<PAGE>

                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-KSB

(Mark One)
  /X/              ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934
                   For the fiscal year ended December 31, 1999

                                       OR

  / /          TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                        Commission file number 000-28349

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

                 Texas                                 76-0467099
      (State or other jurisdiction of                  (I.R.S. Employer
      incorporation or organization)                   Identification No.)

      12777 Jones Road, Suite 400
      Houston, Texas                                   77070
      (Address of principal executive offices)         (Zip Code)

       Registrant's telephone number, including area code: (281) 897-8317

           Securities registered pursuant to Section 12(b) of the Act:
                                      None

           Securities registered pursuant to Section 12(g) of the Act:

                       Class A Common Stock, no par value
                       Class B Common Stock, no par value

      Check whether the issuer (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 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 no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is contained in this form, and no disclosure will be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. /X/

      Issuer's revenues for its most recent fiscal year were $8,626,675.

      As of March 15, 2000, the aggregate market value of the voting and
non-voting common equity held by non-affiliates was approximately $38,989,636,
based on the closing sale price of such common equity on that date.

      As of March 15, 2000, 26,111,813 shares of the issuer's Class A Common
Stock were outstanding and 2,242,952 shares of the issuer's Class B Common Stock
were outstanding.

                       DOCUMENTS INCORPORATED BY REFERENCE
                   Documents incorporated by reference: None.


<PAGE>


                                   CYNET, INC.

                                   FORM 10-KSB

                          YEAR ENDED DECEMBER 31, 1999

                                      INDEX

                                                                            PAGE

PART I
      Item 1. Description of Business..............................,...........2
      Item 2. Description of Properties.......................................12
      Item 3. Legal Proceedings...............................................12
      Item 4. Submission of Matters to a Vote of Security Holders.............12

PART II
      Item 5. Market for Common Equity and Related Stockholder Matters........13
      Item 6. Management's Discussion and Analysis or Plan of Operation.......14
      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 11. Security Ownership of Certain Beneficial Owners and
               Management.....................................................28
      Item 12. Certain Relationships and Related Transactions.................30
      Item 13. Exhibits and Reports on Form 8-K...............................32


<PAGE>

                           FORWARD LOOKING STATEMENTS

         When used in this Form 10-KSB and elsewhere by management or CYNET,
Inc. ("CYNET" or the "Company") from time to time, the words "believes,"
"anticipates," "expects," "will" and similar expressions are intended to
identify forward-looking statements concerning CYNET's operations, economic
performance and financial condition. These include, but are not limited to,
forward-looking statements about CYNET's business strategy and means to
implement the strategy, CYNET's objectives, the amount of future capital
expenditures, the likelihood of CYNET's success in developing and introducing
new products and services and expanding its business, and the timing of the
introduction of new and modified products and services. For those statements,
CYNET claims the protection of the safe harbor for forward-looking statements
contained in the Private Securities Litigation Reform Act of 1995. These
statements are based on a number of assumptions and estimates inherently subject
to significant risks and uncertainties, many of which are beyond the control of
CYNET, and reflect future business decisions, which are subject to change. A
variety of factors could cause actual results to differ materially from those
anticipated in CYNET's forward-looking statements, including the following
factors:

         -     factors described from time to time in the Company's press
               releases, reports and other filings made with the Securities
               and Exchange Commission;

         -     CYNET's ability to manage its growth and to respond to rapid
               technological change and risk of obsolescence of its products,
               services and technology;

         -     market acceptance of new products and services;

         -     development of effective marketing, pricing and distribution
               strategies for new products and services;

         -     the success of CYNET's strategic relationships, including the
               amount of business generated and the viability of the
               strategic partners, may not meet expectations;

         -     possible adverse results of pending or future litigation;

         -     risks associated with interruption in CYNET's services due to
               the failure of the platforms and network infrastructure used
               in providing its services; and

         -     legislative or regulatory changes may adversely affect the
               business in which CYNET is engaged.

         CYNET, Inc. cautions that these factors are not exclusive.
Consequently, all of the forward-looking statements made in this Form 10-KSB are
qualified by these cautionary statements. Readers are cautioned not to place
undue reliance on these forward-looking statements, which speak only as of the
date of this Form 10-KSB. CYNET assumes no obligation to publicly release the
results of any revisions to these forward- looking statements that may be made
to reflect events or circumstances after the date of this Form 10-KSB, or the
date of the statement, if a different date.

                                     1

<PAGE>

                                     PART I

ITEM 1.  DESCRIPTION OF BUSINESS.

SERVICES

         The Company is an Internet business applications solutions provider
integrating convergent messaging with Internet Services. The Company's
products and services are CONVERGENT MESSAGING which includes fax, data,
voice, e-mail and wireless messaging; and INTERNET SERVICES which includes
custom application development, e-commerce development, web content creation,
web hosting and Internet access.

         The Company is a Texas corporation and was founded in 1995 to provide
fax services for business- to-business communications. The Company capitalized
on the dramatic increase in the usage of third-party fax services and created a
niche market for itself with its fax broadcast desktop client software and
related services. In 1997, the Company introduced its point-to-point desktop
software and fax service in order to expand its marketing efforts.

         In response to the rapid growth and popularity of e-mail and the
Internet as a primary communications medium, the Company set out to become an
applications service provider offering full service Internet messaging. In
1998, the Company added Internet-to-fax, fax-to-e-mail, e-mail broadcast,
voice broadcast, and teleconferencing services to its product offerings. To
further enhance its convergent messaging services, the Company, through its
subsidiary, Worldwide Marketing Services, Inc., added enhancement services
such as list procurement, full-service graphic design and copy development
services for its customers. These additional services enabled the Company to
provide its customers with complete messaging solutions with "end-to-end"
control of the solutions.

         In July 1999, the Company began offering Internet-based services by
acquiring CYNET Interactive, Inc. ("CYNET Interactive"), a wholly owned
subsidiary of Cynet Holdings, LLC ("Cynet Holdings"). See "Certain Relationships
and Related Transactions." The acquisition of CYNET Interactive allowed the
Company to expand its messaging and broadcast enhancement services to include
web site design, Internet application development for e-commerce and other
Internet-based applications, and web site hosting. Through a series of projects,
the Company has integrated its messaging services with Internet applications,
creating solutions that are more effective for its customers. The Company's
current Internet projects include the development of on-line shopping malls,
integrated procurement centers, energy trading applications and Internet
web-based magazines for customers. In July 1999, the Company entered into a
strategic alliance with a major Internet service provider to enable the Company
to expand its products and services to include Internet access for business
customers. The Company expects this alliance will enable the Company to
provide complete, "end-to-end" Internet business solutions just as it is able to
provide complete, "end-to-end" messaging business solutions. The Company's
solutions selling approach allows the Company to effectively deliver its
customers' messages irrespective of the transmission medium.

STRATEGY

         The Company's strategy is to position itself as a full service
provider of convergent messaging and Internet service solutions. The Company
coordinates the delivery of and supports these diverse but related services
through a series of seamless strategic alliances connecting through the
Company's core products and services. The Company's sales efforts have been
refocused to target Fortune 500 and other large corporate and medium-sized
companies offering a unified solution. This sales effort has been further
enhanced by the vertical market segmentation of the Company's sales force.
With a vertical market focused sales force, the Company expects to better
interface with a number of strategic alliances and resellers who are able to
sell the Company's products and services.  See "--Strategic Relationships"
below.

                                     2

<PAGE>

CURRENT MESSAGING AND INTERNET MARKET

THE INTERNET

         The Internet has experienced rapid growth and has developed into a
significant tool for global communications, commerce and media, enabling
millions of people to share information and transact business electronically.
Forrester Research, Inc. ("Forrester"), a technology research firm, estimates
that there were over 76 million and 51 million web users in the United States
and over 147 million and 97 million worldwide at the end of 1999 and 1998,
respectively. Forrester projects these numbers will increase to over 135 million
web users in the United States and over 319 million worldwide by the end of
2002. Internet- based businesses have emerged to offer a variety of products and
services over the Internet. Advances in online security and payment mechanisms
have also prompted more businesses and consumers to engage in electronic
commerce. Forrester estimates that the value of purchases of goods and services
on the Internet, excluding fund transfers and stock transfers, will grow from
$32.4 billion worldwide in 1998 to $425.7 billion worldwide in 2002.

TRENDS IN INTERNET MESSAGING

         E-mail, the most widely adopted Internet application, ranges from a
personal messaging tool to a strategic business tool. According to Electronic
Mail & Messaging Systems, an Internet publication, there were approximately 435
million and 325 million e-mail accounts in operation at the end of 1999 and
1998, respectively. E-mail messages have increased in volume and functionality,
and this trend is expected to continue. For example, e-mail has become a major
vehicle for e-commerce transactions. Forrester estimates that by 2001 the
typical online consumer will participate in eight to ten commerce-related
exchanges via e-mail per week. The e-mail account as a locating and delivery
device has become the platform for additional applications such as directory
services, scheduling and document sharing. Furthermore, the e-mail account can
function as a central repository to receive, send, forward, organize and
prioritize voice mail, fax and e-mail messages, thus creating unified messaging.

         With continuing developments in technology, the various messaging media
are currently in the process of converging. Communication channels are becoming
interchangeable as consumers can send the same message through e-mail, voice
mail and fax. With the unification of these functions, consumers increasingly
value messaging services that are "device-independent." Consumers appreciate the
ability to send and retrieve messages in any form and in the most convenient
manner: e-mail, voice mail or fax - (using the telephone, personal computer, and
traditional fax machine) or accessing the web.

         As e-mail continues to grow and a portion of fax traffic migrates to
the Internet, industry analysts are predicting rapid growth of services that
unify and simplify the messaging and communications needs of e-mail users.
Forrester defines unified messaging as a "single 'in-box' for voice, e-mail and
fax messages that is accessible by both telephone and personal computer."
International Data Corporation ("IDC"), a technology research firm estimates
that the market for unified messaging will grow from approximately 90,000
unified messaging mailboxes in 1998 to over 12.9 million boxes in 2002 in the
United States alone generating $20 million in unified messaging revenue per
month.

TRENDS IN FAXING

         The fax machine is a valuable tool for communication for businesses and
individuals. Although e-mail traffic is growing rapidly, faxing continues to
grow because telephone rates continue to decrease and computer-based fax
facilitates broadcast fax and fax-enabled applications. Forrester estimates that
worldwide fax transmissions will increase from 540 billion and 395 billion
minutes in 1999 and 1998, respectively, to 647 billion minutes in 2002.
According to Forrester, fax transmissions generated estimated

                                     3

<PAGE>

revenues of $125 billion and $92 billion in 1999 and 1998, respectively, and are
projected to generate $103 billion in 2002.

         The transmission of faxes over the Internet has become an increasingly
popular tool and provides a low cost method to send and receive faxes. In
addition to Internet faxing, users are increasingly faxing documents directly
from their computers over traditional telephone lines, thereby growing less
dependent on traditional fax machines. IDC estimates that the share of faxes
sent using a fax machine in the United States was 82% in 1998 and is projected
to be 58% in 2002.

         Recent advances in technology allow users to send and receive faxes
from their computers using e-mail to transmit data over the Internet. Internet
faxing using e-mail reduces labor costs associated with traditional faxing by
allowing users to send, receive and manage faxes from their computers, and
reduces carrier costs because of the use of the Internet rather than telephone
lines as the transmission medium.

INTERNET COMMERCE

         The Company believes the worldwide Internet commerce software
applications market is growing at a significant rate as Internet e-commerce
increases. According to Forrester's Internet Commerce Software Applications
Market Review and Forecast, revenues derived from Internet e-commerce soared
280% and 154% to $1.7 billion and $444 million in 1999 and 1998, respectively,
and are expected to increase another 771% to approximately $13.1 billion in
2003. The Company believes many companies will be developing e-commerce sites
over the coming years as e-commerce presents vendors with sales opportunities.

         The proliferation of Internet Service Providers ("ISPs") has enabled
more vendors to use the Internet as a marketing and sales tool. As vendors shift
marketing strategies toward on-line buyers, the Company believes they will seek
single service providers who are able to meet all of their business marketing
needs, including high priority messaging, web hosting and Internet content
development.

NEED FOR COST-EFFECTIVE SOLUTIONS

         The Company believes businesses constantly seek to cost-effectively
manage expanding, increasingly sophisticated communications systems making
utilization of third parties to manage their messaging and Internet needs
preferable. Moreover, the Company believes businesses often find it difficult to
implement state-of-the-art technology in their own infrastructure, as experts
are scarce and costly to hire, train and retain. Consequently, the Company
believes organizations, in an effort to reduce costs and time-to-market with
complex technologies, will look to Internet-based solutions to outsource
non-core competencies.

         The Company provides businesses convenient, cost-effective and reliable
Internet-based messaging and communications services. The Company provides a
commercially available, Internet-based messaging service that supports business
fax, e-mail, voice mail and supporting services. The Company deploys an
integrated Internet and Public Switched Telephone Network solution based on
economy and reliability. The Company also provides a host of electronic commerce
solutions, as well as, Internet content support and ISP services. The Company
believes that by providing a fully integrated suite of products and services,
its customers are able to minimize complexity in messaging and e-commerce
services and maximize productivity.

         Many autonomous communications services are currently provided through
hardware-based legacy systems, including landline telephone systems, messaging
devices and local area networks ("LANs") that reside, entirely or partially, at
a customer's location. The architecture of the customer's equipment comprising
such systems is often resistant to unification with other systems and networks,
making integration difficult and expensive. Increasingly, users are demanding
the combination of existing services with more open and intelligent worldwide
communications networks such as the Internet. CYNET believes that, due

                                     4

<PAGE>



to the expansion of Internet communications and the complexity of the
unification of current telecommunications and Internet services, outsourcing
communications requirements to third parties, such as CYNET, will soon become
widely utilized by Companies and individuals alike. Management believes its
one-stop, customized, network-based solutions for streamlining communications
place the Company in a position to capitalize on these trends.

OPERATIONS

         The Company's operations include forwarding customer messages and
delivering Internet services. The Messaging services are customer driven
using Microsoft Windows-TM--based desktop client software to electronically
transfer to the Company the customer's message and delivery instructions
(such as fax telephone numbers, e-mail addresses, voice mail telephone
numbers, and merge fields for personalizing the message). The customer elects
whether to transfer the document and instructions to the Company by using the
Internet (e-mail) or a direct dial (modem-to-modem) connection. The Company
receives the document and instructions in an electronic format and
automatically executes those instructions without the necessity of human
intervention. The Company's operation software connects the delivery
instructions with the customer's document, organizes the packets of data and
transmits the information to the destination telephone numbers or e-mail
addresses as designated. The Company's technical staff monitors the job queue
on a 24 hour, 7-day per week basis to ensure that the system is efficiently
delivering customer jobs. The Company's customer service staff is available
on a 24 hour, 7-day per week basis to assist customers with questions
concerning the submission of jobs, the status of the jobs or any problems
needing resolution. After any customer job has been executed, the customer
may electronically view a detailed log showing the document delivery status
for each intended recipient.

         Internet access, transmission, co-location and related Internet
services are directly handled by a third-party ISP. The Company's technical
staff monitors both the web site hosting services and the messaging job queues.
Other Internet services are handled by the Company's production staff, which
accepts the specifications on customer projects, interfaces with the customer
and determines which of the Company's resources are needed to meet customer
requirements.

         The Company's operations include Network Operations (technicians to
monitor the servers and messaging queues), Customer Service, Engineering
(developers for custom messaging and Internet application development),
Graphics (writers of document, web site and web content design), and Copy
(designers of document, web site and web content).

         The Company uses various long distance carriers. Major
telecommunications carriers have competed and are expected to continue to
compete to obtain the Company as a customer. Deregulation in the
telecommunications industry has enabled the Company to enter into agreements
with several carriers to provide long distance service at cost-effective rates.
The Company intends to add additional telecommunications facilities and enhance
its network infrastructure to meet the anticipated traffic needs and maintain
excess capacity to accommodate expected increases in demand for its services.

         The Company has developed safeguards to minimize the impact of power
outages and other operational problems. It has installed power backup systems at
its computer center in Houston, Texas to provide an uninterrupted power supply
in the event of a disruption in local utility services. The Company has not
suffered any material interruption in its business due to power outages or
similar problems. As the Company grows, it intends to add another primary
computer center hub for back up and expansion.

                                     5

<PAGE>

CYNET SERVICES

FAX BROADCAST

         The Company's automated fax broadcasting service allows its
customers to mass-distribute business documents over broad geographical areas
during specified periods of time. After the customer electronically submits a
batch order for a broadcast, the Company's system automatically generates and
delivers a complete report that details information about the order, such as
destination cities, area codes, number of pages and all costs associated with
transmission. After the Company has completed the broadcast, customers can
access a detailed report, which can be used for monitoring results, updating
telephone lists and other external applications.

POINT-TO-POINT FAX

         The Company's point-to-point enhanced fax service allows customers to
fax directly from their desktops to recipients using the Company's system. This
service can be fully customized to each customer's individual faxing needs. The
features include: (i) customization of cover pages, (ii) implementation of
accounting codes, (iii) development of control centers that maintain and
manage faxes, (iv) receipt of delivery and non-delivery reports via e-mail and
(v) production of daily journals.

FAX TO E-MAIL

         The Company's fax-to-email service provides customers an automated,
easy-to-use desktop solution that interfaces with most Internet e-mail services.
This service is ideal for professionals performing high-volume sales and
marketing operations or operating inbound call centers. Customers are assigned a
toll-free or local virtual fax number, which is linked to their e-mail address
and to the Company's fax viewer software. The program receives inbound faxes and
sends them directly to the customer's desktop as e-mail. This service allows a
customer to receive, view, store, forward and print confidential inbound faxes
from any location where they have e-mail access.

INTERNET TO FAX

         The Company's Internet to fax service integrates traditional e-mail
with point-to-point fax capabilities. This service allows customers to transmit
high volume, web-generated documents to other e-mail addresses, telex addresses
and fax numbers simultaneously. This service allows any merchant to do
e-commerce with or without a personal computer. Additionally, customers receive
delivery confirmation reports either by e-mail or by fax. An added feature is
the ability to include custom logos and to insert automatic headers into
outgoing messages. This product can also be customized to assign individual
billing codes and tracking reference numbers on faxes and telexes for easy
record keeping.

E-MAIL TO E-MAIL

         The Company's E-mail to E-mail service gives customers the ability
to broadcast e-mail messages to any number of recipients simultaneously. The
Company's service has the capability to deliver approximately 200 e-mail
messages per second or 720,000 per hour. To use this service, the customer
simply forwards an e-mail address list to the Company. The customer then
submits a message. The Company's systems automatically broadcast the message
to the addresses electronically over the Internet. Added features of this
product are: (i) the ability to attach documents, (ii) the presence of a
special e-mail address for forwarding outbound messages and (iii) the
availability of delivery priority options: InstaMail for immediate delivery
or Scheduled for a specific time.

                                     6

<PAGE>

IMAGE RESOLUTION/DOCUMENT ENHANCEMENT

         The Company's image resolution and document enhancement service can be
used in conjunction with any of the Company's messaging services. To use this
service, the customer submits graphics, photos, and brochure layouts,
catalogs with pictures and artwork or any other type of document before
transmission. The Company's graphics technicians and engineers then enhance
the document to ensure top quality output to any receiver.

CELL/MODEM

         The Company's Complete Wireless Cell/Modem is a high-speed V.34
cellular modem that transfers at landline speeds up to 33.6Kbps and cellular
speeds up to 21.6Kbps. This cellular modem can be used with your laptop to
access the Internet, as well as send/receive data, fax, email and voice
communications. It is designed to be compatible with any laptop or portable
device equipped with a PCMCIA Type III slot and contains a built-in cell phone,
eliminating the need for a separate device for voice communications.

VOICE BROADCAST

         The Company's voice-broadcasting service gives customers the capability
to transmit voice broadcasts without having to navigate through various types of
telephone PBX systems. Once an account has been established, the customer is
given a toll free access number to call to record a message for broadcast. The
customer then submits name and voice number lists in digital format to schedule
the broadcast delivery time. The Company's live operators navigate the requisite
auto-attendant systems and drop the messages into the voice mailboxes the
customer specifies.

VOICE TELECONFERENCING

         The Company's voice teleconferencing service offers two distinct
conference-calling services. The first service, "Meet Me," is a conference call
scheduling service. Customers provide to the Company the names and numbers of
all parties desired for a conference call and the Company's live operators relay
the date, time and call-in phone number to all specified parties before the
scheduled date. The second service, "Dial Out," allows customers to have one of
the Company's operators dial out and connect all parties at the scheduled
meeting time. These services are ideal for business, medical, educational and
political organizations that frequently engage in conference calls.

ISP SERVICES

         The Company offers full-service, dedicated and dial-up ISP
capabilities, providing its business customers with Internet connectivity in
addition to e-commerce, wireless and messaging services. The ISP service
includes 24-hour technical support, national ISDN access, 800 number access
while traveling away from home or office territory, personalized home page
service, 6MB of storage for e-mail messages and web site content, e-mail
accounts, online news services and additional services.

INTERNET SOLUTIONS

         As a result of the acquisition of CYNET Interactive, the Company
provides its customers with advanced Internet solutions, including web content,
graphic and copy design, application development and web hosting. The Company's
current Internet projects include on-line shopping malls, integrated procurement
centers, energy trading applications and Internet Web-based magazines.

                                     7

<PAGE>

MARKETING SOLUTIONS

         Worldwide Marketing Services, Inc. ("Worldwide") is a wholly-owned
subsidiary of the Company. Worldwide specializes in providing verified list,
Opt-in e-mail, marketing, graphics and copy writing services. The list services
are expansive and may be ordered to fill simple marketing specifications or
highly customized requirements for sophisticated clients requiring specialized
data. Worldwide's services include corporate logo design, brochures, letterhead
and stationery design and a variety of related items.

EQUIPMENT SAFEGUARDS AND SUPPLIERS

         The success of the Company is largely dependent upon the efficient and
uninterrupted operation of its messaging and Internet system infrastructure. The
Company has a disaster recovery plan with a redundant network-switching center
in place. The Company's systems and operations are vulnerable to damage or
interruption from fire, earthquake or other natural disaster and from power
loss, telecommunications failure, break-ins and similar events. Furthermore, the
hardware, software and network systems developed by the Company are relatively
new and, therefore, have not withstood the demands of the larger volume
associated with the Company's revenue projections. Substantially all of the
Company's computing equipment is readily available from large, well-known
suppliers.

CUSTOMERS

         Historically, the Company's customers consisted of small and
medium-sized businesses with messaging services needs. Those customers purchased
messaging products and services from the Company pursuant to specific purchase
orders and other short-term arrangements. Presently, the Company targets
medium-sized to large corporate clients, establishing customer relationships
with Fortune 500 and middle- tier companies seeking full service Internet
business solutions. Although the Company actively pursues long-term contracts
with its present customers and prospects, no single customer accounted for more
than 4% of the Company's revenues during the years ended December 31, 1999 and
1998.

SALES AND MARKETING

         From inception through 1997, the Company marketed its products and
services almost exclusively through a telephone sales program. The basis of the
Company's marketing strategy was price-based selling and the Company sought to
acquire customers by providing the lowest cost service in the messaging
industry. Beginning in 1998, the Company underwent a fundamental shift away from
price-based selling to solution- based selling and increased its offerings to
include more value-added services.

         To enhance the promotion and sale of its solution-based suite of
products and services, the Company expanded and reorganized its sales force
during 1999 with the goal of developing and maintaining a professional sales
team consisting of individuals with specialized and technical knowledge. As of
March 15, 2000, the Company employed a team of 31 sales and support personnel in
its Houston, Texas, four in its Yorba Linda, California and two in its Portland,
Oregon locations. The Company's sales personnel are trained to target large and
middle tier corporate accounts with the charge to build vertical value-added
markets for the Company's Internet-based products and services.

