<PAGE>

                    U. S. 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 December 31, 2002

                                       or

[_] Transition Report Under Section 13 or 15(d) of the Securities Exchange Act
                                    of 1934.
                       For the Transition Period From To

                         Commission File Number: 0-30781

                                 MANGOSOFT, INC.
        (Exact name of small business issuer as specified in its charter)

            Nevada                                       87-0543565
   State or other jurisdiction                (IRS Employer Identification No.)
of incorporation or organization)

       12 Pine Street Extension
               Nashua, NH                                  03060
  (Address of principal executive offices)               (Zip code)

                    Issuer's telephone number: (603) 324-0400
       Securities registered under Section 12(b) of the Exchange Act: None
         Securities registered under Section 12(g) of the Exchange Act:
                         Common Stock, $0.001 par value

     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 there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of the 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.[_]

     State issuer's revenues for the most recent fiscal year: $517,020

     State the aggregate market value of the voting and non-voting common equity
held by non-affiliates computed by reference to the price at which the common
equity was sold, or the average bid and ask price of such common equity, as of a
specified date within the past 60 days: $1,604,355. This amount reflects the
average bid and ask price of the Company's common stock on the OTCBB on March
20, 2003.

     State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date:

        Common Stock                               1,013,038 Shares
      $0.001 Par Value                      (Outstanding on March 27, 2003)

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                                 MANGOSOFT, INC.

                              INDEX TO FORM 10-KSB

<TABLE>
<CAPTION>
                                     PART I                                                              Page
<S>                                                                                                      <C>
ITEM 1--  Description of Business ....................................................................     3
ITEM 2--  Description of Property ....................................................................     9
ITEM 3--  Legal Proceedings ..........................................................................    10
ITEM 4--  Submission of Matters to a Vote of the Security Holders ....................................    10

                                    PART II

ITEM 5--  Market for Common Equity and Related Stockholder Matters ...................................    11
ITEM 6--  Management's Discussion and Analysis of Financial Condition and Results of
           Operations. ..............................................................................     12
ITEM 7--  Financial Statements .......................................................................    18
ITEM 8--  Changes in and Disagreements With Accountants on Accounting and Financial
           Disclosure. ..............................................................................     18

                                    PART III

ITEM 9--  Directors, Executive Officers, Promoters and Control Persons; Compliance With
           Section 16(a) of the Exchange Act ........................................................     19
ITEM 10-- Executive Compensation ....................................................................     20
ITEM 11-- Security Ownership of Certain Beneficial Owners and Management ............................     21
ITEM 12-- Certain Relationships and Related Transactions ............................................     22
ITEM 13-- Exhibits and Reports on Form 8-K ..........................................................     23
ITEM 14-- Controls and Procedures ....................................................................    24

Signatures and Officer Certification ................................................................     25
</TABLE>

                     FACTORS THAT MAY AFFECT FUTURE RESULTS

     The Company's prospects are subject to certain uncertainties and risks.
This Annual Report on Form 10-KSB also contains certain forward-looking
statements within the meaning of the Federal Securities Laws. The Company's
future results may differ materially from its current results and actual results
could differ materially from those projected in the forward-looking statements
as a result of certain risk factors.

     Readers should pay particular attention to the considerations described in
the section of this report entitled "Risk Factors" beginning on page 7 of this
report. Readers should also carefully review the risk factors described in the
other documents the Company files from time to time with the Securities and
Exchange Commission.

                                       2

<PAGE>

                                     PART I

ITEM 1. DESCRIPTION OF BUSINESS

(A)  BUSINESS DEVELOPMENT

     MangoSoft, Inc. ("MangoSoft") was incorporated as First American Clock Co.
("First American") under the laws of the State of Nevada on May 17, 1995. In
connection with the organization of First American, its president and founders
contributed $8,000 cash as initial capital. To raise funds with which to
commence business operations, First American registered a public offering of its
securities on Form SB-2, Commission File No. 33-93994, which became effective on
October 25, 1995. Pursuant thereto, First American sold 187,800 shares of its
common stock (as adjusted for stock splits) to the public at approximately $0.29
per share and raised gross proceeds of $54,150. However, First American did not
generate any significant revenues from its operations and ceased such operations
at the end of 1998.

     Pursuant to an Agreement and Plan of Merger by and among MangoSoft
Corporation, MangoMerger Corp. and First American, dated August 27, 1999 (the
"Merger Agreement"), MangoSoft Corporation, a Delaware corporation engaged in
software development, merged with MangoMerger Corp., a wholly-owned subsidiary
of First American, which changed its name to MangoSoft, Inc., so that MangoSoft
Corporation became a wholly-owned subsidiary of MangoSoft, Inc., the registrant
(such transactions collectively referred to as the "Merger").

     Pursuant to the terms of the Merger Agreement, all of the outstanding
capital stock of MangoSoft Corporation was converted into common stock of
MangoSoft, Inc., par value $0.001 per share (the "Common Stock"), in accordance
with the conversion rates specified in the Merger Agreement. In connection with
the Merger, MangoSoft, Inc. issued 555,889 shares of Common Stock to security
holders and certain debt holders of MangoSoft Corporation. As part of the
Merger, we completed a private placement of 111,112 shares of common stock for
net proceeds of approximately $3.1 million. We also issued 11,112 shares of
common stock to the placement agent in respect of such private placement.
Because First American was a non-operating entity and the closing of such
private placement was contingent upon the closing of the Merger, the Merger was
accounted for as a capital transaction and treated as a reverse acquisition, so
that MangoSoft Corporation was deemed to have acquired First American.
Accordingly, unless otherwise specified, historical references to our operations
are references to the operations of MangoSoft Corporation.

     Effective March 7, 2003, MangoSoft completed a 1-for-27 reverse stock split
of its common stock. As a result of this reverse stock split, our authorized
shares of common stock decreased from 100,000,000 to 3,703,704.

     On March 11, 2003, MangoSoft declared a dividend distribution of one right
(a "Right") to purchase one-tenth of a share of common stock, $0.001 par value,
for each share of MangoSoft common stock, payable to stockholders of record on
March 18, 2003. MangoSoft also authorized and directed the issuance of one Right
with respect to each common share issued thereafter until the distribution date
(as defined in the Rights Agreement) and, in certain circumstances, with respect
to common shares issued after the distribution date. Except as set forth in the
Rights Agreement, each Right, when it becomes exercisable, entitles the
registered holder to purchase from MangoSoft one-tenth of a common share at a
price of $125.00 per whole common share, subject to adjustment. The description
and terms of the Rights are set forth in a Rights Agreement between the Company
and Interwest Transfer Co., Inc., as Rights Agent, dated as of March 14, 2003.

(B) BUSINESS OF MANGOSOFT

GENERAL

     We develop Internet business software and services that improve the utility
and effectiveness of Internet-based business applications. We develop, market
and support software solutions to address the networking needs of small
businesses, workgroups and large enterprises. We have leveraged our patented
technology known as "Pooling" to develop our suite of software solutions.
Pooling is a peer-to-peer clustering technology that utilizes the network and
resources of client personal computers ("PCs") and workstations to deliver
easy-to-use advanced software services. MangoSoft helps businesses gain a
competitive advantage by improving collaboration with customers, partners and
colleagues through smarter, faster Internet communications. We compete primarily
with general technology suppliers such as Microsoft Corporation, Oracle
Corporation and Novell, Inc., as well as emerging Internet collaboration
companies such as Groove

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Networks, Inc. and eRoom Technology, Inc. We anticipate that we will encounter
substantial competition from these companies as well as others entering the
Internet storage and collaboration markets.

BUSINESS STRATEGY

     Our technology advances have enabled us to develop software tools that
enable our customers to conduct business more efficiently. Our strategy is to
leverage our patented technology to establish more comprehensive distribution
channels and business partnerships.

PRODUCTS

     Our core technology includes our patented, peer-to-peer clustering
technology, originally marketed as Pooling. This technology combines memory and
disk resources of multiple systems on a network into a coherent shared resource,
featuring an efficient distributed directory, dynamic data movement and data
replication. We have applied for ten patents on our technology, five of which
have been granted.

     MangoSoft's software and services make the Internet a better place for
business. Our customers use Mangomind to easily and securely connect with remote
colleagues, clients and partners around the world. In doing so, Mangomind
enables its users to make smarter and faster business decisions. Mangomind
provides the secure file sharing benefits of a virtual private network ("VPN")
without additional hardware and configuration complexities.

     Mangomind(SM) is an adaptation of our patented Pooling technology that
delivers an easy-to-use virtual file service for the Internet. Mangomind
combines the familiarity of Windows applications with the power of the Internet
to deliver a secure means for multiple users to access, share and store
important business files. Mangomind is sold as both a service and a standalone
software product. The Mangomind service provides the security of a VPN without
the additional hardware and configuration complexities. This virtual file
service is hosted by a leading provider of complex Internet services and
provides the familiar interface of a shared network drive. The Mangomind product
is sold as a software license and the typical sale includes installation,
training and extended support services. The Mangomind product is intended for
the enterprise customer.

     Mangomind facilitates business-to-business communications using the
following features:

     .   Simultaneous, multi-user file access. Mangomind is the only Internet
         file-sharing system that allows multiple users in any location to
         simultaneously access and share files.
     .   Online workgroup collaboration. Mangomind allows multiple users to
         collaborate online using Windows database applications commonly used in
         accounting, contact management, calendars, appointment scheduling and
         project management software packages.
     .   Robust, safe and secure. Mangomind allows users to set access
         permissions for files and folders on a Mangomind drive. Data encryption
         (128-bit) at the client (user) level ensures that all files are
         securely transmitted and stored. Service level agreements ensure that a
         user's files are available and protected.
     .   Business level security through encryption. Access to shared files is
         restricted to clients authenticated by using public/private keys; each
         Mangomind user is authenticated using state-of-the-art private key
         encryption. Data is stored in encrypted form to prevent unauthorized
         access.
     .   File access permissions. The Mangomind file system allows users to
         define access permissions for users or groups of users on individual
         drives, files and folders. Permission settings are easily specified
         using the same familiar Microsoft Windows procedures.

                                       4

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     .   Familiar Windows interface. Mangomind looks and operates just like a
         local drive and is completely integrated with Windows. No user training
         is required; applications run as if on a local drive.
     .   Access anytime, even when offline. When disconnected from the Internet,
         users can continue to work on their files offline because Mangomind
         caches the latest version of a file into a system's local memory.
         Mangomind automatically synchronizes the files when the user reconnects
         to the Internet.
     .   High availability service. The Mangomind service provides automatic
         backup and restore functions, full-time customer support and service,
         and service level agreements to ensure high availability of the
         service. The Mangomind service is hosted and managed by leading service
         providers.

     fileTRUST(SM) is an online data storage service we purchased from
FleetBoston Financial Corporation ("FleetBoston") in February 2002. fileTRUST
users can access their stored files from any Internet-connected system. The
fileTRUST service compliments our Mangomind service by providing our customers
with a lower cost online storage system. In conjunction with our purchase of
fileTRUST, we executed a two-year enterprise license agreement with FleetBoston
for the internal use of fileTRUST by FleetBoston.

     Cachelink(TM) is a software-based web-caching product that increases the
delivery speed of Internet and Intranet content to end-users. Cachelink utilizes
our peer-to-peer clustering technology to efficiently link together the
individual browser caches of multiple systems on a LAN into an aggregated, super
cache, resulting in much faster Internet access without the expense of a
dedicated hardware caching appliance or server. Cachelink is a pure peer-to-peer
architecture, including a completely decentralized directory. Cachelink stores
web information within a local network, a technique known as "caching."
Cachelink aggregates the cache from all the PCs on a LAN and makes it available
to the entire network. Therefore, rather than going "outside" to the Internet to
collect information, Cachelink enables the information to be gathered "inside"
within the LAN. In addition to increasing the delivery speed of downloading web
sites, Cachelink also reduces a company's Internet traffic, and as a result
maximizes bandwidth.

MARKETING AND SALES

     Our marketing and sales strategy is focused on small to medium size
companies as well as enterprise accounts. We market our products and services
primarily through a reseller channel. Effective September 30, 2002, we executed
an Information Management Service Agreement (the "Outsourced Services
Agreement") with Built Right Networks, LLC ("Built Right Networks"). Under the
terms of the Outsourced Services Agreement, Built Right Networks now provides
reseller channel management in addition to information systems and technical
end-user support for our products and services. We continue to seek strategic
relationships with business partners capable of rapidly expanding the
distribution of our products and services in targeted industry segments.

     The success of our marketing and sales activities is dependent, among other
things, on our ability to retain and attract qualified resellers and original
equipment manufacturers ("OEMs") as well as the overall market perception of our
products and services.

     Mangomind

     In January 2001, we commercially released our Mangomind service (version
1.5) to the business community. Since its original commercial release, the
Mangomind service has been enhanced several times and is currently on version
3.1.1. In May 2002, we released Mangomind as an enterprise product to the
business community. Since its release the product has been enhanced and is
currently on version 3.0.

     We have identified financial services, consulting, manufacturing,
healthcare, real estate and architecture as key vertical markets to focus our
marketing of the Mangomind service. These industries are characterized

                                       5

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by a high degree of interaction with workgroups outside their organization and a
need for an efficient and secure means of file sharing and project
collaboration. Our recruitment of resellers is targeted toward those resellers
that have existing penetration within these targeted vertical markets. We offer
15-day risk-free trials to participants responding to our resellers' marketing
programs. These participants have become valuable prospects for our direct sales
efforts.

     The introduction of our Mangomind product has allowed our reseller channel
to increase its focus on the enterprise customer. Enterprise sales are
lead-driven and generally require on-site product demonstrations. An enterprise
customer will then enter into a pilot implementation and ultimately a full-scale
deployment. Enterprise sales are a lengthy process and may take three to six
months to close. We currently have one enterprise implementation with a Fortune
100 insurance company.

     Cachelink

     We believe that the success of our marketing and sales strategy for the
Cachelink product is dependent, among other things, on the relationships we
establish with OEMs and the channels we develop. In 2001, we concluded a
value-added reseller agreement with 3Com Corporation. The majority of our
revenues for the year ended December 31, 2001 were generated under the terms of
this agreement. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."

