicate
sufficient production capacity for plastic parts within scheduled delivery
times. The Company does not maintain contracts with any of its suppliers and
purchases system components pursuant to purchase orders placed from time to time
in the ordinary course of business. Failure or delay by the Company's suppliers
in supplying necessary components to the Company could adversely affect the
Company's ability to deliver products on a timely and competitive basis.

The Company offers a one-year warranty for sales in the United States
covering operating defects during which period the Company will replace parts
and make repairs to the system components at its expense.

Research and Development

Since its inception, the Company has devoted substantial resources to the
design and development of the Company's systems. For the fiscal years ended
March 31, 1999 and 1998, the Company expended approximately $724,000 and
$389,000, respectively, on research and development. During the year ended March
31, 1999, almost all research and development expenditures were due to the
development of Cyber Business Internet Gateway (CBIG) and Cyber Internet Access
Network (CIAN) products for the high speed internet access service business.
Although the Company's systems are fully developed such as Cyber Business
Internet Gateway (CBIG), Cyber Internet Access Network (CIAN) and Cyber
Distributed Central Office (CDCO), the Company is continually seeking to refine
and enhance its systems, including enhancements to comply with emerging
regulatory or industry standards or the requirements of a particular customer or
country.

The markets for the Company's products are characterized by rapidly
changing technology and evolving industry standards, often resulting in rapid
product obsolescence. Accordingly, the Company's ability to compete depends in
large part on its ability to introduce its products to the marketplace in a
timely manner, to enhance and improve

22
<PAGE>

continually such products and maintain development capabilities to adapt to
technological changes and advances in the communications industry, including
assuring continuing compatibility with evolving industry standards such as IP
Frame Relay, SS7 and C7 signaling which the Company has developed. There can be
no assurance that the Company will be able to compete successfully, that
competitors will not develop technologies or products that render the Company's
systems obsolete or less marketable, or that the Company will be able to keep
pace with the technological demands of the marketplace or successfully enhance
and adapt its products to satisfy industry standards.

Service and Support

The Company believes that service, support and training are important
factors in promoting sales and customer satisfaction. Service and support
include system planning, site preparation, installation, customer training and
maintenance.

Since, the Company's system hardware consists of a cabinet with shelves
having printed circuit boards inserted into physical slots, a substantial part
of repair and maintenance can be accomplished by simply substituting the
component in need of repair. In addition, the Company's systems are designed to
be accessible by computer from the Company's headquarters, allowing the
Company's service personnel to remotely call up, diagnose and otherwise support
systems, thereby reducing response time and cost.

In addition, the Company intends to enter into agreements with third party
service providers to provide customer support on a local basis in foreign
markets, as needed.

Employees

As of the date hereof, the Company had twenty one full time employees, of
which four were engaged in marketing and sales activities, one was engaged in
technical support, eight were engaged in research and development, four were
engaged in production testing and operations and four were in administration.
None of the Company's employees is represented by a labor union. The Company
considers its employee relations satisfactory.

GLOSSARY OF TERMS

Analog Analog transmission employs continuously
variable signal.

Asynchronous Transfer Mode High bandwidth,low-delay, connection-oriented,
packet switching technique requiring 53-byte,
fixed-sized cells.

Backbone An element of the network infrastructure
that provides high-speed, high capacity
connections among the network's physical
points of presence. The backbone is used to
transport end user traffic across the
metropolitan areas and across the United
States.

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Bandwidth Refers to the maximum amount of data that
can be transferred through a communication
channel in a given time. It is usually
measured in bits per second for digital
communications.

Broadband Broadband systems transmit data at high
speed using high bandwidth capacity
communication channel.

Central Office Incumbent carrier facility where
subscriber lines are connected to ILEC
switching equipment.

Collocation A location where a competitive carrier
network interconnects with the network of an
incumbent carrier's central office.

Competitive Local Exchange
Carrier (CLEC) Category of telephone service
provider that offers local exchange services
in competition with those of the incumbent
carrier.

Copper Line or Loop A pair of traditional copper
telephone lines using electric current to
carry signals.

Digital Digital transmission and switching
technologies employ a sequence of binary
digits to convey information.

DSL Digital Subscriber Line. An analog
transmission technology where binary digits
are sent over analog transmission lines or
local copper loop.

E-Commerce Electronic Commerce. An internet service
that supports electronic transactions
between customers and vendors to purchase
goods and services.

Firewall A computer device that separates a local
area network from the internet and prevents
unauthorized access to the local area
network through the use of electronic
security mechanisms.

Frame Relay A form of packet switching with
variable length frames that may be used with
a variety of communication protocols.

Incumbent Local Exchange
Carrier (ILEC) A company providing local exchange services.

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<PAGE>

Interconnection Agreement A contract between an incumbent
carrier and a competitive carrier for the
connection of a competitive carrier network
to the public switched telephone network.

internet An array of interconnected networks using a
common set of protocols defining the
information coding and processing
requirements that can communicate across
hardware platforms and over many links.

Internet Protocol A standard network protocol that
allows computers with different
architectures and operating system software
to communicate with other computers on the
internet. Advanced packet systems employ the
Internet Protocol (IP) standard.

ISDN Integrated Services Digital Network. A
transmission method that provides
circuit-switched access to the public
network at speeds of 64 or 128 Kbps for
voice or data transmission.

Internet Service Provider A company that provides direct access to the
internet.

Inter-exchange Carrier Usually referred to as a long-distance
carrier.

Kbps Kilobits per second. 1,000 bits per second.

Mbps Megabits per second. 1,000,000 bits per
second.

Modem An abbreviation of Modulator-Demodulator. An
electronic signal-conversion device used to
convert digital signals from a computer to
analog form for transmission over the
telephone network.

Packets Information represented as bytes grouped
together through a communication node with a
common destination address and other
attribute information.

Router A device that accepts the Internet Protocol
from a local area network and
switches/routes Internet Protocol packets
across a network backbone.

T-1 This is a Bell System term for a digital
transmission link with a capacity of 1.544
Mbps.

ITEM 2 - Description of Property

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<PAGE>

The Company's executive offices and assembly operations are located in
approximately 8,200 square feet of leased space in Hauppauge, New York. The
lease provides for annual rent of $55,350 and expires on March 31, 2004. The
Company believes that its facility is adequate for its current needs. The
Company believes that additional physical capacity at its current facility will
accommodate expansion, if required.

ITEM 3 - Legal Proceedings

On or about August 5, 1996, Brockington Securities, Inc. ("Brockington")
commenced an action, in the Supreme Court of the State of New York, County of
Suffolk, against the Company for wrongful termination of a purported agreement
for investment banking services. Brockington is seeking damages in the amount of
(i) $775,000 based upon the alleged net aggregate value of the shares of the
Company's common stock, par value $.01 per share (the "Common Stock"), upon
which Brockington alleges it had a purchase option and (ii) $1 million for the
alleged wrongful termination.

The Company has asserted counterclaims based upon Brockington's wrongful
conduct and is seeking damages in the amount of $428,000 or, in the alternative,
recission of the alleged contract and the return of the 100,000 shares
previously issued Brockington.

The Company believes that Brockington's claims are without merit and
intends to vigorously defend its position.

ITEM 4 - Submission of Matters to a Vote of Security Holders

None.

PART II

ITEM 5 - Market for Common Equity and Related Stockholder Matters

The Company's Common Stock has been traded in the over-the-counter market
and quoted on the electronic bulletin board (the "Bulletin Board") under the
symbol "CYBD" since its initial public offering in 1984. The following table
sets forth, for each of the fiscal periods indicated, the high and low trade
prices for the Common Stock, as reported on the Bulletin Board. These per share
quotations represent inter-dealer prices in the over-the-counter market, do not
include retail markups, markdowns or commissions and may not represent actual
transactions.

Price Per Share
---------------
High Low

Fiscal Year Ended March 31, 1999
First Quarter $1.81 $1.19
Second Quarter 1.56 0.50
Third Quarter 0.87 0.22

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Fourth Quarter 3.12 0.65

Fiscal Year Ended March 31, 1998
First Quarter $3.56 $1.69
Second Quarter 2.87 2.03
Third Quarter 2.87 1.38
Fourth Quarter 2.50 1.25

On March 31, 1999, the closing trade price of the Common Stock as reported
on the Bulletin Board was $2.25 per share. As of such date, there were
approximately 500 stockholders of record of the Company's Common Stock.

To date, the Company has not paid any dividends on its Common Stock and
does not expect to declare or pay any dividends in the foreseeable future. The
Company intends to retain all earnings for use in the Company's business
operations.