         The Company engages in telephone and direct contact with customers and
prospects as part of its marketing efforts. The Company also actively seeks to
forge strategic alliances to enable the Company to market its products and
services through alternate distribution channels. The Company expects to
include, as part of its marketing campaign (i) advertisements in trade journals,
(ii) television and radio promotions, (iii) concentrated marketing through large
reseller channels, (iv) Internet-based advertising and promotions, (v) Internet
business solutions seminars and (vi) participation in trade shows.

                                     8

<PAGE>

STRATEGIC RELATIONSHIPS

         The Company is actively pursuing strategic relationships that the
Company expects will complement its existing services or increase the amount and
variety of services it currently offers. The service providers with whom the
Company engages in strategic transactions generally have pre-existing
relationships with their customers who, typically, require messaging and
Internet services the Company provides. Consequently, the Company expects these
strategic relationships will provide the Company with access to consumers for
its services.

         The following is a summary of certain of the strategic relationships
that the Company has established or is currently pursuing. All strategic
transactions into which the Company enters are subject to a variety of risks and
conditions, including conditions beyond the Company's control. Furthermore, some
of these relationships are in the early stages of development and have not been
finalized. Although the Company believes that individually none of these
relationships is material to its business, the Company considers its strategic
alliances in their entirety to be important to future success.

         BROOKTROUT TECHNOLOGY, INC. ("BROOKTROUT"). The Company is currently
conducting certain joint marketing and technology sharing efforts with
Brooktrout, and has been a Beta Testing customer for certain Brooktrout
technology. The Company and Brooktrout currently conduct joint marketing efforts
at selected trade shows, and have periodic joint technology round table
discussions with their respective research and development, engineering and
software development teams. These joint marketing efforts and discussions could
result in additional technology agreements and understandings between the
Company and Brooktrout. The Company expects to continue to be a Beta Testing
customer for new Brooktrout technology pertaining to faxing, unified messaging
and other related technology.

         TELESYSTEMS MARKETING, INC. ("TELESYSTEMS"). The Company has entered
into a joint marketing alliance with Telesystems, pursuant to which Telesystems
provides its e-mail broadcast, voice broadcast and conference calling to the
Company for resale under the Company's private brand. In consideration for the
foregoing, the Company provides Telesystems its full suite of messaging products
for resale. The agreement also provides for the mutual promotion and marketing
of respective products and services.

         AECsoft USA, INC. ("AECSOFT"). The Company has entered into an
agreement with AECsoft pursuant to which AECsoft provides to the Company and
certain of its clients Internet web-based software and web site building tools
(the "ADC2000" system and modules). AECsoft has granted the Company the right to
resell licenses to use the ADC2000 system and/or its modules to the Company's
clients. Also, AECsoft has agreed to provide web building and customization
services to the Company for ADC2000- related projects. In addition, AECsoft has
agreed to grant the Company up to 50% ownership of the ADC2000 system and
modules based on the Company's sales of ADC2000 projects.

         TELIRAN ELECTRONICS, LTD. ("TELIRAN"). The Company previously entered
into an alliance agreement with GlobeWave, Inc. ("GlobeWave"), a subsidiary of
Teliran, pursuant to which the Company sold and distributed units of the Teliran
Complete PC card (the "Cell Phone/Modem") in the United States from October 1999
through January 2000. On February 16, 2000 the Company, Cynet Holdings and
Teliran entered into another agreement (the "Teliran Agreement"), pursuant to
which Teliran granted Cynet Holdings exclusive worldwide sales and marketing
rights with respect to the Cell Phone/Modem for a term of three years. In
consideration for these rights, Cynet Holdings committed to sell a minimum of
23,700 Cell Phone/Modem units during each of the years 2000, 2001 and 2002, with
a provision for additional sales targets for 2001 and 2002 to be mutually agreed
upon by the parties. Teliran agreed to pay up to $10,000 per month in technical
support with respect to the Cell Phone/Modem units. The Teliran Agreement also
contemplates certain equity purchase rights among the Company, Cynet Holdings
and Teliran if performance by the parties to the Teliran Agreement is
satisfactory after one year. Pursuant to the Teliran Agreement, the Company has
acquired from Cynet Holdings the exclusive sales, marketing and technical
support rights

                                     9

<PAGE>

with respect to the Cell Phone/Modem under the Teliran Agreement for an
initial term of one year, subject to the Company's satisfaction of the
minimum sales and other requirements under the Teliran Agreement. See
"Certain Relationships and Related Transactions."

RESEARCH AND DEVELOPMENT

         CYNET's research and development and engineering personnel are
responsible for developing, testing and supporting proprietary software
applications, as well as creating and improving enhanced system features and
services. CYNET's research and development strategy is to focus efforts on
enhancing its proprietary software and integrating it with readily available
software and hardware when practicable. CYNET maintains both internal and
outsourced software development programs through which the Company introduces
new products and enhances existing ones. CYNET's research, development, and
engineering personnel also engage in joint development efforts with CYNET's
strategic partners.

COMPETITION

         The market and demand for business-to-business messaging services and
Internet application services is highly competitive and growing rapidly, and the
Company faces a high degree of competition in each of its service areas. The
Company believes there are currently no dominant market leaders in the
industries in which the Company competes. The Company's ability to compete
successfully depends on a number of factors, including: (i) the Company's market
presence, (ii) the capacity, reliability and security of the Company's network
infrastructure, (iii) the pricing policies of the Company's competitors and
suppliers, (iv) the timing of the introduction of new services and service
enhancements, and (v) the industry's response to general economic trends.

         Due to the changing messaging industry and the explosive growth in the
Internet services industry, the Company is unable to identify direct competitors
except with respect to the Company's specific product and service offerings. The
Company's current and potential competitors fall into the following categories:

         -     Telecommunications companies and resellers (e.g., AT&T, MCI
               Worldcom);

         -     Internet Service Providers (e.g., UUNET Technologies, NETCOM
               On-Line Communications Services, Inc.);

         -     Enhanced fax service providers (e.g., Mail.com, Premiere
               Technologies, Inc.);

         -     Unified Internet messaging providers (e.g., JFAX.COM, INC. FaxNet
               Corp.);

         -     Wireless Cell/Modem providers (e.g., Sierra Wireless); and

         -     Various web design and electronic commerce service providers
               (e.g., Ariba, Commerce One, Ondisplay, Breakaway Solutions).

         The Company is unaware of any other entity that combines Convergent
Messaging and Internet Services in a unified service offering. Nevertheless,
the Company believes competitors will emulate its current business strategy
in the future and such competitors will enter the markets served by the
Company. Some of those competitors may possess significantly greater
financial, marketing, technical and other resources than the Company.
However, the Company believes its software and product development and sales
approach distinguishes it from its competitors. The Company's software
development resources enables it to develop and introduce new products and
react to changes in customer requirements more quickly than many of its
competitors. In addition, the Company offers pricing policies that result in
competitive cost-saving solutions for its customers. The Company trains sales
personnel to utilize selling techniques aimed at specific customer needs.

                                     10

<PAGE>

         Although the Company will continue to offer competitive products and
services and seek to maintain and enlarge its market share, there can be no
assurance that additional competitors will not enter markets that the Company
plans to serve or that the Company will be able to compete successfully.
Increased competition may result in reductions of prices and gross margin or
erosion of the Company's market share, any of which would have a material
adverse effect on the Company's business, financial condition and operational
results.

GOVERNMENT REGULATIONS

         The telecommunications industry is subject to regulation by the FCC, by
various state public service and public utility commissions and by various
international regulatory authorities. The FCC has the power to impose regulatory
requirements on the Company and currently classifies the Company as a
"nondominant carrier." Generally, the FCC has chosen not to closely regulate the
charges or practices of nondominant carriers. The FCC also has the power to
impose more stringent regulatory requirements on the Company and to change
regulatory classification of the Company. As a result, there can be no assurance
that the FCC will not change the Company's regulatory classification or
otherwise subject the Company to more burdensome regulatory requirements that
would have a material adverse effect on the Company's business, financial
condition or results of operations.

         The Company is subject to federal and state laws regulating the
unsolicited transmission of fax and e-mail transmissions for advertisement
purposes. The Company has adopted a policy to refrain from transmitting fax and
e-mail advertisements except to its own customers and other recipients who have
expressed an interest in receiving the transmitted information or otherwise have
given their permission to receive such transmissions. The Company encourages its
customers to familiarize themselves with the relevant laws and to conduct their
businesses in accordance with applicable laws. Nevertheless, the Company
believes it is not responsible or liable for customer transmissions in violation
of governmental regulations.

         There are currently few laws or regulations that specifically regulate
communications or commerce on the Internet. However, laws and regulations may be
adopted in the future that address issues such as online content, user privacy,
security, pricing and characteristics and quality of products and services.

         The tax treatment of the Internet and e-commerce is also unsettled. A
number of proposals have been made at the federal, state and local level and by
certain foreign governments that could impose taxes on the sale of goods and
services and certain other Internet activities. A recently-passed federal law
places a temporary moratorium on certain types of taxation on Internet commerce.
The Company cannot predict the effect of current attempts at taxing or
regulating commerce over the Internet. Any legislation that substantially
impairs the growth of e-commerce could have a material adverse effect on the
Company's business, financial condition and operating results.

         In connection with its anticipated international operations, the
Company may be required to satisfy a variety of foreign regulatory requirements.
The Company intends to explore and seeks to comply with these requirements on a
country-by-country basis. There can be no assurance that the Company will be
able to satisfy the regulatory requirements in foreign countries and the failure
to satisfy such requirements may prevent the Company from operating in such
countries. The failure to comply with foreign regulatory requirements could have
a material adverse effect on the Company's business, financial conditions and
results of operations.

EMPLOYEES

         As of March 15, 2000, the Company employed 111 persons, substantially
all of whom were full-time employees. None of the Company's employees is
currently covered by a collective bargaining arrangement. The majority of the
Company's employees are located at the Company's headquarters in Houston, Texas.

                                     11

<PAGE>

The Company also has employees in Yorba Linda, California and Portland, Oregon.
The Company considers the relations with its employees to be satisfactory.

INTELLECTUAL PROPERTY

         The Company currently holds no United States or foreign patents. The
Company has registered the trademark names CYNET, HYPERCAST and HYPERLINE in the
United States. The Company regards certain of its computer software as
proprietary and seeks to protect such software with common law copyrights, trade
secret laws, non-disclosure agreements and other safeguards. There can be no
assurance, however, that the steps taken by the Company to protect its
proprietary rights will be adequate or that others will not independently
develop technologies similar or superior to the Company's, or obtain access to
the Company's know-how or software codes, concepts, ideas or documentation.
Further, there can be no assurance that the Company's non-disclosure agreements
with its employees will adequately protect the Company's trade secrets. The
Company also licenses certain technology from third parties as necessary for the
operation of certain of its products and services. In the event that a third
party successfully develops technologies similar or superior to the Company's
technology, the Company may be subject to claims that its products and services
infringe on the intellectual property rights of others.

ITEM 2.  DESCRIPTION OF PROPERTIES

         The Company does not own any real property. The Company's headquarters,
which includes its administrative, sales, marketing, management information
systems and development offices and its operations center, is located in
approximately 22,000 square feet of leased space in Houston, TEXAS. THE LEASE ON
THE HOUSTON FACILITY EXPIRES IN MARCH 2003. THE COMPANY ALSO HAS APPROXIMATELY
1,000 SQUARE FEET OF LEASED SPACE IN YORBA LINDA, CALIFORNIA AND 900 SQUARE FEET
OF LEASED SPACE IN PORTLAND, OREGON. THE COMPANY BELIEVES ITS existing
facilities are adequate to meet current requirements. Suitable additional space
in close proximity to its headquarters will be available as needed to
accommodate growth of its operations.

ITEM 3.  LEGAL PROCEEDINGS

         From time to time, the Company becomes involved in complaints related
to the distribution of unsolicited faxes for a customer of the Company. The
distribution of unsolicited faxes is subject to restriction under federal law
and some state laws. The Company has developed procedures designed to minimize
its exposure to claims of this type.

         The Company and CYNET Interactive have been named as defendants in a
suit filed November 19, 1999 in the District Court of Harris County, Texas, 61
Judicial District (Cause No. 1999-57579) by Bank & Estate Liquidators, Inc., a
former customer of CYNET Interactive. The plaintiff alleges among other things,
that CYNET Interactive failed to complete the design and development of an
Internet Live Auction project in accordance with alleged contract terms and
conditions and is seeking to recover actual and treble damages. The Company has
retained counsel to defend the matter vigorously. Although the Company has not
completed its discovery investigation of the claims asserted by the plaintiff in
this matter, the Company does not believe that this suit will have a material
adverse effect on the Company.

         The Company is a party to other legal proceedings, none of which the
Company believes will have a material adverse effect on the Company.

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

         No matter was submitted to a vote of the Company's security holders
during the fourth quarter of the fiscal year covered by this report.

                                     12

<PAGE>

                                     PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

MARKET INFORMATION

         Since January 19, 2000, the Company's Class A Common Stock, no par
value per share (the "Class A Common Stock"), has been approved for trading on
the NASDAQ OTC Bulletin Board Service under the trading symbol "CYNE." As of
March 15, 2000, there were approximately 503 shareholders of record of the
Company's Class A Common Stock.

         Since January 28, 2000, the Company's Class B Common Stock, no par
value per share (the "Class B Common Stock"), has been approved for trading on
the NASDAQ OTC Bulletin Board Service under the trading symbol "CYNEB." As of
March 15, 2000, there were approximately 160 shareholders of record of the
Company's Class B Common Stock.

DIVIDENDS

         The Company has never paid dividends on its Class A Common Stock or
its Class B Common Stock. The current policy of the Company's Board of
Directors is to retain any available earnings for use in the operations and
expansion of the Company's business. As a result, cash dividend payments on
the Class A Common Stock or the Class B Common Stock are unlikely in the near
future. Any future decision to pay cash dividends will be at the discretion
of the Board of Directors and will depend on the Company's earnings, capital
requirements, financial condition and any other factors deemed relevant by
the Board of Directors.

RECENT SALES OF UNREGISTERED SECURITIES; USE OF PROCEEDS FROM REGISTERED
SECURITIES

         Pursuant to a registration statement on Form SB-2 (the "Registration
Statement") declared effective by the Securities and Exchange Commission on
December 6, 1999 (Registration No. 333-92099), the Company completed its
registered rescission offer (the "Rescission Offer") to rescind the issuance or
sale of certain of the Company's securities (the "Subject Securities"). In order
to fund the Rescission Offer, the Company sold 4,490,216 shares of Class A
Common Stock at a price of $1.37 per share (the "Rescission Financing") to a
group of investors. The net proceeds to the Company from the Rescission
Financing (after deducting offering expenses) were approximately $6,151,598 of
which $5,536,899 was used to repurchase the Subject Securities tendered for
rescission, and of which $614,699 was used for working capital and general
corporate purposes. See Note 7 of the Notes to Consolidated Financial Statements
under the caption "Rescission Offer" beginning on Page F-15.

         The following information relates to securities of the Company issued
or sold by the Company during the past year which were not registered under the
Securities Act of 1933, as amended (the "Securities Act").

         (1)    During 1999, the Company issued an aggregate of 3,714,472
                shares of Class A Common Stock to Cynet Holdings in exchange
                for (i) $2,595,000 cash paid to the Company by Cynet Holdings
                and (ii) the cancellation of the Company's $1,119,472
                indebtedness to Cynet Holdings. The shares were issued
                pursuant to the subscription agreement between the Company and
                Cynet Holdings. See "Certain Relationships and Related
                Transactions." At the time of the offering, the Company
                believed Cynet Holdings was a sophisticated investor and
                received adequate information concerning an investment in the
                Company.

         (2)    In connection with the closing of the Company's Rescission
                Offer in December 1999, the Company issued a warrant entitling
                Michael Silvert to purchase 100,000 shares of Class B

                                     13

<PAGE>

                Common Stock at a price of $1.00 per share. This warrant was
                issued in satisfaction of certain claims by Mr. Silvert that
                he was entitled to receive such warrant in exchange for
                providing services to the Company during 1997. At the time Mr.
                Silvert performed such services in 1997, the Company believed
                Mr. Silvert was a sophisticated investor and received adequate
                information concerning an investment in the Company.

The Company believes the foregoing transactions were exempt from registration
pursuant to Section 4(2) of the Securities Act as transactions by an issuer not
involving a public offering. The shares of Class A Common Stock issued to Cynet
Holdings and the warrant issued to Mr. Silvert (as well as its underlying shares
of Class B Common Stock), may be sold publicly following their registration
under the Securities Act or pursuant to an exemption from the registration
requirements of the Securities Act, such as Rule 144 promulgated thereunder. No
underwriting discounts or commissions were paid in connection with the foregoing
transactions.

ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.

         The following is a discussion of the financial condition of the Company
as of December 31, 1999 and 1998 and results of operations of the Company for
the years ended December 31, 1999 and 1998. It should be read in conjunction
with the financial statements and the notes thereto included elsewhere in this
report. The following information contains forward-looking statements.

OVERVIEW

         In January 1998, the Company underwent a change of control and
management. The new management team completed a registered rescission offering
in December 1999 and its stock began publicly trading on the NASDAQ OTC Bulletin
Board Service in January 2000. In 1999, the Company transitioned itself from a
messaging company (delivering fax, e-mail, voice and data between businesses) to
an Internet applications solutions provider incorporating full convergent
messaging, wireless and Internet capabilities.

         The Company's strategy is to position itself as a one-stop-shop for
convergent messaging and Internet service solutions. The Company coordinates the
delivery of and supports these diverse but related services through a series of
seamless strategic alliances connecting through the Company's core products and
services. The Company's sales efforts have been refocused to Fortune 500, other
large corporate and medium-sized companies offering a unified service solution.
This sales effort has been further enhanced by the vertical market segmentation
of the Company's sales force. With a vertical market focused sales force, the
Company expects to better interface with a number of strategic alliance and
reseller agent sales persons who sell the Company's products and services.

CERTAIN ACCOUNTING POLICIES

         Revenues from messaging and Internet services are recognized as
services are performed. Revenues from sales of customer lists and other related
services are recognized when the list is provided, or the other services are
performed. Cell/Modems revenue is recognized upon final acceptance of product by
the customer under the terms of the right of return policy.

         Expenditures for research and development of telecommunication
technology as it relates to messaging and Internet application services needs
are charged to expense as incurred. For the years ended December 31, 1999 and
1998, research and development expenditures were approximately $755,000 and
$398,000, respectively.

         Deferred taxes result from temporary differences between the financial
statement and income tax bases of assets and liabilities. The Company adjusts
the deferred tax asset valuation allowance based on

                                     14

<PAGE>

judgments as to future realization of the deferred tax benefits supported by
demonstrated trends in the Company's operating results. At December 31, 1999,
the Company provided a 100% valuation allowance for the deferred tax asset
because the Company could not determine whether it was more likely than not that
the deferred tax asset would be realized.

ACCOUNTING PRONOUNCEMENTS

         In June 1998, the Financial Accounting Standards Board issued SFAS 133,
Accounting for Derivative Instruments and Hedging Activities ("SFAS 133"). SFAS
133 requires the Company to recognize all derivatives contracts as either assets
or liabilities in the balance sheet and to measure them at fair value. If
certain conditions are met, a derivative may be specifically designated as a
hedge, the objective of which is to match the timing of gain or loss recognition
on the hedging derivative with the recognition of (i) the changes in the fair
value of the hedged asset or liability that are attributable to the hedged risk
or (ii) the earnings effect of the hedged forecasted transaction. For a
derivative not designated as a hedging instrument, the gain or loss is
recognized in income in the period of change. SFAS 133 is effective for all
fiscal quarters of fiscal years beginning after June 15, 2000. Historically, the
Company has not entered into derivatives contracts either to hedge existing
risks or for speculative purposes. Accordingly, the Company does not expect
adoption of the new standard on January 1, 2001 to affect its financial
statements.

RESULTS OF OPERATIONS

YEAR ENDED DECEMBER 31,1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998

         Revenues decreased to $8,626,675 for the year ended December 31, 1999
from $8,947,732 for the year ended December 31, 1998. The decrease of $321,057
or 4% was primarily attributable to a decrease in sales of the Company's fax
broadcasting product offering. For the years ended 1999 and 1998, revenues from
the Company's messaging services represented 93% and 95% respectively, of the
Company's total revenues.

         Cost of revenues decreased to $4,807,061 for the year ended December
31, 1999 from $6,069,184 for the year ended December 31, 1998. The cost of
revenues as a percentage of revenues decreased to 56% for the period ended
December 31, 1999 as compared to 68% for the period ended December 31, 1998. The
decrease in cost of revenues of $1,262,123 or 21% was primarily attributable to
decreased telephone charges resulting from more advantageous pricing from the
Company's primary telephone carriers. Gross margins increased to 44% for the
year ended December 31, 1999 from 32% for the year ended December 31, 1998 due
to the decrease in telecommunications costs. Management expects additional
telephone rate reductions along with the delivery of higher gross margin value
added products and services to further improve gross margins in the future.

         Selling, and general and administrative expenses increased to
$10,223,558 for the year ended December 31, 1999 from $6,107,978 for the year
ended December 31, 1998. The increase of $4,115,580 was primarily
attributable to (i) a non-cash charge of $1,334,000 resulting from the
Company's agreement to extend the expiration date of certain warrants until
November 4, 2001 (See Note 5 to the Consolidated Financial Statements), (ii)
expensing $841,763 in deferred offering costs related to the rescission
offering, (iii) an increase of $675,200 and $287,106 in personnel costs and
related expenses from expansion of the Company's sales force and
administrative staff, respectively, (iv) an increase of approximately
$358,000 in research and development expense, (v) an increase in office rent
expense of approximately $149,000, and (vi) an increase of approximately
$104,000 in accounting and $50,000 in legal fees.

         Depreciation and amortization increased to $930,450 for the year ended
December 31, 1999 from $728,975 for the year ended December 31, 1998. The
increase was attributable primarily to additional

                                     15

<PAGE>

equipment acquired in 1998, including equipment acquired in the expansion of the
Company's messaging infrastructure.

         Impairment loss on long-lived assets was $271,957 for the year ended
December 31, 1998. The write down was due to obsolete computer equipment and
certain other assets. There were no write-downs of long-lived assets during the
year ended December 31, 1999.

         Other expense totaled $969,544 for the year ended December 31, 1999
compared to other expense of $126,278 for the year ended December 31, 1998.
The increase in other expense was primarily attributable to (i) interest
expense of $154,366 on a revolving account receivable lending agreement and
(ii) effective interest expense of $755,200 associated with the rescission
offer.

         The Company incurred a net loss of $8,303,938 for the year ended
December 31, 1999 compared to a net loss of $4,356,640 for the year ended
December 31, 1998. The increase in net loss was due to the factors discussed
above.

         Net loss per common share increased to $0.33 from $0.19 for the year
ended December 31, 1999 compared to the year ended December 31, 1998.

         In the future the Company may experience significant fluctuations in
its results of operations. Such fluctuations may result in volatility in the
price of the Company's common stock. Results of operations may fluctuate as a
result of a variety of factors, including the demand for the Company's services,
the introduction of new services and service enhancements by the Company or its
competitors, the market acceptance of new services, the mix of revenues between
Internet-based versus telephony-based delivery, the timing of significant
marketing programs, the number and timing of hiring of additional personnel,
competitive conditions in the industry and the general condition of the economy.
Shortfalls in revenues may adversely and disproportionately affect the Company's
results of operations because a high percentage of the Company's operating
expenses are relatively fixed. Accordingly, the Company believes that
period-to-period comparisons of results of operations are not necessarily
meaningful and should not be relied upon as an indication of future results of
operations. There can be no assurance that the Company will be profitable or
that the Company's operating results will meet management's current
expectations.