     We are currently seeking alternative channels to distribute the Cachelink
product. We have targeted the educational market as the key vertical market for
the Cachelink product

PRODUCT SUPPORT

     Built Right Networks provides our end-users and reselling channel with
product support under the terms of the Outsourced Services Agreement. Technical
support is primarily provided through Internet communication, electronic mail
and a traditional telephone support line. We depend on Built Right Networks to
provide end-user support and troubleshooting. We maintain a specific reseller
site on our web page that includes a frequently asked questions page and
regularly updated support information for our reselling channel. Analysis of
support calls is used to improve and enhance both the product and the web site
content.

     Our Mangomind customers are provided with twenty-four hour customer
support. Direct customer support is available through a dedicated telephone line
or e-mail and is managed by Built Right Networks. In addition, we maintain
certain customer support information on our web site.

INTELLECTUAL PROPERTY

     To date, we have been granted five patents as follows: (i) System and
Method for Providing Highly Available Data Storage Using Globally Addressable
Memory (June 1, 1999); (ii) Structured Data Storage Using Globally Addressable
Memory (June 29, 1999); (iii) Remote Access and Geographically Distributed
Computers in a Globally Addressable Storage Environment (November 16, 1999);
(iv) Shared client-side Web Caching Using Globally Addressable Memory (February
15, 2000); and (v) Shared Memory Computer Networks (November 14, 2000). We have
applied for five additional U.S. patents which applications are still pending.
Our patents cover aspects of our peer-to-peer clustering technology, Cachelink
and Mangomind. We have also filed patent applications outside of the U.S. that
are counterparts to the issued patents and pending applications. We also own
trademarks on "Cachelink," "Medley," "Mango," and "MangoSoft." In addition, we
also own service marks on "Mangomind" and "the Business Internet File Service."

     We consider elements of our software and peer-to-peer clustering technology
to be proprietary. We rely on a combination of trade secrets, copyright and
trademark law, contractual provisions, confidentiality agreements, and certain
technology and security measures to protect our intellectual property,
proprietary

                                       6

<PAGE>

technology and know-how. Our future results of operations are highly dependent
on the proprietary technology that we have developed internally. Consequently,
we have taken actions to secure our proprietary technology in the form of patent
protection. If we are denied our patent requests, either individually or as a
group, we believe that there would be a material adverse impact on our business.

     On November 22, 2002, we filed a complaint in United States District Court,
District of New Hampshire against Oracle Corporation for infringement of two of
our patents; 1) Structured Data Storage Using Globally Addressable Memory (June
29, 1999) and 2) Shared Memory Computer Networks (November 14, 2000).

     We license encryption software from a leading e-security software provider.
This encryption software allows multiple users to more securely transmit, share
and store files via the Mangomind service. All files shared, stored and
transmitted over the Internet using the Mangomind service are protected with
128-bit encryption. We are required to make royalty payments to the software
provider based on the volume of our sales.

EMPLOYEES

     As of December 31, 2002, we had 2 full-time employees. Our success is
highly dependent on our ability to attract and retain qualified resellers and to
retain qualified outsourced information system management. To date, we believe
we have been successful in our efforts, but there is no assurance that we will
continue to be as successful in the future. None of our employees are subject to
collective bargaining agreements.

RISK FACTORS

     An investment in our common stock is speculative and subject to a high
degree of risk. You may lose money by investing in our common stock so only
persons who can bear the risk of the loss of their entire investment should
invest. Prospective investors should carefully consider the following factors in
deciding whether to invest in our common stock.

     We Have a Limited Operating History and Substantial Cumulative Operating
Losses.

     We have a history of substantial operating losses and an accumulated
deficit of approximately $87.5 million as of December 31, 2002. For the years
ended December 31, 2002, 2001 and 2000, our losses from operations, excluding
the net effects of stock-based compensation, were $6.0 million, $10.5 million
and $13.9 million, respectively. We have historically experienced cash flow
difficulties primarily because our expenses have exceeded our revenues. We
expect to incur additional operating losses and expect cumulative losses to
increase substantially as we expand our marketing, sales and research and
development efforts. If we are unable to generate sufficient revenue from our
operations to pay expenses or we are unable to obtain additional financing on
commercially reasonable terms, our business, financial condition and results of
operations will be materially and adversely affected.

     We Will Need Additional Financing.

     We will require substantial additional capital to finance our future
operations. We can provide no assurances that we will obtain additional
financing sufficient to meet our future needs on commercially reasonable terms
or otherwise. If we are unable to obtain the necessary financing, our business,
operating results and financial condition will be materially and adversely
affected.

                                       7

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     Our Success Depends on Our Outsourced Services Agreement.

     Effective September 30, 2002, we outsourced the management of our internal
information systems, billable services infrastructure, software code base,
customer support and reseller channel management to Built Right Networks under
our September 30, 2002 Information Management Services Agreement (the
"Outsourced Services Agreement"). The principals of Built Right Networks are all
former MangoSoft employees. Our contract represents a large majority of Built
Right Networks' revenue. We can provide no assurance that Built Right Networks
will remain solvent or can retain their key personnel. Built Right Network's
inability to retain key personnel or to remain solvent would have a material and
adverse effect on our business, financial condition and results of operations.

     Our High-Yield Investments Could Become Impaired.

     We have approximately $1.1 million invested in high-yield, secured
corporate notes. These investments represent a significant portion of our total
assets at December 31, 2002. Investments in high-yield corporate notes entail a
higher risk of delinquency or even complete loss. No assurance can be given that
we will not experience any losses or that our debtors will timely remit on the
maturity of these notes. If we experience any loss or impairment on these
investments, our business, financial condition and results of operations will be
materially and adversely affected.

     Our Performance Depends on Market Acceptance of Our Products.

     We expect to derive a substantial portion of our future revenues from the
sales of Cachelink and Mangomind both of which are in the initial marketing
phase. If markets for our products fail to develop, develop more slowly than
expected or are subject to substantial competition, our business, financial
condition and results of operations will be materially and adversely affected.

     We Depend on Strategic Marketing Relationships.

     We expect our future marketing efforts will focus in part on developing
business relationships with technology companies that seek to augment their
businesses by offering our products to their customers. Our inability to enter
into and retain strategic relationships, or the inability of such technology
companies to effectively market our products, could materially and adversely
affect our business, operating results and financial condition.

     There May Be Limited Liquidity in Our Common Stock and Its Price May Be
     Subject to Fluctuation.

     Our common stock is currently traded on the OTC Bulletin Board and there is
only a limited market for our common stock. We can provide no assurances that we
will be able to have our common stock listed on an exchange or quoted on Nasdaq
or that it will continue to be quoted on the OTC Bulletin Board. If there is no
trading market for our common stock, the market price of our common stock will
be materially and adversely affected.

     SEC Rules Concerning Sales of Low-Priced Securities May Hinder Re-Sales of
     Our Common Stock

     Because our common stock has a market price that is less than five dollars
per share, our common stock is not listed on an exchange or quoted on Nasdaq and
is traded on the OTC Bulletin Board. Brokers and dealers who handle trades in
our common stock are subject to certain SEC disclosure rules when effecting
trades in our common stock, including disclosure of the following: the bid and
offer prices of our common stock, the compensation of the brokerage firm and the
salesperson handling a trade and legal remedies available to the buyer. These
requirements may hinder re-sales of our common stock and may adversely affect
the market price of our common stock.

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     Rapidly Changing Technology and Substantial Competition May Adversely
     Affect Our Business.

     Our business is subject to rapid changes in technology. We can provide no
assurances that research and development by competitors will not render our
technology obsolete or uncompetitive. We compete with a number of computer
hardware and software design companies that have technologies and products
similar to those offered by us and have greater resources, including more
extensive research and development, marketing and capital than us. We can
provide no assurances that we will be successful in marketing our existing
products and developing and marketing new products in such a manner as to be
effective against our competition. If our technology is rendered obsolete or we
are unable to compete effectively, our business, operating results and financial
condition will be materially and adversely affected.

     Litigation Concerning Intellectual Property Could Adversely Affect Our
     Business.

     We rely on a combination of trade secrets, copyright and trademark law,
contractual provisions, confidentiality agreements and certain technology and
security measures to protect our trademarks, patents, proprietary technology and
know-how. However, we can provide no assurance that our rights in our
intellectual property will not be infringed upon by competitors or that
competitors will not similarly make claims against us for infringement. If we
are required to be involved in litigation involving intellectual property
rights, our business, operating results and financial condition will be
materially and adversely affected.

     Defects in Our Software Products May Adversely Affect Our Business.

     Complex software such as the software developed by MangoSoft may contain
defects when introduced and also when updates and new versions are released. Our
introduction of software with defects or quality problems may result in adverse
publicity, product returns, reduced orders, uncollectible or delayed accounts
receivable, product redevelopment costs, loss of or delay in market acceptance
of our products or claims by customers or others against us. Such problems or
claims may have a material and adverse effect on our business, financial
condition and results of operations.

ITEM 2. DESCRIPTION OF PROPERTY

     Our principal corporate offices are located in Nashua, New Hampshire and
consist of approximately 2,400 square feet of office space under a lease
expiring on November 14, 2003. Our office has the capacity to accommodate
approximately twenty people. Our offices are leased from Forward Journey LLC, an
independent third party lessor. In 2002, we recorded approximately $31,000 in
rent expense for this facility. We expect to incur approximately $35,000 in rent
expense in 2003 for this facility. While this facility lease expires on November
14, 2003, we believe we can extend this facility lease into the next fiscal
year.

     Our former principal corporate offices were located in Westborough,
Massachusetts. In January 2002, we restructured our facility lease with
Westborough Five, an independent third party lessor. As a result of this
restructuring, we eliminated approximately 14,000 square feet from our then
28,000 square foot facility lease in exchange for $130,000 in cash. The
restructured facility lease reduced our 2002 rent expense for this facility by
approximately $251,000. In October 2002, we restructured our facility lease with
Westborough Five to effectively terminate the lease. In 2002, we recorded
approximately $453,000 in rent expense for this facility.

                                       9

<PAGE>

ITEM 3. LEGAL PROCEEDINGS

     On November 22, 2002, we filed a complaint, civil action number 02-CV-545,
in the United States District Court, District of New Hampshire against Oracle
Corporation for infringement of U.S. Patent No. 6,148,377 and U.S. Patent No.
5,918,229. The results of this litigation could have material impact on the
financial position of the Company.

     Other than the matter listed above, there are no material pending legal
proceedings, other than the routine litigation occurring in the normal course of
operations, to which we are party or of which any of our properties are subject.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF THE SECURITY HOLDERS

     No matters were submitted during the fourth quarter of the year ended
December 31, 2002 to a vote of our security holders, through the solicitation of
proxies or otherwise.

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                                     PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

(A) Market Information

     Our common stock, $0.001 par value, began trading in October 1999 on the
Over-The-Counter Bulletin Board Market ("OTCBB") under the symbol "MGNX."
Effective March 7, 2003, our common stock began trading under the symbol "MGOF."
Our symbol change is attributable to our March 7, 2003 1-for-27 reverse stock
split.

     The following sets forth the high and low bid price quotations for each
calendar quarter in which trading occurred during the last two fiscal years,
adjusted to reflect the effects of the March 7, 2003 reverse stock split. Such
quotations reflect interdealer prices, without retail markup, markdown or
commission, and may not represent actual transactions:

     2002                                                       High       Low
     ----                                                       ----       ---
     First Quarter ....................................        $20.25    $10.80
     Second Quarter ...................................         12.69      3.51
     Third Quarter ....................................          4.32      1.08
     Fourth Quarter ...................................          3.24      1.08

     2001                                                       High       Low
     ----                                                       ----       ---
     First Quarter ....................................        $76.68    $21.06
     Second Quarter ...................................         42.66     15.66
     Third Quarter ....................................         33.21      9.99
     Fourth Quarter ...................................         27.27     10.80

     On March 13, 2003, the last reported sale price of our common stock on the
OTCBB was $1.05 per share.

(B) Holders

     As of March 13, 2003, there were approximately 400 holders of record of our
common stock. This number does not include stockholders for whom shares were
held in a "nominee" or "street name."

(C) Dividends

     We have not previously paid any cash dividends on our common stock and do
not anticipate or contemplate paying cash dividends on our common stock in the
foreseeable future. It is the present intention of management to utilize all
available funds for future operations.

     The only restrictions that limit the ability to pay dividends on the common
stock are those imposed by corporate law. Under Nevada corporate law, no
dividends or other distributions may be made which would render us insolvent or
reduce assets to less than the sum of our liabilities plus the amount needed to
satisfy any liquidation preference.

                                       11

<PAGE>

(D) Securities Authorized for Issuance Under Equity Compensation Plans

     The following sets forth information surrounding compensation plans in
which we have authorized the future issuance of our common stock, adjusted to
reflect the effects of the March 7, 2003 reverse stock split:

<TABLE>
<CAPTION>
                                  Number of securities to be    Weighted-average exercise        Number of securities
                                   issued upon exercise of         price of outstanding        remaining available for
                                     outstanding options,      options, warrants and rights     future issuance under
                                     warrants and rights                                      equity compensation plans
                                                                                                (excluding securities
                                                                                               reflected in column (a))
                                             (a)                            (b)                          (c)
<S>                               <C>                          <C>                            <C>
1999 Incentive
Compensation Plan, as
amended on May 1, 2000                     83,232                         $ 35.66                      206,923
Warrants to purchase common
stock issued to third parties              13,111                         $ 43.13                          N/A
                                           ------                         -------                      -------
Total                                      96,343                         $ 36.68                      206,923
                                           ======                         =======                      =======

</TABLE>

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

     Management's Discussion and Analysis of Financial Condition and Results of
Operations should be read together with our financial statements and related
notes included elsewhere in this Annual Report on Form 10-KSB. This Annual
Report on Form 10-KSB, including the following discussion, contains trend
analysis and other forward-looking statements within the safe harbor provisions
of the Private Securities Litigation Reform Act of 1995. Any statements in this
Annual Report on Form 10-KSB that are not statements of historical facts are
forward-looking statements. These forward-looking statements are based on a
number of assumptions and involve risks and uncertainties. Actual results may
differ materially from those set forth in such forward-looking statements as a
result of factors set forth elsewhere in this Annual Report on Form 10-KSB,
including under "Risk Factors."

OVERVIEW

     We develop Internet business software and services that improve the utility
and effectiveness of Internet-based business applications. We develop, market
and support software solutions to address the networking needs of small
businesses, workgroups and large enterprises. Our products and services enhance
the performance of PC networks and deliver improved service utilizing existing
equipment.