ITEM 6 - Management's Discussion and Analysis or Plan of Operation

Forward Looking Statements

When used in this report, press releases and elsewhere by the management
of the Company from time to time, the words "believes", "anticipates", and
"expects" and similar expressions are intended to identify forward-looking
statements that involve risks and uncertainties. Additionally, certain
statements contained in this discussion may be deemed forward-looking statements
that involve a number of risks and uncertainties. Among the factors that could
cause actual results to differ materially or adversely are the following: the
ability of the Company to meet its working capital and liquidity needs, the
status of relations between the Company, its primary customers and distributors,
the availability of long-term credit, unanticipated changes in the U.S. and
international economies, business conditions and growth in the
telecommunications industry and the level of growth in internet high speed
access sales generally, the timely development and acceptance of new products,
the impact of competitive products and pricing, changes in the cost of component
materials, changes in product mix, the outcome of litigation in which the
Company is involved, along with product delays and other risks detailed from
time to time in the Company's SEC reports, including but not limited to this
Annual Report on Form 10-KSB for the year ended March 31, 1999. Readers are
cautioned not to place undue reliance on these forward-looking statements which
speak only as of the date hereof. The Company undertakes no obligation to
publicly release the results of any events or circumstances after the date
hereof or to reflect the occurrence of unanticipated events.

Overview

During the year ended March 31, 1999 ("Fiscal 1999"), we made a strategic
shift to enter the fast growing, lucrative high-speed internet access market. We
rapidly developed our Cyber Business Internet Gateway (CBIG) and Cyber Internet
Access Network (CIAN)

27
<PAGE>

switch. We forged an alliance with AT&T Corporation to become a provider of
high-speed internet access and to create Virtual Private Networks (VPN) for
businesses using our Internet Protocol (IP) Frame Relay based "broadband"
technology. We have recently developed our Internet Protocol (IP) Frame Relay
infrastructure equipment to piggyback on AT&T's rapid deployment of Internet
Protocol (IP) Frame Relay based "broadband" internet backbone.

During fiscal 1999, our primary activities have consisted of:

o From April to October 1998, we built direct sales and marketing team to
attempt to address the Competitive Local Exchange Carrier (CLEC) market,
which failed to materialize.

o From April to October 1998, we built a Technical Services Division in
anticipation of digital voice switch sales, which failed to materialize.

o From April to October 1998, we assisted Competitive Local Exchange
Carriers (CLEC) in an attempt to obtain the necessary interconnection
agreements with Incumbent Local Exchange Carriers (ILEC), which were not
with acceptable terms or with satisfactory resolution of disagreements. In
January 1999, the U.S. Supreme Court upheld the Federal Communications
Commission's orders to the ILECs to simplify and expedite dispute
resolution process. We believe that this ruling may

28
<PAGE>

permit the CLECs, with whom we were working, to obtain their
interconnection agreements in the near future.

o From April to August 1998, we assisted National Telecommunications Company
(NTC) of Egypt in obtaining governmental approvals for setting up of an
assembly facility, obtaining duty and income tax waivers, finding a
suitable assembly facility in Egypt, and defining assembly processes among
other things. We are unsure whether our efforts will produce results in
the future. We have decided, however, not to expend any more of our
resources until we receive irrevocable letters of credits against contract
orders.

o In November 1998, we made a strategic shift to enter the lucrative
high-speed internet access market. We re-engineered our company and
changed our sales strategy to grow our business through strategic
alliances and partnering with major companies for both voice and high
speed internet access business.

o From November 1998 to April 1999 we worked with AT&T to forge an alliance
with them to enter the high speed internet access and Virtual Private
Network markets.

o We are still negotiating with certain other major companies to enter
strategic alliances with us to market our digital voice switches in the
U.S.

o We rapidly developed our Cyber Business Internet Gateway (CBIG) and Cyber
Internet Access Network (CIAN) products for the internet business. We have
realigned our Company to become a leader in high speed internet access
business. We are working with AT&T, building our internet sales and
support people, appointing independent sales agents nationwide, appointing
independent wiring and cable contractors and building a management
information system to support our customer care and other administrative
functions.

Results of Operations

Year Ended March 31, 1999, Compared to Year Ended March 31, 1998

Net sales

The Company's net sales for the year ended March 31, 1999 ("Fiscal 1999"),
were $279,926 representing an increase of $213,816 or approximately 323% from
$66,110 for the year ended March 31, 1998 ("Fiscal 1998"). Increases in sales
were due to volume increases in services. Net sales for Fiscal 1999 and Fiscal
1988 were insignificant, primarily attributable to lack of digital voice switch
sales to CLECs. During Fiscal 1999, management focused on strategic shift
towards high-speed internet access business and completing the development of
Cyber Business Internet Gateway (CBIG) and Cyber Internet Access Network (CIAN)
products.

29
<PAGE>

Gross margin

The Company includes in its cost of goods sold the materials and labor
used, subcontractor costs and overhead incurred in the manufacture of its
systems. The Company's average gross margins increased from approximately 32% to
approximately 52% of net sales from Fiscal 1998 to Fiscal 1999. Increase in
gross margins was primarily attributable to increase in volume of services.

Selling, general and administrative

Selling, general and administrative expenses marginally increased from
$1,674,977 in Fiscal 1998 to $1,682,368 in Fiscal 1999, representing an increase
of $7,391. The absolute dollar selling, general and administrative expenses in
Fiscal 1998 and Fiscal 1999 were principally the result of increased selling
expenses incurred with respect to introductory and exploratory marketing efforts
in the U.S. Such efforts have not resulted in any sales to date.

Research and development

Research and development expenses increased from $388,854 in Fiscal 1998
to $650,072 in Fiscal 1999, representing an increase of $261,218 or
approximately 67%. This increase in research and development expenses was
primarily due to the development of Cyber Business Internet Gateway (CBIG) and
Cyber Internet Access Network (CIAN) for the high speed internet access
business. All development costs are expensed in the period incurred.

Income (loss) from operations

Loss from operations in Fiscal 1999 was $(2,187,413) or $(.13) per share
as compared with $(2,042,667) or $(.12) per share in Fiscal 1998. The Company
incurred these losses in Fiscal 1999 and Fiscal 1998 primarily due to lack of
sales and sustained selling, general and administrative expenses as well as
increases in research and development expenses.

Provision for bad debt

Bad debt expense amounted to $355,012 in Fiscal 1999 versus $0 in Fiscal
1998. Accounts receivable are presented net of a zero allowance for doubtful
accounts in Fiscal 1999 and Fiscal 1998.

Net income (loss) available to Common Stockholders

As a result of the foregoing, the net loss in Fiscal 1999 was $(2,761,812)
or $(.16) per share as compared to a net loss of $(2,097,486) or $(.12) per
share in Fiscal 1998.

Liquidity and Capital Resources

30
<PAGE>

The Company's ability to generate cash adequate to meet its needs results
primarily from sale of preferred and common stock and cash flow from operations.
Total working capital decreased by $2,515,748 to $634,674 at March 31, 1999 from
$3,150,422 at March 31, 1998, primarily due to sustained selling, general and
administrative expenses as well as increases in research and development
expenses. The current ratio of current assets to current liabilities decreased
to 6.1 to 1 as at March 31, 1999 from 23.3 to 1 as at March 31, 1998. Current
levels of inventory are adequate to meet sales for the next 6 months. The
Company believes that its current sources of liquidity will be sufficient to
meet its needs for the next 12 months. The Company believes that, if needed, it
will be able to obtain additional funds required for future needs.

The Company used $92,442 and $219,625 during Fiscal 1999 and Fiscal 1998
respectively, for investing activities. The cash used for investing activities
relates primarily to purchases of equipment in Fiscal 1999 and Fiscal 1998.
During Fiscal 1998 production equipment capacity was expanded in anticipation of
greater product sales.

Net cash used by financing activities was $0 and $529,470 for Fiscal 1999
and Fiscal 1998, respectively.

On July 11, 1996, the Company concluded a private placement of its Series
A Preferred Stock and accompanying warrants to accredited institutional
investors and received net proceeds of approximately $7.1 million. The Series A
Preferred Stock was issued without registration in reliance on Regulation S
promulgated by the Securities and Exchange Commission under the Securities Act
of 1933, as amended. On December 30, 1996, the Company concluded a private
placement of 2,000 shares of its Series B-1 Preferred Stock to Syndicated
Communications Venture Partners III, L.P. and received net proceeds of $1.7
million. The Series B-1 Preferred Stock was issued without registration in
reliance on Section 4(2) of the Securities Act of 1933, as amended. Some of the
proceeds from these offerings have been used to retire long-term debt, redeem
Series A Preferred Shares prior to conversion and to fund research and
development, marketing and production expenses. All of the Series A Preferred
Stock has been converted or redeemed and there are no such shares outstanding.
However, there are 824,013 warrants outstanding in connection with the offering
of Series A preferred stock at an exercise price of $6.35 per share for an
aggregate amount of $5,232,482. On each of December 30, 1997 and December 30,
1998, the Series B-1 preferred stockholders received a 10% stock dividend of 200
and 220 shares, respectively, of Series B-1 Preferred Stock in accordance with
the terms of the private placement. On April 14, 1999, all of the Company's
outstanding Series B-1 Preferred Stock was converted into 861,230 shares of the
Company's Common Stock at a conversion price of $2.89 per share.