LIQUIDITY AND CAPITAL RESOURCES

         Net cash used in operating activities was $4,595,011 and $1,783,793 for
the years ended December 31, 1999 and 1998, respectively. The increase in net
cash used in operating activities for the year ended December 31, 1999 was
primarily due to the increase in the Company's net operating loss.

         Net cash used in investment activities was $312,768 and $812,585 for
the years ended December 31, 1999 and 1998, respectively. These amounts were due
primarily to capital expenditures for operating equipment, including computer
equipment and software, furniture and fixtures and telecommunications equipment.

         Net cash provided by financing activities was $5,035,563 and $1,934,985
for the years ended December 31, 1999 and 1998, respectively. The Company has
obtained financing primarily through a series of public and private sales of
Class A Common Stock. During the year ended December 31, 1999, the Company
entered into agreements with certain stand-by investors to provide $6,151,598 to
fund the Company's Rescission Offer of which $5,536,899 was used to repurchase
the Subject Securities tendered for rescission by the shareholders that elected
to accept the Rescission Offer. The amount required to fund the Rescission Offer
was $5,536,899, including $4,781,699 for the repurchase of Subject Securities
plus $858,018 in interest expenses less $102,818 in dividends previously paid.

                                     16

<PAGE>

         As of December 31, 1999 the Company had a cash balance of $182,881 and
a deficit working capital position of $3,345,391. In February 2000, the Company
raised a total of $3,200,000 through a private placement of debt and equity
securities. See Note 13 to the Consolidated Financial Statements for the terms
of this private placement.

         The Company's internally generated cash flows from operations have
historically been and continue to be insufficient for its cash needs. The
Company does not expect that internal sources of liquidity will improve until
additional operating revenues are generated and, until such time, the Company
will continue to rely on external sources for liquidity. Until the Company can
obtain monthly gross revenues of approximately $1,200,000, which the Company
believes would be sufficient to fund current working capital needs, there is
uncertainty as to the ability of the Company to expand its business and continue
as a going concern. There is also no assurance that the current working capital
will be sufficient to cover cash requirements during that period or to bring the
Company to a positive cash flow position. In addition, lower than expected
earnings resulting from adverse economic conditions or otherwise, could restrict
the Company's ability to expand its business as planned, and, if severe enough,
may shorten the period in which the current working capital may be expected to
satisfy the Company's requirements, force curtailed operations, or cause the
Company to sell assets.

         The Company's capital requirements depend on a number of factors
including market acceptance of its products and services, the amount of
resources the Company devotes to network expansion, new product development,
sales and marketing expansion, brand promotions and other factors. The
Company expects a substantial increase in capital expenditures and operating
leases consistent with the planned growth in its convergent messaging and
Internet infrastructures and anticipate that this will continue for the
foreseeable future. Additionally, the Company expects to make additional
investments in technologies and its network, and plans to expand its sales
and marketing programs and conduct more aggressive brand promotions.

         The Company has been advised by its counsel that it is unclear whether
the Rescission Offer (which was completed in December 1999) has eliminated the
Company's liability, if any, for failure to register the issuances of the
Subject Securities under the Securities Act or applicable state and foreign
securities laws. The staff of the Securities and Exchange Commission takes the
position that a person's right of rescission under federal securities law may,
under certain circumstances, survive a rescission offer, while most state
securities laws provide that a person may lose any rescission rights by
rejecting or failing to respond to a valid rescission offer. Generally, the
statute of limitations for noncompliance with the requirement to register
securities under the Securities Act is one year, while under the various state
securities laws, the statute of limitations ranges from one to seven years from
the date of the transaction. The Company is also subject to the anti-fraud
provisions of applicable securities law or rights under common law or equity in
respect of the issuance of the Subject Securities.

         On January 31, 2000, the Company received a letter from a
telecommunications carrier asserting that the Company had failed to meet certain
financial obligations including both payment for services rendered totaling
approximately $248,000 and certain shortfall penalties on volume commitments for
long distance services totaling approximately $1,100,000. The alleged liability
to the Company as a result of this agreement, including future year volume
commitments and other expenses is approximately $4,000,000. The Company has
disputed the claim based on the Company's assertion that the carrier breached
the contract with respect to services rendered. The parties are presently in
preliminary discussions to resolve their disputes. The Company believes it will
resolve the issues related to this dispute by entering into a new multi-year
agreement for long distance or related services and does not expect this dispute
will have a material adverse effect on the Company.

         The Company currently does not have sufficient capital to meet its cash
flow requirements over the next 12 months. As a result, the Company will be
required to satisfy cash flow shortages through private

                                     17

<PAGE>

placements, public offerings and/or bank financing. The Company is currently in
discussions with several investors and financial institutions, however no
definitive agreements have been reached.

         There can be no assurance that the Company will either (i) achieve a
level of revenues adequate to generate sufficient cash flow from operations, or
(ii) receive additional debt or equity financing necessary to support the
Company's working capital requirements. To the extent that funds generated from
operations and any additional financing are insufficient, the Company will have
to raise additional working capital. No assurance can be given that additional
financing will be available, or if available, will be on terms acceptable to the
Company and further could be dilutive to existing shareholders. If adequate
working capital is not available, the Company may be required to curtail its
operations. Accordingly, the Company's independent public accountants have
issued their report for the years ending 1999 and 1998 containing a paragraph
discussing substantial doubt surrounding the Company's ability to continue as a
going concern.

YEAR 2000 COMPLIANCE

         The Company has incorporated a compliance standard with rules and
definitions into its operations systems with respect to Year 2000 compliance.
Based upon an initial evaluation of its broader list of vendors and results of
operations in the first two months of the year 2000, the Company has no reason
to believe that these providers are not in compliance with Year 2000 protocol.

         The Company does not anticipate any material future costs associated
with this project. However, if the Company's customers, providers of hardware
and software or other third parties with whom the Company does business fail to
remedy any Year 2000 issues, the Company's services could be interrupted and it
could experience a material loss of revenues that could have a material, adverse
effect on its business, prospects, results of operations and financial
condition. The Company is unable to reasonably estimate the duration and extent
of any such interruption, or quantify the effect it may have on future revenues.

ITEM 7. FINANCIAL STATEMENTS.

         The Company's Consolidated Financial Statements, Notes to Consolidated
Financial Statements and the report of BDO Seidman, LLP, independent
certified public accountants, with respect thereto, referred to in the Index
to Financial Statements, appear elsewhere in this report beginning on Page
F-1.

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

         There were no changes in or disagreements with independent certified
public accountants on accounting and financial disclosure with respect to the
Company.

                                     18

<PAGE>

                                    PART III

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

DIRECTORS AND OFFICERS

         The following table sets forth information concerning directors,
executive officers and significant employees of the Company, including their
ages and positions with the Company as of March 15, 2000:

<TABLE>
<CAPTION>

                       NAME                         AGE                                   POSITION
          -------------------------------      -------------      -----------------------------------------------
          <S>                                  <C>                <C>
          Vincent W. Beale, Sr.                     51            Chairman of the Board, Chief Executive Officer,
                                                                  President and Director
          Bernard B. Beale                          43            Executive Vice President and Chief Operating
                                                                  Officer
          David R. Hearon, Jr.                      62            Senior Vice President, Institutional Development
          Samuel C. Beale                           44            Vice President, General Counsel and Secretary
          R. Greg Smith                             41            Vice President, Chief Financial Officer
          Michael A. Galloway                       54            Vice President, Technical Operations
          Tom Y. Ren                                33            Vice President
          Menashe Ben David                         47            Vice President
          Wayne Schroeder                           57            Director
          Daniel C. Lawson                          54            Director

</TABLE>

         VINCENT W. BEALE, SR. was elected Chairman of the Board of Directors,
Chief Executive Officer and President of the Company on January 28, 1998. Mr.
Beale acted as a consultant to the Company from June 1997 until January 1998.
Mr. Beale is the President and majority owner of Cynet Holdings, a limited
liability company, which is the largest shareholder of the Company. Mr. Beale is
also the President and Managing Director of BNB Capital, Inc., an investment
banking firm. Prior to joining the Company, Mr. Beale was employed for more than
fifteen years with various investment banking firms including Merrill Lynch,
Pierce, Fenner & Smith, Inc., Kidder Peabody & Co., Inc., Paine Webber, Inc. and
Shearson Lehman Hutton, Inc.

         BERNARD B. BEALE joined the Company in January 1998 as a special
consultant to the Chairman to assist in the reorganization of the Company's
business operations. In July 1998, Mr. Beale was named Executive Vice President
and Chief Operating Officer of the Company. Before joining the Company, Mr.
Beale was employed by The Equitable Company, a financial services firm, and
certain other investment banking firms from 1985 to 1998. From 1979 to 1985, he
was employed in various positions including accounting, human resources and
project management with Western Electric and AT&T. Mr. Beale holds a Master of
Science degree in Business Management from Aurora University, Aurora, Illinois,
and a Bachelor of Arts degree from Oakwood College, Huntsville, Alabama.

         DAVID R. HEARON, JR. joined the Company in March 1998 as Vice President
and Chief Technical Officer. In March 2000, Mr. Hearon was promoted to Senior
Vice President, Institutional Development. From July 1996 until joining the
Company, Mr. Hearon was President of Hearon & Associates, an independent
consulting firm providing consulting services in the areas of information
technology, manufacturing, customer support, re-engineering and human resource
development. From 1959 to May 1996, Mr. Hearon was employed by Lucent
Technologies and its predecessors, AT&T and Western Electric, in management
positions related to telecommunications and information technology, including
engineering, manufacturing voice and data networks, and call centers. Mr. Hearon
holds a Bachelor's degree in Mechanical Engineering from the City College of New
York and has participated in post-graduate business and engineering programs at
the University of Chicago and City College of New York.

                                     19

<PAGE>

         SAMUEL C. BEALE became Vice President, General Counsel and Secretary of
the Company in May 1998. Mr. Beale was an attorney engaged in private law
practice for eight years prior to joining the Company. Prior to entering the
practice of law in November 1990, Mr. Beale spent more than ten years in the
computer industry with companies such as IBM Corporation, Sperry Univac, Martin
Marietta and IOCS, in positions ranging from systems engineer to data processing
manager to sales. Mr. Beale holds a Juris Doctor degree from the Ohio State
University College of Law and a Bachelor of Arts degree from Harvard University.

         R. GREG SMITH joined the Company in August 1998 as Vice President and
Chief Financial Officer. Mr. Smith was employed for more than 12 years in the
health care information systems industry prior to joining the Company. ADAC
Healthcare Information Systems ("ADAC") most recently employed Mr. Smith as Vice
President Finance and Chief Financial Officer from 1995 until joining the
Company. In 1996, ADAC became the first health care manufacturer to receive the
Malcolm Baldridge National Quality Award. Before joining ADAC, Mr. Smith held
numerous financial management positions from 1985 through 1995 for Community
Health Computing, Inc. ("CHC"), including Vice President Finance and Chief
Financial Officer from 1994 through 1995. ADAC acquired CHC in 1995 and retained
Mr. Smith as the Chief Financial Officer for their combined health care
information systems businesses. Mr. Smith holds a Bachelor of Business
Administration degree in Finance from Sam Houston State University.

         MICHAEL A. GALLOWAY joined the Company in February 2000 as Vice
President, Technical Operations. Prior to joining the Company, Mr. Galloway
served two years at General Motors International Operations in Berkshire, UK,
where he held the position of Executive Director of Change Management. Mr.
Galloway's many responsibilities at General Motors included operations
management, process engineering and information technology program
management. Mr. Galloway also served on several technical teams, leading the
development of global voice and data strategies and customer-facing Internet
applications, web hosting and architecture. During the three years prior to
his position at General Motors, Mr. Galloway held various positions with
Dresser-Kellogg Energy Services, Merck & Co., McDermott International and
Brown & Root, Inc.

         TOM Y. REN, joined the Company in October 1999 and serves as a
Vice-President and Director of CYNET Interactive. Prior to joining the
Company, Mr. Ren co-founded and served as President of AECsoft USA, Inc., a
Houston- based software company. For more than the past four years, Mr. Ren
has also held positions with the World Trade Network (wt.net) as Vice
President of Web Development and with COADE Engineering Software as a senior
developer. Mr. Ren graduated from the University of Houston with dual
Master's Degrees in Physics and Chemical Engineering and is a licensed
Professional Engineer in the State of Texas. Mr. Ren engineered and developed
the ADC2000 technology, a web-based trading, Business to Business and
Business to Consumer local/vertical portal technology.

         MENASHE BEN-DAVID joined the Company in January 2000 and serves as a
Vice President of the Company. Mr. Ben-David brings over 20 years of
communications and technology experience to his position with CYNET. Prior to
joining the Company, Mr. Ben-David served one year as President of GlobeWave,
Inc., a wholly owned subsidiary of Teliran Electronics, Ltd. where he was
instrumental in bringing new wireless cell/modem technology to the market.
Mr. Ben-David also provided senior sales, marketing, financial, operational
and executive-level leadership to domestic and global wireless resellers and
end users. Before joining GlobeWave, Mr. Ben-David held positions with Geotek
Communications as Vice President of Field Operations and Bogen Communications
as Executive Vice President and Chief Operating Officer.

         WAYNE SCHROEDER joined the Company in October 1997 as Chief Financial
Officer and Secretary and was elected to the Board of Directors in February
1998. In April 1998, Mr. Schroeder resigned as an officer of the Company to
become the Controller of Capstar Broadcasting Corporation. Mr. Schroeder was
Vice President - Finance, Secretary and Director of Boundless Corporation from
November 1996 to October 1997. Mr. Schroeder was self-employed as a financial
and accounting consultant from June 1994 to October 1996. From July 1987 to May
1994, Mr. Schroeder served as Chief Operating Officer, Chief Financial Officer
and

                                     20

<PAGE>

a director of Arrhythmia Research Technology, Inc. Mr. Schroeder graduated from
the University of Texas at Austin with a degree in finance and accounting.

         DANIEL C. LAWSON was appointed to the Board of Directors during
January 2000 to fill a vacancy in the Board of Directors when the number of
directors was increased from three to four directors. Mr. Lawson is Chairman
and Chief Executive Officer of the DCL Company, Inc. ("DCLC"), a
Houston-based diversified group of companies with expertise in all phases of
supplying products and services to urban public transportation services.
Through a joint effort with Penske Corporation and GE Capital, Mr. Lawson and
Roger Penske created the first turnkey maintenance program for transportation
systems. Mr. Lawson has been recognized by various national publications,
including The New York Times, Black Enterprise, Essence, Fortune, Money and
USA Today for his knowledge of African American business. He is also known as
a dynamic motivational and inspirational speaker carrying a message of
"entrepreneurship" to business, civic, social, and trade organizations,
educational institutions and churches from coast-to-coast.

         Vincent W. Beale, Sr., Bernard B. Beale and Samuel C. Beale are
siblings. There are no other family relationships among any of the Company's
directors and executive officers.

         STRUCTURE OF BOARD OF DIRECTORS. The Board of Directors of the company
consists of Vincent W. Beale, Sr. (Chairman of the Board), Danny C. Lawson
(outside director) and Wayne Schroeder (outside director). Directors are elected
annually by the shareholders. The Board is required to have an annual meeting
following the annual shareholder meeting. Actions can be taken without a meeting
if all of the directors consent in the form of a written consent action. A
majority vote at a duly called meeting of the Board of Directors at which a
quorum is present is required for a motion to be carried at such meeting. A
majority of the total number of directors constitutes a quorum.

COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT

         Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange
Act") requires the Company's directors, executive officers and persons who own
more than ten percent of a registered class of the Company's voting equity
securities, to file with the Securities and Exchange Commission (the "SEC")
initial reports of ownership and reports of changes in ownership of the Class A
Common Stock and other equity securities of the Company. Officers, directors,
and greater than ten-percent beneficial owners are required by SEC regulation to
furnish the Company with copies of all Section 16(a) reports they file.

         Based solely upon a review of the copies of such reports furnished
to the Company, the Company believes there was compliance for the fiscal year
ended December 31, 1999 with all Section 16(a) filing requirements applicable
to the Company's officers, directors and greater than ten percent beneficial
owners.

ITEM 10.  EXECUTIVE COMPENSATION

         The following table sets forth information with respect to all forms of
compensation paid by the Company to the named individuals for the years ended
December 31, 1999, 1998 and 1997. No other director or executive officer
received salary and bonus which exceeded $100,000 during any of the three fiscal
years ended December 31, 1999. See "--Employment Agreements" below for
information regarding the current compensation of certain of the Company's
directors and the executive officers named below.

                                     21

<PAGE>

<TABLE>
<CAPTION>
                                                                                   LONG-TERM
                                                                                  COMPENSATION
                                                                                   SECURITIES
         NAME AND           FISCAL                             OTHER ANNUAL        UNDERLYING         ALL OTHER
    PRINCIPAL POSITION       YEAR      SALARY      BONUS       COMPENSATION        OPTIONS(1)       COMPENSATION
    ------------------       ----      ------      -----       ------------        ----------       ------------
<S>                         <C>       <C>         <C>          <C>               <C>               <C>
  Vincent W. Beale, Sr.      1999     $180,000       --            --                 --                 --
   President and Chief       1998     $133,693    $30,000          --            100,000 shares          --
    Executive Officer
       (since 1/98)

      Ray C. Davis           1998     $110,287      --             --                 --            $188,326(2)
   President and Chief       1997     $198,430    $50,000       $7,500(3)             --            $250,000(4)
    Executive Officer
       (until 1/98)

     Bernard B. Beale        1999     $153,136    $30,000          --                 --                 --
      Executive Vice         1998     $131,696      --             --            150,000 shares          --
     President, Chief
    Operating Officer
       (since 1/98)

   David R. Hearon, Jr.      1999     $150,000      --             --                 --                 --
  Vice President, Chief      1998     $122,226    $30,000          --            75,000 shares           --
    Technical Officer
       (since 3/98)

     Samuel C. Beale         1999     $108,000      --             --                 --                 --
     Vice President,         1998     $90,845       --             --            100,000 shares          --
   General Counsel and
        Secretary
       (since 3/98)

      R. Greg Smith          1999     $125,000    $30,000          --                 --                 --
  Vice President, Chief      1998     $42,308       --             --            100,000 shares          --
    Financial Officer
       (since 8/98)

      Vickroy Stone          1997       --          --            --(5)               --                 --
     Chief Financial
         Officer
      (9/95 to 2/97)

</TABLE>
                                     22

<PAGE>

<TABLE>
<CAPTION>
                                                                                   LONG-TERM
                                                                                  COMPENSATION
                                                                                   SECURITIES
         NAME AND           FISCAL                             OTHER ANNUAL        UNDERLYING         ALL OTHER
    PRINCIPAL POSITION       YEAR      SALARY      BONUS       COMPENSATION        OPTIONS(1)       COMPENSATION
    ------------------       ----      ------      -----       ------------        ----------       ------------
<S>                         <C>       <C>         <C>          <C>               <C>               <C>
         John Kim            1997     $262,302    $6,000           --                 --                 --
  Vice President, Sales                                            --                 --                 --
      (4/96 to 2/98)

      Keith Shaffner         1997      $9,231       --             --                 --            $1,976,663(7)
      Vice President
     (6/97 to 11/97)

</TABLE>

-------------------
(1)    Refers to incentive stock options to purchase shares of Class A Common
       Stock at a purchase price of $0.39 per share granted to Vincent W.
       Beale, Sr., Bernard B. Beale, David R. Hearon, Jr., Samuel C. Beale and
       R. Greg Smith under the 1997 Restated Stock Option Plan in accordance
       with their respective employment agreements with the Company. (See
       "--Employment Agreements" and "--Stock Option Plan" below).

(2)    Represents (i) a $121,043 account receivable owed by Mr. Davis to the
       Company which was forgiven in exchange for the termination of Mr.
       Davis' employment agreement pursuant to the Settlement Agreement and
       Mutual Release in Full executed between the Company and Mr. Davis. See
       "--Employment Agreements" below and (ii) $67,283 of property
       transferred to Mr. Davis as compensation for services rendered. See
       "Certain Relationships and Related Transactions."

(3)    Represents the value of providing Mr. Davis the use of an automobile
       owned by the Company.

(4)    Represents consideration paid to Mr. Davis in exchange for his
       assignment to the Company of all of his "intellectual property." See
       "Certain Relationships and Related Transactions."

(5)    Excludes (i) the repurchase by the Company of 450,000 shares of Class A
       Common Stock from Mr. Stone for $450,000 and (ii) the issuance of
       warrants to purchase 450,000 shares of Class A Common Stock which were
       deemed to have no value on the date of issuance. See "Certain
       Relationships and Related Transactions."

(6)    Represents $1,005,136 paid to Mr. Shaffner, individually, and $971,527
       paid to his affiliate, CyFax, Inc. See "Certain Relationships and
       Related Transactions."

STOCK OPTION PLAN

         On October 20, 1997, the Board of Directors and a majority of the
holders of the Class A Common Stock adopted the Company's 1997 Stock Option
Plan, which plan was restated effective July 31, 1999 (the "1997 Plan").

         The 1997 Plan provides for the granting of stock options ("Options") to
key employees of the Company. Within certain limitations provided by the 1997
Plan, such Options may include provisions regarding vesting, exercise price, the
amount of each grant and other terms as shall be approved by the Board of
Directors or by a committee designated by the Board of Directors. Options
granted under the 1997 Plan may be either options that qualify as "incentive
stock options," within the meaning of Section 422 of the Internal Revenue Code
of 1986, as amended ("Incentive Options"), or those that do not qualify as such

                                     23

<PAGE>

"incentive stock options" ("Non-qualified Options"). The 1997 Plan, which
permits up to 2,000,000 shares of the Company's Class A Common Stock to be
issued, terminates on October 19, 2007.

         The 1997 Plan is administered by the Board of Directors or by a
Compensation Committee of the Board of Directors, which committee, to the extent
required to qualify for certain exemptions under Rule 16b-3 of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, to satisfy the
requirements of Section 162(m) of the Code, will at all times consist of at
least two non-employee directors. Subject to the terms of the 1997 Plan, the
Board of Directors or a Compensation Committee determines to whom Options are
granted, the terms, and the number of shares covered by each Option. The term of
each Option may not exceed ten years from the date the option is granted, or
five years in the case of an Incentive Option granted to a holder of more than
10% of the fully diluted capital stock of the Company. Nonqualified Options and
Incentive Options may become exercisable six months after the date of grant and
may continue to be exercisable, in whole or in part, up to ten years after the
date of grant, as determined by the Board of Directors or the Compensation
Committee.

         The 1997 Plan provides that all Incentive Options and Non-qualified
Options which are not exercisable on the date of termination of an option
holder's employment generally expire when the optionee ceases to be employed by
the Company; however, the Board of Directors or the Compensation Committee may,
in its discretion, permit the holder to exercise unvested options upon such
termination. Options may not be transferred other than by will or the laws of
descent and distribution, and during the lifetime of an optionee may be
exercised only by the optionee. The 1997 Plan provides that each stock option
agreement with respect to any Non-qualified Option or Incentive Option shall
specify the effects of termination of employment on exercisability of such
options.

         The 1997 Plan contains a provision accelerating the exerciseablity of
Options upon the occurrence of specified events, including a merger,
consolidation, dissolution or liquidation of the Company. The acceleration of
vesting of the Options in the event of a merger or other similar event may have
the effect of discouraging a proposal for merger, a takeover attempt or other
efforts to gain control of the Company.