     Mangomind is a multi-user, business-oriented, peer-to-peer file sharing
system, allowing individual users to collaborate over the Internet across
organizational boundaries in a safe and secure manner. The architecture is a
blend of the manageability of client/server with the autonomy, clustering, and
caching optimizations of peer-to-peer. The user experience is one of easy file
sharing with colleagues through what looks like an ordinary LAN shared drive.
Mangomind provides the secure file sharing benefits of a VPN without additional
hardware and configuration complexities. Mangomind is sold as both a service and
a standalone software product.

     fileTRUST is an online data storage service we purchased from FleetBoston
in February 2002 for approximately $427,000, of which $175,000 was paid in cash
and the balance in our common stock and warrants to purchase our common stock at
$0.53 per share. fileTRUST users can access their stored files from any
Internet-connected system. The fileTRUST service compliments our Mangomind
service by providing customers with a lower cost online storage system. In
conjunction with our purchase of fileTRUST, we executed a two-year enterprise
license agreement with FleetBoston for the internal use of fileTRUST by
FleetBoston. We expect to receive approximately $350,000 in revenues over this
two-year

                                       12

<PAGE>

period from the sale of the fileTRUST service to FleetBoston.

     Cachelink is a peer-to-peer clustered web cache. Cachelink utilizes our
peer-to-peer clustering technology to efficiently link together the individual
browser caches of multiple systems on a LAN into an aggregated "super cache,"
resulting in much faster Internet access without the expense of a dedicated
hardware caching appliance or server. Cachelink is a pure peer-to-peer
architecture, including a completely decentralized directory. The product is
self-configuring and self-healing from any number of system failures.

CRITICAL ACCOUNTING POLICIES

     Our accounting policies are fully described in Note 2 to our consolidated
financial statements. The following describes the application of accounting
principles that have significant impact on our consolidated financial
statements:

     Going Concern Assumption - The consolidated financial statements do not
include any adjustments relating to the recoverability and classification of
assets or the amounts and classification of liabilities that might be necessary
should we be unable to continue as a going concern. If the consolidated
financial statements were prepared on liquidation basis, the carrying value of
our assets and liabilities would be adjusted to net realizable amounts. In
addition, the classification of the assets and liabilities would be adjusted to
reflect the liquidation basis of accounting.

     Revenue Recognition - We recognize revenue generated from the sale of
Cachelink when persuasive evidence of an arrangement exists, the price is fixed
and determinable, delivery has occurred and collection is probable. We recognize
revenue generated from the sale of the Mangomind and fileTRUST services as the
service is provided. We recognize revenue generated from the sale of the
Mangomind product over the period of the first year's maintenance agreement when
persuasive evidence of the arrangement exists, the price is fixed and
determinable, delivery and any required installation has been completed and
collection is probable.

     Investments - At December 31, 2002, we have approximately $1.1 million
invested in several high-yield, secured corporate notes to better maximize our
rate of return on our cash. These investments represent a significant portion of
our total assets at December 31, 2002. These investments are classified as
held-to-maturity and are carried at their amortized cost. Investments and
maturities of less than one year are classified as short-term investments.

     Stock-based Compensation - As part of our compensation programs offered to
our employees, we grant stock options. In addition, we have engaged third-party
consultants and advisors and have compensated them in the form of stock options.
Compensation for stock options issued to employees is generally measured as the
difference between the exercise price of the options granted and the fair value
of our common stock on the date of grant. Compensation for stock options issued
to third-party consultants and advisors is measured at the fair value on the
date of grant, determined using the Black-Scholes valuation model. Because of
the cashless exercise feature of the stock options granted in 1999 and the
repricing of options granted in 2000, we are required to remeasure the
compensation related to these awards at each reporting date. As the quoted
market price of our common stock fluctuates, our reported operating expenses
will continue to fluctuate. These fluctuations can be significant.

     Deferred Taxation - Because of the significant operating losses incurred
and projected future operating losses, we have provided a full valuation
allowance against the deferred tax assets created by our net operating loss
carryforwards.

     Cost of software license revenues and cost of services - Cost of software
license revenues primarily consist of disk replication costs and other costs we
incur in connection with sales of Cachelink. Cost of

                                       13

<PAGE>

services consist solely of the expenses we incur to administer and service the
Mangomind and fileTRUST services. These expenses consist primarily of salaries
and related personnel costs, the cost of our outsourced data center, the license
royalties we pay to our e-security software provider for the encryption used in
the Mangomind service and the fees we pay to Built Right Networks to manage our
billable services infrastructure.

     Engineering and Development Expenses - Engineering and development expenses
consist primarily of salaries and related personnel costs and other costs
related to the design, development, testing, deployment and enhancement of our
products and services. We have expensed our engineering and development costs as
incurred. At December 31, 2002, there were no full time employees performing
engineering or development on our products and services. Effective September 30,
2002, we have outsourced the maintenance of our billable services infrastructure
as well as product and customer support to Built Right Networks.

     Other Operating Expenses - Selling and marketing expenses consist primarily
of salaries and related personnel costs and additional costs incurred to market
our products and services such as the costs of attending and presenting at trade
shows. General and administrative expenses consist primarily of salaries and
related personnel costs and other general corporate costs such as facility
costs, commercial and general liability insurance, accounting and legal expenses
and other costs typical of a publicly held corporation. At December 31, 2002,
there were no full time employees performing selling and marketing activities.
Our remaining two employees are performing general and administrative
activities.

     Reduction in Force - We have reduced our work force on four occasions since
April 23, 2001 due to adverse economic conditions and our need to conserve
capital. Effective April 23, 2001, we implemented an approximate 40% reduction
in our work force. Effective June 28, 2002, we implemented an approximate 50%
reduction in our then existing work force and the remaining twenty (20)
employees took a ten percent reduction in their salary. Effective July 29, 2002,
we reduced our work force by approximately 35% to thirteen (13) persons.
Effective September 30, 2002, we reduced our work force to three (3) persons. At
December 31, 2002, we had two employees, each working in a general and
administrative capacity.

RESULTS OF OPERATIONS - YEARS ENDED DECEMBER 31, 2002 AND 2001

     Revenue increased $186,074 from $330,946 in 2001 to $517,020 in 2002, an
increase of approximately 56%. In 2002, we recognized $2,597 from the sale of
the Cachelink product, $47,234 from the sale of the Mangomind product, $323,239
from the sale of the Mangomind service and $143,950 from the sale of the
fileTRUST service. In 2001, we recognized $80,661 from the sale of the Mangomind
service and $250,285 from the sale of the Cachelink product, of which $212,000
was generated under our July 13, 2000 Value Added Reseller Agreement with 3Com
Corporation ("3Com'). The increase in revenues was primarily attributable to the
increases in Mangomind and fileTRUST service revenue offset by the significant
decrease in Cachelink sales. We concluded our reselling agreement with 3Com in
2001. Customers representing more than 10% of our 2002 revenues were
FleetBoston, New York Life Insurance Company and Veritas Software Company,
approximately 38%, 20% and 18%, respectively. In 2001, sale of Cachelink to 3Com
represented 64% of our revenues. No other customer represented 10% or more of
revenue in either period.

     Cost of software license revenues represents the disk replication costs we
incurred in connection with our sales of Cachelink under of agreement with 3Com.
In 2001, we incurred $37,011 in disk replication costs in connection with
$212,000 in Cachelink sales to 3Com. We did not incur any such costs in 2002.

     Cost of services for the year ended December 31, 2002 decreased $337,700 or
33% from $1,037,765 in 2001 to $700,065 in 2002. The decrease in our cost of
services is due primarily to the significant reduction in our operations
personnel as a result of our 2001 and 2002 reductions in force. At December 31,
2002, we no longer have any internal personnel dedicated to maintaining our
services. We have outsourced these services

                                       14

<PAGE>

to Built Right Networks for approximately $30,000 each month. In addition, we
will continue to incur costs of service in the area of our security license
royalties and our outsourced data center.

     Engineering and development expenses decreased approximately 44% or
$1,421,675 from $3,239,526 in 2001 to $1,817,851 in 2002. The decrease in
engineering and development expenses is due primarily to the reductions in our
engineering and development personnel headcount and its related effect on
salaries and related personnel costs. At December 31, 2002, we no longer have
any internal personnel dedicated to advancing our existing products and services
or developing new products and services.

     Other operating expenses including selling and marketing and general and
administrative expenses decreased approximately 42% or $2,694,334 to $3,748,845
in 2002 from $6,443,179 in 2001. The significant decrease in other operating
expenses is primarily attributable to the reductions in our selling and
marketing and general and administrative personnel. In addition, we continued
our aggressive cost savings plan that began in the third quarter of 2000. We no
longer maintain a selling and marketing team. These activities have been
outsourced to Built Right Networks as part of our September 30, 2002 Outsourced
Services Agreement. Future selling and marketing expenses will consist primarily
of sales commissions and various marketing programs intended to compliment our
sales channel. Our two remaining employees are performing our general and
administrative activities. We will continue to incur general and administrative
costs necessary to operate our business. These costs typically include salaries
and related personnel costs, facility rent, commercial insurance, accounting and
legal expenses and other costs typical of a publicly held corporation.

     Stock-based compensation expense decreased $695,794 to $482,030 in 2002
compared to $1,177,824 in 2001. The decrease is due to the significant decrease
in the number of outstanding options to purchase our common stock as a result of
stock option cancellations and their related effect on stock-based compensation.
Terminated employees are given ninety days from the date of their termination to
exercise their vested stock options. No employee exercised their stock options
in 2002. See Note 8 to the consolidated financial statements.

     We recorded a $232,782 charge in 2002 primarily as a result of our
write-down of certain computer hardware and related equipment that are no longer
used in our operations. As a result of our shift in outsourced data centers, we
significantly changed the configuration and therefore the computer equipment
requirements used to operate our billable services infrastructure. As the net
book value of these assets may not be recovered through the expected future cash
flows from their use and eventual disposition, we wrote down these assets.

     Excluding the effects of stock-based compensation and our asset write-down,
our loss from operations decreased approximately 45% or $4,796,279 to $5,749,741
in 2002 from $10,546,020 in 2001 as a result of the above factors.

     Interest income decreased $430,238 to $80,151 in 2002 compared to $510,389
in 2001. The decrease was attributable to the reduced balances of our
interest-bearing cash accounts as a result of our use of cash in operations as
well as a decrease in the rate of return on our investments in 2002 as compared
to 2001.

RESULTS OF OPERATIONS - YEARS ENDED DECEMBER 31, 2001 AND 2000

     Revenue increased $270,408 from $60,538 in 2000 to $330,946 in 2001, an
increase of approximately 447%. We recognized $250,285 from the sale of the
Cachelink product and $80,661 from the sale of the Mangomind service. In 2000,
all of our revenues were generated from the sale of Cachelink; Mangomind was not
made commercially available until January 2001. The increase in revenues was
primarily attributable to the revenue we generated for the sale of Cachelink
under our agreement with 3Com. As a percentage of revenue, sales of Cachelink to
3Com amounted to approximately 64% of our net revenues. In 2000, our

                                       15

<PAGE>

largest customers included 3Com and Premio Computer, Inc., which represented 74%
and 18% of our revenues, respectively. No other customer represented 10% or more
of revenue in either period.

     Cost of software license revenues represents the disk replication costs we
incurred in connection with our sales of Cachelink under of agreement with 3Com.
Cost of software license revenues increased $28,056 from $8,955 in 2000 to
$37,011 in 2001. This increase is consistent with the overall increase in
Cachelink sales made under this agreement.

     Cost of services for the year ended December 31, 2001 consisted primarily
of managed storage service costs and the salaries and related personnel costs of
our dedicated technical support on Mangomind operations teams. There were no
such costs incurred in 2000 as the Mangomind service was not made available
commercially until 2001.

     Engineering and development expenses decreased approximately 41% or
$2,273,941 from $5,513,467 in 2000 to $3,239,526 in 2001. The decrease in
engineering and development expenses was primarily attributable to a decrease in
our engineering and development personnel headcount and its related effect on
salaries and related personnel costs. A significant portion of our April 23,
2001 work force reduction was made to our engineering and development
departments.

     Other operating expenses including selling and marketing and general and
administrative expenses decreased approximately 22% or $1,830,679 to $6,443,179
in 2001 from $8,273,858 in 2000. The decrease in other operating expenses is
primarily attributable to our commitment to an aggressive cost savings plan that
began in early 2001 that, in effect, curtailed our mass marketing and
advertising campaigns that had begun in the third quarter of 2000.

     Stock-based compensation expense of $1,177,824 was recorded in 2001
compared to a benefit of $15,098,350 in 2000. The significant fluctuation in
this expense is attributable to the fluctuations in the market price of our
common stock and the related effect on stock-based compensation recorded in
employee stock options accounted for as variable awards. See Note 8 to the
consolidated financial statements.

     Excluding the effects of stock-based compensation, our loss from operations
decreased approximately 24% or $3,351,010 to $10,546,020 in 2001 from
$13,897,030 in 2000 as a result of the above factors.

     Interest income decreased $592,485 to $510,389 in 2001 compared to
$1,102,874 in 2000. The decrease was attributable to the reduced balances of our
interest-bearing cash accounts as a result of our use of cash in operations as
well as a decrease in the rate of return on our investments in 2001 as compared
to 2000.

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

     We were formed in June 1995 and since our formation have raised
approximately $74,200,000 in financing from private placements of debt and
equity securities. In addition to the financing we received through the sale of
our securities, we have, at times, depended on bank debt, loans from
stockholders and directors and credit from suppliers to meet our interim
financing needs. Borrowings from stockholders and directors have generally been
refinanced with new debt instruments or converted into additional equity. At
December 31, 2002, approximately $1,016,000 in additional financing was provided
through accounts payables, accrued expenses and other trade credit.

     At December 31, 2002, we had a cash balance of approximately $425,000 and
working capital of approximately $137,000. At December 31, 2002, we had
approximately $1,115,000 invested in several high-yield short and long-term
investments. Excluding our Nashua, NH facility lease, we do not have any
commercial commitments or off balance sheet financing. Our commitments under our
operating leases are described in Note 10 to our consolidated financial
statements.