On July 12, 1999, the Company concluded a private placement of its Series
C Preferred Stock and accompanying warrants to accredited investors and received
net proceeds of approximately $310,000. The Series C Preferred Stock was issued
without registration in reliance on Section 4(2) of the Securities Act of 1933,
as amended.

31
<PAGE>

Due to the completion of the Series A, Series B and Series C Preferred
Stock transactions, expected exercise of options and warrants and together with
expected cash flow from operations, the Company believes its liquidity will be
sufficient to meets its needs for the next 12 months.

Impact of Inflation

Inflation has historically not had a material effect on the Company's
operations.

Impact of the Year 2000 ("Y2K") Issue

The Company conducted a review of its operating and computer systems to
identify the areas, which could be affected by the Y2K issue. The Company
presently believes the Year 2000 problem will not pose significant operational
problems for the Company and the estimated cost of achieving compliance is
minimal and is not expected to have a material adverse effect on the financial
condition, liquidity or results of operations of the Company.

The Company's internet gateway, digital voice switching and networking
systems which it designs, develops, manufactures, markets and services have been
designed to be Y2K compliant and the Y2K issue is not expected to have a
material effect on the Company's ability to serve its customers.

As part of the Company's assessment of the Y2K issue, consideration was
given to the possible impact upon the Company from using purchased software,
suppliers and outside service providers. The Company's efforts with regard to
Y2K issues are dependent in part on information received from such suppliers and
vendors upon which the Company has relied. While it is not possible for the
Company to predict all future outcomes and events, the Company is not aware, at
this time, of any Y2K non-compliant situations with regard to any of its
purchased software or its use of suppliers and outside service providers.

ITEM 7 - Financial Statements

The Financial Statements of the Company are filed as part of this Form
10-KSB.

ITEM 8 - Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure.

None.

PART III

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

32
<PAGE>

The directors and executive officers of the Company are:

Name Age Office

Jawahar C. Chatpar 51 Chairman of the Board, President, and
Chief Executive Officer

Jack P. Dorfman 61 Director and Secretary

Jatinder V. Wadhwa 64 Director and Treasurer

Terry L. Jones 51 Director

Khushi A. Nichani 61 Director

Larry S. Shluger 60 Vice President of Operations

Jawahar C. Chatpar is a founder of the Company and has served as Chairman
of the Board, Chief Executive Officer and President since March 1991, as
Chairman of the Board, Chief Executive Officer and Secretary from November 1986
until March 1991, and as President and Chief Executive Officer since inception
until November 1986. Mr. Chatpar has also served as a director since inception.
Mr. Chatpar founded the Company in 1983 as a successor to a Canadian corporation
of the same name, which he founded in 1982. From 1980 to 1982, Mr. Chatpar was
employed by Bayly Engineering Limited, a manufacturer of digital
telecommunication systems and a member of A.E.G. Telefunken Group, as a General
Manager of Digital Transmission and Fiber Optics Engineering (research and
development). From 1974 to 1980, Mr. Chatpar served in various engineering,
general management and marketing positions with Northern Telecom. He holds an
B.Tech (honors) degree in Electrical Engineering from the Indian Institute of
Technology, Bombay, India and an M.S. degree in Electrical Engineering from the
University of Waterloo, Canada.

Jack P. Dorfman joined the Company as a Director in November 1993, and has
served as Secretary since October 1995. Mr. Dorfman has otherwise been retired
since June 1996. Prior thereto, since 1992, Mr. Dorfman served as consultant and
manager for a number of pharmacies. From 1990 to 1992, he served as a management
consultant for Clark Container, a division of Mark IV Industries, a
conglomerate. From 1988 to 1990, he served as Vice President and Treasurer of US
Distribution, a transportation company. Prior to 1988, he owned, managed and
operated an independent community pharmacy for over fifteen years.

Jatinder Wadhwa has served as a Director of the Company since 1986 and as
Treasurer of the Company since August 1997. He had been the Secretary of the
Company from 1993 to 1995. Since 1994, Mr. Wadhwa has served as the Chief
Executive Officer of Security First Financial Corp., a financial institution
dealing with first and second mortgages on residential and commercial
properties. From 1989 to 1994, Mr. Wadhwa had served as a management consultant
to Gibbons Goodwin van Amerongen, an investment banking firm,

33
<PAGE>

Wells Aluminum Corporation, a manufacturer of aluminum extrusion products and
Sealy Mattress Company. From 1970 to 1990, Mr. Wadhwa had served as Chief
Operating Officer and Vice President of Operations of EZ Por Corporation, a
manufacturer of aluminum products.

Terry L. Jones has served as a Director of the Company since November
1997. He has been the President of Syndicated Communications, Inc. ("Syncom"), a
communications venture capital investment company, since 1990. He joined Syncom
in 1978 as a Vice President. Mr. Jones serves in various capacities, including
director, president, general partner and vice president for various other
entities affiliated with Syncom. He also serves on the Board of Directors of
Radio One, Inc. Mr. Jones earned his B.S. degree from Trinity College, his M.S.
from George Washington University and his M.B.A. from Harvard Business School.

Khushi A. Nichani has served as a Director of the Company since November
1997. He has been a commercial manager at Black & Veatch Incorporated, an
engineering and architectural firm for power industrial projects, since May
1997, where his responsibilities included negotiating orders for turnkey power
plants. From 1973 to May 1997, he held various positions (most recently as
Manager of Proposals & Estimating) at GE Co. Power Generation, the power project
division of General Electric.

Larry S. Shluger has been Vice President of Operations of the Company
since August 1996. From 1991 to 1996, Mr. Shluger was Director of Purchasing and
Operations at Cashtek Corporation, a company which designs, develops and
manufactures computerized gaming systems. From 1975 to 1991, he was Director of
Purchasing and Operations at Kenilworth Systems Corporation until its
acquisition by Cashtek Corporation. Prior to 1975 he was employed in various
management positions at Ecologic Instruments Corporation, a company which
designs, develops and manufactures test equipment for the environment and
pollution control fields, and Dynamic Instruments Corporation, a manufacturer of
battery chargers.

There is no family relationship among the Directors and Officers of the
Company.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"1934 Act"), requires the Company's directors and executive officers, and
persons who own more than ten (10%) percent of a registered class of the
Company's equity securities, to file with the Securities and Exchange Commission
(the "Commission") initial reports of ownership and reports of changes in
ownership of Common Stock and other equity securities of the Company. Reporting
persons are required by Commission regulations to furnish the Company with
copies of all Section 16(a) forms they file.

To the Company's knowledge, based solely on review of the copies of such
reports furnished to the Company, the following persons failed to file, on a
timely basis, the following reports required by Section 16(a) of the 1934 Act:
J.C. Chatpar failed to timely file three Forms 4, in connection with the receipt
of certain stock options, during the fiscal years ended March 31, 1998 and 1999.
Jatinder Wadhwa failed to timely file four Forms 4,

34
<PAGE>

in connection with the receipt and exercise of certain stock options, during the
fiscal years ended March 31, 1998 and 1999. Jack Dorfman failed to timely file
three Forms 4, in connection with the receipt of certain stock options, during
the fiscal years ended March 31, 1998 and 1999. Terry Jones failed to timely
file a Form 3, and in connection with the receipt of certain stock options, two
Forms 4 during the fiscal years ended March 31, 1998 and 1999. Khushi Nichani
failed to timely file a Form 3, and in connection with the receipt of certain
stock options, two Forms 4 during the fiscal years ended March 31, 1998 and 1999
Larry Shluger failed to timely file a Form 3, and in connection with the receipt
of certain stock options, a Form 4, during the fiscal year ended March 31, 1998.
These forms are currently being prepared for filing.

Summary Compensation Table

The following table sets forth information concerning the compensation for
services in all capacities for the fiscal years ended March 31, 1999, 1998 and
1997 of those persons who were, at March 31, 1999, the chief executive officer
(the "Named Officer"). During such periods, no executive officer of the Company
received compensation in excess of $100,000 other than J.C. Chatpar.

35
<PAGE>

<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
Annual Compensation Long Term Compensation All
------------------- Other
Com-
pen-
sation
============================================
Payouts
Awards
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Name and Year Salary Bonus Other Restricted Securities LTIP
Principal ($) ($) Annual Stock Underlying Payouts
Position Com- Awards ($) Options/ ($)
pensa- SARs(#)
tion
($)(1)
- ------------------------------------------------------------------------------------------------------------
J.C. Chatpar, 1999 $165,000 None None None 120,000(4) None None
Chairman of 1998 $150,000 None None None 140,000(3) None None
the Board, 1997 $130,000(2) $100,000(2) None None None None None
President and
Chief
Executive
Officer
- ------------------------------------------------------------------------------------------------------------------
</TABLE>

(1) The Company has concluded that the aggregate amount of perquisites and other
personal benefits paid to each of the Named Officers named in the table did not
exceed the lesser of 10% of such officer's total annual salary and bonus for the
1999, 1998 and 1997 fiscal years or $50,000, thus, such amounts are not included
in the table.

