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                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

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

                                    FORM 10-K


[X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934

     For the fiscal year ended September 30, 2001


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

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

                             MindArrow Systems, Inc.
             (Exact name of registrant as specified in its charter)

          Delaware                    0-28403                     77-0511097
(State or other jurisdiction  (Commission File Number)        (I.R.S. Employer
      of incorporation)                                      Identification No.)

           101 Enterprise, Suite 340, Aliso Viejo, California        92656
               (Address of principal executive offices)            (ZIP Code)

       Registrant's telephone number, including area code: (949) 916-8705

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

                                      None

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

                         Common Stock, $0.001 Par Value

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

     Indicate by check mark whether the Registrant: (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 [_]

     Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not 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-K or any amendment to this
Form 10-K. [_]

     As of December 17, 2001, the aggregate market value of Common Stock held by
non-affiliates of the registrant was approximately $13,682,717, based on the
closing sale price of $1.00 per share as reported by the Nasdaq SmallCap Market.
Shares of Common Stock held by officers, directors, and 5% holders have been
excluded from this calculation because such persons may be deemed to be
affiliates. The determination of affiliate status is not a conclusive
determination for other purposes.

     The number of shares of the Registrant's common stock outstanding on
December 17, 2001, was 14,493,906 shares of common stock.

                       DOCUMENTS INCORPORATED BY REFERENCE

                                      None

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                             MindArrow Systems, Inc.

                                 2001 FORM 10-K
                                TABLE OF CONTENTS

                                                                            Page
                                                                            ----
                                     PART I

ITEM 1.  BUSINESS...........................................................   3
ITEM 2.  PROPERTIES.........................................................  20
ITEM 3.  LEGAL PROCEEDINGS..................................................  20
ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................  20

                                     PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
         STOCKHOLDER  MATTERS...............................................  21
ITEM 6.  SELECTED FINANCIAL DATA............................................  23
ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
         AND RESULTS OF OPERATIONS..........................................  24
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.........  29
ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA........................  30
ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
         AND FINANCIAL DISCLOSURE...........................................  55

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.................  56
ITEM 11. EXECUTIVE COMPENSATION.............................................  59
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
         MANAGEMENT.........................................................  62
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.....................  65

                                     PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
         FORM 8-K...........................................................  66
SIGNATURES..................................................................  67
EXHIBIT INDEX...............................................................  68




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     Certain of the matters and subject areas discussed in this annual report on
Form 10-K contain "forward-looking statements" that are subject to a number of
risks and uncertainties, many of which are beyond our control. All statements,
other than statements of historical fact included in this report regarding our
business strategy, future operations, financial position, estimated revenues,
projected costs, prospects, plans and objectives of management as well as third
parties are forward-looking statements. Generally, when used in this report, the
words "anticipate," "intend," "estimate," "expect," "project," and similar
expressions are intended to identify forward-looking statements, although not
all forward-looking statements contain such identifying words. All
forward-looking statements speak only as of the date of this report. Although we
believe that the expectations reflected in the forward-looking statements are
reasonable, we can give no assurance that such expectations will prove to be
correct. Important factors that could cause our actual results to differ
materially from our expectations are described below and in our other filings
with the SEC.

                                     PART I

ITEM 1. BUSINESS

Overview

     MindArrow Systems, Inc. provides direct digital marketing software and
services that can help companies reduce costs, shorten sales cycles, and improve
retention by automating and enhancing sales and marketing communications. Our
patented and patent-pending technologies deliver interactive multimedia content,
including streaming video, downloadable video, Flash, audio, HTML, graphics, and
animation, combined with the in-depth information of web links, digital
documents and e-commerce capabilities. Our technology platform allows our
clients to create, deliver, track and manage email marketing campaigns as well
as individual one-to-one communications. Our products and services can be
deployed on a stand-alone basis, or used to augment existing customer
relationship management ("CRM") software.