     During 2002, we issued approximately $1,565,000 in several secured
corporate notes receivable accruing interest at 12.0% to 15.0% per annum.
Approximately $458,000 was repaid to us in 2002 as some of the corporate notes
matured. Approximately $865,000 of the corporate notes receivable were issued to
Plantiff Funding Corporation, a privately-held corporation in which Selig Zises
is a stockholder. A $150,000 corporate note receivable was issued to LawCash II
LLC, a privately-held company in which Selig Zises is a member. Two corporate
notes receivable totaling $550,000 were issued to Unicrown Partners LLC, a
privately-held company in which Selig Zises and Jay Zises are members. Selig
Zises and Jay Zises are stockholders of MangoSoft, Inc. Selig Zises was the
former co-chairman of our Board of Directors.

                                       16

<PAGE>

     In February 2002, we acquired the fileTRUST online data storage service and
related assets from FleetBoston for $175,000 in cash, 350,000 shares of our
common stock and warrants to purchase 150,000 shares of our common stock at
$0.53 per share. The total aggregate consideration for this transaction was
approximately $427,000. We acquired approximately $329,000 of software and
acquired technology, $54,000 of computer equipment and related hardware and
$44,000 in other identifiable intangible assets. Concurrent with this purchase,
we executed a two-year enterprise license agreement for the internal use of
fileTRUST by FleetBoston. We expect to recognize approximately $350,000 in
revenues under this agreement over the next two years.

     Capital expenditures amounted to approximately $29,000 in 2002 and
pertained primarily to the purchase of fileTRUST computer hardware.

RECENTLY ISSUED ACCOUNTING STANDARDS

     In April 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 145, "Rescission of
FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections." SFAS No. 145 rescinds SFAS No. 4, which required all
gains and losses from extinguishment of debt to be aggregated and, if material,
classified as an extraordinary item, net of related income tax effect. Upon
adoption of SFAS No. 145, we will be required to apply the criteria in APB
Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions" (Opinion No. 30), in determining the
classification of gains and losses resulting from the extinguishment of debt.
SFAS No. 145 is effective for annual years beginning after May 15, 2002, with
earlier adoption encouraged. The new standard is not expected to have a
significant impact on our consolidated financial statements.

     In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 requires companies to
recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
Examples of costs covered by the standard include lease termination costs and
certain employee severance costs that are associated with a restructuring,
discontinued operation, plant closing, or other exit or disposal activity. SFAS
No. 146 is effective prospectively for exit or disposal activities initiated
after December 31, 2002, with earlier adoption encouraged. As the provisions of
SFAS No. 146 are required to be applied prospectively after the adoption date,
we cannot determine the potential effects that adoption of SFAS No. 146 will
have on our consolidated financial statements.

     In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation." SFAS No. 148 amends the disclosure requirements of SFAS No. 123,
"Accounting for Stock-Based Compensation," to require prominent disclosures in
both interim and annual financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. SFAS No. 148 also amends SFAS No. 123 to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. We will expend our interim disclosures to
satisfy the reporting requirements of this pronouncement. As we have decided not
to voluntarily adopt the SFAS No. 123 fair value method of accounting for
stock-based employee compensation, the new transition alternatives of SFAS No.
148 will not have a material impact on our consolidated financial statements.

     In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 elaborates on the
existing disclosure requirements for most guarantees. FIN 45 requires that at
the time a company issues certain guarantees, the company must recognize an
initial liability for the fair value, or

                                       17

<PAGE>

market value, of the obligations it assumes under that guarantee and must
disclose that information in its interim and annual financial statements. The
initial recognition and initial measurement provisions of FIN 45 are applicable
on a prospective basis to guarantees issued or modified after December 31, 2002.
FIN 45's disclosure requirements are effective for financial statements of
interim or annual periods ending after December 15, 2002 and are applicable to
all guarantees issued by the guarantor subject to FIN 45's scope, including
guarantees issued prior to the issuance of FIN 45. The adoption of FIN 45 did
not have a material impact on our consolidated financial statements.

     In November 2002, the Emerging Issues Task Force finalized its consensus on
EITF Issue 00-21, "Revenue Arrangements with Multiple Deliverables," which
provides guidance on the method of revenue recognition for sales arrangements
that include the delivery of more than one product or service. EITF 00-21 is
effective prospectively for arrangements entered into in fiscal periods
beginning after June 15, 2003. Under EITF 00-21, revenue must be allocated to
all deliverables regardless of whether an individual element is incidental or
perfunctory. We recognize revenue from our software license and service sales
ratably over the term of the maintenance agreement or service period. We do not
believe that the adoption of EITF-00-21 will have a material impact on our
consolidated financial statements.

ITEM 7. FINANCIAL STATEMENTS

     Our consolidated financial statements and related notes, which are attached
to this Annual Report on Form 10-KSB beginning on page 27, are incorporated by
reference.

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

     Incorporated by reference from Form 8-K filed with the Securities and
Exchange Commission ("SEC") on September 18, 2002, Deloitte & Touche LLP
("Deloitte") resigned as our independent auditors.

     Incorporated by reference from Form 8-K filed with the SEC on September 26,
2002, we engaged Stowe & Degon as our new independent auditors. The decision to
appoint Stowe and Degon was approved by our Board of Directors.

     Deloitte's reports on our consolidated financial statements for the years
ended December 31, 2000 and 2001 did not contain an adverse opinion or
disclaimer of opinion. Furthermore, such reports were not qualified or modified
as to scope or accounting principles. The report for the year ended December 31,
2001 contained an explanatory paragraph indicating that conditions existed that
raised substantial doubt with respect to our ability to continue as a
going-concern.

     During the years ended December 31, 2000 and 2001 and the subsequent
interim period preceding Deloitte's resignation, there were no disagreements
between us and Deloitte on any matter of accounting principles or practices,
financial statement disclosures, auditing scope or procedure, which if not
resolved to the satisfaction of Deloitte would have caused Deloitte to make
reference to the subject matter of the disagreement in condition with this
report.

                                       18

<PAGE>

                                    PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT

     Dale Vincent, age 56, is our President, Chief Executive Officer and sole
director. Mr. Vincent provides his services on a full-time basis. Mr. Vincent
was appointed President, Chief Executive Officer and elected a Director in
September 1999. Previously, he served as the Chief Executive Officer of
MangoSoft Corporation since May 1999, as its Chief Financial Officer from
September 1998 to May 1999, and as a Director of MangoSoft Corporation since
July 1995. Mr. Vincent has over 25 years of senior financial and business
management experience, with the last 10 years developing and funding companies
in the software industry. Since April 1990, Mr. Vincent has served as a Managing
Director of ACAP, a private investment company, the general partner of
Associated Capital L.P., a private investment company, and consults with
Associated Capital L.P with respect to its investment and marketing activities.
He has also served as a Director of MaMaMedia Inc. since 1996.

     Effective September 3, 2002, the following directors resigned their
positions on our Board of Directors: Paul C. O'Brien (Co-Chairman), Selig Zises
(Co-Chairman), Tony Coehlo, Ira Goldstein and Nick Treddinick.

Section 16 (a) Beneficial Ownership Reporting Compliance

     Section 16(a) of the Exchange Act and the rules thereunder require our
directors and officers and persons who own more than 10% of our outstanding
common stock to file reports of ownership and changes in ownership with the
Securities and Exchange Commission (the "Commission"). Our personnel generally
prepare these reports on the basis of information obtained from each director
and officer, and greater than 10% stockholders are required by the Commission to
furnish the Company with copies of all reports filed. To the best of our
knowledge, all reports required by Section 16(a) of the Exchange Act to be filed
by our directors, officers and 10% or greater stockholders during our fiscal
year ended December 31, 2002 were filed on time.

                                       19

<PAGE>

ITEM 10. EXECUTIVE COMPENSATION

     The following table sets forth information concerning the total
compensation we paid to our chief executive officer and the two other executive
officers that served as executive officers during 2002. These three persons are
hereinafter referred to collectively as the "Named Executive Officers."

                           Summary Compensation Table

<TABLE>
<CAPTION>
                                          Annual Compensation                Long Term Compensation                  All
                                          -------------------                ----------------------
                                                                Restricted Stock  Securities Under      LTIP        Other
Name and Principal Position        Year    Salary      Bonus         Awards         Options/SARS       Payouts      Comp.
---------------------------        ----    ------      -----         ------         ------------       -------      -----
<S>                                <C>    <C>          <C>      <C>               <C>                  <C>          <C>
Dale Vincent ..................... 2002   $214,177          -               -                    -           -          -
President and Chief                2001    201,923          -               -                    -           -          -
Executive Officer                  2000    171,635          -               -              600,000           -          -

Dr. Donald A. Gaubatz (1) ........ 2002    120,000          -               -                    -           -     15,615
Senior Vice President and Chief    2001    179,231          -               -                    -           -          -
Operating Officer                  2000    140,096          -               -              225,000           -          -

Scott H. Davis (2) ............... 2002    146,651          -               -                    -           -     11,188
Vice President and Chief           2001    136,400          -               -                    -           -          -
Technology Officer                 2000    135,200     19,000               -                    -           -          -
</TABLE>

(1)  Dr. Donald A. Gaubatz's position was eliminated in connection with our July
     29, 2002 reduction in force. Dr. Gaubatz received $15,615 in severance at
     the time of his termination.

(2)  Mr. Scott H. Davis's position was eliminated on November 30, 2002. Mr.
     Davis received $11,188 in severance at the time of his termination.

Options

     The following tables sets forth information concerning grants of stock
options to, and exercises of stock options by, the Named Executive Officers
during 2002, and the number and value of unexercised options held by each of
them at December 31, 2002. The value of the unexercised in-the-money options is
based on the average bid and ask price of our common stock on the OTCBB on
December 31, 2002.

                    Options / SAR Grants in Last Fiscal Year

     There were no individual grants of stock options made to any Named
Executive Officer in 2002.

                       Fiscal Year-End Option / SAR Values

<TABLE>
<CAPTION>
                                                                No. of Securities Underlying          Value of Unexercised
                                                                    Unexercised Options               In-The-Money Options
                                                                    -------------------               --------------------
                                    Shares
                                 Acquired on       Value
         Name                      Exercise      Realized      Exercisable     Unexercisable     Exercisable      Unexercisable
         ----                      --------      --------      -----------     -------------     -----------      -------------
<S>                              <C>             <C>           <C>             <C>               <C>              <C>
Dale Vincent ......                     -               -       1,000,000                 -       $       -        $       -
Dr. Donald A. Gaubatz (1).              -               -               -                 -               -                -
Scott H. Davis ....                     -               -         243,600                 -               -                -
</TABLE>

(1) Effective October 29, 2002, Dr. Donald A. Gaubatz's options to purchase
    250,000 shares of common stock were cancelled in connection with his July
    29, 2002 termination.

                                       20

<PAGE>

Compensation of Directors

     Effective September 3, 2002, the following directors resigned their
positions on our Board of Directors: Paul C. O'Brien (Co-Chairman), Selig Zises
(Co-Chairman), Tony Coehlo, Ira Goldstein and Nick Treddinick. Mr. Vincent is
our sole director. Information concerning Mr. Vincent's compensation as well as
stock options has already been provided. No other compensation was paid to any
director in 2002.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The following table sets forth certain information as of February 28, 2003
with respect to beneficial ownership of our common stock by (i) each person we
know to own beneficially more than 5% of our outstanding common stock; (ii) each
director and named executive officer; and (iii) all directors and named
executive officers as a group. The percentages in the last column are based on
27,352,033 shares of common stock outstanding on February 28, 2003 and have not
been adjusted to reflect our March 7, 2003 1-for-27 reverse stock split. In each
case, except as otherwise indicated in the footnotes to the table, the shares
shown in the second column are owned directly by the individual or members of
the group named in the first column and such individual or group members have
sole voting and dispositive power with respect to the shares shown. For the
purposes of this table, beneficial ownership is determined in accordance with
the federal securities laws and regulations; inclusion in the table of shares
not owned directly by the named director or executive officer does not
constitute an admission that such shares are beneficially owned by the director
or officer for any other purpose.

<TABLE>
<CAPTION>
                                                            Number of Shares of      Percent of Outstanding
Beneficial owners:                                          Common Stock Owned         Common Stock Owned
------------------                                          -------------------      ----------------------
<S>                                                         <C>                      <C>
Jay Zises (1) ..........................................         3,154,077                  11.5%
  767 3/rd/ Avenue, 16/th/ Floor
  New York, NY 10017
Selig Zises (2) ........................................         2,966,192                  10.8
  447 Madison Avenue, 14/th/ Floor
  New York, NY 10022
Directors and officers:
  Dale Vincent  (3) ....................................         1,030,135                   3.8
  Dr. Donald A. Gaubatz (4) ............................                 -                     *
  Scott H. Davis (5) ...................................           250,000                     *
                                                                 ---------

All Directors and officers as a group ..................         1,280,135                   4.7%
</TABLE>

* Less than one percent.

(1)  Total shares of common stock beneficially owned by Jay Zises, the brother
     of the former co-chairman of our Board of Directors Selig Zises, include
     the following: 127,928 shares owned by Jay Zises; 2,652,375 shares owned by
     Delaware Guarantee & Trust TTEE FBO Jay Zises IRA (a self-directed IRA);
     40,478 shares owned by Jay and Nancy Zises JTWROS; 169,932 shares owned by
     Guarantee & Trust TTEE FBO Jay Zises IRA DTD 7-9-92 (a self-directed IRA);
     67,458 shares owned by Associated Capital LP; and 94,406 shares owned by
     Associated Capital Offshore LP. Nancy Zises is the wife of Jay Zises. Jay
     Zises is a limited partner in Associated Capital LP and Associated Capital
     Offshore LP, and has voting and dispositive power in respect of the common
     stock owned by such entities. Other than such limited partnerships and the
     Zises family relationships referenced in this table and the related
     footnotes, there are no affiliations between Jay Zises and any other
     persons or entities identified in such table or footnotes.

                                       21

<PAGE>

(2)  Total shares of common stock beneficially owned by the former co-chairman
     of our Board of Directors Selig Zises include the following: 2,784,106
     shares owned by Selig Zises; 113,287 shares owned by Guarantee & Trust Co.
     TEE FBO Selig Zises R-IRA DTD 5-20-96 (a self-directed IRA); and 68,799
     shares owned by his daughter Lynn Zises. Selig Zises is the brother of Jay
     Zises, both of whom are principal stockholders of the MangoSoft. Other than
     the Zises family relationships references in this table and the related
     footnotes, there are no affiliations between Selig Zises and any other
     persons or entities identified in such table or footnotes.

(3)  Includes 1,000,000 shares of common stock Mr. Vincent has the right to
     acquire through the exercise of stock options within 60 days of December
     31, 2002. Mr. Vincent's address is c/o MangoSoft, Inc., 12 Pine Street
     Extension, Nashua, NA 01060.