(2) Mr. Chatpar's salary was raised from $80,000 per annum to $150,000 per annum
effective August 12, 1996.

(3) Mr. Chatpar was granted 110,000 options each to purchase one share of Common
Stock exercisable at $2.56 and 30,000 options each to purchase one share of
Common Stock exercisable at $2.43 in Fiscal 1998.

(4) Mr. Chatpar was granted 120,000 options each to purchase one share of Common
Stock exercisable at $0.75 in Fiscal 1999.

Option Grants In Last Fiscal Year

The following table sets forth information concerning stock option grants
made during Fiscal 1999 to the Named Officers. The Company has not granted any
stock appreciation rights.

<TABLE>
<CAPTION>
Individual Grants
-----------------
Number % of Total
Of Options
Securities Granted To
Underlying Employees in Exercise
Options Fiscal Year Price Expiration
Granted 1999 ($/Share) Date
Name (#) (1) (2) (3)
- ---- --- --- --- ---
<S> <C> <C> <C> <C> <C>
J.C. Chatpar 120,000 60.0% $0.75 8/30/2008
</TABLE>

36
<PAGE>

- ----------
(1) During Fiscal 1999, options to purchase an aggregate of 120,000 shares of
Common Stock were granted to Mr. Chatpar and options to purchase an aggregate of
200,000 shares of Common Stock were granted to six other employees.

(2) The exercise price of the options granted was equal to the fair market value
of the underlying stock on the date of grant.

(3) Options are immediately exercisable.

Aggregated Fiscal Year End Option Values

The following table sets forth information concerning the number of
unexercised options and the Fiscal 1999 year end value of unexercised options on
an aggregated basis held by the Named Officers. The Company has not granted any
stock appreciation rights and no options were exercised in Fiscal 1999.

<TABLE>
<CAPTION>
Number of Securities Value of
Underlying Unexercised Unexercised In-The-Money
Options at Fiscal Year-End (#) Options at Fiscal Year-End ($)
=============================================================================
Name Exercisable Unexercisable Exercisable Unexercisable
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
J.C. Chatpar 740,000 0 $792,400 0
</TABLE>

(1) Options are "in-the-money" if, on March 31, 1999, the market price of the
Common Stock ($2.25) exceeded the exercise price of such options. The value of
such options is calculated by determining the difference between the aggregate
market price of the Common Stock underlying the options on March 31, 1999 and
the aggregate exercise price of such options.

Compensation of Directors

The directors of the Company are paid $250 per Board meeting. During
Fiscal 1999, the Board of Directors met two times and each director attended at
least 75% of the meetings of the Board of Directors. The Board does not have any
committees. In addition, the Company currently reimburses each director for
expenses incurred in connection with his attendance at each meeting of the Board
of Directors.

In August 31, 1998, the Company issued to J.C. Chatpar, Jack Dorfman,
Jatinder Wadhwa, Terry Jones and Khushi Nichani, directors of the Company,
non-qualified stock options to purchase 120,000, 20,000, 20,000, 10,000, and
10,000 shares of Common Stock, respectively, at an exercise price of $0.75 per
share.

Employment Agreements and Insurance

The Company has entered into an Amended and Restated Employment Agreement
with Mr. J.C. Chatpar dated as of August 4, 1997 (the "Employment Agreement")
for a three year term. Such three-year term shall be automatically extended for
successive three-year

37
<PAGE>

terms unless either party gives the other party 120 days prior written notice of
termination before the end of any such three-year period. The Board, however,
has the authority to terminate such extension upon cause. "Cause" is defined as
conviction of a felony or willful misconduct. Mr. Chatpar is entitled to receive
a salary of $150,000 per annum, with an annual increase of 10%. In recognition
of the complex scientific and technical leadership which Mr. Chatpar brings to
the Company. The Company has also agreed that its Board of Directors may raise
his salary during the term of his employment as soon as the financial resources
of the Company and other business conditions permit. In such event, Mr.
Chatpar's salary shall be at a level comparable to that of chief executive
officers of other comparable technology-driven publicly held companies.

In addition to his base salary, Mr. Chatpar shall be entitled to receive a
bonus based upon the following formula: (a) 1% of gross revenues for each fiscal
year in excess of $3 million provided, however, that the Company shall be
profitable, plus (b) 5% of net income after deduction of the bonus provided for
in (a) above, and plus (c) 10% of the increase in net income over that of the
prior fiscal year after deduction of the bonus provided for in (a) above.

In the event of a termination of Mr. Chatpar's employment due to
disability, he shall receive royalty payments of 5% of the gross revenues earned
by the Company ("Royalties") for a period of 15 years following termination. In
the event of Mr. Chatpar's death, his wife, if any, or his estate, shall receive
a payment equal to six months of his base salary and Royalties for 15 years. In
the event of a termination of Mr. Chatpar's employment for any reason other than
pursuant to disability, death or for cause, or if there is a change of control
(as defined in the Employment Agreement) of the Company which results in an
actual or constructive termination of employment (as defined therein), he shall
receive a payment equal to three years of his base salary plus three times his
prior year's bonus, Royalties for 15 years, and all of his outstanding options
will be deemed immediately vested and exercisable for a period of one year from
the effective termination date.

The Company does not have employment contracts with any other officer or
director. The Company offers basic health, major medical and life insurance to
its employees. No retirement, pension or similar program has been adopted by the
Company.

ITEM 11 - Security Ownership of Certain Beneficial Owners and Management

The following table sets forth certain information known to the Company
regarding beneficial ownership of the Company's Common Stock as of March 31,
1999, for (i) each person or group that is known by the Company to be a
beneficial owner of more than 5% of the outstanding shares of Common Stock, (ii)
each of the Named Officers and directors, and (iii) all directors and executive
officers of the Company as a group. Except as otherwise indicated, the Company
believes that such beneficial owners, based on information furnished by such
owners, have sole investment and voting power with respect to such shares,
subject to community property laws, where applicable.

38
<PAGE>

Names and Address
of Beneficial Owners Number of Shares Percentage Owned (1)(2)
- -------------------- ---------------- -----------------
J.C. Chatpar(3) 5,465,712 30.0%
c/o Cyber Digital, Inc.
400 Oser Avenue
Hauppauge, NY 11788

Jack P. Dorfman(4) 220,000 1.2%

Jatinder V. Wadhwa(5) 217,812 1.2%

Terry L. Jones (6) 20,000 *

Khushi A. Nichani (7) 28,000 *

All directors and executive
officers as a group: (6)
persons 5,951,524 32.7%

*less than 1%

(1) For purposes of computing the percentage of outstanding shares of Common
Stock held by each person or group of persons named above, any security which
such person or persons have or have the right to acquire within 60 days is
deemed to be outstanding, but is not deemed to be outstanding for the purpose of
computing the percentage of ownership of any other person.

(2) Assumes the exercise of the warrants to purchase 824,013 shares of Common
Stock issued in connection with the offering of the Company's Series A Preferred
stock.

(3) Does not include 476,000 shares owned by Sylvie Chatpar, his wife, and
175,000 shares owned by certain other relatives, to which shares Mr. Chatpar
disclaims beneficial ownership. Includes 740,000 shares as to which Mr. Chatpar
holds non-qualified stock options, which are exercisable at any time.

(4) Includes 100,000 shares as to which Mr. Dorfman holds a non-qualified stock
option, which are exercisable at any time. Does not include 360,000 shares owned
by his wife, Sandra Dorfman, to which shares Mr. Dorfman disclaims beneficial
ownership.

(5) Includes 60,000 shares as to which Mr. Wadhwa holds non-qualified stock
options which are exercisable at any time.

(6) Terry Jones is a general partner of a limited partnership that is the
general partner of Syndicated Communications Venture Partners III, L.P. ("Syncom
III"), a fund which owns all the 2,420 shares of the Company's Series B
convertible preferred stock (the "Series B Stock") currently outstanding.
Includes 20,000 shares as to which Mr. Jones holds non-qualified stock options
which are exercisable at any time.

(7) Includes 20,000 shares as to which Mr. Nichani holds non-qualified stock
options which are exercisable at any time.

39
<PAGE>

ITEM 12 - Certain Relationships and Related Transactions

On December 30, 1996, the Company consummated a private placement of its
Series B Stock, to Syncom III. The Company issued 2,000 shares of its Series B
Stock to Syncom III in return for $2,000,000. Such shares are convertible into
shares of the Company's Common Stock commencing one year from closing date. The
conversion price is lesser of either eighty-five (85%) per cent of the average
closing price during the five trading days preceding the conversion date or
$7.50 per share. All shares of Series B Stock shall automatically be converted
into shares of the Company's Common Stock on December 21, 2001. On December 30,
1997 and December 30, 1998, Syncom III received 10% dividend through issuance of
200 and 220 shares of Series B Stock, respectively. On April 14, 1999, all of
the Company's outstanding Series B-1 Preferred Stock was converted into 861,230
shares of the Company's Common Stock at a conversion price of $2.89 per share.