Clients

     Our growing list of over 100 clients includes companies such as
Hewlett-Packard, Disney, Johnson & Johnson, Toyota, Deutsche Bank, Northwest
Airlines, Avaya, Procter & Gamble and the NBA (National Basketball Association).

Products & Services

     Our company was incorporated as eCommercial.com, Inc. in April 1999, and we
changed our name to MindArrow Systems, Inc. in April 2000. We were a development
stage company until early 2000 when principal operations commenced. Our first
products were our electronic multimedia messages, called "eCommercials" and
"eBrochures," which are our proprietary, highly compressed, self-contained files
that can contain high quality video, audio, graphics and hypertext links. We
also developed a software tool called Messenger (formerly "Virtual Prospector")
that enables our clients to create personalized messages and deliver and track
digital content through a web-hosted, application service provider model. In
June 2001, we completed the acquisition of Control Commerce, Inc., which added
e-commerce functionality to our product offering. And, in September 2001, we
acquired Radical Communication, Inc., which added technology for streaming video
and other applications. We now provide a comprehensive set of products and
services throughout the direct digital marketing value chain.

     Our clients can create, deliver, track, analyze and manage rich media and
other digital marketing communications, using our self-service software and
in-house services. They can also blend elements of our product offering with
certain third-party products and services. We license our RadicalBuilder
software to clients who wish to create, track and manage email marketing
campaigns that contain streaming video content. Our Messenger software and suite
of products is designed for clients who wish to manage digital marketing and
sales communications directly, and who may want to provide their sales force
and/or dealer network access to digital collateral. We also provide digital
marketing consulting services, creative services and engineering support
services, as needed.

     RadicalMail Suite. Our RadicalMail(TM) suite of products is designed for
     -----------------
digital marketing campaigns where a client desires to use rich media to enhance
and augment email communications.


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RadicalMail software empowers digital marketers to create, deliver, track and
manage dynamic rich media messages that can be instantly viewed by recipients
without requiring them to install any additional software, such as players or
plug-ins. This software combines technology obtained in the Radical
Communication and Control Commerce acquisitions with our eCommercial and
eBrochure technology. These patent-pending technologies can dynamically deliver
content based on the recipient's connection speed, ensuring an optimized
experience for all viewers. They offer secure e-commerce functionality directly
within the email or through our patented pop-up window technology. And, the rich
media content can also be immediately published to a Web site.

     The RadicalMail suite is flexible. Clients can license our Radical Builder
software to design and assemble their own streaming video RadicalMail campaigns,
or they can also use MindArrow services to support projects that require other
rich media features for their marketing campaigns, such as Flash design,
downloadable video, HTML graphics, custom engineering and data capture, custom
reporting, etc. Radical Builder is an easy-to-use, web-based software tool that
allows clients to quickly and easily create, send, track and manage dynamic rich
media email marketing campaigns with streaming video. All of our streaming video
email messages are now branded RadicalMail. RadicalMails can be delivered
directly by MindArrow, or through a variety of email marketing software and
service providers. (See "Business Strategy - Digital Marketing Relationships").
We provide training for Radical Builder software, online assistance for digital
marketing campaigns, and interactive production services for all aspects of
client projects.

     Our technology allows clients to track and analyze over 40 different
data-points for email marketing campaigns, enabling real-time analysis of
campaign performance and recipient activity to optimize future marketing and
advertising activities. This information allows our clients to accurately
measure the interest generated by their sales and marketing efforts, including
the so-called viral or "pass-along" impact of their content. We provide detailed
reporting to our clients, and campaign data can be exported to or integrated
with other CRM systems for further analysis.

     We have developed several hundred digital marketing campaigns and have
delivered several million rich media messages for our clients. The number of
recipients who view the digital marketing content as a percentage of those who
receive the email message varies with the specific campaign's call to action,
the quality of the list, and the size of the target group; however, the average
viewership for all of our digital marketing campaigns has been approximately
22%. Of the recipients who viewed the multimedia message, approximately 61% have
taken some form of additional action, such as responding to questions, clicking
a hypertext link, placing a product order, or forwarding the multimedia message
to a friend or colleague. These statistics compare favorably with average
response rates for traditional direct marketing, which average from 1% to 4%,
according to an October 2001 report by PWC Consulting.