(4)  Dr. Gaubatz's address is 483 Hill Road, Boxborough, MA 01719.

(5)  Mr. Davis's address is 136 Riverbend Drive, Groton, MA 01450.


ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

(a)  Transactions with directors and officers

     During 2001, Dr. Ira Goldstein, a former director, provided us with
part-time technical consulting. For these services, we reimbursed Dr. Goldstein
on a per-diem basis. We paid Dr. Goldstein approximately $108,000 for the
technical consulting services he provided us in 2001. We believe that the fees
paid to Dr. Goldstein for his technical consulting services during 2001 were on
terms as favorable as those available from non-affiliated persons.

     During 2002, we issued approximately $1,565,000 in several secured
corporate notes receivable accruing interest at 12.0% to 15.0% per annum.
Approximately $458,000 was repaid to us in 2002 as some of the corporate notes
matured. Approximately $865,000 of the corporate notes receivable were issued to
Plaintiff Funding Corporation, a privately-held corporation in which Selig Zises
is a stockholder. A $150,000 corporate note receivable was issued to LawCash II
LLC, a privately-held company in which Selig Zises is a member. Two corporate
notes receivable totaling $550,000 were issued to Unicrown Partners LLC, a
privately-held company in which Selig Zises and Jay Zises are members. Selig
Zises and Jay Zises are stockholders of MangoSoft, Inc. Selig Zises was the
former co-chairman of our Board of Directors.

                                       22

<PAGE>

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

(a)  Exhibits:
    Exhibit
    Number                      Description of Exhibit

      2.1      Agreement and Plan of Merger by and among First American Clock
               Co., MangoSoft Corporation and MangoMerger Corp., dated as of
               August 27,1999. (1)
      3.1      Articles of Incorporation, as amended. (2)
      3.2      By-laws. (2)
       10      Lease of Westborough Office Park, Building Five, dated November
               10, 1995. (3)
       16      Letter on Change in Certifying Accountant. (4)
       21      Subsidiary of the Registrant. (2)
     23.1      Consent of Stowe & Degon.
     99.1      1999 Incentive Compensation Plan, as amended and restated on May
               1, 2000. (1)
     99.2      Form of Subscription Agreement for purchase of common stock,
               dated as of March 20, 2000. (1)
     99.3      Form of Warrant Agreement. (1)
     99.4      Value Added Reseller Agreement, dated July 14, 2000, between
               MangoSoft, Inc. and 3Com Corporation. (5)
     99.5      Asset Purchase Agreement, dated February 11, 2002, between
               MangoSoft, Inc. and Fleet National Bank. (6)
     99.6      Warrant Agreement, dated February 11, 2002, between MangoSoft,
               Inc. and Fleet National Bank. (6)
     99.7      Information Management Services Agreement, dated September
               30, 2002, between MangoSoft, Inc. and Built Right Networks LLC.
               (7)
     99.8      Officer Certification.

     (1) Filed as an exhibit to our Current Report on Form 8-K for an event
         dated September 7, 1999 and hereby incorporated by reference thereto.
     (2) Filed as an exhibit to our Registration Statement on Form 10-SB, filed
         June 9, 2000, and hereby incorporated by reference thereto.
     (3) Filed as an exhibit to our Quarterly Report filed November 9, 1999 for
         the quarter ended September 30, 1999 and hereby incorporated by
         reference thereto.
     (4) Filed as an exhibit to our Current Report on Form 8-K/A for an event
         dated January 11, 2000 and hereby incorporated by reference thereto.
     (5) Filed as an exhibit to our Registration Statement on Form 10-SB/A,
         filed August 30, 2000, and hereby incorporated by reference thereto.
     (6) Filed as an exhibit to our Quarterly Report filed August 14, 2002 for
         the quarter ended June 30, 2002 and hereby incorporated by reference
         thereto.
     (7) Filed as an exhibit to our Current Report on Form 8-K for an event
         dated September 30, 2002 and hereby incorporated by reference thereto

(b)  Reports on Form 8-K:

     On October 2, 2002, we filed on Form 8-K a notification that we reduced our
work force to three (3) persons, which represented an approximate 70% reduction
in our personnel effective September 30, 2002. In connection with this work
force reduction, we eliminated the positions held by Robert E. Parsons, Vice

                                       23

<PAGE>

President and Chief Financial Officer, and Doug Edwards, Vice President of
Sales. In conjunction with our reduction in workforce, we entered into an
Information Management Services Agreement with Built Right Networks LLC ("Built
Right Networks"), whereby Built Right Networks would provide outsourced
management and support to our information technology infrastructure, our
billable services infrastructure, software code base and reseller network. The
principals of Built Right Networks are all former MangoSoft employees, including
our former Vice President of Sales.

     On December 6, 2002, we filed on Form 8-K a notification that (i) effective
November 1, 2002, our principal offices were relocated to 12 Pine Street
Extension, Nashua, New Hampshire 03060, and (ii) on November 22, 2002, we filed
a complaint (civil action number 02-CV-545) in the United States District Court,
District of New Hampshire, against Oracle Corporation for infringement of U.S.
Patent No. 6,148,377 and U.S. Patent No. 5,918,229.

     ITEM 14. CONTROLS AND PROCEDURES

     We have significantly reduced our work force on several occasions during
2001 and 2002. At December 31, 2002, we had two (2) employees, including Mr.
Dale Vincent, our President, Chief Executive Officer and sole director.

     A complete set of internal controls including segregation of duties is not
possible in an organization of this size. However, we have implemented control
procedures surrounding the maintenance of our accounting and financial systems
and the safeguarding of our assets. Further, all transactions entered into
outside the normal course of our day-to-day operations must be approved by Mr.
Vincent.

     It is our responsibility to maintain an adequate system of internal
controls. We believe that our current system is adequate to timely alert Mr.
Vincent of any material information required to be included in our periodic SEC
filings.

                                       24

<PAGE>

                                   SIGNATURES

     In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form 10-KSB and authorized this Annual Report
to be signed on its behalf by the undersigned, in Nashua, New Hampshire, on the
28th day of March 2003.

                                          MANGOSOFT, INC.

                                          /s/ Dale Vincent
                                          ----------------
                                          Dale Vincent
                                          President, Chief Executive Officer and
                                          Chairman of the Board of Directors
                                          (chief accounting officer)

CERTIFICATION:

I, Dale Vincent, certify that:

1.   I have reviewed this annual report on Form 10-KSB of MangoSoft, Inc. (the
     "Registrant");

2.   Based on my knowledge, this annual report does not contain any untrue
     statement of a material fact or omit to state a material fact necessary to
     make the statements made, in light of the circumstances under which such
     statements were made, not misleading with respect to the period covered by
     this annual report;

3.   Based on my knowledge, the financial statements, and other financial
     information included in this annual report, fairly present in all material
     respects the financial condition, results of operations and cash flows of
     the Registrant as of, and for, the periods presented in this annual report;

4.   I am responsible for establishing and maintaining disclosure controls and
     procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the
     Registrant and have:

     (a) designed such disclosure controls and procedures to ensure that
     material information relating to the Registrant, including its consolidated
     subsidiaries, is made known to us by others within those entities,
     particularly during the period in which this annual report is being
     prepared;

     (b) evaluated the effectiveness of the Registrant's disclosure controls and
     procedures as of a date within 90 days prior to the filing date of this
     annual report (the "Evaluation Date"); and

     (c) presented in this annual report my conclusions about the effectiveness
     of the disclosure controls and procedures based on our evaluation as of the
     Evaluation Date;

5.   I have disclosed, based on my most recent evaluation, to the Registrant's
     auditors and the audit committee of the Registrant's board of directors (or
     persons performing the equivalent functions):

     (a) all significant deficiencies in the design or operation of internal
     controls which could adversely affect the Registrant's ability to record,
     process, summarize and report financial data and have identified for the
     Registrant's auditors any material weakness in internal controls; and

     (b) any fraud, whether or not material, that involves management or other
     employees who have a significant role in the Registrant's internal
     controls; and

                                       25

<PAGE>

6.   I have indicated in this annual report whether there were significant
     changes in internal controls or in other factors that could significantly
     affect internal controls subsequent to the date of our most recent
     evaluation, including any corrective actions with regard to significant
     deficiencies and material weaknesses.

Date: March 28, 2003

/s/ Dale Vincent
----------------------------------
Chief Executive Officer

                                       26

<PAGE>

                         MANGOSOFT, INC. AND SUBSIDIARY

                          INDEX TO FINANCIAL STATEMENTS


<TABLE>
<CAPTION>
                                                                                                                Page
<S>                                                                                                               <C>
Independent Auditors' Report ................................................................................     28

Consolidated Balance Sheets as of December 31, 2002 and 2001 ................................................     29

Consolidated Statements of Operations For The Years Ended December 31, 2002, 2001, and 2000 .................     30

Consolidated Statements of Stockholders' Equity (Deficiency) For The Years Ended
   December 31, 2002, 2001 and 2000 .........................................................................     31

Consolidated Statements of Cash Flows For The Years Ended December 31, 2002, 2001 and 2000 ..................     32

Notes to Consolidated Financial Statements ..................................................................     33
</TABLE>

                                       27

<PAGE>

                          INDEPENDENT AUDITORS' REPORT

To the Stockholders and Board of Directors of MangoSoft, Inc.:

We have audited the accompanying consolidated balance sheets of MangoSoft, Inc.
and subsidiary (the "Company") as of December 31, 2002, and the related
consolidated statements of operations, stockholders' equity (deficiency), and
cash flows for the year ended December 31, 2002. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit. The consolidated
financial statements of the Company as of and for the two years ended December
31, 2001, were audited by other auditors whose report dated February 22, 2002,
expressed an unqualified opinion on those statements.

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

In our opinion, such consolidated financial statements present fairly, in all
material respects, the consolidated financial position of MangoSoft, Inc. and
subsidiary as of December 31, 2002, and the results of their operations and
their cash flows for the year ended December 31, 2002, in conformity with
accounting principles generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern. As discussed in Note 1, the
Company's recurring losses from operations and its dependency on financing raise
substantial doubt its ability to continue as a going concern. Management's plans
concerning these matters are also discussed in Note 1. The consolidated
financial statements do not include any adjustments that might result from the
outcome of these uncertainties.

/s/ STOWE & DEGON
Worcester, Massachusetts
March 21, 2003

THE REPORT OF DELOITTE & TOUCHE LLP WITH RESPECT TO THE REGISTRANT'S FINANCIAL
STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000 HAS NOT BEEN INCLUDED
IN THIS FILING BECAUSE SUCH REPORT COULD NOT BE OBTAINED WITHOUT UNDUE BURDEN
AND EXPENSE.

                                       28

<PAGE>

                         MANGOSOFT, INC. AND SUBSIDIARY

                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                               December 31,
                                                                                     2002                         2001
                                                                                     ----                         ----
<S>                                                                              <C>                         <C>
                                      ASSETS
Current Assets:
     Cash and cash equivalents ..........................................        $    425,369                $   6,911,906
     Short-term investments .............................................             608,317                           --
     Accounts receivable ................................................              20,226                       41,925
     Prepaid expenses and other current assets ..........................              98,660                      199,653
                                                                                -------------                -------------
          Total current assets ..........................................           1,152,572                    7,153,484
Property and equipment - net ............................................             240,019                      875,533
Long-term investments ...................................................             507,080                           --
Intangibles - net .......................................................             228,472                           --
Other assets ............................................................              31,778                        2,400
                                                                                -------------                -------------
               Total ....................................................       $   2,159,921                $   8,031,417
                                                                                =============                =============

                       LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
     Accounts payable ...................................................       $     707,123                $     772,919
     Accrued compensation ...............................................              23,142                      309,426
     Other accrued expenses .............................................             220,322                      141,624
     Deferred revenue ...................................................              65,317                       13,059
                                                                                -------------                -------------
          Total current liabilities .....................................           1,015,904                    1,237,028
                                                                                -------------                -------------

Commitments and Contingencies (Note 10)

Stockholders' Equity:
     Preferred stock - $0.001 par value; authorized, 5,000,000
       shares; issued and outstanding, none .............................                  --                           --
     Common stock - $0.001 par value; authorized, 3,703,704
       shares; issued and outstanding, 1,013,038 shares in 2002 and
        1,000,075 shares in 2001 ........................................               1,013                        1,000
     Additional paid-in-capital .........................................          88,660,123                   89,586,433
     Deferred compensation ..............................................             (17,976)                  (1,678,303)
     Accumulated deficit ................................................         (87,499,143)                 (81,114,741)
                                                                                -------------                -------------
          Total stockholders' equity ....................................           1,144,017                    6,794,389
                                                                                -------------                -------------
               Total ....................................................       $   2,159,921                $   8,031,417
                                                                                =============                =============
</TABLE>

               See notes to the consolidated financial statements.

                                       29

<PAGE>

                         MANGOSOFT, INC. AND SUBSIDIARY

                      CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                                    Year Ended December 31,
                                                                         2002               2001              2000
                                                                         ----               ----              ----
<S>                                                                   <C>               <C>              <C>
Software license revenues ........................................    $    49,831       $    250,285     $     60,538
Service revenues .................................................        467,189             80,661               --
                                                                      -----------       ------------     ------------
   Total revenues ................................................        517,020            330,946           60,538
Costs and expenses:
  Cost of software license revenues ..............................             --             37,011            8,955
  Cost of services (1) ...........................................        700,065          1,037,765               --
  Engineering and development (1) ................................      1,817,851          3,239,526        5,513,467
  Selling and marketing (1) ......................................        721,957          1,944,196        3,546,272
  General and administrative (1) .................................      3,026,888          4,498,983        4,727,586
  Equipment write-down ...........................................        232,782                 --               --
  Stock-based compensation expense ...............................        482,030          1,177,824      (15,098,350)
  Consulting fees paid to related parties ........................             --            119,485          161,288
                                                                      -----------       ------------     ------------
   (Loss) income from operations .................................     (6,464,553)       (11,723,844)       1,201,320
Interest income ..................................................         80,151            510,389        1,102,874
Interest expense .................................................             --                 --           10,224
                                                                      -----------       ------------     ------------
Net (loss) income ................................................     (6,384,402)       (11,213,455)       2,293,970
Accretion of preferred stock .....................................             --                 --        9,627,147
                                                                      -----------       ------------     ------------
Net loss applicable to common stockholders .......................    $(6,384,402)      $(11,213,455)    $ (7,333,177)
                                                                      ===========       ============     ============

Net loss per share applicable to common stockholders -
   basic and diluted .............................................    $     (6.31)      $     (11.23)    $      (7.91)
Weighted average shares outstanding - basic and diluted ..........      1,011,547            998,903          927,596

(1) Excludes stock-based compensation expense as follows:
    Cost of services .............................................    $    37,125       $     71,492     $         --
    Engineering and development ..................................        182,618            334,192       (9,150,884)
    Selling and marketing ........................................         16,417            208,360         (606,575)
    General and administrative ...................................        245,870            563,780       (5,340,891)
                                                                      -----------       ------------     ------------
                                                                      $   482,030       $  1,177,824     $(15,098,350)
                                                                      ===========       ============     ============
</TABLE>

               See notes to the consolidated financial statements.