Terry Jones, a director, is the general partner of WJM Partners III, L.P.
("WJM"), the general partner of Syncom III. Pursuant to the terms of the Stock
Purchase Agreement entered into in connection with such placement, so long as
Syncom III holds at least 750 shares of Series B Stock and/or shares of the
Company's Common Stock issued upon conversion of such shares of Series B Stock,
or any combination thereof, the Company's Board of Directors shall consist of
not less than five members and the Company shall use its best efforts to cause
Terry Jones (or another partner of WJM) to be elected as a director.

ITEM 13 - Exhibits and Reports on Form 8-K

(a) Exhibits.

3.1 Composite Amended and Restated Certificate of Incorporation
(incorporated herein by reference to Exhibit 3.1 to the Company's Quarterly
Report on Form 10-QSB for the period ended December 31, 1996).

3.2 Composite Amended and Restated By-Laws (incorporated herein by
reference to Exhibit 3.1 to the Company's Quarterly Report on Form 10-QSB for
the period ended September 30, 1997 (the "September 1997 Form 10-QSB")).

10.1 Cyber Digital, Inc. 1993 Stock Incentive Plan (incorporated herein by
reference to Exhibit 10(a) to the Company's Annual Report on Form 10-K for the
fiscal year ended March 31, 1994).

10.2 Amended and Restated Employment Agreement, dated as of August 4,
1997, between the Company and J.C. Chatpar (incorporated herein by reference to
Exhibit 10.1 to the September 1997 Form 10-QSB).

10.3 Manufacturing License Contract between the Company and National
Telecommunications Co., dated as of December 4, 1995 (incorporated herein by
reference to Exhibit 10(c) to the Company's Annual Report on Form 10-KSB/A for
the fiscal year ended March 31, 1996)).

40
<PAGE>

10.4 Manufacturing License Contract between the Company and Gujarat
Communications and Electronics, Ltd. dated as of May 30, 1996 (incorporated
herein by reference to Exhibit 10.5 to the Company's Annual Report on Form
10-KSB for the fiscal year ended March 31, 1997).

10.5 Cyber Digital, Inc. 1997 Stock Incentive Plan (incorporated herein by
reference to Exhibit 10.5 to the Company's Annual Report of Form 10-KSB for the
fiscal year ended March 31, 1998).

10.6 Contractor Agreement between the Company and GTE Data Services GmbH,
dated as of December 9, 1997 (incorporated herein by reference to Exhibit 10.6
to the Company's Annual Report of Form 10-KSB for the fiscal year ended March
31, 1998).

27 Financial Data Schedule.

(b) Reports of Form 8-K. No reports on Form 8-K were filed for the three months
ended March 31, 1999.

41
<PAGE>

CYBER DIGITAL, INC.
FINANCIAL STATEMENTS

<PAGE>

TABLE OF CONTENTS

Page No.
--------

Independent Auditors' Report .................................. F-1

Financial Statements

Balance Sheets ............................................ F-2

Statements of Operations .................................. F-3

Statements of Changes in Shareholders' Equity ............. F-4

Statements of Cash Flows .................................. F-5

Notes to Financial Statements ............................. F-6 - F-15

All schedules omitted are not required, not applicable, or the information is
provided in the financial statements or notes therein.

<PAGE>

A L B R E C H T , V I G G I A N O , Z U R E C K
& C O M P A N Y , P . C .
CERTIFIED PUBLIC ACCOUNTANTS
25 SUFFOLK COURT
HAUPPAUGE, NY 11788
(516) 434-9500

INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Shareholders
Cyber Digital, Inc.
Hauppauge, New York

We have audited the accompanying balance sheets of Cyber Digital, Inc. as of
March 31, 1999 and 1998 and the related statements of operations, shareholders'
equity, and cash flows for the years then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.

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

In our opinion, the accompanying financial statements referred to in the first
paragraph presents fairly, in all material respects, the financial position of
Cyber Digital, Inc. as of March 31, 1999 and 1998 and the results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.

/s/ Albrecht, Viggiano, Zureck and Company, P. C.

Hauppauge, New York
June 15, 1999

F-1
<PAGE>

CYBER DIGITAL, INC.
BALANCE SHEETS
March 31,

<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
ASSETS

Current Assets
Cash and cash equivalents $ 246,832 $ 2,436,473
Accounts receivable, net -0- 383,603
Inventories 482,633 447,750
Prepaid and other current assets 29,190 23,545
------------ ------------

Total Current Assets 758,655 3,291,371

Property and Equipment, net 250,809 227,965

Other Assets 14,350 14,350
------------ ------------
$ 1,023,814 $ 3,533,686
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY

Current Liabilities
Accounts payable, accrued expenses, and taxes $ 123,981 $ 140,949
------------ ------------

Total Current Liabilities 123,981 140,949
------------ ------------

Commitments and Contingencies

Shareholders' Equity
Preferred stock - $.05 par value; cumulative, convertible and
participating; authorized 10,000,000 shares
Series A; issued and outstanding - none at March 31, 1999
and 1998 -0- -0-
Series B-1 issued and outstanding 2,420 and 2,200 shares
at March 31, 1999 and 1998, respectively 121 110
Series B-2 issued and outstanding - none at March 31, 1999
and 1998 -0- -0-
Common stock - $.01 par value; authorized 30,000,000
shares; issued and outstanding 17,386,053 shares
at March 31, 1999 and 1998, respectively 173,861 173,861
Additional paid-in capital 14,161,764 13,892,867
Accumulated deficit (13,435,913) (10,674,101)
------------ ------------

899,833 3,392,737
------------ ------------

$ 1,023,814 $ 3,533,686
============ ============
</TABLE>

See accompanying notes to financial statements.

F-2
<PAGE>

CYBER DIGITAL, INC.
STATEMENTS OF OPERATIONS
Years ended March 31,

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

<S> <C> <C>
Net Sales $ 279,926 $ 66,110

Cost of Sales 134,899 44,946
------------ ------------

Gross Profit 145,027 21,164
------------ ------------

Operating Expenses
Selling, general and administrative expenses 1,682,368 1,674,977
Research and development 650,072 388,854
------------ ------------

Total Operating Expenses 2,332,440 2,063,831
------------ ------------

Loss from Operations (2,187,413) (2,042,667)
------------ ------------

Other Income (Expense)
Interest income 58,395 188,146
Interest expense -0- (4,606)
Other expense (4,361) (972)
Bad debt expense (355,012) -0-

Total Other Income (Expense) (300,978) 182,568

Loss Before Income Taxes (2,488,391) (1,860,099)

Provision for Income Taxes 4,513 4,777
------------ ------------

Net Loss $ (2,492,904) $ (1,864,876)

Preferred Stock Dividend (268,908) (232,610)
------------ ------------

Income Available to Common Shareholders (2,761,812) (2,097,486)
============ ============

Net Loss Per Share of Common Stock (See Note 5)

Net Loss - Basic $ (.16) $ (.12)
============ ============
Diluted $ (.16) $ (.12)
============ ============

Weighted average number of common shares outstanding 17,386,053 17,312,550
============ ============
</TABLE>

See accompanying notes to financial statements.

F-3
<PAGE>

CYBER DIGITAL, INC.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years ended March 31, 1999 and 1998

<TABLE>
<CAPTION>
Preferred Stock
-----------------------------------------------------------------------
Series A Series B-1 Series B-2
---------------------- ------------------------ ------------------
Additional Paid- Accumulated Shareholders'
Shares Amount Shares Amount Shares Amount
-------- ------- ----------- ------ -------- ------

<S> <C> <C> <C> <C> <C> <C>
Balance at April 1, 1997 86 $ 4 2,000 $ 100 -0- -0-

Exercise of stock options

10% Preferred stock dividend - Series B-1 200 10

Conversion of preferred stock - Series A (38) (2)

Redemption of Series A preferred stock (48) (2)

Net Loss
---------- ------------ ------------ ------------ ------ -----
Balance at March 31, 1998 -0- $ -0- 2,200 $ 110 -0- $ -0-

10% Preferred stock dividend - Series B-1 220 11

Net Loss
---------- ------------ ------------ ------------ ------ -----
Balance at March 31, 1999 -0- $ -0- 2,420 $ 121 -0- $ -0-
========== ============ ============ ============ ====== =====

<CAPTION>
Common Stock Total
------------ Additional Paid- Accumulated Shareholders'
Shares Amount in Capital Deficit Equity
------ ------ ---------- ------- ------
<S> <C> <C> <C> <C> <C>
Balance at April 1, 1997 17,095,176 $ 170,952 $ 13,919,241 $ (8,303,214) $ 5,787,083

Exercise of stock options 90,000 900 82,900 83,800

10% Preferred stock dividend - Series B-1 232,600 (232,610) -0-

Conversion of preferred stock - Series A 200,877 2,009 78,466 (80,473) -0-

Redemption of Series A preferred stock (420,340) (192,928) (613,270)

Net Loss (1,864,876) (1,864,876)
---------- ------------ ------------ ------------ ------------
Balance at March 31, 1998 17,386,053 $ 173,861 $ 13,892,867 $(10,674,101) $ 3,392,737

10% Preferred stock dividend - Series B-1 268,897 (268,908) -0-

Net Loss (2,492,904) (2,492,904)
---------- ------------ ------------ ------------ ------------
Balance at March 31, 1999 17,386,053 $ 173,861 $ 14,161,764 $(13,435,913) $ 899,833
========== ============ ============ ============ ============
</TABLE>

See accompanying notes to financial statements.