     Messenger Suite. MindArrow Messenger is an integrated software suite
     ---------------
designed for sales, marketing and corporate communications applications. This
self-service platform enables users to combine rich media content with digital
documents to create one-to-one messages or deliver interactive multimedia to
multiple users.

     We support the design and development of collateral materials and then host
the content on our servers, or provide links to content on a client's servers.
Clients can choose to manage communications directly from their desktops, or
engage us to perform and manage these tasks on their behalf. In either case, the
client has control over all materials and access to all reporting metrics.

     The Messenger suite supports a variety of marketing applications for
building and enhancing customer relationships, including: special promotional
messages, new product announcements, product updates and demonstrations, coupons
(both online and in-store), training materials, surveys, newsletters, service
reminders, e-commerce programs, special event invitations and announcements,
customer support materials, and other interactive multimedia communications, all
of which can be stored in an online catalog.

     Each application can be designed using many formats, including HTML, any
Microsoft Office file, common image and artwork formats, PDF files, audio, and
video, or any combination - all designed to deliver the desired message,
collateral content and call to action. The call to action in each message can be
active or passive and can be executed within the email (purchase within the
email) or link to an existing


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website. An active call to action may be designed to facilitate an immediate
customer response, such as a purchase, sign-up or survey, while a passive call
to action may perform brand & loyalty reinforcement, such as newsletters,
reminder notices, rewards (coupons), or offline activities (call in for more
information). Through a simple web interface, the user can access the templates
and digital collateral, select relevant materials, distribute to customers, and
track the resulting recipient interactions.

     One core value driver of the Messenger suite is the ability to store and
manage all multimedia, digital collateral, and corporate-branded stationary
templates in one central repository or catalog. These materials can be designed
by marketing with consistent corporate messaging and branding, but sent with
personalized, targeted messaging by individuals in a sales force, dealer
network, or corporate communications department.

     Each user is assigned a password-protected, individual Messenger account,
which provides the ability to log on through any Internet browser, and access
materials, customize information and add personal messages. Each Messenger
account contains utilities to upload and add new email addresses, further
enhancing the client's email address database.

     To ensure control and security, Messenger provides access management to
maintain controlled distribution of materials contained in the catalog.
Additionally, corporate authors and administrators can control who is retrieving
which version of what media, and when and how often a user communicates with a
particular contact (frequency capping). Reporting metrics are also customizable
to satisfy access and revision control needs, as well as advanced tracking
requirements. Detailed tracking and reporting about recipient interactions with
each message can enhance traditional CRM systems, enabling a company to develop
a more comprehensive understanding of their customers.

     Users can see which recipients viewed a message, when they viewed it, how
long they spent with collateral materials, and what actions they took. By making
Messenger available to a sales force or dealer network, a client can deliver a
controlled and monitored digital communications solution for one-to-one or
one-to-many email communications with new prospects and existing customers, and
can leverage the power of creating information once and publishing multiple
times, while maintaining content integrity and accountability.

Value Proposition

     We believe our clients can benefit from our products and services by:

     .    Communicating faster and more effectively with their customers, using
          interactive multimedia and targeted one-to-one messaging;

     .    Improving response rates by leveraging rich media content via email
          and the Web;

     .    Driving additional online revenue by enabling e-commerce transactions
          directly within an email message or through multimedia links to an
          online catalog;

     .    Generating new customer leads through viral, "send to a friend," email
          marketing;

     .    Shortening sales cycles and strengthen a relationship through
          customized messaging and real-time tracking and reporting;

     .    Fostering long-term relationships through targeted digital campaigns
          that collect information, develop an understanding of the customer,
          and create a continued dialog; and

     .    Reducing costs and improving return on investment as compared to
          direct mail and printed mail.