                                       30

<PAGE>

                         MANGOSOFT, INC. AND SUBSIDIARY

          CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)

<TABLE>
<CAPTION>
                                                            Convertible Preferred Stock       Common Stock
                                                            ---------------------------       ------------           Additional
                                                             Shares             Amount     Shares       Amount     Paid-in Capital
                                                             ------             ------     ------       ------     ---------------
<S>                                                         <C>                <C>         <C>         <C>         <C>
Balance, January 1, 2000 .................................        --            $   --       737,930    $  738       $ 72,204,914
 Issuance of convertible preferred stock, Series A,
  net of $947,129 in issuance costs ......................    92,593                92            --        --          9,764,008
 Conversion of accounts payable at various prices
  ranging from $5.00 to $8.00 per share ..................        --                --         2,648         3            329,997
 Issuance of common stock, net of $44,000 in
  issuance costs .........................................        --                --       162,453       162         22,381,119
 Conversion of preferred stock to common stock ...........   (92,593)              (92)       92,593        92                 --
 Stock options exercised .................................        --                --         1,526         2            120,248
 Stock-based compensation (benefit) ......................        --                --         1,252         1        (14,342,825)
 Net income ..............................................        --                --            --        --                 --
                                                            --------            ------     ---------    ------       ------------
Balance, December 31, 2000 ...............................        --                --       998,402       998         90,457,461
                                                            --------            ------     ---------    ------       ------------
 Stock options exercised .................................        --                --         1,673         2              8,714
 Stock-based compensation ................................        --                --            --        --           (879,742)
 Net loss ................................................        --                --            --        --                 --
                                                            --------            ------     ---------    ------       ------------
Balance, December 31, 2001 ...............................        --                --     1,000,075     1,000         89,586,433
 Issuance of 350,000 and 150,000 warrants at $0.53
  per share for the purchase of file TRUST ...............        --                --        12,963        13            251,987
 Stock-based compensation ................................        --                --            --        --         (1,178,297)
 Net loss ................................................        --                --            --        --                 --
                                                            --------            ------     ---------    ------       ------------
Balance, December 31, 2002 ...............................  $     --            $   --     1,013,038    $1,013       $ 88,660,123
                                                            ========            ======     =========    ======       ============

<CAPTION>
                                                              Deferred          Accumulated
                                                            Compensation          Deficit            Total
                                                            ------------          -------            -----
<S>                                                         <C>                <C>               <C>
Balance, January 1, 2000 .................................  $ (2,980,343)      $ (72,195,256)    $ (2,969,947)
 Issuance of convertible preferred stock, Series A,
  net of $947,129 in issuance costs ......................            --                  --        9,764,100
 Conversion of accounts payable at various prices
  ranging from $5.00 to $8.00 per share ..................            --                  --          330,000
 Issuance of common stock, net of $44,000 in
  issuance costs .........................................            --                  --       22,381,281
 Conversion of preferred stock to common stock ...........            --                  --               --
 Stock options exercised .................................            --                  --          120,250
 Stock-based compensation (benefit) ......................      (775,526)                 --      (15,098,350)
 Net income ..............................................            --           2,293,970        2,293,970
                                                            ------------       -------------     ------------
Balance, December 31, 2000 ...............................    (3,735,869)        (69,901,286)      16,821,304
                                                            ------------       -------------     ------------
 Stock options exercised .................................            --                  --            8,716
 Stock-based compensation ................................     2,057,566                  --        1,177,824
 Net loss ................................................            --         (11,213,455)     (11,213,455)
                                                            ------------       -------------     ------------
Balance, December 31, 2001 ...............................    (1,678,303)        (81,114,741)       6,794,389
 Issuance of 350,000 and 150,000 warrants at $0.53
  per share for the purchase of file TRUST ...............            --                  --          252,000
 Stock-based compensation ................................     1,660,327                  --          482,030
 Net loss ................................................            --          (6,384,402)      (6,384,402)
                                                            ------------       -------------     ------------
Balance, December 31, 2002 ...............................  $    (17,976)      $ (87,499,143)    $  1,144,017
                                                            ============       =============     ============
</TABLE>

              See notes to the consolidated financial statements.

                                       31

<PAGE>

                         MANGOSOFT, INC. AND SUBSIDIARY
                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                   Year Ended December 31,
                                                                        2002                  2001                  2000
                                                                        ----                  ----                  ----
<S>                                                             <C>                     <C>                  <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income .............................................  $  (6,384,402)         $ (11,213,455)       $   2,293,970
Adjustments to reconcile net (loss) income  to net cash
  used in operating activities:
    Depreciation, amortization and equipment write-down .......        831,612                541,602              356,711
    Stock-based compensation ..................................        482,030              1,177,824          (15,098,350)
    Unrealized investment gains ...............................         (9,057)                    --                   --
    Loss on the disposal of equipment .........................             --                  6,647                   --
    Increase (decrease) in cash from the change in:
      Accounts receivable .....................................         21,699                (31,286)             (10,639)
      Prepaid expenses and other current assets ...............        100,993                (44,208)             (27,290)
      Accounts payable ........................................        (65,796)              (522,695)             (18,012)
      Accrued compensation ....................................       (286,284)                22,874               94,361
      Accrued expenses to related parties .....................             --                     --             (702,683)
      Other accrued expenses ..................................         78,698                (87,331)            (111,141)
      Deferred revenue ........................................         52,258                (41,941)              55,000
                                                                --------------        ---------------       --------------
          Net cash used in operating activities ...............     (5,178,249)           (10,191,969)         (13,168,073)
                                                                --------------        ---------------       --------------

CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment .........................        (29,348)              (258,866)          (1,373,738)
Cash paid for fileTRUST assets ................................       (175,000)                    --                   --
Cash paid for short and long-term investments .................     (1,564,669)                    --                   --
Investment maturities .........................................        458,329                     --                   --
Decrease in other long-term assets ............................          2,400                     --                3,543
Merger costs ..................................................             --                     --              (77,893)
                                                                --------------        ---------------       --------------
          Net cash used in investing activities ...............     (1,308,288)              (258,866)          (1,448,088)
                                                                --------------        ---------------       --------------

CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of notes issued to related parties .................             --                     --             (232,500)
Repayments of other debt financings ...........................             --                     --              (92,904)
Stock options exercised .......................................             --                  8,716              120,250
Net proceeds from the issuance of common and preferred
  shares ......................................................             --                     --           32,145,381
                                                                --------------        ---------------       --------------
          Net cash provided by financing activities ...........             --                  8,716           31,940,227
                                                                --------------        ---------------       --------------
NET (DECREASE) INCREASE IN CASH AND CASH
  EQUIVALENTS .................................................     (6,486,537)           (10,442,119)          17,324,066
CASH AND CASH EQUIVALENTS, BEGINNING OF
  PERIOD ......................................................      6,911,906             17,354,025               29,959
                                                                --------------        ---------------       --------------

CASH AND CASH EQUIVALENTS, END OF YEAR ........................  $     425,369          $   6,911,906        $  17,354,025
                                                                ==============        ===============       ==============
</TABLE>

               See notes to the consolidated financial statements.

                                       32

<PAGE>

                         MANGOSOFT, INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.   Nature of Business and Operations

     The Company

     MangoSoft, Inc. and subsidiary (the "Company") develops Internet business
software and services that improve the utility and effectiveness of
Internet-based business applications. The Company develops, markets and supports
software solutions to address the networking needs of small businesses,
workgroups and large enterprises. The Company is engaged in a single operating
segment of the computer software industry.

     On September 7, 1999, MangoMerger Corp., a wholly-owned subsidiary of First
American Clock Co. ("First American"), merged with and into MangoSoft
Corporation, pursuant to an Agreement and Plan of Merger (the "Merger") dated
August 27, 1999. Following the Merger, the business to be conducted by First
American was the business conducted by MangoSoft Corporation prior to the
Merger. In conjunction with the Merger, First American, which is the legal
acquirer and surviving legal entity, changed its name to MangoSoft, Inc

     Immediately after the Merger, the former common and preferred stockholders
of MangoSoft Corporation held 6,008,998 shares of the Company's common stock,
while the former common stockholders of First American held 1,575,000 shares of
the Company's common stock. In addition, the 12% Senior Secured Convertible
Notes (the "12% convertible notes") in the aggregate of $6,000,000 held by
creditors of MangoSoft Corporation were converted into an aggregate of 9,000,000
shares of the Company's common stock. As part of the Merger, the Company
completed a Private Placement (the "Private Placement") of 3,000,000 shares of
common stock for net proceeds of $3,098,827. The Company also issued 300,000
shares of common stock to the placement agent in respect of such Private
Placement.

     At the time of the Merger, the common shares issued to the former
stockholders of MangoSoft Corporation represented a majority of the Company's
common stock, enabling them to retain voting and operating control of the
Company. Because First American was a nonoperating entity and the closing of the
Private Placement was contingent upon the closing of the Merger, the Merger was
accounted for as a capital transaction and was treated as a reverse acquisition,
as the shareholders of MangoSoft Corporation received the larger portion of the
voting interests in the combined enterprise. Estimated costs of the Merger of
$276,173 and the value ($375,000) of the 300,000 shares of common stock issued
to the placement agent have been recorded as issuance costs of the Private
Placement.

     Through December 31, 2001, the Company was considered to be a development
stage company because it had not generated significant revenues from products
and had not commercially launched its principal product line. In January 2001,
the Company launched its principal product and began to recognize revenues for
the sale of this product. As such, effective January 1, 2001, the Company was
deemed to have exited the development stage.

     As shown in the consolidated financial statements, during each of the three
years in the period ended December 31, 2002, the Company incurred net income
(loss) of $(6,384,402), $(11,213,455) and $2,293,970, respectively. Absent the
reversal of stock-based compensation expense in 2000, the net loss would have
been $(12,804,380). Cash used in operations during each of the three years in
the period ended December 31, 2002 was $5,178,249, $10,191,969 and $13,168,073,
respectively. These factors, among others, raise significant doubt about the
Company's ability to continue as a going concern. The consolidated financial
statements do not include any adjustments relating to the recoverability and
classification of assets or the amounts and classification of liabilities that
might be necessary should the Company be unable to continue as a going concern.
The Company's continuation as a going concern is dependent upon its ability to
generate sufficient cash flow and meet its obligations on a timely basis and
ultimately attain profitability.

     The Company has reduced its work force on four separate occasions since
April 23, 2001 due to adverse economic conditions and the Company's need to
conserve capital. Effective April 23, 2001, the Company implemented an
approximate 40% reduction in its work force. Effective June 28, 2002, the
Company implemented an approximate 50% reduction in its then existing work force
and the remaining twenty (20) employees took a ten percent reduction in their
salary. Effective July 29, 2002, the Company reduced its work force by
approximately 35% to thirteen (13) employees. Effective September 30, 2002, the
Company reduced its work force to three (3) employees. At December 31, 2002, the
Company had two (2) employees, each working in a general and administrative
capacity.

                                       33

<PAGE>

                         MANGOSOFT, INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2.   Summary of Significant Accounting Policies

     Principles of Consolidation - As described in Note 1, the Company completed
the Merger on September 7, 1999 that has been accounted for as a reverse
acquisition. Accordingly, the Company's consolidated financial statements for
periods prior to September 7, 1999 represent those of MangoSoft Corporation,
which is considered to be the acquirer for accounting purposes. The consolidated
financial statements for periods subsequent to September 7, 1999 include the
accounts of the Company and its wholly-owned subsidiary after the elimination of
all significant intercompany balances.

     Use of Estimates - The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the balance sheet dates. Actual results could differ from those
estimates.

     Cash and Equivalents - Cash and equivalents include cash on hand, cash
deposited with banks and highly liquid debt securities with remaining maturities
of ninety days or less when purchased.

     Investments - Investments in which the Company has the ability and positive
intent to hold to maturity are carried at amortized cost. Investments and
maturities of less than one year are classified as short-term investments.

     Property and Equipment - Property and equipment consists primarily of
computer equipment and is recorded at cost. Depreciation and amortization are
provided using the straight-line method over the estimated useful lives
(generally three to five years) of the related assets. The Company periodically
evaluates the recoverability of its long-lived assets based on the expected
undiscounted cash flows and recognizes impairments, if any, based on discounted
cash flows.

     Revenue Recognition - Software revenue is recognized upon delivery if
persuasive evidence of an arrangement exists, the price is fixed and
determinable, delivery has occurred and collection is probable. Revenue from
sales to distributors is recognized upon sales to end users. Service revenue is
recognized as services are performed.

     Software Development Costs - Costs incurred prior to technological
feasibility of the Company's software products are expensed as research and
development costs. Certain costs incurred after technological feasibility has
been established are capitalized. To date, the time period between the
establishment of technological feasibility and completion of software
development has been short and no significant development costs have been
incurred during that period. Accordingly, the Company has not capitalized any
software development costs to date.

     Stock-Based Compensation - The Company accounts for stock-based employee
compensation arrangements using the intrinsic value method in accordance with
Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued
to Employees," and complies with the disclosure provisions of Statement of
Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation."

     Equity instruments issued to non-employees are accounted for in accordance
with the provisions of SFAS No. 123 and Emerging Issues Task Force ("EITF")
Abstract No. 96-18, "Accounting for Equity Instruments That Are Issued To Other
Than Employees for Acquiring, or in Conjunction with Selling, Goods or
Services."

                                       34

<PAGE>

                         MANGOSOFT, INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2.   Summary of Significant Accounting Policies (continued)

     The Company's 1999 Incentive Compensation Plan, as amended, provides for
the issuance of up to 296,297 shares of common stock to employees, officers,
directors and consultants in the form of nonqualified and incentive stock
options, restricted stock grants and other stock-based awards, including stock
appreciation rights. Employee options typically vest over three or four year
periods. An option's maximum term is ten years.