         Incentive Options to purchase shares of the Class A Common Stock have
been granted to Vincent W. Beale, Sr., Bernard B. Beale, David R. Hearon, Jr.,
Samuel C. Beale and R. Greg Smith under the 1997 Plan in accordance with their
respective employment agreements described in "--Employment Agreements" above
as follows: 100,000 shares to Vincent W. Beale, Sr. which vested immediately on
the date of grant, 150,000 shares to Bernard B. Beale which vested immediately
on the date of grant, 100,000 shares to Samuel C. Beale which vested immediately
on the date of grant, 75,000 shares to David R. Hearon, Jr. which vest ratably
over a four-year period, and 100,000 shares to R. Greg Smith which vest ratably
over a three-year period. Each of these stock options has an exercise price of
$0.39 per share.

AGGREGATED OPTIONS EXERCISED IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION
VALUES

         The table below reflects the number of shares covered by both
exercisable and non-exercisable stock options as of December 31, 1999 for the
executive officers named below. Values for "in the money" options represent the
position spread between the exercise price of existing options and the market
value for the Company's Class A Common Stock on December 31, 1999:

                                     24

<PAGE>

<TABLE>
<CAPTION>
                                   Shares                                                               Value of Unexercised
                                  Acquired                           Number of Unexercised              in-the-money Options
                                on Exercise        Value           Options at Fiscal Year End           at December 31, 1999
Name                                (#)          Realized       Exerciseable/Unexerciseable (1)    Exerciseable/Unexerciseable(2)
----                            -----------      --------       ---------------------------        ---------------------------
<S>                             <C>              <C>            <C>                                <C>
Vincent W. Beale, Sr.
President,
Chief Executive Officer             (3)             (3)                     100,000                           $151,000
(since 1/98)                                                                -------                           --------
                                                                           100,000/0                         $151,000/0

Bernard B. Beale
Executive Vice
President,                          (3)             (3)                     150,000                           $226,500
Chief Operating                                                             -------                           --------
Officer                                                                    150,000/0                         $226,500/0
(since 1/98)


David R. Hearon, Jr.
Vice President,
Chief Technical Officer             (3)             (3)                      75,000                           $113,250
(since 3/98)                                                                 ------                           --------
                                                                          18,750/56,250                    $28,313/$84,938

Samuel C. Beale
Vice President, General
Counsel and Secretary               (3)             (3)                     100,000                           $151,000
(since 3/98)                                                                -------                           --------
                                                                           100,000/0                         $151,000/0

R. Greg Smith
Vice President,
Chief Financial Officer             (3)             (3)                      100,000                          $151,000
(since 8/98)                                                                 -------                          --------
                                                                          33,333/66,667                   $50,333/$100,667
</TABLE>

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

(1)      Indicates number of options exercisable and unexerciseable as of
         December 31, 1999.

(2)      Based upon $1.51 per share, the estimated fair market value of a share
         of the Class A Common Stock at December 31, 1999, as determined by
         reference to the last transaction in 1999 involving the sale and
         issuance of shares of Class A Common Stock.

(3)      None of the Company's executive officers exercised any options during
         the fiscal year ended December 31, 1999. The Company did not issue any
         SARs during the fiscal year ended December 31, 1999.

         Directors who are employees or consultants of the Company do not
receive any compensation for serving as directors. All directors are reimbursed
for ordinary and necessary expenses incurred in attending any meeting of the
Board of Directors or any committee thereof or otherwise incurred in their
capacities as directors.

         None of the Company's executive officers was granted awards under any
long-term incentive plan during the fiscal year ended December 31, 1999.

                                     25

<PAGE>

EMPLOYMENT AGREEMENTS

         On June 17, 1997, the Company entered into a Consulting Agreement with
Vincent W. Beale, Sr., pursuant to which Mr. Beale agreed to assist the Company
with respect to an initial public offering and certain proposed mergers and
acquisitions. Mr. Beale was paid an aggregate of $189,000 in consulting fees
under the terms of the Consulting Agreement.

         Effective February 1, 1998, the Company terminated his Consulting
Agreement and entered an employment agreement with Vincent W. Beale, Sr.
pursuant to which Mr. Beale serves as the Chairman of the Board and Chief
Executive Officer of the Company. The agreement has an initial term of five
years and can continue for additional one-year periods upon the agreement of Mr.
Beale and the Company, and requires Mr. Beale to devote substantially all of his
business time, attention and energy exclusively to the business of the Company,
and to use his best efforts to promote the success of the Company's business. In
exchange, Mr. Beale is entitled to (i) receive an annual salary, commencing
February 1, 1998, of $180,000 (subject to annual review by the Board of
Directors), (ii) earn an incentive bonus in accordance with the Company's bonus
plan to be established for its executives, (iii) receive a signing bonus of
$30,000, (iv) an option under the Company's 1997 Amended and Restated Stock
Option Plan to purchase 100,000 shares of Class A Common Stock at a price of
$0.39 per share which vests immediately when granted and (v) participate in the
Company's other employee benefit plans. Mr. Beale's employment agreement is
terminable by the Company at any time for "cause," as specified in the
agreement, and in certain other events. The employment agreement also contains
covenants limiting Mr. Beale's right to compete with the Company during the term
of the employment agreement and for two years after the termination of his
employment.

         Effective March 1, 1998, the Company entered into an employment
agreement with David R. Hearon, Jr. pursuant to which Mr. Hearon serves as the
Vice President of Operations of the Company. The agreement has an initial term
of four years and can continue for additional one-year periods upon the
agreement of Mr. Hearon and the Company, and requires Mr. Hearon to devote
substantially all of his business time, attention and energy exclusively to the
business of the Company, and to use his best efforts to promote the success of
the Company's business. In exchange, Mr. Hearon is entitled to (i) receive an
annual salary, commencing March 1, 1998, of $150,000 (subject to annual review
by the Board of Directors), (ii) earn an incentive bonus in accordance with the
Company's bonus plan to be established for its executives, (iii) receive a
signing bonus of $30,000, (iv) an option under the Company's 1997 Amended and
Restated Stock Option Plan to purchase 75,000 shares of Class A Common Stock at
a price of $0.39 per share which vests ratably over a four-year period and (v)
participate in the Company's other employee benefit plans. Mr. Hearon's
employment agreement is terminable by the Company at any time for "cause," as
specified in the agreement, and in certain other events. The employment
agreement also contains covenants limiting Mr. Hearon's right to compete with
the Company during the term of the employment agreement and for two years after
his termination of employment.

         Effective March 3, 1997, the Company entered into a three-year
executive employment agreement with Ray C. Davis, the founder of the Company.
The agreement was automatically renewable at the end of its initial term for
consecutive one-year terms and provided for an annual base salary of $220,000,
and incentives (annual and long-term), retirement benefits, welfare benefits,
and fringe benefits, which were available to other executive employees of the
Company. Mr. Davis received a $50,000 signing bonus from the Company upon
execution of his agreement. The agreement also contained provisions for the
acceleration of certain compensation due to Mr. Davis in the event of a "change
of control" of the Company, as defined in the agreement.

         Effective April 13, 1998, the employment agreement between the Company
and Ray C. Davis was terminated and Mr. Davis entered into a new employment
agreement with the Company. The agreement had an initial term of five years, and
provided for Mr. Davis to (i) receive an annual salary, commencing April 13,
1998, of $150,000 (subject to annual review by the Board of Directors), (ii)
receive a warrant to purchase

                                     26

<PAGE>

an aggregate of 2,000,000 shares of Class A Common Stock at a price of $1.00 per
share and (iii) participate in certain of the Company's other employee benefit
plans. The employment agreement provided Mr. Davis devotes approximately
one-half of his business time and attention to the business of the Company. All
inventions and technological improvements to the Company's software developed by
Mr. Davis during the term of the employment agreement became the property of the
Company and the Company is not required to compensate Mr. Davis for any such
inventions or improvements. The employment agreement also contained covenants
limiting Mr. Davis's right to compete with the Company during the term of the
employment agreement and for three years after his termination of employment.
Effective August 31, 1998, Mr. Davis resigned from the Company, and the Company
and Mr. Davis entered into a Settlement Agreement and Mutual Release in Full
(the "Davis Settlement"), providing for (i) the termination of Mr. Davis'
employment agreement with the Company, (ii) the Company's forgiveness and
release of $121,043.14 in indebtedness owed by Mr. Davis to the Company, and
(iii) Mr. Davis' release of claims against the Company with respect to his
employment agreement. See "Certain Relationships and Related Transactions."

         Effective July 22, 1998, the Company entered into an employment
agreement with Bernard B. Beale pursuant to which Mr. Beale serves as the
Executive Vice President of the Company. The agreement has an initial term of
four years and can continue for additional one-year periods upon the agreement
of Mr. Beale and the Company, and requires Mr. Beale to devote substantially all
of his business time, attention and energy exclusively to the business of the
Company, and to use his best efforts to promote the success of the Company's
business. In exchange, Mr. Beale is entitled to (i) receive an annual salary,
commencing July 22, 1998, of $150,000 (subject to annual review by the Board of
Directors), (ii) earn an incentive bonus in accordance with the Company's bonus
plan to be established for its executives, (iii) receive a signing bonus of
$30,000, (iv) an option under the Company's 1997 Amended and Restated Stock
Option Plan to purchase 150,000 shares of Class A Common Stock at a price of
$0.39 per share which vests immediately when granted and (v) participate in the
Company's other employee benefit plans. Mr. Beale's employment agreement is
terminable by the Company at any time for "cause," as specified in the
agreement, and in certain other events. The employment agreement also contains
covenants limiting Mr. Beale's right to compete with the Company during the term
of the employment agreement and for two years after his termination of
employment.

         Effective July 22, 1998, the Company entered into an employment
agreement with Samuel C. Beale pursuant to which Mr. Beale serves as the Vice
President, General Counsel and Secretary of the Company. The agreement has an
initial term of three years and can continue for additional one-year periods
upon the agreement of Mr. Beale and the Company, and requires Mr. Beale to
devote substantially all of his business time, attention and energy exclusively
to the business of the Company, and to use his best efforts to promote the
success of the Company's business. In exchange, Mr. Beale is entitled to (i)
receive an annual salary, commencing July 22, 1998, of $108,000 (subject to
annual review by the Board of Directors), (ii) earn an incentive bonus in
accordance with the Company's bonus plan to be established for its executives,
(iii) receive a signing bonus of $30,000, (iv) an option under the Company's
1997 Amended and Restated Stock Option Plan to purchase 100,000 shares of Class
A Common Stock at a price of $0.39 per share which vests immediately when
granted and (v) participate in the Company's other employee benefit plans. Mr.
Beale's employment agreement is terminable by the Company at any time for
"cause," as specified in the agreement, and in certain other events. The
employment agreement also contains covenants limiting Mr. Beale's right to
compete with the Company during the term of the employment agreement and for two
years after his termination of employment.

         Effective August 26, 1998, the Company entered into an employment
agreement with R. Greg Smith pursuant to which Mr. Smith serves as the Vice
President Finance and Chief Financial Officer of the Company. The agreement has
an initial term of three years and can continue for additional one-year periods
upon the agreement of Mr. Smith and the Company, and requires Mr. Smith to
devote substantially all of his business time, attention and energy exclusively
to the business of the Company, and to use his best efforts to promote the
success of the Company's business. In exchange, Mr. Smith is entitled to (i)
receive an annual

                                     27

<PAGE>



salary, commencing August 26, 1998, of $125,000 (subject to annual review by the
Board of Directors), (ii) earn an incentive bonus in accordance with the
Company's bonus plan to be established for its executives, (iii) receive a
signing bonus of $30,000, (iv) an option under the Company's 1997 Amended and
Restated Stock Option Plan to purchase 100,000 shares of Class A Common Stock at
a price of $0.39 per share which vests ratably over a three-year period and (v)
participate in the Company's other employee benefit plans. Mr. Smith's
employment agreement is terminable by the Company at any time for "cause," as
specified in the agreement, and in certain other events. The employment
agreement also contains covenants limiting Mr. Smith's right to compete with the
Company during the term of the employment agreement and for two years after his
termination of employment.

CONSULTING SERVICES

         Pursuant to the terms of the Rescission Financing, the Company
entered into a Consulting Agreement (the "Enron Advisory Agreement") with
Houston Economic Opportunity Fund, L.P. ("HEOF"), an investor in the funding
of the Company's Rescission Offer and an affiliate of Enron Corporation,
pursuant to which HEOF agreed to provide certain business advisory services
to the Company. Pursuant to the Enron Advisory Agreement, the Company issued
a warrant entitling HEOF to purchase up to 413,600 shares of Class A Common
Stock at a purchase price of $2.00 per share upon the completion of the
Rescission Financing. The warrant is exercisable, in whole or in part, at any
time during the three-year period beginning on September 30, 1999.

LIMITATION ON DIRECTORS' LIABILITY; INDEMNIFICATION

         Texas law authorizes corporations to limit or eliminate the personal
liability of directors to corporations and their shareholders for monetary
damages under certain conditions and circumstances. The Articles of
Incorporation of the Company limit the liability of directors of the Company (in
their capacity as directors, but not in their capacity as officers) to the
Company or its shareholders to the fullest extent permitted by Texas law.
Specifically, no director of the Company will be personally liable to the
Company or its shareholders for monetary damages for any act or omission in such
director's capacity as a director, except for (i) a breach of the director's
duty of loyalty to the Company or its shareholders, (ii) an act or omission not
in good faith which involve intentional misconduct or a knowing violation of the
law, (iii) an act or omission for which the liability of a director is expressly
provided for by an applicable statute or (iv) any transaction from which the
director derived an improper personal benefit, whether or not the benefit
resulted from an action taken in the person's official capacity.

         The inclusion of this provision in the Company's Articles of
Incorporation may have the effect of reducing the likelihood of derivative
litigation against directors, and may discourage or deter shareholders or
management from bringing a lawsuit against directors for breach of their duty of
care, even though such an action, if successful, might otherwise have benefited
the Company and its shareholders. However, such limitation on liabilities does
not affect the standard of conduct with which directors must comply, the
availability of equitable relief or any causes of action based on federal law.

         The Company's Articles of Incorporation provide for the indemnification
of its current and former officers and directors to the fullest extent permitted
by applicable law.

ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

         The following table sets forth, as of March 15, 2000, the number of
outstanding shares of Class A Common Stock (the Company's only class of voting
securities) owned by (i) each person known by the Company to beneficially own
more than 5% of its outstanding Class A Common Stock, (ii) each director, (iii)
each named executive officer and (iv) all officers and directors as a group.


                                       28
<PAGE>


<TABLE>
<CAPTION>

                                                            Shares of Class A
           Name of Beneficial Owner                              Common                        Percent of Class(1)
                                                        Stock Beneficially Owned
-----------------------------------------------      -------------------------------      ------------------------------
<S>                                                  <C>                                  <C>
Vincent W. Beale, Sr.                                     16,939,283 shares(2)                        45.2%
Cynet Holdings, LLC                                       15,691,283 shares(3)                        41.9%
Leonard Childress                                          3,164,964 shares(4)                         8.5%
Guy M. Lewis                                               2,883,888 shares(5)                         7.7%
Northern Neck Enterprises, Inc.                            2,868,268 shares(6)                         7.6%
Houston Economic Opportunity Fund, L.P.                    2,180,023 shares(7)                         5.8%
Bernard B. Beale                                           1,150,000 shares(8)(9)                      3.1%
Samuel C. Beale                                            1,100,000 shares(8)(9)                      2.9%
Wayne Schroeder                                              100,000 shares(8)                           *
Daniel C. Lawson                                             100,000 shares                              *
David R. Hearon, Jr.                                          37,500 shares(8)                           *
R. Greg Smith                                                 33,333 shares(8)                           *
All directors and executive officers
    as a group (6 people)                                 17,460,116 shares(10)                       46.6%
</TABLE>

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

*        Less than one percent.
(1)      Percentages shown are based upon (i) 27,784,207 shares of Class A
         Common Stock presently outstanding, (ii) warrants to purchase 8,593,571
         shares of Class A Common Stock and (iii) 972,500 shares subject to
         vested stock options. On this basis, for purposes of these
         calculations, the number of shares used is 37,445,307.
(2)      Represents (i) 15,691,283 shares of beneficially owned by Cynet
         Holdings, of which Mr. Beale is the President and majority owner, (ii)
         1,148,000 shares subject to warrants which Mr. Beale received from Ray
         C. Davis in July 1998, and (iii) 100,000 shares subject to vested stock
         options.
(3)      Includes (i) 9,473,000 shares purchased from Ray C. Davis and related
         entities controlled by Mr. Davis, (ii) 5,225,472 shares purchased
         pursuant to the Subscription Agreement between the Company and Cynet
         Holdings (the "Holdings Subscription Agreement"), (iii) 1,090,000
         shares which may be purchased at any time prior to July 22, 2003, at a
         purchase price of $1.00 per share, upon exercise of a warrant issued
         pursuant to the Holdings Subscription Agreement, and (iv) 152,811
         shares purchased as part of the Rescission Financing. The amount shown
         excludes 250,000 shares that were pledged to an unaffiliated financial
         institution in 1998 and subsequently foreclosed upon. See "Certain
         Relationships and Related Transactions."
(4)      Includes (i) 1,300,000 shares deemed beneficially owned by Mr.
         Childress as a result of his interest in Cynet Holdings and (ii)
         1,000,000 shares which may be purchased at any time prior to July 22,
         2003, at a purchase price of $1.00 per share, upon exercise of a
         warrant originally issued pursuant to the Holdings Subscription
         Agreement.
(5)      Includes 2,000,000 shares which may be purchased at any time prior to
         July 22, 2003, at a purchase price of $1.00 per share, upon exercise of
         a warrant originally issued pursuant to the Holdings Subscription
         Agreement.
(6)      Includes (i) 1,500,000 shares deemed beneficially owned by Northern
         Neck Enterprises, Inc. as a result of its interest in Cynet Holdings
         and (ii) 1,000,000 shares which may be purchased at any time prior to
         July 22, 2003, at a purchase price of $1.00 per share, upon exercise of
         a warrant originally issued pursuant to the Holdings Subscription
         Agreement.
(7)      Represents (i) 1,766,423 shares into which an equal number of shares of
         the Series D Redeemable Convertible Preferred Stock may be converted
         and (ii) 413,600 shares, which may be purchased upon exercise of a
         warrant issued pursuant to the Enron Advisory Agreement.


                                       29
<PAGE>

(8)      Includes shares subject to vested stock options.

(9)      Includes shares deemed beneficially owned as a result of an interest in
         Cynet Holdings.

(10)     Includes an aggregate of 7,425,683 shares that such persons have the
         right to acquire within 60 days pursuant to warrants and options held
         by such persons.

ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

         RAY C. DAVIS. In May and August of 1995, the Company issued an
aggregate of 10,000,000 shares of Class A Common Stock (after giving effect to a
nine for one share dividend) to the Davis Family Partnership, Ltd., the Charles
C. Davis Trust, the Nicholas M. Davis Trust and the Rachel I. Davis Trust
(collectively, the "Davis Interests") for services rendered by Ray C. Davis in
connection with the organization of the Company. The Company valued such
services at $1,000.

         In August 1996, the Company purchased 277,000 shares of Class A Common
Stock from the Davis Family Partnership, Ltd. for $277,000. The purchase price
of $1.00 per share of Class A Common Stock was deemed by Mr. Davis, the then
sole director of the Company, to be equal to the fair market value of the shares
purchased based upon sales of shares of Class A Common Stock by the Company to
private investors, at or near the time of the purchase of shares from the Davis
Family Partnership, Ltd. A majority of the proceeds from the sale of shares of
Class A Common Stock to the Company was used by Mr. Davis to repay certain loans
and advances made to him by the Company during prior periods.

         Effective March 3, 1997, Mr. Davis assigned to the Company all right,
title and interest to all "intellectual property" which Mr. Davis owned. In
exchange for such assignment, the Company paid Mr. Davis $250,000. The
Assignment of Intellectual Property executed by Mr. Davis in favor of the
Company defines "intellectual property" to include (i) all patents, patent
applications, patent disclosures and related documents, (ii) all trademarks,
service marks, trade dress logos and trade names, (iii) all copyrights and
registrations and applications for registration thereof, (iv) all mask works and
registrations and applications for registrations, (v) all computer software,
data and documentation, (vi) all trade secrets and confidential business
information, know-how, and related business information, (vii) all proprietary
rights relating to any of the foregoing items and (viii) all copies and tangible
embodiments of any of the foregoing.

         In April 1998, the Company transferred certain property having a net
book value of $67,283 to Mr. Davis and recorded such transfers as compensation.
This amount is in addition to compensation paid to Mr. Davis under his
employment agreements. See Note 5 of the Notes to Consolidated Financial
Statements.

         Effective August 31, 1998, Mr. Davis resigned as a director, officer
and employee of the Company and the Company and Mr. Davis entered into the Davis
Settlement providing for (i) the termination of Mr. Davis' employment agreement
with the Company, (ii) the Company's forgiveness and release of claims of
$121,043 in indebtedness owed by Mr. Davis to the Company, and (iii) Mr. Davis'
release of claims against the Company with respect to his employment agreement.

         KEITH SHAFFNER. In November 1996, the Company issued warrants to
purchase an aggregate of 738,000 shares of Class A Common Stock at an exercise
price of $1.00 per share to various persons for assistance in the organization
and formation of sixteen limited liability companies. Among the persons
receiving such warrants was Keith Shaffner, formerly a Vice President of the
Company. Mr. Shaffner received a warrant to purchase 145,500 shares of Class A
Common Stock in this transaction, the value of which was $37,830. Also in 1996,
the Company paid Mr. Shaffner an aggregate of $111,315 for services rendered. On
November 14, 1997, the Company entered into a Settlement Agreement and Mutual
Release

                                     30

<PAGE>

with Mr. Shaffner for services rendered by him during 1996 and 1997. In
exchange for a complete release of all claims by Mr. Shaffner and his
affiliate, CyFax, Inc. ("CyFax"), against the Company, the Company issued to
Mr. Shaffner: (i) a warrant to purchase 1,150,000 shares of Class B Common
Stock at a price of $1.00 per share, exercisable on or before August 30, 1999
(which the Company extended until November 4, 2001), valued at $184,000 at
the time of issuance, (ii) a warrant to purchase 1,050,000 shares of Class B
Common Stock at a price of $1.00 per share, exercisable on or before February
28, 2000 (which the Company extended until November 4, 2001), valued at
$178,500 at the time of issuance, (iii) 500,000 shares of Class A Common
Stock, valued at $500,000 at the time of issuance, and (iv) $51,000 in cash.
The extension of these warrants required the Company to recognize a non-cash
charge of approximately $1,344,000 during the third quarter of 1999. See Note
5 of the Notes to Consolidated Financial Statements. In addition, the Company
issued 200,000 shares of Class A Common Stock, valued at $78,000, to CyFax
for the termination of an exclusive agent management agreement with the
Company. The Company also paid Mr. Shaffner, individually, $91,636, and CyFax
an aggregate of $893,527 for services rendered in 1997.