     Additional Benefits. Our technology also automates email communication
     -------------------
management to improve productivity and reduce the burden on our client's
information technology ("IT") departments and resources. A significant
investment in IT infrastructure is required to perform the automated email list
management, large scale delivery, opt-in/opt-out management, email bounce back
management, streaming media, message personalization, website response tools,
and comprehensive message tracking, including email notification services, that
we provide. This investment would need to cover hardware, networking,


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bandwidth, database software and system software, along with applications and
personnel to manage the workflow and keep equipment up to date. Our hosted
service offers a scalable, secure, and reliable solution that lessens the burden
on our clients' infrastructure and allows them to scale as their needs grow.

Sales and Marketing

     We currently market our products and services through a direct sales force
and indirectly through a small number of third-party affiliates, primarily to
businesses with large sales organizations and/or those that aggressively use the
Internet for marketing. We are pursuing direct sales to large, well-established
companies in several industries, including, but not limited to technology,
financial services, automotive, retail, and high-affinity groups (sports,
entertainment, associations).

     We generate revenue by:

     .    Charging clients for design and production services to create
          multimedia messages;

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

     .    Charging clients per transaction for rich media message delivery and
          tracking; and

     .    Obtaining software license fees for the Builder tool within the
          RadicalMail Suite and for MindArrow Messenger.

     During the fiscal year ended September 30, 2001, 69% of our revenue has
been generated from production and consulting service fees, 17% has been
generated from per-item transaction charges, and 14% has been generated from
software licensing fees.

     In June 2001, we released the current version of our Messenger software
product (formerly "Virtual Prospector"), which we license to companies on a per
user basis. We also license our Radical Builder rich media assembly tool on a
per site basis.

Business Strategy

     Target clients and industries. We intend to continue to focus on obtaining
     -----------------------------
clients from the Fortune 1000 that have large sales forces and/or aggressively
use the Internet for marketing purposes. Jupiter Media Matrix projects that
companies in the financial services, automotive, technology, and media
industries will lead online marketing spending through 2005. These are our
primary target vertical markets. Rich media is particularly useful for companies
in these industries to promote high-margin products or products that involve a
long-term relationship between purchasers and the company, such as financial
services or long-distance phone service, or products that are better
demonstrated through video, such as a sports highlight, movie trailer or music
video.

     Technology enhancement. We intend to continue to develop and introduce new
     ----------------------
technologies and methods for direct digital marketing in order to provide
solutions that fulfill our customers' communications objectives. Beyond
continuous improvement of our current product offering, we will continue to
explore and apply new methods for direct digital communications, which may
include instant video communications, wireless delivery, and personal push
channels, whether we develop these solutions internally, acquire technology
capabilities that add to our offerings, or enter into strategic partnerships.

     Strategic acquisitions. During the past several months we have added to our
     ----------------------
technology, products and resources with an end-to-end streaming video product
and a patented e-commerce application through the acquisitions of Radical
Communication, Inc. and Control Commerce, Inc., respectively. We intend to
continue to seek acquisitions that enhance our value proposition and allow us to
build our business strategically.

     Digital marketing relationships. We have entered relationships with several
     -------------------------------
companies that enable us to extend and strengthen our market presence through
complementary product offerings on several dimensions.

     .    Our Radical Builder software has been used by several major
          advertising agencies for rich media email marketing campaigns for
          their respective clients;


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     .    Our technology is compatible with, and our rich media messages can be
          deployed by, leading email distribution companies. We have established
          distribution relationships with several eMarketing companies including
          DoubleClick, Bigfoot Interactive, Responsys, NetCreations, and
          YesMail.

     .    Our Messenger software is compatible with and can currently be
          integrated into products from major CRM vendors, including Siebel
          Systems, Pivotal Corporation and Onyx Software; and

     .    Our digital messaging software is compatible with video capture
          technologies, which will allow us to develop direct, personalized
          video messaging products for selected markets.