     In December 2002, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 148, "Accounting for Stock-Based Compensation -Transition and
Disclosure." This Statement amends the transition and disclosure requirements of
SFAS No. 123 with respect to the implementation of the fair value method of
accounting for options. See Note 8 for additional information regarding the
Company's stock options.

     Pursuant to the disclosure requirements of SFAS No. 148, the following
table provides an expanded reconciliation for all periods presented that adds
back to reported net income (loss) the recorded expense under APB No. 25, deduct
the total fair value expense under SFAS No. 123 and shows the reported and pro
forma earnings per share amounts:

<TABLE>
<CAPTION>
                                                                           2002                2001               2000
                                                                           ----                ----               ----
<S>                                                                  <C>                <C>                <C>
Net loss applicable to common stockholders, as reported              $ (6,384,402)      $ (11,213,455)     $  (7,333,177)
Add back: stock-based compensation costs (benefit) included
  in the determination of net loss applicable to common
  shareholders, as reported                                               482,030           1,177,824        (15,098,350)
Less: Stock-based (compensation) benefit had all options
  been recorded at fair value                                          (1,845,633)         (3,776,965)         1,731,519
                                                                     ------------       -------------      -------------
Adjusted net loss                                                    $ (7,748,005)      $ (13,812,596)     $ (20,700,008)
                                                                     ============       =============      =============

Weighted average shares outstanding, basic and diluted                 1,011,547              998,903            927,596

Net loss per share applicable to common shareholders,
  basic and diluted, as reported                                     $     (6.31)       $      (11.23)     $       (7.91)
                                                                     ===========        =============      =============
Adjusted net loss per share applicable to common
  Shareholders, basic and diluted                                    $     (7.66)       $      (13.83)     $      (22.32)
                                                                     ===========        =============      =============
</TABLE>

     Income Taxes - Deferred tax liabilities and assets are determined based on
the difference between the financial statement carrying amounts and tax bases of
existing assets and liabilities, using enacted tax rates. Valuation allowances
are established when necessary to reduce the deferred tax assets to those
amounts expected to be realized.

     Comprehensive Income - Comprehensive income (loss) was equal to net income
(loss) for each year presented.

     Net Income (Loss) Per Common Share - Basic net income (loss) per common
share is computed by dividing net income (loss) applicable to common
stockholders by the weighted average number of common shares outstanding during
the period. Diluted net income (loss) per common share reflects, in addition to
the weighted average number of common shares, the potential dilution if common
stock options were exercised into common stock, unless the effects of such
exercises would have been antidilitive.

                                       35

<PAGE>

                         MANGOSOFT, INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2.  Summary of Significant Accounting Policies (continued)

    A reconciliation of net (loss) per common share and the weighted average
shares used in the net (loss) per share calculations is as follows:

                                   Net Loss
                             Applicable to Common
                                Stockholders           Shares        Per Share
                                 (Numerator)       (Denominator)      Amount
                                 -----------       -------------      ------
2002
  Basic ...................      $  (6,384,402)       1,011,547       $  (6.31)
  Effect of options .......                 --               --             --
                                 -------------     ------------     ----------
  Diluted .................      $  (6,384,402)       1,011,547       $  (6.31)
                                 =============     ============     ==========
2001
  Basic ...................      $ (11,213,455)         998,903       $  11.23
  Effect of options .......                 --               --             --
                                 -------------     ------------     ----------
  Diluted .................      $ (11,213,455)         998,903       $  11.23
                                 =============     ============     ==========
2000
  Basic ...................      $  (7,333,177)         927,596       $   7.91
  Effect of options .......                 --               --             --
                                 -------------     ------------     ----------
  Diluted .................      $  (7,333,177)         927,596       $   7.91
                                 =============     ============     ==========

     Basic and diluted loss per common share are the same for 2002, 2001 and
2000 as potentially dilutive stock options totaling 83,232 in 2002, 209,412
in 2001 and 213,481 in 2000 have not been included in calculations of diluted
net loss per common share available to common stockholders, as their inclusion
would have been antidilutive.

     Reclassifications - Certain reclassifications have been made to the 2001
and 2000 amounts to conform to the 2002 presentation.

     Supplemental Cash Flow Information - The following table sets forth certain
supplemental cash flow information for the years ended December 31, 2002, 2001
and 2000:

<TABLE>
<CAPTION>
                                                                        Years Ended December 31,
                                                                  2002           2001           2000
                                                                  ----           ----           ----
<S>                                                             <C>            <C>          <C>
Cash paid for interest ......................................   $      --      $     --     $    10,224

NON CASH FINANCING ACTIVITIES:
  Accretion of preferred stock ..............................          --            --       9,627,147
  Conversion of accounts payable into common
    stock ...................................................          --            --         330,000
  Fair value of warrants issued in connection with
    the sale of the convertible preferred stock, Series A....          --            --         711,229
  Fair value of common stock and warrants issued in
    connection with the purchase of the fileTRUST assets ....     252,000            --              --
</TABLE>

                                       36

<PAGE>

                         MANGOSOFT, INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2.   Summary of Significant Accounting Policies (continued)

     Recently Issued Accounting Pronouncements - In April 2002, the FASB issued
SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of
FASB Statement No. 13, and Technical Corrections." SFAS No. 145 rescinds SFAS
No. 4, which required all gains and losses from extinguishment of debt to be
aggregated and, if material, classified as an extraordinary item, net of related
income tax effect. Upon adoption of SFAS No. 145, the Company will be required
to apply the criteria in APB Opinion No. 30, "Reporting the Results of
Operations - Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions"
(Opinion No. 30), in determining the classification of gains and losses
resulting from the extinguishment of debt. SFAS No. 145 is effective for annual
years beginning after May 15, 2002, with earlier adoption encouraged. The new
standard is not expected to have a significant impact on the Company's
consolidated financial statements.

     In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 requires companies to
recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
Examples of costs covered by the standard include lease termination costs and
certain employee severance costs that are associated with a restructuring,
discontinued operation, plant closing, or other exit or disposal activity. SFAS
No. 146 is effective prospectively for exit or disposal activities initiated
after December 31, 2002, with earlier adoption encouraged. As the provisions of
SFAS No. 146 are required to be applied prospectively after the adoption date,
the Company cannot determine the potential effects that adoption of SFAS No. 146
will have on its consolidated financial statements.

     In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation." SFAS No. 148 amends the disclosure requirements of SFAS No. 123,
"Accounting for Stock-Based Compensation," to require prominent disclosures in
both interim and annual financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. SFAS No. 148 also amends SFAS No. 123 to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. The Company will expend its interim and
annual disclosures to satisfy the reporting requirements of this pronouncement.
As the Company has decided not to voluntarily adopt the SFAS No. 123 fair value
method of accounting for stock-based employee compensation, the new transition
alternatives of SFAS No. 148 will not have a material impact on its consolidated
financial statements.

     In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 elaborates on the
existing disclosure requirements for most guarantees. FIN 45 requires that at
the time a company issues certain guarantees, the company must recognize an
initial liability for the fair value, or market value, of the obligations it
assumes under that guarantee and must disclose that information in its interim
and annual financial statements. The initial recognition and initial measurement
provisions of FIN 45 are applicable on a prospective basis to guarantees issued
or modified after December 31, 2002. FIN 45's disclosure requirements are
effective for financial statements of interim or annual periods ending after
December 15, 2002 and are applicable to all guarantees issued by the guarantor
subject to FIN 45's scope, including guarantees issued prior to the issuance of
FIN 45. The adoption of FIN 45 did not have a material impact on the Company's
consolidated financial statements.

                                       37

<PAGE>

                         MANGOSOFT, INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2.   Summary of Significant Accounting Policies (continued)

     In November 2002, the Emerging Issues Task Force finalized its consensus on
EITF Issue 00-21, "Revenue Arrangements with Multiple Deliverables," which
provides guidance on the method of revenue recognition for sales arrangements
that include the delivery of more than one product or service. EITF 00-21 is
effective prospectively for arrangements entered into in fiscal periods
beginning after June 15, 2003. Under EITF 00-21, revenue must be allocated to
all deliverables regardless of whether an individual element is incidental or
perfunctory. The Company does not believe that the adoption of EITF-00-21 will
have a material impact on our consolidated financial statements.

3.   Business Combination

     On February 11, 2002, the Company acquired the fileTRUST online data
storage service and related assets from FleetBoston Financial Corporation
("FleetBoston"). Under the terms of the purchase, the Company paid $175,000 in
cash, issued 12,963 shares (as restated for the 1-for-27 reverse stock split on
March 7, 2003) of the Company's common stock and warrants to purchase 5,556
shares (as restated for the 1-for-27 reverse stock split on March 7, 2003) of
the Company's common stock at an exercise price of $14.31 per share (as restated
for the 1-for-27 reverse stock split on March 7, 2003). The aggregate fair value
of the common stock was $182,000, which was based on the closing price of the
Company's common stock on February 11, 2002. The aggregate fair value of the
warrants was $70,000, which was determined using the Black-Scholes valuation
model using the following assumptions: expected life of the warrants, 5 years;
volatility, 127%; and the risk free interest rate, 4.25%.

     As part of the transaction, FleetBoston and the Company entered into a
two-year enterprise license agreement for the internal use of fileTRUST by
FleetBoston. In addition, the two companies will continue to market fileTRUST
under a cooperative marketing agreement. Under the terms of this cooperative
marketing agreement, the Company is required to issue warrants to purchase its
common stock to FleetBoston based on certain revenue targets, not to exceed
31,481 warrants over this two-year period. The 31,481 warrants have been
accounted for as contingent consideration and will be recognized as additional
purchase price as the revenue targets are achieved. No warrants were issued in
2002 under the terms of the cooperative marketing agreement.

     The total aggregate consideration rendered for this transaction totaled
approximately $427,000. The following presents the preliminary allocation of the
purchase price:

Cash paid ...............................................     $ 175,000
Fair value of common stock issued .......................       182,000
Fair value of warrants issued ...........................        70,000
                                                              ---------
Purchase price ..........................................     $ 427,000
                                                              =========

Software and acquired technology ........................     $ 329,000
Computer equipment ......................................        54,000
Other identifiable intangible assets ....................        44,000
                                                              ---------
                                                              $ 427,000
                                                              =========

                                       38

<PAGE>

                         MANGOSOFT, INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

3.   Business Combination (continued)

     The software and acquired technology represents the fileTRUST operating
software that has reached technological feasibility and has future economic
value. The other identifiable intangible assets are comprised of customer
relationships and the fileTRUST service mark. The computer equipment is being
depreciated over its estimated useful lives, generally not to exceed three
years. The software and acquired technology is being amortized over three years.
The other identifiable intangible assets have indefinite lives and will not be
amortized but will be subject to an impairment analysis in accordance with SFAS
No. 142, "Goodwill and Other Intangible Assets."

     The operations of the fileTRUST assets prior to the acquisition were not
material to the Company's financial statements.

4. Investments

     Investments in held-to-maturity debt securities are carried at amortized
costs and are as follows at December 31, 2002:

<TABLE>
<CAPTION>
                                                                                Unrealized    Estimated
                                                                     Cost          Gain       Fair Value
                                                                      ----         ----       ----------
<S>                                                               <C>           <C>           <C>
Corporate notes, 12.0%, issued October 31, 2002,
  maturity date, December 15, 2003 ...........................    $ 350,000       $ 7,019     $ 357,019
Corporate notes, 12.0%, issued December 15, 2002,
  maturity date, December 15, 2003 ...........................      200,000         1,052       201,052
Corporate notes, 12.0%, issued December 16, 2002,
  maturity date, June 16, 2003 ...............................       50,000           246        50,246
                                                                  ---------       -------     ---------

Total short-term held-to-maturity investments ................    $ 600,000       $ 8,317     $ 608,317
                                                                  ---------       -------     ---------

Corporate notes, 15.0%, issued December 26, 2002,
  maturity date, December 25, 2004 ...........................    $ 150,000       $   740     $ 150,740
Corporate notes, 12.0%, issued at various dates in 2002,
  maturity dates vary in 2004 ................................      356,340            --       356,340
                                                                  ---------       -------     ---------

Total long-term held-to-maturity investments .................    $ 506,340       $   740     $ 507,080
                                                                  =========       =======     =========
</TABLE>

     The secured corporate notes have been executed between the Company and
several privately-held companies, each of which are related parties (see Note
11). The notes are secured by certain collateral pursuant to each note agreement
and certain guarantees by the respective corporations. Unrealized gains have
been recorded as interest income and the Company's investments in the corporate
notes carried at amortized cost. The 12.0% corporate notes with varying maturity
dates in 2004 are carried at cost due to the uncertainty of their interest
payment. The principal on these notes are collateralized by the debtor's
receivables. Management believes that the Company's principal and unrealized
gains will be collectible. There were no such investments at December 31, 2001.

                                       39

<PAGE>

                         MANGOSOFT, INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

5.  Property and Equipment

     Property and equipment at December 31, 2002 and 2001 consists of the
following:

<TABLE>
<CAPTION>
                                                           2002          2001
            <S>                                         <C>          <C>
            Computer equipment ......................   $ 878,295    $1,621,859
            Furniture and fixtures ..................      96,319        96,319
            Leasehold improvements ..................          --        27,449
                                                        ---------    ----------
              Total .................................     974,614     1,745,627
            Accumulated depreciation ................    (734,595)     (870,094)
                                                        ---------    ----------
              Property and equipment - net ..........   $ 240,019    $  875,533
                                                        =========    ==========
</TABLE>

     During the year ended December 31, 2002, the Company relocated its
outsourced data centers and changed its billable service's infrastructure
configuration. Certain computer hardware, related equipment and leasehold
requirements used to operate these services were no longer necessary and were
disposed of. The Company recorded a $232,782 charge during the year ended
December 31, 2002 as the Company believes that the net book value of these
assets may not be recovered through expected future cash flows from their use
and eventual disposition.

6.  Income Taxes

     The Company has federal and state tax net operating loss carryforwards
available for future periods of approximately $71,400,000. The federal tax net
operating loss carryforwards expire beginning in 2010, and state tax net
operating loss carryforwards began expiring in 2000. As a result of the changes
in the ownership of the Company, there may be limitations on the amounts of net
operating loss carryforwards that may be utilized in any one year. The Company
also has research and development credits for federal and state tax purposes of
approximately $1,548,000 and $1,118,000, respectively, which expire beginning in
2011.