F-4
<PAGE>

CYBER DIGITAL, INC.
STATEMENTS OF CASH FLOWS
Years ended March 31,

<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Cash Flows from Operating Activities
Net loss $(2,492,904) $(1,864,876)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation 69,598 35,758
Bad debt expense 355,012 -0-
(Increase) decrease in operating assets:
Accounts receivable 28,591 (56,226)
Inventories (34,883) (13,277)
Prepaid and other current assets (5,645) (17,260)
Increase (decrease) in operating liabilities:
Accounts payable, accrued expenses, and taxes (16,968) 98,676
----------- -----------

Net Cash Used in Operating Activities (2,097,199) (1,817,205)
----------- -----------

Cash Flows from Investing Activities
Purchase of equipment (92,442) (219,625)
----------- -----------

Net Cash Used in Investing Activities (92,442) (219,625)
----------- -----------

Cash Flows from Financing Activities
Issuance of common stock -0- 83,800
Redemption of preferred stock -0- (613,270)

Net Cash Used in Financing Activities -0- (529,470)
----------- -----------

Net Decrease in Cash and Cash Equivalents (2,189,641) (2,566,300)

Cash and Cash Equivalents at Beginning of Period 2,436,473 5,002,773
----------- -----------

Cash and Cash Equivalents at End of Period $ 246,832 $ 2,436,473
=========== ===========

Supplemental Disclosures of Cash Flow Information Cash paid during the period
for:
Income taxes $ 4,140 $ 6,949
Interest -0- 4,606
</TABLE>

See accompanying notes to financial statements.

F-5
<PAGE>

CYBER DIGITAL, INC.
NOTES TO FINANCIAL STATEMENTS

Note 1 - Summary of Significant Accounting Policies

Description of Business

Cyber Digital, Inc. (the "Company") was incorporated in the state of New York in
April 1983. The Company designs, develops, manufactures and markets digital
switching and networking systems that enable simultaneous communication of voice
and data to a large number of users. The Company's systems are based on its
proprietary software technology which permits "modemless" transmission of data
between a variety of incompatible and dissimilar end-user equipment, such as
personal computers, printers, work stations and data terminals, over standard
telephone lines.

Operating and Financing Matters

Since inception, the Company has devoted substantial resources to the design and
development of the Company's systems. As such, the Company has not achieved
revenue growth and has incurred operating losses. At March 31, 1999, the Company
had an accumulated deficit of $13,435,913 and a shareholders' equity of
$899,833. The decrease in equity from March 31, 1998 to March 31, 1999 is due
mainly to a net loss of $2,492,904 for the fiscal year ended March 31, 1999. The
Company had working capital of $634,674 at March 31, 1999 relating largely to
cash and cash equivalents from prior year's stock issuances as discussed in Note
7, and inventories. The Company historically has generated sufficient cash flow
to support its operations mainly from these issuance of debt and equity
securities.

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 and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.

Fair Value of Financial Instruments

The carrying amounts of financial instruments including cash and cash
equivalents, accounts receivable, prepaid expenses, accounts payable and accrued
expenses, approximate fair value due to the relatively short maturity of these
instruments. The estimated fair value amounts have been determined by the
Company using available market information and the appropriate valuation
methodologies. Considerable judgment is necessarily required in the interpreting
of market data to develop the estimates of fair value, and, accordingly, the
estimates are not necessarily indicative of the amounts that the Company could
realize in a current market exchange.

Cash and Cash Equivalents

For purposes of the statement of cash flows, the Company considers highly liquid
temporary cash investments with an original maturity of three months or less to
be cash equivalents.

F-6
<PAGE>

CYBER DIGITAL, INC.
NOTES TO FINANCIAL STATEMENTS

Note 1 - Summary of Significant Accounting Policies (continued)

Accounts Receivable

Accounts receivable are presented net of a zero allowance for doubtful accounts
at March 31, 1999 and 1998. The allowance is based on prior experience and
management's evaluation of the collectibility of accounts receivable. Management
believes that the allowance is adequate. However, additions to the allowance may
be necessary based on changes in economic conditions.

Inventories

The Company uses a cost system which approximates the first-in, first-out
method. Inventories are valued at the lower of cost or market.

Property and Equipment

Property and equipment are stated at cost, less accumulated depreciation.
Depreciation and amortization are computed by the straight-line method over
their estimated useful lives. Repairs and maintenance are charged against
operations as incurred.

Revenue Recognition

The Company recognizes product system sales upon shipment and acceptance by the
customer. Component parts and software sales are recognized upon shipment to the
customer.

Income Taxes

Income taxes are provided for the tax effects of transactions reported in the
financial statements and consist of taxes currently due plus deferred taxes
related primarily to differences between the bases of assets and liabilities for
financial and income tax reporting. The deferred tax assets and liabilities
represent the future tax return consequences of those differences, which will
either be taxable or deductible when the assets and liabilities are recovered or
settled.

Deferred taxes also are recognized for operating losses that are available to
offset future federal income taxes. The Company accounts for investment tax
credits using the flow-through method, and thus reduces income tax expense in
the year the related assets are placed in service.

Research and Development Costs

Research and development costs are charged to expense when incurred.

Warranty Expense

The Company records warranty expense as incurred and does not make a provision
as shipments are made. Such expense is not significant.

F-7
<PAGE>

CYBER DIGITAL, INC.
NOTES TO FINANCIAL STATEMENTS

Note 1 - Summary of Significant Accounting Policies (continued)

Impairment of Long-Lived Assets

The Financial Accounting Standards Board has issued Statement No. 121,
"Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed of" (FASB 121), which the Company has adopted effective April 1, 1996.
FASB No. 121 requires that long-lived assets and certain identifiable
intangibles held and used by the Company be reviewed for possible impairment
whenever events or changes in circumstance indicate that the carrying amount of
an asset may not be recoverable. FASB No. 121 also requires that long-lived
assets and certain identifiable intangibles held for sale be reported at the
lower of carrying amount of fair value less cost to sell. The Company determined
that no impairment loss need be recognized for the applicable assets.

Reclassifications

Certain prior period amounts have been reclassified to conform with the current
financial statement presentation.

Earnings (Loss) Per Share

Effective for the Company's financial statements for the year ended March 31,
1998, the Company adopted SFAS No. 128, "Earnings per Share," which replaces the
presentation of primary earnings per share ("EPS") and fully diluted EPS with a
presentation of basic EPS and diluted EPS, respectively. Basic EPS excludes
dilution and is computed by dividing earnings available to common stockholders
by the weighted-average number of common shares outstanding for the period.
Similar to fully diluted EPS, diluted EPS assumes conversion of the convertible
preferred stock, the elimination of the related preferred stock dividend
requirement, and the issuance of common stock for all other potentially dilutive
equivalent shares outstanding.

New Accounting Pronouncements

In February 1998, the FASB, the FASB issued SFAS No. 132, Employers' Disclosures
about Pensions and Other Postretirement Benefits, which is effective for fiscal
years beginning after December 15, 1998. This statement standardizes the
disclosure requirements for pensions and other postretirement benefits. The
Company is evaluating methods for adoption of this statement, if necessary, and
currently does not expect this new pronouncement to have a material impact on
its financial statements.

Note 2 - Inventories

At March 31, inventories consist of:
1999 1998
-------- --------

Raw materials $345,024 $312,792
Work-in-process -0- 37,076
Finished goods 137,609 97,882
-------- --------

$482,633 $447,750
======== ========

F-8
<PAGE>

CYBER DIGITAL, INC.
NOTES TO FINANCIAL STATEMENTS

Note 3 - Property and Equipment

Major classes of property and equipment consist of the following at March 31:

1999 1998 Useful Lives
-------- -------- ------------

Machinery and equipment $366,395 $275,819 5 years
Furniture and fixtures 68,271 68,271 7 years
Leasehold improvements 4,786 2,920 lease term
-------- --------

439,452 347,010
Less: Accumulated depreciation 188,643 119,045
-------- --------

$250,809 $227,965
======== ========

Note 4 - Other Assets

Other assets consist of various security deposits.

Note 5 - Earnings (Loss) Per Share

Earnings per share ("EPS") has been computed and presented pursuant to the
provisions of Statement of Financial Accounting Standards No. 128, Earnings per
Share, which was adopted during the fiscal year ended March 31, 1999.