         CYNET HOLDINGS, LLC. From February 1998 through July 1998, Cynet
Holdings purchased an aggregate of 9,473,000 shares of Class A Common Stock
from the Davis Interests for an aggregate amount of $1,250,000. The funds
utilized by Cynet Holdings to purchase such shares were generated from Cynet
Holdings' equity capital. Vincent W. Beale, Sr. is the President and majority
owner of Cynet Holdings. In July 1998 the Company entered into a Subscription
Agreement with Cynet Holdings, pursuant to which Cynet Holdings committed to
purchase up to 10,000,000 shares of Class A Common Stock of the Company for
$1.00 per share prior to December 31, 1998. In August 1999 the Subscription
Agreement was amended to (i) extend the duration of the Subscription
Agreement to December 31, 1999 and (ii) permit the issuance of Class B Common
Stock to the extent that no authorized Class A Common Stock is available. In
January 2000 the Subscription Agreement was amended to extend the duration of
the agreement to June 30, 2000 and increase the purchase price per share
payable by Cynet Holdings from $1.00 to $1.51 per share. As of March 15,
2000, the Company issued an aggregate of 5,225,472 shares of Class A Common
Stock to Cynet Holdings pursuant to the Holdings Subscription Agreement in
exchange for (i) $4,106,000 in cash contributions, and (ii) the conversion of
$1,119,472 in short-term unsecured borrowings that were converted into shares
of Class A Common Stock at a price of $1.00 per share. In 1998, 250,000
shares of Class A Common Stock purchased by Cynet Holdings were pledged to an
unaffiliated financial institution and subsequently foreclosed upon. Also
pursuant to the Holdings Subscription Agreement, the Company (i) issued a
five-year warrant entitling Cynet Holdings to purchase an aggregate of
4,800,000 shares of Class A Common Stock at a price of $1.00 per share and
(ii) entered into a registration rights agreement granting Cynet Holdings
certain registration rights covering the Company's securities held by Cynet
Holdings. Cynet Holdings also entered into an Underwriting Agreement with the
Company pursuant to which Cynet Holdings purchased 584,825 shares of Class A
Common Stock for $1.37 per share as a rescission underwriter in the
Rescission Offer.

         In July 1999, the Company entered into a Purchase and Sale Agreement
with Cynet Holdings (the "CYNET Interactive Agreement"), pursuant to which Cynet
Holdings transferred all of the outstanding membership interests of CYNET
Interactive to the Company, resulting in CYNET Interactive becoming a
wholly-owned subsidiary of the Company. In consideration for this transfer, the
Company forgave a $118,936 account receivable due from CYNET Interactive.

         During 1999, Cynet Holdings provided the Company short-term financing
of an aggregate of $1,119,472 for working capital and other corporate purposes.
These borrowings were unsecured, non-interest bearing and due on demand by Cynet
Holdings. On December 31, 1999, in accordance with the Holdings Subscription
Agreement, the Company issued 1,119,472 shares of Class A Common Stock to Cynet
Holdings.

                                     31

<PAGE>

         In January 2000, Cynet Holdings provided the Company additional
short-term financing of $500,000 for working capital and other corporate
purposes. These borrowings were unsecured, non-interest bearing and due on
demand by Cynet Holdings. In February 2000, the Company repaid the short-term
financing and provided Cynet Holdings a short-term advance of $80,000 for
working capital. This advance is unsecured, bears interest at a rate of 6% per
annum and is due on demand by the Company. Cynet Holdings has advised the
Company that it expects the advance will be repaid on or before June 30, 2000.

         On March 1, 2000, Cynet Holdings assigned to the Company its sales and
marketing rights with respect to the Cell Phone/Modem under the Teliran
Agreement for an initial term of one year in consideration for, among other
things, the Company's agreement to satisfy the minimum sales requirements
applicable to the Cell Phone/Modem units as provided in the Teliran Agreement.
This assignment is renewable for additional one-year periods subject to the
Company's meeting such minimum sales requirements.

         CYNET INTERACTIVE. On July 31, 1999, the Company acquired from Cynet
Holdings all of the outstanding membership interests of CYNET Interactive, LLC,
a wholly-owned subsidiary of Cynet Holdings, pursuant to the terms of a Purchase
and Sale Agreement (the "CYNET Interactive Agreement") between the Company and
Cynet Holdings. CYNET Interactive, LLC is a Houston, Texas-based Internet
content provider, whose services include graphic and copy design, application
development and web hosting services. Pursuant to the CYNET Interactive
Agreement, the Company acquired all of the membership interests of CYNET
Interactive from Cynet Holdings in exchange for the Company's forgiveness of a
$118,936 account receivable due from CYNET Interactive. As a result of the
acquisition of CYNET Interactive, CYNET Interactive became a wholly-owned
subsidiary of the Company. The acquisition of CYNET Interactive was approved by
the disinterested members of the Company's Board of Directors.

         HOUSTON ECONOMIC OPPORTUNITY FUND, L.P. In December 1999, Houston
Economic Opportunity Fund, L.P. ("HEOF") acquired 1,766,423 shares of Class A
Common Stock for a purchase price of $1.37 per share as part of the
Rescission Financing. The Company also issued HEOF a warrant to purchase
413,600 shares of Class A Common Stock for a purchase price of $1.00 per
share pursuant to the Enron Advisory Agreement. The warrant is exercisable,
in whole or in part, at any time during the three-year period beginning on
September 30, 1999. On February 4, 2000, the Company also completed a private
placement (the "HEOF Financing") of its securities to HEOF, pursuant to which
HEOF (i) invested $1,600,000 in the Company in exchange for 1,600,000 shares
of the Company's newly-issued Series C Redeemable Callable Preferred Stock,
no par value, and (ii) exchanged 1,766,423 shares of Common Stock owned by
HEOF for 1,766,423 shares of the Company's newly-issued Series D Redeemable
Convertible Preferred Stock, no par value. The HEOF Financing was completed
pursuant to a Stock Purchase Agreement dated as of January 31, 2000 by and
between the Company and HEOF.

         EXECUTIVE EMPLOYMENT AGREEMENTS. In 1998 the Company entered into
employment agreements with each of Vincent W. Beale, Sr., Bernard B. Beale,
David P. Hearon, Jr., Samuel C. Beale and R. Greg Smith. See "Executive
Compensation--Employment Agreements."

         Future transactions with directors, officers, employees or affiliates
of the Company are anticipated to be minimal and will be made or entered into on
terms that are no less favorable to the Company than those that could be
obtained from an unaffiliated third party. Any such transactions will be
approved in advance by a majority of the disinterested members of the Board of
Directors.

ITEM 13.  EXHIBITS AND REPORTS ON FORM 8-K.

EXHIBITS

         3.1               Articles of Incorporation of the Company, as amended
                           (incorporated by reference to the same numbered
                           exhibit to Amendment No. 2 to the Company's
                           Registration Statement on Form SB-2, No. 333-60765,
                           filed September 17, 1999).

                                     32

<PAGE>



         3.2               Bylaws of the Company (incorporated by reference to
                           the same numbered exhibit to Amendment No. 2 to the
                           Company's Registration Statement on Form SB-2, No.
                           333-60765, filed September 17, 1999).

         4.1               Form of Certificate Representing Class A Common Stock
                           (incorporated by reference to the same numbered
                           exhibit to Amendment No. 2 to the Company's
                           Registration Statement on Form SB-2, No. 333-60765,
                           filed September 17, 1999).

         4.2               Form of Certificate Representing Class B Common Stock
                           (incorporated by reference to the same numbered
                           exhibit to Amendment No. 2 to the Company's
                           Registration Statement on Form SB-2, No. 333-60765,
                           filed September 17, 1999).

         4.3               Form of Certificate Representing the Series C
                           Redeemable Callable Preferred Stock

         4.4               Form of Certificate Representing the Series D
                           Redeemable Convertible Preferred Stock

         4.5               Statement of the Powers, Designations, Preferences
                           and Rights of the Series C Preferred Stock

         4.6               Statement of the Powers, Designations, Preferences
                           and Rights of the Series D Preferred Stock

         10.1              Employment Agreement dated as of March 3, 1997,
                           between the Company and Ray C. Davis (incorporated by
                           reference to the same numbered exhibit to the
                           Company's Registration Statement on Form SB-2, No.
                           333-60765, filed August 6, 1998).

         10.2              Assignment of Intellectual Property dated as of March
                           3, 1997, between the Company and Ray C. Davis
                           (incorporated by reference to the same numbered
                           exhibit to the Company's Registration Statement on
                           Form SB-2, No. 333-60765, filed August 6, 1998).

         10.3              Consulting Agreement dated as of June 17, 1997,
                           between the Company and Vincent W. Beale, Sr.
                           (incorporated by reference to the same numbered
                           exhibit to the Company's Registration Statement on
                           Form SB-2, No. 333-60765, filed August 6, 1998).

         10.4              Settlement Agreement and Mutual Release dated as of
                           November 14, 1997, among the Company, Keith Shaffner
                           and CyFax, Inc. (incorporated by reference to the
                           same numbered exhibit to the Company's Registration
                           Statement on Form SB-2, No. 333-60765, filed August
                           6, 1998)

         10.5              1997 Restated Stock Option Plan (incorporated by
                           reference to the same numbered exhibit to Amendment
                           No. 1 to the Company's Registration Statement on Form
                           SB-2, No. 333-60765, filed August 12, 1999).

         10.6              Employment Agreement dated as of February 1, 1998,
                           between the Company and Vincent W. Beale, Sr.
                           (incorporated by reference to the same numbered
                           exhibit to the Company's Registration Statement on
                           Form SB-2, No. 333-60765, filed August 6, 1998).

         10.7              Employment Agreement dated as of March 1, 1998,
                           between the Company and David R. Hearon, Jr.
                           (incorporated by reference to the same numbered
                           exhibit to the Company's Registration Statement on
                           Form SB-2, No. 333-60765, filed August 6, 1998).

         10.8              Employment Agreement dated as of April 13, 1998,
                           between the Company and Ray C. Davis (incorporated by
                           reference to the same numbered exhibit to the
                           Company's Registration Statement on Form SB-2, No.
                           333-60765, filed August 6, 1998).

         10.9              Warrant dated April 13, 1998, issued to Ray C. Davis
                           (incorporated by reference to the same numbered
                           exhibit to the Company's Registration Statement on
                           Form SB-2, No. 333-60765, filed August 6, 1998).

         10.10             Employment Agreement dated as of July 22, 1998,
                           between the Company and Bernard B. Beale
                           (incorporated by reference to the same numbered
                           exhibit to the Company's Registration Statement on
                           Form SB-2, No. 333-60765, filed August 6, 1998).

                                     33

<PAGE>

         10.11             Employment Agreement dated as of July 22, 1998,
                           between the Company and Samuel C. Beale (incorporated
                           by reference to the same numbered exhibit to the
                           Company's Registration Statement on Form SB-2, No.
                           333-60765, filed August 6, 1998).

         10.12             Subscription Agreement dated as of July 22, 1998,
                           between the Company and Cynet Holdings, LLC
                           (incorporated by reference to the same numbered
                           exhibit to the Company's Registration Statement on
                           Form SB-2, No. 333-60765, filed August 6, 1998).

         10.13             Registration Rights Agreement dated as of July 22,
                           1998, between the Company and Cynet Holdings, LLC
                           (incorporated by reference to the same numbered
                           exhibit to the Company's Registration Statement on
                           Form SB-2, No. 333-60765, filed August 6, 1998).

         10.14             Warrant dated July 22, 1998 issued to Cynet Holdings,
                           LLC (incorporated by reference to the same numbered
                           exhibit to the Company's Registration Statement on
                           Form SB-2, No. 333-60765, filed August 6, 1998).

         10.15             Form of Assignment Agreement between the Company and
                           the members of certain limited liability companies
                           (incorporated by reference to the same numbered
                           exhibit to Amendment No. 1 to the Company's
                           Registration Statement on Form SB-2, No. 333-60765,
                           filed August 12, 1999).

         10.16             Letter Agreement dated June 26, 1996, between the
                           Company, Ray Davis and International Fax Corporation
                           (incorporated by reference to the same numbered
                           exhibit to Amendment No. 1 to the Company's
                           Registration Statement on Form SB- 2, No. 333-60765,
                           filed August 12, 1999).

         10.17             Supplement dated October 30,1997, to the Letter
                           Agreement dated June 26, 1996, among the Company, Ray
                           Davis and International Fax Corporation (incorporated
                           by reference to the same numbered exhibit to
                           Amendment No. 1 to the Company's Registration
                           Statement on Form SB-2, No. 333-60765, filed August
                           12, 1999).

         10.18             Employment Agreement dated as of August 26, 1998,
                           between the Company and R. Greg Smith (incorporated
                           by reference to the same numbered exhibit to
                           Amendment No. 1 to the Company's Registration
                           Statement on Form SB-2, No. 333-60765, filed August
                           12, 1999).

         10.19             Settlement Agreement and Mutual Release in Full dated
                           as of August 31, 1998, between the Company and Ray C.
                           Davis (incorporated by reference to the same numbered
                           exhibit to Amendment No. 2 to the Company's
                           Registration Statement on Form SB-2, No. 333-60765,
                           filed September 17, 1999).

         10.20             First Amendment to Subscription Agreement dated July
                           31, 1999, between the Company and Cynet Holdings, LLC
                           (incorporated by reference to the same numbered
                           exhibit to Amendment No. 1 to the Company's
                           Registration Statement on Form SB-2, No. 333-60765,
                           filed August 12, 1999).

         10.21             Purchase and Sale Agreement as of July 31, 1999,
                           between the Company and Cynet Holdings, LLC
                           (incorporated by reference to the same numbered
                           exhibit to Amendment No. 1 to the Company's
                           Registration Statement on Form SB-2, No. 333-60765,
                           filed August 12, 1999).

         10.22             Strategic Alliance Agreement dated August 9, 1999,
                           between the Company and IXC Communications Services,
                           Inc. (incorporated by reference to the same numbered
                           exhibit to Amendment No. 2 to the Company's
                           Registration Statement on Form SB- 2, No. 333-60765,
                           filed September 17, 1999).

         10.23             Letter of December 15, 1998, from the Company to
                           Brooktrout Technology, Inc. (incorporated by
                           reference to the same numbered exhibit to Amendment
                           No. 2 to the Company's Registration Statement on Form
                           SB-2, No. 333-60765, filed September 17, 1999).

                                     34

<PAGE>

         10.24             Joint Sales and Support Agreement dated January 21,
                           1999 between the Company and Telesystems Marketing,
                           Inc. (incorporated by reference to the same numbered
                           exhibit to Amendment No. 2 to the Company's
                           Registration Statement on Form SB- 2, No. 333-60765,
                           filed September 17, 1999).

         10.25             Form of Rescission Fund Escrow Agreement by and among
                           the Company, First Bank Texas, N.A. and each of the
                           Rescission Underwriters (incorporated by reference to
                           the same numbered exhibit to Amendment No. 3 to the
                           Company's Registration Statement on Form SB-2, No.
                           333-60765, filed October 15, 1999).

         10.26             Letter Agreement dated September 22, 1999 and
                           Addendum dated October 22, 1999, among the Company,
                           GlobeWave, Inc. and Teliran Electronic Industries,
                           Inc. (incorporated by reference to the same numbered
                           exhibit to the Company's Registration Statement on
                           Form SB-2, No. 333-92099, filed December 3, 1999).

         10.27             Second Amendment to Subscription Agreement dated
                           January 12, 2000, between the Company and Cynet
                           Holdings, LLC.

         10.28             Securities Purchase Agreement dated as of January 31,
                           2000 by and between the Company and Augustine Fund,
                           L.P.

         10.29             Stock Purchase Agreement dated as of January 31, 2000
                           by and between the Company and Houston Economic
                           Opportunity Fund, L.P.

         10.30             Agreement dated February 16, 2000 among the Company,
                           Teliran Electronics, Ltd., and Cynet Holdings, LLC.

         10.31             Agreement dated March 1, 2000 between the Company and
                           Cynet Holdings, LLC.


         21                Subsidiaries of the Company

Following is a list of the Company's Subsidiaries:

<TABLE>
<CAPTION>
                                                           Other Name Under
                                                           Which Subsidiary             Jurisdiction of
            Name of Subsidiary                            Conducts Business              Incorporation
            ------------------                            -----------------              -------------
            <S>                                           <C>                           <C>
            Worldwide Marketing Services, Inc.                   None                        Texas
            CYNET Interactive, LLC                               None                        Texas

</TABLE>


         27                Financial Data Schedule.

REPORTS ON FORM 8-K FILED DURING THE LAST QUARTER OF THE PERIOD COVERED BY THIS
FORM 10-KSB.

         None.


                                     35

<PAGE>


                                   SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

Date: March 30, 2000                           CYNET, INC.

                                      By:      /s/ Vincent W. Beale, Sr.
                                               ---------------------------------
                                               Vincent W. Beale, Sr., Chairman
                                               of the Board and Chief Executive
                                               Officer
                                               (Principal Executive Officer)

                                      By:      /s/ R. Greg Smith
                                               ---------------------------------
                                               R. Greg Smith, Chief Financial
                                               Officer
                                               (Principal Financial and
                                               Accounting Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons in the capacities and on the
dates indicated:

<TABLE>
<CAPTION>

SIGNATURE                                     TITLE                                               DATE
---------                                     -----                                               ----
<S>                                           <C>                                                 <C>
/s/ VINCENT W. BEALE, SR..                    Chairman of the Board of Directors                  March 30, 2000
------------------------------                and Chief Executive Officer
Vincent W. Beale, Sr.                         (Principal Executive Officer)


/s/ R. GREG SMITH                             Chief Financial Officer                             March 30, 2000
------------------------------                (Principal Financial and Accounting Officer)
R. Greg Smith


/s/ WAYNE SCHROEDER                           Director                                            March 30, 2000
------------------------------
Wayne Schroeder


/s/ DANIEL C. LAWSON                          Director                                            March 30, 2000
------------------------------

</TABLE>

                                     36

<PAGE>

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

                                                                     PAGE
                                                                     ----

CYNET, INC. CONSOLIDATED FINANCIAL STATEMENTS:

     Report of Independent Certified Public Accountants...........    F-2
     Consolidated Balance Sheet...................................    F-3
     Consolidated Statements of Loss..............................    F-4
     Consolidated Statements of Capital Deficit...................    F-5
     Consolidated Statements of Cash Flows .......................    F-6
     Notes to Consolidated Financial Statements...................    F-7 - F-25













                                     F-1

<PAGE>

               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS


CyNet, Inc.
Houston, Texas

We have audited the accompanying consolidated balance sheet of CyNet, Inc. as of
December 31, 1999 and the related consolidated statements of loss, capital
deficit and cash flows for each of the two years in the period ended December
31, 1999. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of CyNet,
Inc. at December 31, 1999 and the results of its operations and its cash flows
for each of the two years in the period ended December 31, 1999, in conformity
with generally accepted accounting principles.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company has incurred losses for the years
ended December 31, 1999 and 1998 totaling $8,303,938 and $4,356,640,
respectively, and at December 31, 1999 had a capital deficit of $3,707,046. The
Company will require additional working capital to develop and support its
technologies and business until the Company either (1) achieves a level of
revenues adequate to generate sufficient cash flows from operations; or (2)
obtains additional financing necessary to support its working capital
requirements. These conditions raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans in regard to this
matter are also described in Note 2. The accompanying consolidated financial
statements do not include any adjustments that might result from the outcome of
these uncertainties.

                                                        BDO SEIDMAN, LLP

Houston, Texas
February 11, 2000, except for note 13,
  which is as of March 10, 2000

                                     F-2

<PAGE>

                                   CYNET, INC.
                           CONSOLIDATED BALANCE SHEET

<TABLE>
<CAPTION>
                                                                                                     December 31,
                                                                                                             1999
                                                                                                     ------------
                                                      ASSETS
                                                      ------
<S>                                                                                                  <C>
Current Assets:
    Cash................................................................................                  $ 182,881

    Accounts receivable:
       Trade, less allowance for doubtful accounts of $140,000..........................                    306,840
       Employees (Note 5)...............................................................                     82,684

    Prepaid expenses - other............................................................                     41,978
                                                                                                     --------------

       Total Current Assets.............................................................                    614,383

Property and Equipment, less accumulated depreciation and amortization (Note 3).........                  2,122,096

Goodwill, less accumulated amortization of $70,596......................................                    183,548
                                                                                                     --------------

                                                                                                       $  2,920,027
                                                                                                     ==============
                                          LIABILITIES AND CAPITAL DEFICIT
                                          -------------------------------
Current Liabilities:
   Accounts payable.....................................................................               $  2,314,635
   Accrued expenses.....................................................................                    836,043
   Dividends payable ...................................................................                    361,773
   Note Payable, including accrued interest (Note 4)....................................                    331,575
   Accrued stock and warrant rights (Note 7)............................................                    115,748
                                                                                                       ------------

   Total Current Liabilities............................................................                  3,959,774
                                                                                                       ------------

Redeemable Class A voting Common Stock (Note 7).........................................                  2,667,299
                                                                                                       ------------

Commitments and Contingencies (Notes 7, 9, 10 and 13)

Capital Deficit (Note 7):
   Cumulative Convertible Preferred Stock:
     Series A, non-voting, $2.00 and $1.43 stated value; 3,600,000 shares authorized;
       66,000 shares issued and outstanding............................................                    109,997
     Series B, non-voting, $3.00 stated value; 2,000,000 shares authorized;
       60,832 shares issued and outstanding.............................................                    126,240
   Common stock:
     Class A voting, no par value; 40,000,000 shares authorized;
       27,784,207 shares issued and outstanding ........................................                 16,263,783
     Class B nonvoting, no par value; 20,000,000 shares authorized;
       2,123,264 shares issued and outstanding .........................................                  3,199,119
     Additional paid-in capital.........................................................                    308,039
     Outstanding warrants...............................................................                  1,888,437
     Deficit............................................................................                (25,602,661)
                                                                                                       -------------

     Total Capital Deficit..............................................................                 (3,707,046)
                                                                                                       -------------

                                                                                                       $  2,920,027
                                                                                                       ============
</TABLE>

          See accompanying notes to consolidated financial statements.
                                     F-3

<PAGE>

                                   CYNET, INC.
                         CONSOLIDATED STATEMENTS OF LOSS

<TABLE>
<CAPTION>
                                                                                                  Years Ended
                                                                                                 December 31,
                                                                                          --------------------------
                                                                                                 1999          1998
                                                                                          -----------   ------------
<S>                                                                                       <C>           <C>
Revenues........................................................................          $ 8,626,675   $  8,947,732

Cost of revenues................................................................            4,807,061      6,069,184
                                                                                          -----------   ------------

Gross profit....................................................................            3,819,614      2,878,548

Selling, general and administrative expenses (Notes 1 and 5)....................           10,223,558      6,107,978

Depreciation and amortization...................................................              930,450        728,975

Write-down of long-lived assets (Note 12).......................................                    -        271,957
                                                                                          -----------   ------------

Loss from operations............................................................           (7,334,394)    (4,230,362)
                                                                                          ------------  ------------

Other income (expense):
  Interest expense (Notes 4 and 7)..............................................             (939,557)      (103,851)
  Interest income...............................................................               24,902          2,816
  Other.........................................................................              (54,889)       (25,243)
                                                                                          ------------  ------------


                                                                                             (969,544)      (126,278)
                                                                                          ------------  ------------


Net loss before dividends on preferred stock....................................           (8,303,938)    (4,356,640)

Dividends on preferred stock....................................................              (46,304)       (40,243)

Accretion on redeemable Class A voting common stock.............................             (247,299)             -
                                                                                          ------------  ------------

Net loss applicable to common stockholders......................................          $(8,597,541)  $ (4,396,883)
                                                                                          ============  ============

Net loss per common share - basic and assuming dilution.........................          $     (.33)   $       (.19)
                                                                                          ===========   ============

Weighted average number of common shares outstanding............................           25,809,272     23,109,154
                                                                                          ===========   ============
</TABLE>














          See accompanying notes to consolidated financial statements.
                                     F-4