     The tax effect of significant items comprising the Company's deferred tax
assets at December 31, 2002 and 2001 are as follows:

<TABLE>
<CAPTION>
                                                             2002            2001
                                                             ----            ----
<S>                                                     <C>              <C>
              Deferred tax assets:
                Net operating loss carryforwards        $ 25,882,000     $ 26,190,000
                Stock-based compensation                   2,006,000        2,006,000
                Research and development credits           2,664,000        2,346,000
                Depreciation and amortization                272,000          221,000
                Organization costs and software               53,000           11,000
                Accrued vacation                               6,000           34,000
                                                        ------------     ------------
                                                          30,883,000       30,808,000
              Valuation allowance                        (30,883,000)     (30,808,000)
                                                        ------------     ------------
                Net deferred tax assets                 $         --     $         --
                                                        ============     ============
</TABLE>

                                       40

<PAGE>

                         MANGOSOFT, INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

6.  Income Taxes (continued)

     The Company believes that uncertainty exists with respect to future
realization of the deferred tax assets and has established a valuation allowance
for the full amount as of December 31, 2002 and 2001.

     A reconciliation between the amount of income tax determined by applying
the applicable U.S. statutory tax rate to the pre-tax loss is as follows:

<TABLE>
<CAPTION>
                                                                    2002      2001     2000
<S>                                                                 <C>       <C>      <C>
Federal statutory rate .........................................     34%       34 %      34 %
State tax, net of federal impact ...............................      6         6         6
Stock-based compensation expense (benefit)                                             (205)
Provision for valuation allowance on deferred
  tax assets ...................................................    (40)      (40)      165
                                                                    ---       ---      ----
Effective tax rate .............................................     --  %     -- %      -- %
                                                                    ===       ===      ====
</TABLE>

7.   Stockholders' Equity

     Common Stock - At December 31, 2002, the Company had 100,000,000 authorized
shares of common stock, $0.001 par value per share, of which 27,352,033 were
issued and outstanding. On March 7, 2003, the Company completed its 1-for-27
reverse stock split. As a result of this reverse stock split, the Company's
authorized shares of common stock decreased to 3,703,704, of which 1,013,038
were issued and outstanding. All common stock shares and price per share
described in this note have been restated to reflect the 1-for-27 reverse stock
split on March 7, 2003.

     Preferred stock - At December 31, 2002, the Company had 5,000,000
authorized shares of preferred stock, $0.001 par value per share, of which no
shares were issued and outstanding.

     In March 2000, the Company issued 92,593 shares of Convertible
Preferred Stock, Series A, (the "Preferred Stock") to accredited investors at
$108.00 per share. The Preferred Stock was convertible into common stock
(initially at a ratio of one to one) and had a liquidation preference of $10.0
million. The Preferred Stock would automatically convert to common stock upon
the subsequent sale of an additional $10.0 million of the Company's securities.

     In accordance with Emerging Issues Task Force Abstract No. 98-5,
"Accounting for Convertible Securities with Beneficial Conversion Features or
Contingently Adjustable Conversion Ratios," the net proceeds from the Preferred
Stock financing were allocated between the conversion feature and the carrying
value of the Preferred Stock; because the fair value of the common stock was
significantly in excess of the conversion price implicit in the Preferred Stock,
the net proceeds were allocated to the conversion feature. Since the Preferred
Stock was immediately convertible into common stock, an immediate dividend or
accretion of $9,050,371 was recorded from common stockholders' equity to the
carrying value of the Preferred Stock.

     In April 2000, the Company issued 155,556 million shares of common stock to
accredited investors at $135.00 per share. Upon completion of the sale of common
stock, the Preferred Stock automatically converted, in accordance with its
terms, into 92,593 shares of common stock. The Company completed the sale of
approximately 6,897 additional shares of common stock at prices ranging from
$108.00 to $135.00 per share in May 2000.

                                       41

<PAGE>

                         MANGOSOFT, INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

7.  Stockholders' Equity (continued)

     Costs incurred in connection with the sale of the common and Preferred
Stock were $947,129, including $711,229 representing the fair value of warrants
issued to the placement agent to purchase 2,184 shares of the common stock at
$108.00 per share. The fair value of the warrants was calculated using the
Black-Scholes option pricing model, with a risk-free interest rate of 6%, an
expected life of two years, no dividends and a volatility of 150%. Because the
Preferred Stock was immediately convertible into common stock, an immediate
dividend or accretion of $576,776, representing the difference between the
quoted market price of the common stock and the exercise price of the warrants
was recorded from common stockholders equity relating to the warrants.

     In connection with the Merger in September 1999, as described in Note 1,
all shares of MangoSoft Corporation common stock and Preferred Stock were
converted into common stock of MangoSoft, Inc. In addition, all outstanding
options and warrants to purchase MangoSoft Corporation common stock were
terminated and new options to purchase MangoSoft, Inc. common stock were issued
in their place.

8.  Stock Option Plan

     In connection with the Merger, MangoSoft Corporation's 1995 Stock Option
Plan was terminated and the Company adopted the 1999 Incentive Compensation Plan
(the "Plan"). As amended and restated, the Plan provides for the issuance of up
to 296,297 shares of common stock to employees, officers, directors and
consultants in the form of nonqualified and incentive stock options, restricted
stock grants or other stock-based awards, including stock appreciation rights.
The stock options are exercisable as specified at the date of grant and expire
no later than ten years from the date of grant. As of December 31, 2002, there
were 206,923 remaining options available under the Plan.

     As discussed in Note 2, the Company accounts for stock options granted to
employees in accordance with APB No. 25. Options granted in 1999 included stock
appreciation rights ("SARs") that permit the employee to receive the
appreciation in shares of common stock in lieu of exercising the option. At
December 31, 2002, 2001 and 2000, there were 42,086, 99,393 and 106,791
outstanding options, respectively, to purchase the Company's common stock that
included SARs.

     Under APB No. 25, SARs are accounted for as variable awards and
compensation expense is measured at each reporting date based on the difference
between the exercise price and the market price of the common stock. For
unvested options, compensation expense is recognized over the vesting period;
for vested options, compensation expense is adjusted up or down at each
reporting date based on changes in the market price of the Company's common
stock.

     On April 3, 2001, the Company's Board of Directors resolved to reprice
options to purchase 95,710 shares of the Company's common stock. The options
were originally issued between October 1999 and December 2000 and had exercise
prices ranging from $50.76 to $135.00 per share. The exercise price for these
options was reduced to $27.81, the closing market value of the Company's common
stock as of the repricing date. The repriced options are now accounted for as
variable awards, similar to the SARs. At December 31, 2002 and 2001, there were
27,627 and 76,340 outstanding options, respectively, to purchase the Company's
common stock that were repriced and subject to variable plan accounting.






                                       42

<PAGE>

                         MANGOSOFT, INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

8.  Stock Option Plan (continued)

     The Company records stock-based compensation when it grants options to
purchase its common stock to non-employees. The Company granted 6,342 and 6,481
options to non-employees in 2001 and 2000, respectively. All options granted to
non-employees were fully vested at the date of grant. The Company recorded
stock-based compensation of $183,035 and $630,047 in 2001 and 2000,
respectively, related to these grants. There were no such grants made in 2002.
The fair value of the stock options awarded to non-employees is calculated using
the Black-Scholes option-pricing model.

     In 2000, the Company granted employees 94,930 options to purchase its
common stock at prices less than the current market price of its common stock on
the grant date. Stock-based compensation of $482,030, $991,212 and $4,184,385 is
included in the Company's 2002, 2001 and 2000 results of operations in
connection with these grants, respectively.

     Stock option activity, including options granted under the predecessor 1995
Stock Option Plan, was as follows:
                                                     Weighted
                                         Number      Exercise     Average
                                       of Options     Price     Fair Value
                                       ----------    --------   ----------
Outstanding at January 1, 2000 .......  116,683        34.29
  Granted ............................  107,616       119.34      272.16
  Exercised ..........................   (2,995)       56.70
  Forfeited ..........................   (7,823)       35.10
                                        -------
Outstanding at December 31, 2000 .....  213,481        76.95
  Granted ............................   33,731        40.23       32.67
  Exercised ..........................   (1,678)        5.40
  Forfeited ..........................  (36,122)       29.43
                                        -------
Outstanding at December 31, 2001 .....  209,412        76.95
  Granted ............................       --           --          --
  Exercised ..........................       --           --
  Forfeited .......................... (126,180)       34.56
                                        -------
Outstanding at December 31, 2002 .....   83,232        35.64
                                        -------
Exercisable at December 31, 2002 .....   76,245
Exercisable at December 31, 2001 .....  161,662
Exercisable at December 31, 2000 .....  149.013

<TABLE>
<CAPTION>
             Options Outstanding
             -------------------                                Options Exercisable
                                 Weighted Average               -------------------
Number of    Range of Exercise    Remaining Life       Weighted Average       Number Currently
 Options          Prices            (in years)          Exercise Price          Exercisable
---------    -----------------    --------------       ----------------       ----------------
<S>         <C>                  <C>                   <C>                    <C>

   1,481           $0.27               0.10                $ 0.27                   1,481
  70,640     $27.81 to $33.75          6.56                 31.32                  69,208
  11,111          $67.50               8.17                 67.50                   5,556
  ------                                                                           ------
  83,232                                                                           76,245
  ------                                                                           ------
</TABLE>

                                       43

<PAGE>

                         MANGOSOFT, INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

8.  Stock Option Plan (continued)

     Pro Forma Disclosure - SFAS No. 123 requires the disclosure of pro forma
information as if the Company adopted the fair value method for grants or awards
made to employees. For purposes of the pro forma disclosures, the fair value of
options on their grant date was measured using the Black-Scholes option pricing
model. Forfeitures are recognized as they occur.

     Had compensation expense been determined based on the fair values at the
grant dates for awards in accordance with SFAS No. 123, the Company's net loss
applicable to common stockholders and net loss per common share would have been
as follows:

<TABLE>
<CAPTION>
                                                                           2002               2001               2000
                                                                           ----               ----               ----
<S>                                                                    <C>               <C>                <C>
Net loss applicable to common stockholders as reported ..............  $(6,384,402)      $(11,213,455)      $ (7,333,177)
Pro forma net loss applicable to common stockholders. ...............   (7,748,005)       (13,812,596)       (20,700,008)
Diluted net loss per common share as reported .......................        (6.31)            (11.23)             (7.91)
Pro forma diluted net loss per common share .........................        (7.66)            (13.83)            (22.32)
</TABLE>

     The fair value of options on their grant date was measured using the
Black-Scholes option-pricing model. Key assumptions used to apply this pricing
model are as follows:

<TABLE>
<CAPTION>
                                                                           2002               2001               2000
                                                                           ----               ----               ----
<S>                                                                    <C>               <C>                <C>
Risk-free interest rate .............................................       4.25 %              4.0 %              5.0 %
Expected life of option grants ......................................      5 years            4 years            4 years
Expected volatility of underlying stock .............................        127 %              148 %              164 %
</TABLE>

9.   Retirement Savings Plan

     The Company adopted a savings plan for its employees pursuant to Section
401(k) of the Internal Revenue Code. All employees are eligible to participate
and the plan allows a deferral ranging from a minimum 1% to the maximum
percentage of compensation permitted by law. The Company may, at the discretion
of the Board of Directors, make contributions on behalf of its employees under
this plan. Such contributions, if any, become fully vested after five years of
continuous service. The Company did not make any contribution in 2002, 2001 or
1999.

10.  Commitments and Contingencies

     The Company has a noncancelable operating lease for office space, which
expires in November 2003. Total rent expense was approximately $453,000,
$710,000 and $596,000 for the years ended December 31, 2002, 2001 and 2000,
respectively. The Company restructured its operating lease on its principal
offices in January and again in October 2002 to effectively terminate its lease
obligation. Future minimum rental payments under the Company's noncancelable
office its new principal offices is approximately $35,000 in 2003.

     The Company has been, and expects to continue to be, subject to legal
proceedings and claims that arise in the ordinary course of business. Management
currently believes that resolving these matters will not have a material adverse
impact on the Company's financial position, results of operations or its cash
flows.

                                       44

<PAGE>

                         MANGOSOFT, INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

11.  Related Party Transactions

     Technical Consulting Services - During 2001 and 2000, a director provided
the Company with part-time technical consulting services. Amounts recorded for
such services were approximately $108,000 and $126,000 in 2001 and 2000,
respectively.

     Investments - During 2002, the Company issued approximately $1,565,000 in
several secured corporate notes receivable accruing interest at 12.0% to 15.0%
per annum to companies who are beneficially owned by two stockholders.
Approximately $458,000 was repaid to the Company in 2002 as some of the
corporate notes matured.

12.  Geographic Sales Information and Major Customers

     The Company generates the majority of its revenues from the sale of its
products and services in North America. All of the Company's 2002 revenues and
approximately 92% and 97% of the Company's 2001 and 2000 revenues were generated
from sales to North American customers, respectively.

     Three customers accounted for approximately 76% of the Company's 2002
revenues. One customer accounted for approximately 64% of the Company's 2001
revenues. The two largest customers accounted for approximately 92% of the
Company's 2000 revenues.

13.  Subsequent Events

     Effective March 7, 2003, the Company announced a 1-for 27 reverse stock
split of its common stock. Also effective March 7, 2003 the Company's trading
symbol for its common stock was changed from "MNGX" to "MGOF" in connection with
the reverse stock split.

     On March 11, 2003, the Board of Directors of MangoSoft, Inc. declared a
dividend distribution of one right (a "Right") to purchase one-tenth of a share
of common stock, $0.001 par value, of the Company for each share of common
stock, payable to stockholders of record on March 18, 2003. The Board of
Directors also authorized and directed the issuance of one Right with respect to
each common share issued thereafter until the distribution date (as defined in
the Rights Agreement) and, in certain circumstances, with respect to common
shares issued after the distribution date. Except as set forth in the Rights
Agreement, each Right, when it becomes exercisable, entitles the registered
holder to purchase from the Company one-tenth of a common share at a price of
$125.00 per whole common share, subject to adjustment. The description and terms
of the Rights are set forth in a Rights Agreement between the Company and
Interwest Transfer Co., Inc., as Rights Agent, dated as of March 14, 2003.

                                       45