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

Net Loss $ (2,492,904) $ (1,864,876)
Dividends paid on Preferred Stock Series B-1 (268,908) (232,610)
------------ ------------

Income Available to Common Shareholders $ (2,761,812) $ (2,097,486)
------------ ------------
Weighted Average Common Shares Outstanding 17,386,053 17,312,550
------------ ------------

Basic EPS $ (.16) $ (.12)
Diluted EPS $ (.16) $ (.12)

Diluted earnings per share does not include any stock warrants, options, or
convertible preferred stock as the inclusion of these items would be
antidilutive to earnings per share.

F-9
<PAGE>

CYBER DIGITAL, INC.
NOTES TO FINANCIAL STATEMENTS

Note 6 - Stock Option Plans

The Company's Board of Directors adopted, on November 7, 1997, the 1997 Stock
Incentive Plan (the "1997 Plan"). The 1997 plan is a successor to the 1993 plan,
which has been terminated. Under the terms of the 1997 Plan, 850,999 shares were
reserved for issuance to officers, directors, other employees and consultants
meeting certain qualifications. Under the 1997 Plan, incentive stock options are
granted at 100% of fair market value on the date of grant. The right to exercise
the options accrues equally on each of the first, second, third and fourth
anniversaries of the date of grant. Options granted under the plan expire on the
day before the tenth anniversary of the plan.

Pursuant to the 1997 Plan, incentive stock options, nonqualified stock options,
restricted stock and stock appreciation rights may be granted to such officers,
directors, and employees of the Company, and to such consultants to the Company
and such other persons or entities, as the Stock Option Committee of the Board
of Directors (the "Committee") shall select. All incentive stock options
("ISO"), which may be granted only to employees and which provide certain tax
advantages to the optionee, must have an exercise price of at least 100 percent
of the fair market value of a share of common stock on the date the option is
granted. No ISOs will be exercisable more than 10 years after the date of grant.
ISOs granted to ten percent shareholders must have an exercise price of at least
110 percent of fair market value and may not be exercisable after the expiration
of five years from grant. The exercise price and the term of nonqualified stock
options will be determined by the Committee at the time of grant.

Stock appreciation rights ("SARS") may be granted independently or in connection
with all or any part of any option granted under the 1997 Plan, either at the
time of grant of the option or at any time thereafter. The holder of an SAR has
the right to receive from the Company, in cash or in shares as the Committee
shall determine, an amount equal to the excess of the fair market value of the
shares covered by the SAR at the date of exercise over the exercise price set at
the date of grant of the SAR. At the request of the holder of an option, the
committee may at its discretion substitute for the exercise of the option,
compensation (in cash or in shares) in an amount equal to or less than the
excess of the fair market value of the shares covered by the option at the
request date over the exercise price set at the grant of the option.

A restricted stock award, entitling the recipient to acquire shares of common
stock for a purchase price at least equal to par value may be granted to such
persons and in such amounts and subject to such terms and conditions as the
Committee may determine. Shares of restricted stock may not be sold, assigned,
transferred, pledged or otherwise encumbered or disposed of except as specified
in the 1997 Plan or the written agreement governing the grant. The Committee, at
the time of grant, will specify the date or dates on which the
nontransferability of the restricted stock shall lapse. During the 90 days
following the termination of the grantee's employment for any reason, the
Company has the right to require the return of any shares to which restrictions
on transferability apply, in exchange for which the Company shall repay to the
grantee any amount paid by the grantee for such shares.

F-10
<PAGE>

CYBER DIGITAL, INC.
NOTES TO FINANCIAL STATEMENTS

Note 6 - Stock Option Plans (continued)

Unless sooner terminated by the Board, the provisions of the 1997 Plan regarding
the grant of ISOs shall terminate on the tenth anniversary of the adoption of
the 1997 Plan by the Board. No ISOs shall thereafter be granted under the Plan,
but all ISOs granted theretofore shall remain in effect in accordance with their
terms.

In addition to these plans, the Company has issued non-qualified stock options
and warrants upon the approval by the Board of Directors. Such options and
warrants are granted at 100% of fair market value on the date of the grant.
Information with respect to non-qualified stock options and warrants are
summarized as follows:
Price Shares
----- ------
Outstanding, April 1, 1998 $.38 to $10.00 3,051,013
Granted $.75 to $1.43 200,000
Canceled $1.50 to $10.00 ( 692,000)
---------------
Outstanding March 31, 1999 2,559,013
===============

In October 1995, the Financial Accounting Standards Board issued Statement No.
123 "Accounting for Stock-Based Compensation" ("FASB 123"), which is effective
for the Company's year beginning April 1,1996. As permitted under FASB 123, the
Company has elected not to adopt the fair value based method of accounting for
its stock-based compensation plans, but will continue to account for such
compensation under the provisions of Accounting Principles Board Opinion No. 25.
Pro forma information regarding net income and earnings per share is required by
FASB 123, and has been determined as if the Company had accounted for its stock
options under the fair value method of that Statement. The fair value for these
options was estimated at the date of grant using the Black-Scholes option
pricing model.

The following assumptions were employed to estimate the fair value of stock
options granted:
Fiscal Year Ended March 31,
1999 1998
---------- ---------
Expected dividend yield 0.00% 0.00%
Expected price volatilities 96.00% 95.20%
Risk-free interest rate 4.40% 5.00%
Expected life (years) 5.20 6.75

For pro forma purposes, the estimated fair value of the Company's stock options
is amortized over the options' vesting period. The Company pro forma information
follows:

1999 1998
------------- -------------
Weighted average fair value of
Options granted $ 0.05 $ 0.19

Net Loss
As reported $ (2,492,904) $ (1,864,876)
Pro Forma (2,524,906) (1,882,448)

Net Loss Per Share
As reported
Basic $ (0.16) $ (0.12)
Diluted $ (0.16) $ (0.12)
Pro Forma
Basic $ (0.16) $ (0.12)
Diluted $ (0.16) $ (0.12)

F-11
<PAGE>

CYBER DIGITAL, INC.
NOTES TO FINANCIAL STATEMENTS

Note 7 - Convertible, Cumulative and Participating Preferred Stock

In the fiscal year ended March 31, 1997, the Company completed two private
placements of preferred stock. The Company sold 805 shares of 10% Series A
convertible preferred stock, priced at $10,000 per share. The Company also sold
2,000 shares of 10% Series B-1 convertible, cumulative and participating
preferred stock, priced at $1,000 per share.

During the fiscal year ended March 31, 1998, pursuant to an optional conversion
or redemption of Series A preferred stock, 38 shares were converted into 200,877
shares of common stock and 48 shares were redeemed leaving no shares
outstanding. These shares were converted based upon 85% of the average closing
bid price for the five trading days prior to the conversion.

The 10% Series B-1 convertible, cumulative and participating preferred stock is
convertible into restricted common shares at a price which is the lesser of (a)
$7.50 per share or (b) 85% of the average closing price for the five days prior
to the conversion date. As of March 31, 1999, there are $60,334 of undeclared
dividends on the Series B-1 preferred stock.

In December 1998 and 1997, the Board of Directors declared and distributed a
stock dividend on the preferred Series B-1 stock. The stock amounted to 220 and
200 shares of preferred Series B-1 stock at $1,000 per share, respectively. The
stock dividends were equivalent to the 10% annual dividend on the preferred
Series B-1 stock, plus $48,908 and $32,610 representing the beneficial
conversion feature on the preferred stock dividend, respectively.

The 10% Series B-2 preferred stock is convertible into restricted common shares
at a price which is the greater of (a) $7.50 per share or (b) 85% of the average
closing price for the five days prior to the conversion date. As of March 31,
1999, this preferred stock remains unissued.

Note 8 - Income Taxes

The Company has net operating loss carryforwards for tax purposes amounting to
approximately $12 million that may be offset against future taxable income which
expire through 2014. In addition, the Company has investment and research and
development tax credits for tax purposes amounting to approximately $196,000
which expire through 2003.

Deferred income taxes are recognized for differences between the bases of assets
and liabilities for financial statement and income tax purposes. The utilization
of these tax attributes is contingent upon the Company's ability to generate
future taxable income and tax before the tax attributes expire as well as
Internal Revenue Code limitations. As a result, a valuation allowance equal to
the full extent of the deferred tax asset has been established. The change in
the deferred tax asset (as well as the valuation account) was approximately
$848,000 for the fiscal year ended March 31, 1999.

The Company was subject to capital based taxes for New York State for the years
ended March 31, 1999 and 1998.

F-12
<PAGE>

CYBER DIGITAL, INC.
NOTES TO FINANCIAL STATEMENTS

Note 9 - Commitments and Contingencies

Employment Contract

During the year ended March 31, 1998, the Company entered into a new employment
agreement with the Chairman. The new agreement is for a three year period
covering August 4, 1997 through August 3, 2000. This agreement is renewable for
successive three year periods.