<PAGE>

<TABLE>
<CAPTION>
                                                          Series A              Series B                 Class A
                                                       Preferred Stock       Preferred Stock          Common Stock
                                                       ---------------       ---------------          ------------
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998        Shares     Amount     Shares      Amount       Shares       Amount
                                                    --------  ---------   --------   ---------   ----------  -----------
<S>                                                 <C>       <C>         <C>        <C>         <C>         <C>
BALANCE, at December 31, 1997....................    108,500  $       -     77,349   $       -   19,770,165  $ 3,014,936
Issuance of Class B common stock
   subject to rescission.........................          -          -          -           -            -            -
Issuance of Class A common stock.................          -          -          -           -    1,101,767    1,101,767
Issuance of Series B preferred stock
   through a private placement
   subject to rescission.........................          -          -     36,666           -            -            -
Issuance of Class A common stock
   warrants for services.........................          -          -          -           -            -            -
Issuance of Class B common stock
   warrants for services.........................          -          -          -           -            -            -
Purchase of treasury shares,
   Class B common stock..........................          -          -          -           -            -            -
Issuance of Class A common stock
   from treasury, 10,000 shares
   subject to rescission.........................          -          -          -           -            -            -
Issuance of Class A common stock
   to purchase minority interests................          -          -          -           -       92,640            -
Issuance of Class A common stock
   on conversion of Series A
   preferred stock...............................     (5,000)         -          -           -        5,500            -
Issuance of Class B common stock
   on conversion of Series B
   preferred stock...............................          -          -    (26,666)          -            -            -
Accrued dividends on preferred stock.............          -          -          -           -            -            -
Net loss.........................................          -          -          -           -            -            -
                                                    --------  ---------   --------   ---------   ----------  -----------
BALANCE, at December 31, 1998....................    103,500          -     87,349           -   20,970,072    4,116,703
Issuance of Class A common stock.................          -          -          -           -    2,595,000    2,595,000
Issuance of Class A common stock on conversion
   of advances from CyNet Holdings, LLC..........          -          -          -           -    1,119,472    1,119,472
Reclassification of rescission
   liability (Note 5)............................          -          -          -      30,000            -            -
Modification of terms of previously
   issued Class B common stock
   warrants, (Note 5)............................          -          -          -           -            -            -
Acquisition of CyNet Interactive, LLC
   (Note 5)......................................          -          -          -           -            -            -
Accrued dividends on preferred stock.............          -          -          -           -            -            -
Issuance of Class A common stock in
   rescission offer..............................          -          -          -           -    4,490,216    6,151,598
Issuance of Class A common stock warrants in
   rescission offer..............................          -          -          -           -            -            -
Reclassification and accretion of redeemable
   Class A voting common stock...................          -          -          -           -            -   (2,420,000)
Shares rescinded pursuant to the rescission offer
   (Note 7)......................................    (37,500)   109,997    (26,517)     96,240   (1,390,553)   4,742,304
Cost of issuance of Class A common stock.........          -          -          -           -            -      (41,294)
Net loss.........................................          -          -          -           -            -            -
                                                    --------  ---------   --------   ---------   ----------  -----------
BALANCE, at December 31, 1999....................     66,000  $ 109,997     60,832   $ 126,240   27,784,207  $16,263,783
                                                    ========  =========   ========   =========   ==========  ===========


                                                                                       CYNET, INC.
                                                                       CONSOLIDATED STATEMENTS OF CAPITAL DEFICIT

<CAPTION>
                                                               Class B
                                                            Common Stock                 Additional          Warrants (1)
                                                    -------------------------               Paid-in  -----------------------
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998        Shares        Amount                  Capital    Shares      Amount
                                                    -----------   -----------     -----------------  -----------  ----------
<S>                                                 <C>           <C>             <C>                <C>          <C>
BALANCE, at December 31, 1997....................     2,954,470   $   700,000     $               -    3,449,000  $  362,500
Issuance of Class B common stock
   subject to rescission.........................       154,000             -                     -            -           -
Issuance of Class A common stock.................             -             -                     -            -           -
Issuance of Series B preferred stock
   through a private placement
   subject to rescission.........................             -             -                     -            -           -
Issuance of Class A common stock
   warrants for services.........................             -             -                     -    6,800,000           -
Issuance of Class B common stock
   warrants for services.........................             -             -                     -      350,954           -
Purchase of treasury shares,
   Class B common stock..........................             -             -                     -            -           -
Issuance of Class A common stock
   from treasury, 10,000 shares
   subject to rescission.........................             -             -                     -            -           -
Issuance of Class A common stock
   to purchase minority interests................             -             -                     -            -           -
Issuance of Class A common stock
   on conversion of Series A
   preferred stock...............................             -             -                     -            -           -
Issuance of Class B common stock
   on conversion of Series B
   preferred stock...............................        29,333             -                     -            -           -
Accrued dividends on preferred stock.............             -             -                     -            -           -
Net loss.........................................             -             -                     -            -           -
                                                    -----------   -----------     -----------------  -----------  ----------
BALANCE, at December 31, 1998....................     3,137,803       700,000                     -   10,599,954     362,500
Issuance of Class A common stock.................             -             -                     -            -           -
Issuance of Class A common stock on conversion
   of advances from CyNet Holdings, LLC..........             -             -                     -            -           -
Reclassification of rescission
   liability (Note 5)............................             -             -                     -            -           -
Modification of terms of previously
   issued Class B common stock
   warrants, (Note 5)............................             -             -                     -            -   1,344,004
Acquisition of CyNet Interactive, LLC
   (Note 5)......................................             -             -               308,039            -           -
Accrued dividends on preferred stock.............             -             -                     -            -           -
Issuance of Class A common stock in
   rescission offer..............................             -             -                     -            -           -
Issuance of Class A common stock warrants in
   rescission offer..............................             -             -                     -      413,600           -
Reclassification and accretion of redeemable
   Class A voting common stock...................             -             -                     -            -           -
Shares rescinded pursuant to the rescission offer
   (Note 7)......................................    (1,014,539)    2,499,119                     -            -     181,933
Cost of issuance of Class A common stock.........             -             -                     -            -           -
Net loss.........................................             -             -                     -            -           -
                                                    -----------   -----------     -----------------  -----------  ----------
BALANCE, at December 31, 1999....................     2,123,264   $ 3,199,119     $         308,039   11,013,554  $1,888,437
                                                    ===========   ===========     =================  ===========  ==========

<CAPTION>
                                                                        Treasury Stock
                                                                       -------------------
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998          Deficit     Shares       Amount             Total
                                                    --------------     ------  -----------       -----------
<S>                                                 <C>               <C>      <C>               <C>
BALANCE, at December 31, 1997....................   $  (12,682,625)   419,233  $  (727,000)      $(9,332,189)
Issuance of Class B common stock
   subject to rescission.........................                -          -            -                 -
Issuance of Class A common stock.................                -          -            -         1,101,767
Issuance of Series B preferred stock
   through a private placement
   subject to rescission.........................                -          -            -                 -
Issuance of Class A common stock
   warrants for services.........................                -          -            -                 -
Issuance of Class B common stock
   warrants for services.........................                -          -            -                 -
Purchase of treasury shares,
   Class B common stock..........................                -     18,041            -                 -
Issuance of Class A common stock
   from treasury, 10,000 shares
   subject to rescission.........................                -   (419,233)     409,233           409,233
Issuance of Class A common stock
   to purchase minority interests................                -          -            -                 -
Issuance of Class A common stock
   on conversion of Series A
   preferred stock...............................                -          -            -                 -
Issuance of Class B common stock
   on conversion of Series B
   preferred stock...............................                -          -            -                 -
Accrued dividends on preferred stock.............          (40,243)         -            -           (40,243)
Net loss.........................................       (4,356,640)         -            -        (4,356,640)
                                                    --------------  ---------  -----------    --------------
BALANCE, at December 31, 1998....................      (17,079,508)    18,041     (317,767)      (12,218,072)
Issuance of Class A common stock.................                -          -            -         2,595,000
Issuance of Class A common stock on conversion
   of advances from CyNet Holdings, LLC..........                -          -            -         1,119,472
Reclassification of rescission
   liability (Note 5)............................                -          -            -            30,000
Modification of terms of previously
   issued Class B common stock
   warrants, (Note 5)............................                -             -         -         1,344,004
Acquisition of CyNet Interactive, LLC
   (Note 5)......................................                -             -         -           308,039
Accrued dividends on preferred stock.............          (46,304)            -         -           (46,304)
Issuance of Class A common stock in
   rescission offer..............................                -             -         -         6,151,598
Issuance of Class A common stock warrants in
   rescission offer..............................                -             -         -                 -
Reclassification and accretion of redeemable
   Class A voting common stock...................         (247,299)         -            -        (2,667,299)
Shares rescinded pursuant to the rescission offer
   (Note 7)......................................           74,388    (18,041)     317,767         8,021,748
Cost of issuance of Class A common stock.........                -          -            -           (41,294)
Net loss.........................................       (8,303,938)         -            -        (8,303,938)
                                                    ---------------    ------  -----------       -----------
BALANCE, at December 31, 1999....................   $  (25,602,661)         -  $         -       $(3,707,046)
                                                    ===============    ======  ===========       ===========
</TABLE>

(1) Outstanding warrants consisted of the following at December 31:

<TABLE>
<CAPTION>
                                           1998                     1999
                                           ----                     ----
                                      Shares    Amount      Shares        Amount
                                   ---------   --------   ----------     --------
<S>                                <C>         <C>         <C>           <C>
Class A common stock warrants       8,049,000  $201,645     8,462,600    $  181,933
Class B common stock warrants       2,550,954   362,500     2,550,954     1,706,504
                                   ----------  --------   -----------    ----------
                                   10,599,954  $564,145    11,013,554    $1,888,437
                                   ==========  ========   ===========    ==========
</TABLE>



                See accompanying notes to consolidated financial statements.
                                     F-5

<PAGE>

                                   CYNET, INC.

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                           INCREASE (DECREASE) IN CASH

<TABLE>
<CAPTION>
                                                                                                           Years Ended
                                                                                                           December 31,
                                                                                                 -----------------------------
                                                                                                          1999            1998
                                                                                                 -------------    ------------
<S>                                                                                              <C>              <C>
Cash flows from operating activities:
Net loss ..............................................................................          $  (8,303,938)   $ (4,356,640)
Adjustments to reconcile net loss to net cash used in operating activities:
    Depreciation and amortization.......................................................               930,450         728,975
    Write-down of long-lived assets.....................................................                     -         271,957
    Loss on disposal of equipment.......................................................                31,628          25,243
    Property transferred for compensation...............................................                     -          67,283
    Forgiveness of receivable as compensation...........................................                     -         121,043
    Provision for bad debts.............................................................               200,272         349,327
    Stock and warrants issued for compensation and services.............................             1,344,004               -
    Stock and warrant rights issued for loan costs and services.........................                65,748               -
    Expensing of deferred offering costs pursuant to the rescission offer...............               712,567               -
    Changes in assets and liabilities:
      Accounts receivable...............................................................              (126,763)       (658,594)
      Prepaid expenses and other assets.................................................                11,865          54,926
      Accounts payable and accrued expenses.............................................               539,156       1,612,687
                                                                                                 -------------       ---------

   Net cash used in operating activities...............................................             (4,595,011)     (1,783,793)
                                                                                                 --------------     ----------

Cash flows from investing activities:
   Purchase of property and equipment..................................................               (349,678)       (867,835)
   Proceeds from sale of property and equipment........................................                 37,000          55,250
                                                                                                 -------------    ------------

   Net cash used in investing activities...............................................               (312,678)       (812,585)
                                                                                                 --------------   ------------

Cash flows from financing activities:
   Issuance of preferred stock - Series B..............................................                      -         110,000
   Issuance of common stock - Class A, net of issuance costs...........................              8,705,302       1,101,767
   Proceeds from note payable and advances.............................................              1,119,472         600,000
   Payments on note payable............................................................                 (7,512)       (260,913)
   Payment of rescission liability.....................................................             (4,781,699)              -
   Purchase of treasury stock..........................................................                      -         (45,102)
   Sale of treasury stock..............................................................                      -         429,233
                                                                                                 -------------    ------------

   Net cash provided by financing activities...........................................              5,035,563       1,934,985
                                                                                                 -------------    ------------

Net increase (decrease) in cash........................................................                127,874        (661,393)
   Cash, beginning of period...........................................................                 55,007         716,400
                                                                                                 -------------    ------------
   Cash, end of period.................................................................          $     182,881    $     55,007
                                                                                                 =============    ============
</TABLE>






                See accompanying notes to consolidated financial statements.
                                     F-6

<PAGE>

                                   CYNET, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BUSINESS AND BASIS OF PRESENTATION

         The accompanying consolidated financial statements include the accounts
of CyNet, Inc., its 50% (prior to December 1, 1997) owned limited liability
companies ("LLCs") and its wholly-owned subsidiaries Worldwide Marketing, Inc.
formed April 24, 1998 and CyNet Interactive, LLC, acquired in July 1999.
Pursuant to a private placement memorandum, the Company acquired the remaining
50% ownership in the LLCs as of December 1, 1997 (See Note 6). All significant
intercompany accounts and transactions have been eliminated. CyNet, Inc.,
Worldwide Marketing, Inc., CyNet Interactive, LLC and the LLCs are referred to
herein as the Company. During 1998, the Company dissolved each of the LLCs.

         The Company is an Internet business solutions provider integrating full
convergent messaging with internet services. The Company's products and services
are convergent messaging which includes Fax, Data, Voice, E-Mail and Mobile
Messaging, and Internet services which includes custom application development,
e-commerce development, web content creation, web hosting and Internet access.

         The Company is a Texas corporation and was founded in April 1995 to
provide fax services for business-to-business communication. The Company
capitalized on the dramatic increase in the usage of third-party fax services
and created a niche market for itself with its HYPERCAST fax broadcast desktop
client software and service. In 1997, the Company introduced HYPERLINE, its
point-to-point desktop software and fax service in order to expand its existing
fax service.

         Having built a reputation for high performance in communications
through its fax services, the Company responded to the rapid growth and
popularity of e-mail and the Internet as a primary communications medium and set
out to become a full service Internet messaging provider. In 1998, the Company
added to its product offering HYPERWEB, its e-mail-to-fax service; HYPERMAIL,
its fax-to-e-mail service; WEBCAST, its e-mail broadcast service, TELECAST, its
voice broadcast service; and HYPERCOMM, its teleconferencing service. To further
enhance its messaging services, the Company, through its subsidiary Worldwide
Marketing Services, Inc., also added enhancement services such as list
procurement, full-service graphic design and copy development services for its
customers. These additional services enabled the Company to sell complete
messaging solutions with end-to-end control of the solution.

         In July 1999, the Company acquired CyNet Interactive, LLC from CyNet
Holdings, LLC, a 56.2% stockholder of the Company, prior to the rescission offer
and rescission financing, (see Note 5). The acquisition of CyNet Interactive,
LLC allowed the Company to expand its messaging and broadcast enhancement
services to include web site design, Internet application development for
e-commerce and other Internet-based applications, and web site hosting. In July
1999, the Company entered into a strategic alliance with a major Internet
service provider to enable the Company to further expand its products and
services to include Internet access for business customers. This alliance
enables the Company to provide complete, "end-to-end" Internet business
solutions just as it is able to provide complete "end-to-end" messaging business
solutions.

PROPERTY AND EQUIPMENT

         Property and equipment are stated at cost. Depreciation is computed
over the estimated useful lives of the assets using the straight-line method for
financial reporting purposes and accelerated methods for income tax purposes.
Maintenance and repairs are charged to operations as incurred.

         The Company reviews property and equipment for impairment whenever
events or changes in circumstances indicate the carrying value of an asset may
not be fully recoverable.

INCOME TAXES

         Deferred taxes result from temporary differences between the financial
statement and income tax bases of assets and liabilities (see Note 8). The
Company adjusts the deferred tax asset valuation allowance based on judgments as
to future realization of the deferred tax benefits supported by demonstrated
trends in the Company's operating results.

                                     F-7

<PAGE>

                                   CYNET, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

RESEARCH AND DEVELOPMENT

         Expenditures for research and development of telecommunication
technology as it relates to fax broadcasting and to various customer interface
and application needs are charged to expense as incurred. For the years ended
December 31, 1999 and 1998, research and development expenditures were
approximately $755,000 and $398,000, respectively.

REVENUE RECOGNITION

         Messaging and Internet service revenues are recognized as services are
performed. Revenues from sales of customer lists and other related services are
recognized when the list is provided, or the other services are performed. The
Company also earns revenue from fees relating to web site design, Internet
application development for e-commerce and other Internet-based applications,
and web site hosting. These fees are recognized as revenue once the related
activities have been performed and the project is complete.

GOODWILL

         Goodwill recorded in connection with the acquisition of CyNet
Interactive, LLC (see Note 5) is being amortized using the straight-line method
over three years. Periodically, the Company reviews the recoverability of
goodwill. The measurement of possible impairment is based primarily on the
ability to recover the balance of the goodwill from expected future operating
cash flows on an undiscounted basis. In management's opinion, no impairment
exists at December 31, 1999.

LOSS PER COMMON SHARE

         The Company is required to provide basic and dilutive earnings (loss)
per common share information.

         The basic net loss per common share is computed by dividing the net
loss applicable to common stockholders by the weighted average number of common
shares outstanding.

         Diluted net loss per common share is computed by dividing the net loss
applicable to common stockholders, adjusted on an "as if converted" basis, by
the weighted average number of common shares outstanding plus potential dilutive
securities. For the years ended December 31, 1999 and 1998, potential dilutive
securities had an anti-dilutive effect and were not included in the calculation
of diluted net loss per common share.

         These securities at December 31, 1999 and 1998 were as follows:

<TABLE>
<CAPTION>
                                                                                         1999            1998
                                                                                   ----------    ------------
                                                                                     (shares)        (shares)
         <S>                                                                       <C>           <C>
         Conversion of Series A preferred stock - Class A....................          66,000         103,500
         Conversion of Series B preferred stock - Class B....................          60,832          87,349
         Incentive stock option plan - Class A...............................       2,176,249       1,465,563
         Stock warrants outstanding - Class A................................       8,462,600       8,049,000
         Stock warrants outstanding - Class B ...............................       2,550,954       2,550,954
                                                                                   ----------    ------------
                                                                                   13,316,635      12,256,366
                                                                                   ==========    ============
</TABLE>

STOCK OPTIONS AND WARRANTS

         The Company accounts for stock options and warrants issued to employees
in accordance with Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees. For financial statement disclosure purposes and
issuance of options and warrants to non-employees for services rendered, the
Company follows statement of Financial Accounting Standards No. 123, Accounting
for Stock-Based Compensation.

                                     F-8

<PAGE>

                                   CYNET, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

RISKS AND UNCERTAINTIES

         The Company is subject to the business risks inherent in the
telecommunications industry. These risks include, but are not limited to, a high
degree of competition within the telecommunications industry and continuous
technological advances. Future technological advances in the telecommunications
industry may result in the availability of new services or products that could
compete with the enhanced messaging and Internet services currently provided by
the Company or decreases in the cost of existing products or services that could
enable the Company's established or potential customers to fulfill their own
needs for enhanced messaging and Internet services more cost efficiently. There
can be no assurance that the Company would not be adversely affected in the
event of such technological change.

FAIR MARKET VALUE OF FINANCIAL INSTRUMENTS AND CONCENTRATIONS OF CREDIT RISK

         The Company's financial instruments include accounts receivable,
accounts payable and notes payable. The fair market value of accounts
receivable, accounts payable and notes payable approximates their carrying
values because their maturities are generally less than one year in duration.
The Company extends credit to customers in a wide variety of industries and does
not consider there to be a concentration of credit risk.

MANAGEMENT'S ESTIMATES AND ASSUMPTIONS

         The accompanying consolidated financial statements are prepared in
conformity with generally accepted accounting principles which requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

         In June 1998, the Financial Accounting Standards Board issued SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133").
SFAS 133 requires companies to recognize all derivatives contracts as either
assets or liabilities in the balance sheet and to measure them at fair value. If
certain conditions are met, a derivative may be specifically designated as a
hedge, the objective of which is to match the timing of gain or loss recognition
on the hedging derivative with the recognition of (i) the changes in the fair
value of the hedged asset or liability that are attributable to the hedged risk
or (ii) the earnings effect of the hedged forecasted transaction. For a
derivative not designated as a hedging instrument, the gain or loss is
recognized in income in the period of change. SFAS 133 is effective for all
fiscal quarters of fiscal years beginning after June 15, 2000.

         Historically, the Company has not entered into derivatives contracts
either to hedge existing risks or for speculative purposes. Accordingly, the
Company does not expect adoption of the new standard on January 1, 2001 to
affect its financial statements.

                                     F-9

<PAGE>

                                   CYNET, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2 - FINANCIAL CONDITION AND GOING CONCERN

         For the years ended December 31, 1999 and 1998, the Company incurred
net losses totaling $8,303,938 and $4,356,640, respectively, and at December 31,
1999 had a capital deficit of $3,707,046. Because of these recurring losses, the
Company will require additional working capital to develop and support its
technologies and business until the Company either (1) achieves a level of
revenues adequate to generate sufficient cash flows from operations; or (2)
receives additional financing necessary to support the Company's working capital
requirements.

         Subsequent to December 31, 1999, the Company raised a total of
$3,200,000 through debt and equity financing agreements. See Note 13 for the
terms of these agreements. In addition, in accordance with the amended stock
subscription agreement, the Company has a remaining commitment of $4,774,528
from CyNet Holdings, LLC, through June 30, 2000 for additional working capital
needs. See Note 5 for the terms of the stock subscription agreement.

         Additionally, the Company intends to raise additional working capital
through either private placements, public offerings and/or bank financing. As of
February 11, 2000, the Company is in discussions with several investors and
lending institutions, however no definitive agreements have been reached.

         There are no assurances that the Company will be able to either (1)
achieves a level of revenues adequate to generate sufficient cash flow from
operations; or (2) obtain additional financing through either private placement,
public offerings and/or bank financing necessary to support the Company's
working capital requirements. To the extent that funds generated from operations
and any private placements, public offerings and/or bank financing are
insufficient, the Company will have to raise additional working capital. No
assurance can be given that additional financing will be available, or if
available, will be on terms acceptable to the Company. If adequate working
capital is not available the Company may be required to curtail its operations.

         These conditions raise substantial 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
asset carrying amounts or the amount and classification of liabilities that
might be necessary should the Company be unable to continue as a going concern.

NOTE 3 - PROPERTY AND EQUIPMENT

         At December 31, 1999, property and equipment consisted of the
following:

<TABLE>
<CAPTION>
                                                                                      Estimated
                                                                                         Useful
                                                                                    Lives (Years)         Amount
                                                                                    -------------  -------------
         <S>                                                                        <C>            <C>
         Computer equipment................................................                3-5     $   1,778,926
         Computer software.................................................                5             965,420
         Furniture and fixtures............................................                7             559,423
         Telephone equipment...............................................                3-5           305,273
         Automobiles.......................................................                5             152,613
         Leasehold improvements............................................                5             219,822
                                                                                                   -------------
                                                                                                       3,981,477

         Less - accumulated depreciation and amortization..................                            1,859,381
                                                                                                   -------------
                                                                                                   $   2,122,096
                                                                                                   =============
</TABLE>

                                     F-10

<PAGE>

                                   CYNET, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 4 - NOTE PAYABLE

         In August 1998, the Company entered into a five-year agreement with an
early cancellation provision to sell certain of its eligible accounts
receivable, on a revolving basis to a non-affiliated entity. The Company
continues to service the receivables and maintains an allowance for doubtful
accounts based upon the expected collectibility of all accounts receivables,
including the receivables sold. The Company agreed to pay a finance charge on
the accounts receivable sold at rates ranging from 5% to 34.01% based on the
aging of the receivables. However, the Company has not been remitting the
collection of the sold accounts receivable to the factoring agent and has been
using the agreement as a line of credit and is paying finance charges of
approximately 5% per month (60% annually) on the advances. For the year ended
December 31, 1999 and 1998, the Company incurred finance charges of $154,366 and
$66,877, respectively. As of December 31, 1999 the note payable was $331,575,
including accrued interest of $31,596.

NOTE 5 - RELATED PARTY TRANSACTIONS

         Related party transactions for the year ended December 31, 1999 are as
follows:

         (a)  In July 1999, the Company entered into a purchase agreement with
              CyNet Holdings, LLC. Pursuant to the agreement CyNet Holdings, LLC
              transferred all of the outstanding membership interest of CyNet
              Interactive, LLC, a wholly-owned subsidiary of CyNet Holdings,
              LLC, formed March 1999, to the Company, resulting in CyNet
              Interactive, LLC becoming a wholly-owned subsidiary of the
              Company. In consideration for this transfer, the Company forgave a
              $118,936 account receivable due from CyNet Interactive, LLC. Prior
              to the transfer both the Company and CyNet Interactive, LLC were
              considered under common control of CyNet Holdings, LLC.
              Accordingly, the transfer was accounted for at historical cost in
              a manner similar to a pooling of interest. The operations of CyNet
              Interactive, LLC from date of inception through date of
              acquisition were minimal.

         (b)  In September 1999, the Company modified the terms of previously
              issued warrants to purchase 2,200,000 shares of Class B common
              stock. The new terms of the warrants call for the warrants to vest
              immediately, are exercisable at $1.00 per share and expire
              November 4, 2001. Due to the modification of the terms of the
              warrants, the Company recorded a third quarter 1999 non-cash
              charge of approximately $1,344,000 based on the fair value of the
              warrants at the date of modification.

         (c)  During 1999, the Company was advanced $1,119,472 from CyNet
              Holdings, LLC for working capital, pending the outcome of the
              rescission offer. The unsecured advances were non-interest bearing
              and due on demand. As of December 31, 1999, all advances from
              CyNet Holdings, LLC were converted into Class A common stock at
              $1.00 per share under the subscription agreement discussed below.

         (d)  As of December 31, 1999, the Company had an outstanding employee
              receivable from an officer of the Company totaling $50,399.

         Related party transactions for the year ended December 31, 1998 are as
follows:

         (a)  In July 1998, the Company entered into a stock subscription
              agreement with CyNet Holdings, LLC, an entity that beneficially
              owned approximately 56.2% of the Company's Class A common stock to
              finance the Company's capital requirements. The agreement allows
              the related entity to purchase up to 10,000,000 shares of the
              Company's Class A common stock at a $1.00 per share and a five
              year warrant to purchase up to 4,800,000 shares of Class A common
              stock at $1.00 per share. The agreement was subsequently amended
              to extend the duration of the agreement to December 31, 1999 and
              permit the issuance of Class B common stock to the extent that no
              authorized Class A common stock is available. The Company
              determined the warrants had no value on issuance under the minimum
              value method. As of December 31, 1998, the related entity had
              purchased 1,511,000 shares of Class A common stock of which
              409,233 shares were sold from treasury and 1,101,767 were newly
              issued shares, and purchased an additional 3,714,472 shares in
              1999. On January 3, 2000, the stock subscription agreement was
              amended whereby the duration of the agreement was extended to June
              30, 2000 and the price per share was increased to $1.51.

                                     F-11

<PAGE>

                                   CYNET, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

              In addition, in April 1999 CyNet Holdings, LLC acquired 10,000
              shares of Series B preferred stock from a stockholder of the
              Company for $30,000 in accordance with a settlement agreement with
              the stockholder. Accordingly, the acquired shares are no longer
              subject to the rescission offer.

         (b)  In May 1998, stockholders received 350,954 Class B common stock
              warrants for services rendered. The warrants vest immediately, are
              exercisable at $1.00 per share and expire five years from the date
              of issue. The Company determined the warrants had no value on
              issuance under the minimum value method.

         (c)  In April 1998, the Company transferred certain property with a net
              book value of $67,283 to the former president of the Company and
              recorded such transfer as compensation. This amount is in addition
              to compensation paid in accordance with this individual's
              employment agreements.

         (d)  On August 31, 1998, in accordance with a settlement agreement and
              mutual release between the Company and its former president, the
              Company forgave a receivable totaling $121,043 due from this
              individual (see Note 9).

NOTE 6 - PURCHASE OF MINORITY INTEREST OF THE LIMITED LIABILITY COMPANIES

         Effective December 1, 1997, pursuant to a private placement memorandum,
the Company acquired the remaining 50% ownership in the LLCs by issuance of
2,328,940 shares of the Company's Class A common stock. At the time of formation
of the LLCs, the holders of the minority interest paid approximately $1,941,000
for such interest which included a conversion feature of 1.2 shares of the
Company's Class A common stock for every dollar invested by the LLC member upon
certain events, as defined. Based on an independent third party appraisal of the
Company's Class A common stock, there was no additional consideration given
above the original conversion feature for the purchase of the minority interest.
Accordingly, the purchase of the minority interest of the LLCs was accounted for
at book value. In January 1998, the Company issued an additional 92,640 shares
of Class A common stock in connection with the purchase of the minority interest
of the LLCs.

NOTE 7 - CAPITAL

COMMON STOCK

         The Company is authorized to issue up to 60,000,000 shares of its no
par value common stock of which 40,000,000 shares have been designated as Class
A voting common stock and 20,000,000 shares have been designated as Class B
non-voting common stock. The holders of shares of Class A common stock are
entitled to one vote for each share on all matters submitted to a vote of
stockholders. Holders of Class B common Stock are entitled under the Texas
Business Corporation Act to vote in connection with the voluntary dissolution of
the Company but have no voting privileges with respect to other matters. The
holders of both Class A and Class B common stock are entitled to receive such
dividends, if any, as may be declared by the Board of Directors from time to
time out of legally available funds. Upon liquidation or dissolution of the
Company, the holders of both Class A and Class B common stock are entitled to
share ratably in all assets of the Company that are legally available for
distribution, after payment of all debts and other liabilities and subject to
the priority rights of any holders of preferred stock then outstanding. Holders
of Class A and Class B common stock have no preemptive rights to acquire new
securities issued by the Company and have no rights to convert their common
stock into any other securities of the Company.

CLASS A COMMON STOCK

         During the year ended December 31, 1999, in association with the
completion of the rescission offer, the Company issued 4,490,216 shares of Class
A common stock at $1.37 per share, in accordance with the terms of the stand-by
investor agreements. Of the shares issued, 1,766,423 shares are subject to a put
option. See Rescission Offer below for discussion of this put option.

                                     F-12

<PAGE>

                                   CYNET, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

         During the year ended December 31, 1999, in association with the
completion of the rescission offer, the Company purchased and retired 1,390,553
shares of Class A common stock for $2,220,150, not including interest and
dividends paid. See Rescission Offer below.

         During the years ended December 31, 1999 and 1998, the Company sold
3,714,472 and 1,511,000 shares of common stock, respectively, at $1.00 per share
to CyNet Holdings, LLC, a related entity of which 409,233 were issued from
treasury stock for the year ended December 31, 1998. In addition, during 1998
the Company sold 10,000 shares of Class A common stock from treasury stock for
$2.00 a share, which were subject to the rescission offer.

         During the year ended December 31, 1998, the Company issued 92,640
shares of Class A common stock in connection with the purchase of the minority
interest of the LLCs, see Note 6.

CLASS B COMMON STOCK

         During the year ended December 31, 1999, in association with the
completion of the rescission offer, the Company purchased and retired 1,014,539
shares of Class B common stock for $2,376,999, not including interest and
dividends paid. See Rescission Offer below.

         During the year ended December 31, 1998, the Company purchased 18,041
shares of Class B common stock for $45,102 which were subject to the rescission
offer.

         During the year ended December 31, 1998, the Company issued 154,000
shares of Class B common stock valued at $60,000. The stock rights were accrued
at December 31, 1997 for consulting services and were subject to the rescission
offer.

         At December 31, 1999, the Company had common stock reserved for future
issuance as follows:

<TABLE>
<CAPTION>
                                                                                                         1999
                                                                                                 ------------
                                                                                                     (shares)
         <S>                                                                                     <C>
         Conversion of Series A preferred stock to Class A...................                          66,000
         Conversion of Series B preferred stock to Class B...................                          60,832
         Stock rights - Class A..............................................                          50,000
         Warrant rights - Class B............................................                         100,000
         Incentive stock option plan - Class A...............................                       2,176,249
         Stock warrants outstanding - Class A................................                       8,462,600
         Stock warrants outstanding - Class B................................                       2,550,954
                                                                                                 ------------
                                                                                                   13,466,635
                                                                                                 ============
</TABLE>

PREFERRED STOCK

         The Company is authorized to issue up to 10,000,000 shares of no par
value preferred stock. The preferred stock may be issued in one or more series,
the terms of which may be determined at the time of issuance by the Board of
Directors, without further action by stockholders, and may include voting rights
(including the right to vote as a series on a particular matter), preferences as
to dividends and liquidation, conversion, redemption rights and sinking fund
provisions.

SERIES A PREFERRED STOCK

         The Company is authorized to issue a total of 3,600,000 shares of
Series A preferred stock. The preferred stock is non-voting, has a $2.00 per
share stated value and has an annualized dividend rate of $0.24 per share.
Attributes of the Series A preferred stock are discussed below:

                                     F-13

<PAGE>

                                   CYNET, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

         RANKING. The Series A preferred stock is senior to the Company's common
and Series B preferred stock with respect to dividends and rights upon
liquidation or dissolution of the Company. As long as any Series A preferred
stock is outstanding, the Company will not be entitled to authorize or issue any
class of securities that is senior to or on parity with the Series A preferred
stock without the approval of holders of at least 66-2/3% of the Series A
preferred stock.

         VOTING RIGHTS. Holders of Series A preferred stock are not entitled to
vote.

         DIVIDEND RIGHTS. The holders of Series A preferred stock are entitled
to receive out of funds of the Company legally available, dividends at an annual
rate of $0.24 per share, payable semi-annually in arrears in two equal
installments of $0.12 in June and December of each year. Dividends accrue and
accumulate from the date of first issuance and are paid to holders of record as
they appear on the books of the Company as of the record date of the last day of
May and November in each year which immediately precedes each respective
dividend payment date. Accumulation of dividends does not bear interest. So long
as the Series A preferred stock is outstanding, the Company may not declare or
pay any dividends on the common stock or other stock unless the full cumulative
dividends on the Series A preferred stock have been paid in full.

         CONVERSION AND MANDATORY CONVERSION. Shares of Series A preferred stock
are convertible by the holder at any time (a) on or after the date of issuance
and before November 1, 1997 into shares of Class A common stock at a conversion
rate of 1.2 shares of Class A common stock for each share of Series A preferred
stock tendered; and (b) after November 1, 1997 and before September 1, 1998 at a
conversion rate of 1.1 shares of Class A common stock for each share of Series A
preferred stock (c) after September 1, 1998 the conversion rate is 1.0. Any
accrued and unpaid dividends will be paid to holders of the Series A preferred
stock at the time of conversion. The Company at its sole discretion and option
has the right to require that holders of Series A preferred stock to convert
their shares to Class A common stock at any time on or after January 1, 1999. In
the event of this mandatory conversion election by the Company, holders of
Series A preferred stock will receive one share of Class A common stock for each
share of Series A preferred stock.

         LIQUIDATION RIGHTS. In the event of liquidation or dissolution of the
Company, whether voluntary or otherwise, after payment or provision for payment
of the debts and other liabilities of the Company, the holders of the Series A
preferred stock are entitled to receive, out of the remaining net assets of the
Company available for distribution to stockholders before any distribution or
payment made to holders of common stock or Series B preferred stock other junior
capital stock, the Series A preferred stock stated value of $2.00 per share plus
any accrued and unpaid dividends. Upon payment of the full amount of the Series
A preferred stock stated value plus any unpaid dividends, the holders of Series
A preferred stock shall not be entitled to any further participation in any
distribution of assets of the Company.

         During the year ended December 31, 1999, in association with the
completion of the rescission offer, the Company purchased and retired 37,500
shares of Series A preferred stock for $75,000, not including interest and
dividends paid. See Note 7 rescission offer.

         During the year ended December 31, 1998, 5,000 shares of previously
issued Series A preferred stock were converted into 5,500 shares of Class A
common stock at a conversion rate of 1.1 share of Class B common stock for each
share of Series B preferred stock.

SERIES B PREFERRED STOCK

         The Company is authorized to issue a total of 2,000,000 shares of
Series B cumulative convertible preferred stock. The preferred stock is
non-voting, has a $3.00 per share stated value and has an annualized dividend
rate of $0.30 per share. Attributes of the Series B preferred stock are
discussed below:

         RANKING. The Series B preferred stock is junior to the Series A
preferred stock and senior to the Company's common stock with respect to
dividends and rights upon liquidation or dissolution of the Company. As long as
any Series B preferred stock is outstanding, the Company will not be entitled to
authorize or issue any class of securities that is senior to or on parity with
the Series B preferred stock without the approval of holders of at least 66-2/3%
of the Series B preferred stock.

         VOTING RIGHTS. Holders of Series B preferred stock are not entitled to
vote.

                                     F-14

<PAGE>

                                   CYNET, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

         DIVIDEND RIGHTS. The holders of Series B preferred stock are entitled
to receive out of funds of the Company legally available, dividends at an annual
rate of $0.30 per share, payable semi-annually in arrears in two equal
installments of $0.15 in June and December of each year. Dividends accrue and
accumulate from the date of first issuance and are paid to holders of record as
they appear on the books of the Company as of the record date of the last day of
May and November in each year which immediately precedes each respective
dividend payment date. Accumulation of dividends will not bear interest. So long
as the Series A or B preferred stock is outstanding, the Company may not declare
or pay any dividend on the common stock or other capital stock unless the full
cumulative dividends on the Series A and Series B preferred stock have been paid
in full.

         CONVERSION AND MANDATORY CONVERSION. Shares of Series B preferred stock
are convertible by the holder at any time (a) on or after the date of issuance
and before November 1, 1997 into shares of Class B non-voting common stock at a
conversion rate of 1.2 shares of such common stock for each share of Series B
preferred stock; and (b) after November 1, 1997 and before September 1, 1998 at
a conversion rate of 1.1 shares of Class B non-voting common stock for each
share of Series B preferred stock after September 1, 1998 the conversion rate is
1.0. Any accrued and unpaid dividends will be paid to holders of the Series B
preferred stock at the time of conversion. The Company at its sole discretion
and option has the right to require that holders of Series B preferred stock to
convert their shares to Class B non-voting common stock at any time on or after
January 1, 1999. In the event of this mandatory conversion election by the
Company, holders of Series B preferred stock will receive one share of Class B
non-voting common stock for each share of Series B preferred stock.

         LIQUIDATION RIGHTS. In the event of liquidation or dissolution of the
Company, whether voluntary or otherwise, after payment or provision for payment
of the debts, other liabilities of the Company, and Series A preferred
shareholders, the holders of the Series B preferred stock are entitled to
receive, out of the remaining net assets of the Company available for
distribution to stockholders before any distribution or payment made to holders
of common stock or other junior capital stock, the Series B preferred stock
stated value of $3.00 per share plus any accrued and unpaid dividends. Upon
payment of the full amount of the Series B preferred stock stated value plus any
unpaid dividends, the holders of Series B preferred stock shall not be entitled
to any further participation in any distribution of assets of the Company.

         During the year ended December 31, 1999, in association with the
completion of the rescission offer, the Company purchased and retired 26,517
shares of Series B preferred stock for $109,500, not including interest and
dividends paid. See Rescission Offer below.

         During the year ended December 31, 1998, the Company sold 36,666 shares
of Series B preferred stock for $3 per share for net cash proceeds of $110,000.
Of these shares, 26,666 shares were converted into 29,333 shares of Class B
common stock during the year ended December 31, 1998 at a conversion rate of 1.1
shares of Class B common stock for each share of Series B preferred stock.

RESCISSION OFFER

         During 1998, 1997 and 1996, the Company sold certain common and
preferred stock which were not registered pursuant to the federal and state
securities laws, but were sold in a series of three private placement offerings
in reliance upon the exemptions from registration afforded by (i) Sections 3(b)
and 4(2) of the Securities Act of 1933, as amended, and Regulation D promulgated
thereunder and (ii) various state limited offering provisions, respectively. In
addition, the Company issued certain common and preferred stock and stock
warrants for services provided to the Company.

                                     F-15

<PAGE>

                                   CYNET, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

         However, the Company was advised that under the integration provisions
of Regulation D, the private placement offerings may be viewed by the Securities
and Exchange Commission as one continuous offering and, as such, may not have
been conducted in compliance with all applicable Regulation D limited offering
conditions. If the private placement offerings were not conducted in compliance
with the securities laws, the purchasers of the common and preferred stock would
have the right to have such securities repurchased by the Company for an amount
equal to the purchase price paid less any dividends received plus interest, or
if the common and preferred stock have been disposed of by the holder at a loss,
the difference between the purchase price and the price received upon disposal
less dividends received plus interest. In addition, the Company determined that
certain issuances of common and preferred stock and stock warrants issued for
services were also subject to rescission for an amount equal to the estimated
value of services rendered to the Company. As a result, the Company elected to
make a rescission offer to the holders of certain issuances of common and
preferred stock and stock warrants. The rescission offer was effective October
18, 1999, and was outstanding for approximately thirty-five days. Of the common
stock and preferred stock sold during 1998, 1997 and 1996, taking into
consideration the conversion of Series A and B preferred stocks, 5,300,304 and
2,050,093 shares of Class A and B common stock for net proceeds of $7,988,989
and $5,119,475, respectively; 103,500 shares of Series A preferred stock for net
proceeds of $207,000 and 77,349 shares of Series B preferred stock for net
proceeds of $232,047, were subject to the rescission offer, less dividends paid
on Series A and B preferred stock of $192,478 and $55,650, respectively, prior
to the conversion to common stock.

         Regarding the common and preferred stock and stock warrants issued for
services in prior periods, as previously discussed; 214,187 shares of Class A
common stock valued at $149,887, taking into consideration the conversion of
Series A preferred stocks; 669,640 shares of Class B common stock valued at
$299,099 taking into consideration conversion of Series B preferred stock; and
799,000 Class A common stock warrants valued at $201,640, were subject to the
rescission offer.

         Accordingly, the Company was precluded from classifying these
securities and proceeds as capital until such time as the rescission offer was
completed. At which time the Company classified as capital such securities and
proceeds to the extent the security holders elected to retain their ownership in
the Company. For security holders electing to rescind their ownership, the
rescission price was paid in cash.

         The Company's rescission offer was effective October 18, 1999 and was
outstanding for approximately thirty-five days. The following is a summary of
the outcome of the rescission offer:

<TABLE>
<CAPTION>

                                                          Stockholders
                             Securities Subject to     Electing to Accept
                                Rescission Offer        Rescission Offer                                Total
                          ------------------------  ----------------------     Interest Dividends     Rescission
Class of Stock                Shares        Amount      Shares      Amount    Expenses        Paid    Liability
--------------            ----------  ------------  ----------  ----------   ---------  ----------   -----------
<S>                       <C>         <C>           <C>         <C>          <C>        <C>          <C>
Series A Preferred Stock     103,500  $    201,265      37,500  $   75,000   $  12,775  $   (2,333)  $    85,442
Series B Preferred Stock      77,349       229,923      26,517     109,550      22,720        (855)      131,415
Class A Common Stock       5,514,491     7,952,134   1,390,553   2,220,150     421,791     (81,497)    2,560,444
Class B Common Stock       2,719,733     5,365,047   1,014,539   2,376,999     400,732     (18,133)    2,759,598
Warrants - Class A           799,000       201,640           -           -           -           -             -
                                      ------------              ----------   ---------  ----------   -----------

                                      $ 13,950,009              $4,781,699   $ 858,018  $ (102,818)  $ 5,536,899
                                      ============              ==========   =========  ===========  ===========
</TABLE>

         To fund the rescission liability of $5,536,899, the Company arranged
for stand-by investors. During the year ended December 31, 1999, the Company
entered into agreements with stand-by investors to provide $6,151,598 to fund
the rescission offer. The agreements provided that the stand-by investors
purchase up to $6,151,598 of Class A common stock at $1.37 per share to the
extent stockholders elected to accept the rescission offer. In addition with the
consent of the stand-by investors, any unused proceeds from the stand-by
investors that remained after the funding of the rescission offer was used by
the Company for general working capital purposes.

                                     F-16

<PAGE>

                                   CYNET, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

         One of the agreements entered into by the Company discussed above
contains a put option. In accordance with the agreement, this stand-by investor,
which committed to fund $2,420,000 of the rescission financing, can put their
shares back to the Company by the anniversary date of the expiration of the
rescission offer at a $1.51 per share. Accordingly, the $2,420,000 was
immediately accreted up to $2,667,299 to reflect the put option and classified
outside of the equity section as mezzanine capital until such time the put
option has expired. In addition, in August 1999 the Company entered into an
agreement with a related entity of the stand-by investor to provide financial
advisory services to the Company. In accordance with the agreement the related
entity received warrants to purchase 413,600 shares of the Company's Class A
common stock. The warrants have an exercise price of $2.00 per share, vest
immediately and expire three years from issuance.

COMMON STOCK OPTIONS AND WARRANTS

         In September, 1999, the Company agreed in principle with a stockholder
of the Company to issue a warrant to purchase 100,000 share of Class B common
stock for assistance with the private placement of preferred stock. The warrant
vests immediately, is exercisable at $1.00 per share and expires November 4,
2001. Due to the settlement of the claim with the stockholder, the Company
accrued a third quarter 1999 non-cash charge of approximately $66,000 based on
the fair value of the warrant.

         In July 1998, the Company issued warrants to purchase 4,800,000 shares
of Class A common stock at $1.00 per share for a term of five years, see Note 5.
The warrants vest immediately and had no value on issuance under the minimum
value method.

         In April 1998, the Company issued warrants to purchase 2,000,000 shares
of Class A common stock at $1.00 per share for a term of five years in
connection with an employment agreement with the Company's former president. The
warrants vest immediately and had no value on issuance under the minimum value
method. Subsequent to receiving these warrants, the Company's former president
assigned the warrants to various stockholders, including 1,710,000 warrants to
the new Chairman of the Board and Chief Executive Officer of the Company.

         In May 1998, the Company issued warrants to purchase 350,954 shares of
Class B common stock at $1.00 per share for a term of five years for services
rendered. The warrants vest immediately and had no value on issuance under the
minimum value method.

         During the year ended December 31, 1997, the Company's Board of
Directors approved and the Company adopted the 1997 Incentive Stock Option Plan
(the Plan) which was amended and restated effective July 1999. The Plan provides
for the granting of Class A common stock options to key employees of the
Company. Within certain limitations provided by the Plan, such options may
include provisions regarding vesting, exercise price, the amount of each grant
and other terms as shall be approved by the Board of Directors or by a committee
designated by the Board of Directors. Options granted under the Plan may be
either options that qualify as "incentive stock options", within the meaning of
Section 422 of the Internal Revenue Code of 1986, as amended, or those that do
not qualify as such "incentive stock options" ("non-qualified options"). The
Plan, which permits up to 2,000,000 shares of the Company's Class A Common Stock
to be issued, terminates on October 19, 2007.