Under this employment agreement, the Company is obligated to pay the Chairman
$150,000 for the period ending August 3, 1998 with an annual increase of 10% for
each subsequent year under the terms of employment. The Company also agrees that
its Board of Directors may raise the Chairman's salary as soon as the financial
resources of the Company and other business conditions permit. In such event,
the Chairman's salary shall be comparable to that of chief executive officers of
other technology driven publicly held companies.

This employment agreement can terminate for one of the following reasons: (1)
disability, (2) death, (3) for cause, and (4) without cause, change in control.

The following payout terms apply if this agreement is terminated:

1. In the case of disability, the Chairman shall be paid until the end of
the month in which such disability occurs. The Chairman will receive
royalties of 5% of the gross revenues earned by the Company each month
for a period of fifteen years from the effective date of termination.

2. If the agreement terminates due to the death of the Chairman, the
agreement shall terminate immediately, except that the Chairman's
wife, if any, or otherwise his estate, shall receive the Chairman's
salary until the termination date, payments in the amount of the
Chairman's base salary for a period of six months from the date of
termination and the aforementioned royalty.

3. If the agreement terminates due to cause. Cause is defined as willful
misconduct by the executive or the conviction of a felony, the
Chairman shall receive his regular salary until the end of the month
in which such termination occurs. The Chairman must be notified at
least ten days prior of his termination.

4. If the agreement terminates due to a change in control or without
cause, the Chairman shall receive his salary until the end of the
month in which he is terminated, an amount equal to three years base
salary plus three times the prior year bonus, the aforementioned
royalties and all of the Chairman's outstanding options will be deemed
immediately vested and exercisable for a period of one year from the
effective date of termination.

F-13
<PAGE>

CYBER DIGITAL, INC.
NOTES TO FINANCIAL STATEMENTS

Note 9 - Commitments and Contingencies (continued)

Operating Leases

Effective April 1, 1994, the Company commenced a noncancellable operating lease
that expired on March 31, 1998. In April 1998 this lease was renewed at the same
terms for a one year period with respect to the Company's executive offices and
operations. Rent expense was $55,688 and $58,714 for the years ended March 31,
1999 and 1998, respectively. Subsequent to year end, the Company renewed the
lease for a five year period.

In January 1998, the Company commenced a noncancellable operating lease that
expires on February 28, 2000, with a renewal option for two additional, two year
periods, with respect to the companies Indiana office. In October 1998, the
Company began subleasing their Indiana office on a month-to-month basis. Rent
expense was $9,450 and $3,092 for the year ended March 31, 1999 and 1998.
The expense for 1999 is net of sublease income.

The Company also has non-cancelable operating leases for vehicles. The monthly
rental on the vehicles $1,293. The amount charged to expense was $12,676 and
$3,636, for the years ended March 31, 1999 and 1998, respectively.

Future minimum rentals are as follows:

For years ending March 31, 2000 $ 70,200
2001 57,564
2002 59,867
2003 62,261
2004 64,752
----------
$ 314,644
==========

Government Regulation

The Company's operations are highly sensitive to regulations promulgated by the
United States and throughout the world in which the Company has targeted its
marketing efforts. These regulations or deregulations could affect both the
competition for the Company's product as well as the costs associated with doing
business abroad.

Pending Litigation

The Company is a defendant in an action arising from an alleged wrongful
termination of a purported agreement with Brockington Securities, Inc. The
Company has asserted counter claims and intends to vigorously defend its
position. The outcome and range of damages or settlement (if any) is unknown.

F-14
<PAGE>

CYBER DIGITAL, INC.
NOTES TO FINANCIAL STATEMENTS

Note 10 - Segment Information and Significant Customers

Significant Customers

For fiscal years ended March 31, 1999 and 1998, the Company derived 0% and 9%,
respectively, of its revenue from Federal government agencies. For the fiscal
years ended March 31, 1999 and 1998, the Company had sales representing 99% and
91% of its revenue from two customers, namely GTE Data Services GMBH and Sprint
representing 79% and 20%, respectively, for the year ended March 31, 1999 and
GTE Data Services GMBH and National Telecommunications Company representing 48%
and 43%, respectively, for the year ended March 31, 1998. The accounts
receivable for these customers accounted for 0% and 100% of the total accounts
receivable at March 31, 1999 and 1998, respectively.

Note 11 - Foreign Operations

During the fiscal year ended March 31, 1998, the Company formed a wholly owned
subsidiary, Cyber Digital (India) Private Limited, under the rules and
regulations of the Government of India. The subsidiary has not begun operations
and has no assets as of March 31, 1999 and 1998.

Note 12 - Subsequent Events

Preferred Stock Conversion

During April 1999, all of the Company's outstanding Series B-1 preferred stock
in accordance with terms discussed in Note 7 (2,420 shares) was converted into
861,230 shares of the Company's common stock.

New Contract

In April 1999, the Company signed a reseller agreement with AT & T Corporation.
Under the terms and conditions of this agreement, the Company will have the
right to market "AT & T Business IP Services" and "AT & T Managed Internet
Services" for a period of one year which shall automatically renew for
additional one year terms at the discretion of either party.

Private Placement

On May 28, 1999, the Company designated 1,200 of the 10,000,000 authorized
preferred shares as Series C. On July 12, 1999, the Company closed on a private
placement of 310 of the 1,200 shares priced at $1,000 per share for a total of
$310,000.

F-15

<PAGE>

SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

Dated: July 12,1999

CYBER DIGITAL, INC.

By: /s/ J.C. Chatpar
-------------------
J.C. Chatpar

Chairman of the Board, President
and Chief Executive Officer

In accordance with the Exchange Act, this report has been signed below
by the following person on behalf of the registrant and in the capacities and on
the dates indicated.

Signature Title Date
- --------- ----- ----

/s/ J.C. Chatpar Chairman of the Board, President July 12, 1999
- ------------------ and Chief Executive Officer
J.C. Chatpar (Principal Executive, Accounting
and Financial Officer)

/s/ Jack P. Dorfman Secretary and Director July 12, 1999
- --------------------
Jack P. Dorfman

/s/ Jatinder Wadhwa Treasurer and Director July 12, 1999
- -------------------
Jatinder Wadhwa

/s/ Terry Jones Director July 12, 1999
- -------------------
Terry Jones

/s/ Khushi Nichani Director July 12, 1999
- -------------------
Khushi Nichani

<PAGE>

Index to Exhibits

Exhibit Number Description
- -------------- -----------

3.1 Composite Amended and Restated Certificate of Incorporation (incorporated
herein by reference to Exhibit 3.1 to the Company's Quarterly Report on
Form 10-QSB for the period ended December 31, 1996).

3.2 Composite Amended and Restated By-Laws (incorporated herein by reference
to Exhibit 3.1 to the Company's Quarterly Report on Form 10-QSB for the
period ended September 30, 1997 (the "September 1997 Form 10-QSB")).

10.1 Cyber Digital, Inc. 1993 Stock Incentive Plan (incorporated herein by
reference to Exhibit 10(a) to the Company's Annual Report on Form 10-K for
the fiscal year ended March 31, 1994).

10.2 Amended and Restated Employment Agreement, dated as of August 4, 1997,
between the Company and J.C. Chatpar (incorporated herein by reference to
Exhibit 10.1 to the September 1997 Form 10-QSB).

10.3 Manufacturing License Contract between the Company and National
Telecommunications Co., dated as of December 4, 1995 (incorporated herein
by reference to Exhibit 10(c) to the Company's Annual Report on Form
10-KSB/A for the fiscal year ended March 31, 1996)).

10.4 Manufacturing License Contract between the Company and Gujarat
Communications and Electronics, Ltd. dated as of May 30, 1996
(incorporated herein by reference to Exhibit 10.5 to the Company's Annual
Report on Form 10-KSB for the fiscal year ended March 31, 1997).

10.5 Cyber Digital, Inc. 1997 Stock Incentive Plan (incorporated herein by
reference to Exhibit 10.5 to the Company's Annual Report of Form 10-KSB
for the fiscal year ended March 31, 1998).

10.6 Contractor Agreement between the Company and GTE Data Services GmbH, dated
as of December 9, 1997 (incorporated herein by reference to Exhibit 10.6
to the Company's Annual Report of Form 10-KSB for the fiscal year ended
March 31, 1998).

27 Financial Data Schedule.

<ARTICLE> 5
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> MAR-31-1999
<CASH> 247
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 483
<CURRENT-ASSETS> 43
<PP&E> 440
<DEPRECIATION> (189)
<TOTAL-ASSETS> 1,024
<CURRENT-LIABILITIES> 124
<BONDS> 0
0
0
<COMMON> 174
<OTHER-SE> 726
<TOTAL-LIABILITY-AND-EQUITY> 1024
<SALES> 280
<TOTAL-REVENUES> 280
<CGS> 135
<TOTAL-COSTS> 2332
<OTHER-EXPENSES> 301
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (2488)
<INCOME-TAX> 5
<INCOME-CONTINUING> (2493)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2493)
<EPS-BASIC> 0.16
<EPS-DILUTED> 0.16

</TABLE>