                                     F-17

<PAGE>

                                   CYNET, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

         A summary of the Company's stock option plan for the years ended
December 31, 1999 and 1998 is presented below:

<TABLE>
<CAPTION>
                                                               1999                              1998
                                                    -------------------------      ----------------------------
                                                                     Weighted                        Weighted
                                                                      Average                         Average
                                                                     Exercise                        Exercise
                                                        Shares          Price          Shares           Price
                                                 -------------  -------------      ----------    --------------
         <S>                                     <C>            <C>                <C>           <C>
         Options outstanding at
           beginning of year.....................    1,465,563   $        .39               -    $           -
         Options granted.........................      940,000           1.11       1,475,000              .39
         Options exercised.......................            -              -               -                -
         Options cancelled.......................     (229,314)           .50          (9,437)             .39
                                                 --------------  ------------      ----------    -------------
         Options outstanding at
           end of year...........................    2,176,249   $        .67       1,465,563    $         .39
                                                 =============   ============      ==========    =============
         Shares exercisable......................      926,250   $        .39         738,438    $         .39
                                                 =============   ============      ==========    =============
         Weighted-average fair value of
           options from during the year..........                $        .62                    $         .22
                                                                 ============                    =============
</TABLE>

         The following table summarizes information about stock options
outstanding at December 31, 1999:

<TABLE>
<CAPTION>
                               OPTIONS OUTSTANDING                                      OPTIONS EXERCISABLE
              ---------------------------------------------------------------    -----------------------------
                                                      Weighted
                                                       Average       Weighted                         Weighted
                   Range of           Number         Remaining        Average          Number          Average
                   Exercise      Outstanding       Contractual       Exercise      Exercisable        Exercise
                     Prices      At 12/31/99              Life          Price      At 12/31/99           Price
              -------------   --------------     -------------    -----------    -------------     -----------
              <S>             <C>                <C>              <C>            <C>               <C>
              $ .39 - $ 1.51       2,176,243            3.8           $ .67           926,250          $ .39
</TABLE>

         SFAS 123 requires the Company to provide pro forma information
regarding net loss applicable to common stockholders and loss per share as if
compensation cost for the Company's stock options granted had been determined in
accordance with the fair value based method prescribed in that Statement. The
Company estimates the fair value of each stock option at the grant date by using
the Black-Scholes option pricing model with the following weighted average
assumptions used for grants in 1999 and 1998:

<TABLE>
<CAPTION>
                                                                                         1999            1998
                                                                                   ----------    ------------
        <S>                                                                        <C>           <C>
         Dividend yield................................................                    0%              0%
         Expected volatility...........................................                   60%             60%
         Risk-free interest rate.......................................                    6%              5%
         Expected lives................................................               5 years         5 years
</TABLE>

         Under the accounting provisions of SFAS No. 123, the Company's net loss
applicable to common stockholders and loss per share would have been revised to
the pro forma amounts indicated below:

<TABLE>
<CAPTION>
                                                                                            For the Years Ended
                                                                                                   December 31,
                                                                                     ---------------------------
                                                                                            1999            1998
                                                                                     -----------    ------------
         <S>                                                                         <C>            <C>
         Net loss applicable to common stockholders:
              As reported..............................................              $(8,597,541)   $(4,396,883)
                                                                                     ============   ============
              Pro forma................................................              $(8,655,315)   $ (4,557,531)
                                                                                     ============   =============
         Net loss per common share:
            Basic and assuming dilution
              As reported..............................................              $     (.33)      $    (.19)
                                                                                     ===========      ==========
              Pro forma................................................              $     (.34)      $    (.20)
                                                                                     ===========      ==========
</TABLE>

                                     F-18

<PAGE>

                                   CYNET, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 8 - INCOME TAXES

         Deferred taxes are determined based on the temporary differences
between the financial statement and income tax bases of assets and liabilities
as measured by the enacted tax rates which will be in effect when these
differences reverse.

         The components of deferred income tax assets (liabilities) at December
31, 1999, were as follows:

<TABLE>
<CAPTION>
                                                                                       Amount
                                                                                -------------
         <S>                                                                    <C>
         Net operating loss carryforward....................................    $   6,826,000
         Warrant expense.....................................................         457,000
         Loss on write-off of investments....................................         409,000
         Property and equipment.............................................           27,000
         Other ..............................................................         (11,000)
                                                                                --------------
         Gross deferred tax assets...........................................       7,708,000
         Valuation allowance.................................................      (7,708,000)
                                                                                --------------
         Net deferred tax assets.............................................   $           -
                                                                                =============
</TABLE>

         At December 31, 1999, the Company provided a 100% valuation allowance
for the deferred tax asset because it could not determine whether it was more
likely than not that the deferred tax asset would be realized.

         For the years ended December 31, 1999 and 1998, the income tax benefit
determined by applying the statutory income tax rate to pre-tax loss from
operations differs from the actual benefit as follows:

<TABLE>
<CAPTION>
                                                                                        1999             1998
                                                                                  ----------     ------------
         <S>                                                                    <C>             <C>
         Provision for income tax benefit at statutory rate..................   $  (2,823,000)  $  (1,481,000)
         Change in deferred tax asset valuation allowance....................       2,815,000       1,476,000
         Other...............................................................           8,000           5,000
                                                                                --------------   ------------
                                                                                $           -   $           -
                                                                                =============   =============
</TABLE>

         At December 31, 1999, the Company had a net operating loss
carryforwards for federal income tax purposes totaling approximately $20,077,000
which, if not utilized, will expire as follows:

<TABLE>
<CAPTION>

         Year Ended December 31,                                                     Amount
         -----------------------                                                -----------
         <S>                                                                    <C>
         2010 ..............................................................    $    61,000
         2011 ...............................................................       888,000
         2012 ...............................................................     7,400,000
         2018 ...............................................................     4,704,000
         2019 ...............................................................     7,024,000
                                                                                ------------

                                                                                $20,077,000
                                                                                ===========
</TABLE>

         In April 1998, the Company had a change in ownership which has resulted
in the Company's net operating loss carryforwards being subject to certain
utilization limitations in the future.






                                     F-19

<PAGE>

                                   CYNET, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 9 - COMMITMENTS AND CONTINGENCIES

LEASES

         The Company is obligated under a long-term non-cancelable operating
lease for office space expiring through the year 2003, at a minimum annual rent
as follows:

<TABLE>
<CAPTION>

         YEAR ENDED DECEMBER 31                                                    AMOUNT
         ----------------------                                                    ------
         <S>                                                                  <C>
         2000 ..............................................................   $  362,123
         2001 ...............................................................     345,623
         2002 ...............................................................     311,663
         2003 ...............................................................      75,201
                                                                               ----------

                                                                               $1,094,610
                                                                               ==========
</TABLE>

         Rent expense for the years ended December 31, 1999 and 1998 totaled
$378,508 and $225,693, respectively.

TELECOMMUNICATION CARRIER DISPUTE

         On January 31, 2000, the Company received a letter from a major
telecommunications carrier asserting that the Company had failed to meet certain
financial obligations including both payment for services rendered totaling
approximately $248,000 and certain short fall penalties on volume commitments
for long distance services totaling approximately $1,100,000. The alleged
liability to the Company as a result of this agreement, including future year
volume commitments and other expenses is approximately $4,000,000. The Company
has disputed the claim based on the Company's assertion that the carrier
breached the contract with respect to services rendered. The parties are
presently in preliminary discussions to resolve their disputes. The Company
believes it will resolve the issues relating to this dispute by entering into a
new multi-year agreement for long distance or related services and does not
expect this dispute will have a material adverse effect on the Company. As of
December 31, 1999, the Company had recorded a liability of approximately
$179,000 for services rendered.

LITIGATION

         On November 19, 1999, the Company and CyNet Interactive were named as
defendants in a suit filed by a former customer of CyNet Interactive. The
plaintiff alleges, among other things, that CyNet Interactive failed to complete
the design and development of an Internet Live Auction project in accordance
with alleged contract terms and conditions, and is seeking to recover actual and
treble damages. The Company has retained counsel to vigorously defend the
matter. Although the Company has not completed its investigation of the claims
asserted by the plaintiff in this matter, the Company does not believe that this
suit will have a material adverse effect on the Company. The Company is not a
party to any other legal proceedings which the Company believes could have a
material adverse effect on the Company.

EMPLOYMENT AGREEMENTS

         On February 1, 1998, the Company entered into an employment agreement
with the Chairman of the Board and Chief Executive Officer of the Company. The
five year agreement provides for an annual salary of $180,000, plus incentives
and certain employee benefits, as defined by the agreement. The agreement also
provides for a $30,000 signing bonus and an option under the Company's 1997
Incentive Stock Option Plan to purchase 100,000 shares of Class A common stock
at a price of $.39 per share which vests immediately and is exercisable over a
five year period.

         On March 1, 1998, the Company entered into an employment agreement with
the Vice President of Operations of the Company. The four year agreement
provides for an annual salary of $150,000, plus incentives and certain employee
benefits, as defined by the agreement. The agreement also provides for a $30,000
signing bonus, which was accrued for as of December 31, 1998 and subsequently
paid, and an option under the Company's 1997 Incentive Stock Option Plan to
purchase 75,000 shares of Class A common stock at a price of $.39 per share
which vests 25% annually and is exercisable over a five year period.

                                     F-20

<PAGE>

                                   CYNET, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

         On July 22, 1998, the Company entered into an employment agreement with
the Executive Vice President of the Company. The four year agreement provides
for an annual salary of $150,000, plus incentives and certain employee benefits,
as defined by the agreement. The agreement also provides for a $30,000 signing
bonus, which was accrued for as of December 31, 1998 and subsequently paid, and
an option under the Company's 1997 Incentive Stock Option Plan to purchase
150,000 shares of Class A common stock at a price of $.39 per share which vests
immediately and is exercisable over a five year period.

         On July 22, 1998, the Company entered into an employment agreement with
the Vice President, General Counsel and Secretary of the Company. The three year
agreement provides for an annual salary of $108,000, plus incentives and certain
employee benefits, as defined by the agreement. The agreement also provides for
a $30,000 signing bonus, which was accrued for as of December 31, 1998 and
remains unpaid, and an option under the Company's 1997 Incentive Stock Option
Plan to purchase 100,000 shares of Class A common stock at a price of $.39 per
share which vests immediately and is exercisable over a five year period.

         On August 26, 1998, the Company entered into an employment agreement
with the Chief Financial Officer. The three year agreement provides for an
annual salary of $125,000, plus incentives and certain employee benefits, as
defined by the agreement. The agreement also provides for a $30,000 signing
bonus, which was accrued for as of December 31, 1998 and subsequently paid, and
an option under the Company's 1997 Incentive Stock Option Plan to purchase
100,000 shares of Class A common stock at a price of $.39 per share which vests
33% annually and is exercisable over a five year period.

         In March 1997, the former President of the Company, who was also a
stockholder, entered into an employment agreement. The agreement provided for a
three year employment term that automatically renewed annually with the first
year compensation set at $220,000, plus incentives and certain employee
benefits, as defined by the agreement. If the former President terminated his
employment for good reason or the Company terminated the President other than
for cause or disability, the former President was entitled to receive three
times his annual salary and bonus, as defined by the agreement, vesting of any
options and any such amounts credited to a qualified plan, continuation of
certain benefits for a year and any other amount due the former President. The
agreement also provided for a $50,000 signing bonus.

         On April 13, 1998, the former President of the Company terminated his
original employment agreement discussed above, resigned as president and sold
his stock ownership interest in the Company to an entity which is partially
owned by certain existing stockholders of the Company. In accordance with the
agreement the former president entered into a new five-year employment agreement
which provides for an annual salary of $150,000, a 2,000,000 Class A common
stock warrant that vests immediately and is exercisable over a five year period
at $1 per share and participation in certain of the Company's employee benefit
plans. Subsequent to receiving this warrant the Company's former president
assigned the warrant to various stockholders, including 1,710,000 warrants to
the new Chairman of the board and Chief Executive Officer of the Company. The
agreement provides that the individual will devote approximately one-half of his
business time and attention to the business of the Company.

         On August 31, 1998, the former president of the Company terminated his
employment agreement dated April 13, 1998, discussed above, and entered into a
settlement agreement and mutual release with the Company. In accordance with the
agreement the individual terminated his employment and waived his right to
receive any compensation in accordance with this current employment agreement.
In return, the Company agreed to forgive a receivable from the individual of
$121,043.

NOTE 10 - EMPLOYEE BENEFIT PLAN

         The Company has a savings and profit sharing plan which allows
participants to make contributions by salary reduction pursuant to Section
401(k) of the Internal Revenue Code. Participants may elect to defer up to 15%
of their compensation annually based on certain limits established by the
Internal Revenue Code. The Company may elect a discretionary matching
contribution annually. Participants' salary deferral contributions are fully
vested when made and Company discretionary match contributions vest over a five
year period. The Company made no discretionary matching contributions for the
years ended December 31, 1999 and 1998.

                                     F-21

<PAGE>

                                   CYNET, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 11 - SUPPLEMENTAL CASH FLOW INFORMATION

         During the year ended December 31, 1999, the Company had the following
non-cash transactions:

         (a)  During 1999, the Company completed a rescission offer as discussed
              in Note 7. Of the outstanding liability at December 31, 1998, of
              $13,980,009, $4,781,699 was rescinded for cash and the remainder
              was reclassified as follows:

<TABLE>
<CAPTION>
                                                                                                    Amount
                                                                                             -------------
<S>                                                                                          <C>
              Rescission liability at December 31, 1998.................................     $  13,980,009

              Rescinded for cash........................................................         4,781,699
                                                                                             -------------

              Reclass to equity.........................................................         9,198,310

              Reclass deferred offering costs to equity for shares not rescinded........        (1,366,258)

              Reclass accrued dividends no longer payable to equity.....................           219,696

              Reclass shares purchased by CyNet Holdings, LLC during 1999...............           (30,000)
                                                                                             --------------

              Net reclass to equity to reflect the rescission offer.....................     $   8,021,748
                                                                                             =============
</TABLE>


         (b) The Company accrued dividends payable totaling $46,304.

         (c)  The Company acquired CyNet Interactive, LLC from CyNet Holdings,
              LLC in a transaction accounted for at historical cost in a manner
              similar to a pooling of interest (see Note 5). This transaction
              resulted in an increase to additional paid-in capital of $308,039,
              increase in property, plant and equipment of $53,895 and an
              increase in goodwill of $254,144.

         (d)  The Company issued 1,119,472 shares of the Company's Class A
              common stock on conversion of advance totaling $1,119,472 from
              CyNet Holdings, LLC.

         During the year ended December 31, 1998, the Company had the following
non-cash transactions:

         (a) The Company accrued dividends payable totaling $40,243.

         (b) The Company issued 154,000 shares of Class B common stock valued
             at $60,000 for services.


NOTE 12 - WRITE-DOWN OF LONG-LIVED ASSETS

         During 1998, the Company acquired certain telecommunications equipment
that is more efficient and has a higher fax transmission capacity than certain
of its existing equipment. The Company determined that its nodes, which is
primarily computer equipment that is located in various cities throughout the
United States, were cost prohibitive. The computer equipment from the nodes was
implemented in the Company's operations to the extent possible. Accordingly, the
Company recorded a write-down of $163,079 for the year ended December 31, 1998
for property and equipment that is currently not being utilized.

         In addition, during 1998 the Company wrote-down certain art work and
artifacts to their estimated market value based on an independent appraisal and
recorded an impairment loss of $108,878.

                                     F-22

<PAGE>

                                   CYNET, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 13 - SUBSEQUENT EVENTS

DEBT FINANCING

         On January 31, 2000, the Company entered into a securities purchase
agreement with a non-related entity. In accordance with the agreement the
Company issued a $1,600,000 Series A (8%) Convertible promissory note. The
promissory note bears interest at 8% payable quarterly in cash or common stock
beginning June 30, 2000, with outstanding principal and interest due January 31,
2002. At the holders' option at any time commencing at the earlier of the
effective date of the registration statement or May 30, 2000, the original face
amount of the note or a portion can be converted into the Company's Class A
common stock at a per share conversion rate equaled to the lesser of (1) 110% of
the average of the closing bid prices for the Company's Class A common stock
five trading days prior to January 31, 2000 or (2) 75% of the average of the
three lowest closing bid prices for the Company's Class A common stock thirty
trading days immediately preceding the conversion date.

         On issuance of the promissory note the Company recorded a debt discount
of approximately $1,250,000 to record the effect of the beneficial conversion
rate of the promissory note at date of issuance. The debt discount will be
amortized as a non-cash charge to interest expense from the date the promissory
note was issued to the first date the promissory note is eligible for
conversion. Accordingly, the Company will incur a non-cash interest charge of
approximately $625,000 in each of the first and second quarters of 2000.

         In addition, the Company issued the note holder a warrant to purchase
160,000 shares of the Company's Class A common stock at a per share price
equaled to 120% of the average of the closing bid prices of the Company's Class
A common stock five trading days prior to January 31, 2000. The warrant vests
immediately and expires January 31, 2003. At the date of issuance the Company
recorded a debt discount of approximately $350,000 for the value of the warrant.
The debt discount will be amortized as a non-cash charge to interest expense
over the term of the promissory note.

         In accordance with the agreement, the Company is required to file a
registration statement to register the appropriate shares of Class A common
stock that the promissory note and warrant can be converted into by March 1,
2000 or have the registration statement effective by May 30, 2000. If the
Company fails to comply, the Company is subject to liquidating damages of 1% of
the face value of the promissory note outstanding each thirty days until the
registration statement is declared effective. In addition, if the above
registration requirements are not met, the 75% conversion rate discussed above
is reduced by 2% each thirty days, with a 50% floor, until such time the
registration statement becomes effective.

         The agreement also requires the Company, among other things, to
maintain a shelf registration, comply with the terms of the agreement, and
maintain the public trading of the Company's Class A common stock. If the
Company breaches these requirement it is subject to the 1% liquidating damages
discussed above for each thirty days the violation has not been cured.

         In association with the issuance of this promissory note the Company
paid finders fees totaling $185,000, which consisted of issuance of 10,000
shares of the Company's Class A common stock valued at $55,000 and a cash
payment of $130,000.

EQUITY FINANCING

         On February 3, 2000, the Company entered into a stock purchase
agreement with a stockholder who was one of the stand-by investors during the
rescission offer (see Note 7, Rescission Offer). In accordance with the
agreement, the stockholder (1) purchased 1,600,000 shares of newly designated
Series C preferred stock at $1.00 per share, and (2) exchanged 1,766,423 shares
of Class A common stock issued during the rescission offer for 1,766,423 shares
of newly designated Series D preferred stock.

                                     F-23

<PAGE>

                                   CYNET, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

         The non-voting Series C preferred stock is senior to the Company's
common and Series D preferred stock and is junior to the Company's Series A and
B preferred stock with respect to rights upon liquidation or dissolution of the
Company. The Series C preferred stock is not entitled to any dividends, except
liquidating dividends, as defined by the agreement. The Series C preferred stock
contains a call and put option feature as follows:

         Call Option:

<TABLE>
<CAPTION>
                        Period                                                                   Price per Share
        -------------------------------------                                                    ---------------
<S>                                                                                              <C>
         February 3, 2000 to July 31, 2000...................................................      $     1.09
         August 1, 2000 to January 31, 2001..................................................      $     1.18
         February 1, 2001 to July 31, 2001...................................................      $     1.31
         August 1, 2001 to January 31, 2002..................................................      $     1.45
         February 1, 2002 to July 31, 2002...................................................      $     1.64
         On or after August 1, 2002..........................................................      $     1.86

</TABLE>

         Put Option:

<TABLE>
                        Period                                                                   Price per Share
         ------------------------------------                                                    ---------------
<S>                                                                                              <C>
         February 1, 2001 to July 31, 2001...................................................      $     1.31
         August 1, 2001 to January 31, 2002..................................................      $     1.45
         February 1, 2002 to July 31, 2002...................................................      $     1.64
         On or after August 1, 2002..........................................................      $     1.86
</TABLE>

         The Series C preferred stock also has a mandatory redemption feature,
whereby the Company shall redeem shares of Series C preferred stock at the
applicable call option price upon the issuance of any equity or debt securities
of the Company, as defined by the Agreement. The amount of shares redeemed shall
equal the aggregate dollar amount of consideration the Company received, other
than for outstanding stock options and warrants, divided by the applicable call
option price.

         Due to the put option feature the Series C preferred stock will be
classified outside of the equity section as mezzanine capital and accreted up to
the put redemption value over the applicable periods as defined above.

         The Series C preferred stock agreement also contains certain protective
provisions whereby, as long as the Series C preferred stock is outstanding the
Company will not, without first obtaining the approval of its holders of at
least 66-2/3% of the Series C preferred stock, among other things, (1) sell or
otherwise dispose of substantially all of its property or business, as defined,
(2) authorize or issue equity securities, as defined, except for securities
issued pursuant to the stock subscription agreement between the Company and
CyNet Holdings, LLC., or any other options, warrants or other commitments to
issue equity securities outstanding as of January 31, 2000, (3) purchase of
Series A and B preferred stock and Class A and B common stock, as defined, (4)
declare or pay dividends on Class A and B common stock, (5) increase the number
of directors of the Company greater than nine and (6) incur any debts,
obligations or other liabilities except ordinary trade payables and accrued
operating expenses.

         The voting Series D preferred stock is senior to the Company's common
stock and is junior to the Company's Series A, B and C preferred stock with
respect to rights upon liquidation or dissolution of the Company. The Series D
preferred stock is entitled to receive dividends equal to the per share
dividends declared on the Company's Class A common stock. The Series D preferred
stock contains a put option, whereby, the holder can put their shares back to
the Company by the second annual anniversary of the date of the issuance of the
Series D preferred stock at $1.51 per share. See rescission offer Note 7 for
discussion of the accretion of this redemption value prior to the exchange of
the Class A common stock for the Series D preferred stock. Due to the redemption
feature the Series D preferred stock will be classified outside of the equity
section as mezzanine capital until such time as the put option has expired. In
addition, the Series D preferred stock may be converted into the Company's Class
A common stock at a conversion rate of $1.00 per share.

                                     F-24

<PAGE>

                                   CYNET, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

         In addition, CyNet Holding, Inc. granted this stockholder the right to
first refusal to purchase up to 25% of the shares of the Company's Class A
common stock which CyNet Holdings, LLC may, from time to time, propose to
purchase pursuant to the stock subscription agreement between CyNet Holdings,
LLC and the Company (see Note 5).

WIRELESS CELL/MODEM SALES AND MARKETING AGREEMENT

         On February 16, 2000, the Company and CyNet Holdings, LLC entered into
an agreement with a non-related entity to grant and provide, among other things,
sales and marketing rights and technical support pertaining to the wireless
cell/modem product. In accordance with the agreement and a separate agreement
with CyNet Holdings, LLC, the Company receives the exclusive global sales and
marketing rights for the wireless cell/modem products for the year 2000. The
agreements require a minimum sales performance level for the year ended December
31, 2000. In the event the sales levels are not achieved CyNet Holdings, LLC may
take back the sales and marketing rights for the specific markets that these
sale levels have not been achieved. Sales and marketing rights are revoked if
the agreements terminate.

         In accordance with the agreements, the Company is required to meet the
minimum sales performance level of $8,295,000 for the year ended December 31,
2000. If any or all of the specific area sales and marketing rights are revoked,
the Company's minimum sales level is reduced accordingly. To secure the first
quarter 2000 purchase commitment, the Company is required to provide a letter of
credit or other acceptable security for $1,050,000. As of March 10, 2000, the
Company had provided a letter of credit totaling $1,050,000, which expires June
8, 2000, in accordance with this agreement.

         The agreements require beginning February 1, 2000, the non-related
entity will pay the Company $10,000 per month towards the technical support,
sales and marketing employee and related costs the Company will incur to
successfully perform in accordance with the agreements.

         In addition, the Company, CyNet Holdings, LLC and the non-related
entity have agreed to form a joint venture for the research and development of
improvements to the cell/modem product and other products. The joint venture
agreement shall be executed on or before April 1, 2000. The Company and CyNet
Holdings, LLC have agreed to invest up to a minimum of $5,000,000 in cash and/or
technologies and related knowledge on or before December 31, 2000.

         Upon entering into these agreements, the Company formed a new division,
CyNet Wireless, which was formed to implement this agreement and to better serve
the Company's wireless customers and develop wireless technology.

CONVERSION OF SERIES A AND B PREFERRED STOCK

         On February 28, 2000, the Company elected to exercise the mandatory
conversion feature of the Series A and B preferred stock. Accordingly, Series A
and B preferred stock totaling 66,000 and 60,832, respectively, were converted
into 66,000 and 60,832 shares of Class A and B common stock, respectively.

                                     F-25