     Global expansion. Because we believe that significant commercial
     ----------------
opportunities exist outside of the United States, we intend to expand our
business to promising global markets, principally through the adoption of our
systems and technology by international companies, sending rich media messages
on behalf of U.S.-based clients and entering key foreign markets in Asia and
Europe.

Industry

     The Internet and electronic commerce has fundamentally changed the way
businesses interact with customers, prospects, partners, investors, employees
and other interested constituents. Companies in almost every industry are using
the Internet and electronic commerce to redefine the way that goods and services
are marketed, sold and distributed.

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

     "Direct Digital Marketing" allows businesses to cost-effectively target
customers through customized email campaigns, interactive web promotions, and
online advertising. We provide integrated solutions that allow clients to
create, deliver, track and manage communications, throughout the direct digital
marketing value chain.

     With the growth of permission-based email, where individuals sign up or
"opt-in" to receive information from specific sources on topics of interest to
them, email has become an increasingly important direct marketing tool.
According to Jupiter Media Matrix's October 2001 report, more than 70 percent of
the U.S. population will be online by 2006, compared to approximately 50 percent
in 2001, and email users will receive an average of 170 email messages per week
in 2006 (including commercial, personal, and work- or school-related messages).
The Jupiter study concludes that more effective targeting technology and
increasing use of HTML and rich media email will allow marketers to better
target their messages to particular users and audience segments.

     We believe that the company is also well-positioned to take advantage of
the converging needs in the fast growing markets for eCRM and e-commerce. Data
from our products can be used for CRM analysis, and our Messenger product is
integrated with several leading CRM offerings. Additionally, we introduced our
first e-commerce product in November 2001, and our clients can now add
e-commerce functionality to their digital marketing campaigns.We believe that
our full-service solutions that span from opt-in list-scrubbing to rich media
and e-commerce creation to delivery and tracking to data hosting and
self-service software, all position the company to benefit from growth in the
direct digital marketing industry.

Competition

     The market for digital marketing services is highly competitive and we
expect that competition will continue to intensify. According to a December 2001
study by the Winterberry Group, there are more than 200 marketing services
companies or business units that provide email marketing solutions, and it is an
industry that is experiencing significant changes and consolidation. Our
competition is widely distributed among a variety of companies in the digital
marketing space, and we also compete with marketing companies that provide
various components of our product and service offerings, including


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online banner ads and Internet media services. Several of our competitors have
longer operating histories, significantly greater financial, technical,
marketing, and other resources, with wider recognition and more extensive
customer bases.

     Some of the private and publicly-held digital marketing providers include
companies such as @Once, 24/7 Media (Nasdaq: TFSM), Bigfoot Interactive,
ClickAction (Nasdaq: CLAC), Cheetah Mail, Chordiant Software (Nasdaq: CHRD),
Digital Impact (Nasdaq: DIGI), DoubleClick (Nasdaq: DCLK), E.piphany (Nasdaq:
EPNY), e-Dialog, Kana Communications (Nasdaq: KANA), NetCreations, Responsys,
Silverpop, TMX Interactive, Traffix (Nasdaq: TRFX), and Yahoo! (Nasdaq: YHOO).
These companies may focus on certain segments of digital marketing, such as list
generation (Cheetah Mail) or data analysis (E.piphany), or may provide more of a
services solution (Bigfoot).

     We also compete for a share of the total budget for production and
distribution of marketing materials and targeted content with traditional media
such as television, radio and print. We compete primarily on our technologies
and services, and while we don't compete directly on price, we believe that our
products and services provide a solid return on investment compared to
traditional marketing methods.

     We differentiate ourselves by providing an integrated, full-service
solution to create, manage, deliver and track any type of message, from text and
HTML to dynamic, rich media content that includes video, audio and animation. We
provide a complete self-service solution for both large email marketing
campaigns and 1-to-1 sales communications. Most rich media vendors offer only
campaigns and do not offer the ability to dynamically deliver and track 1-to-1
messages. In addition, most marketing automation solutions typically only offer
text or HTML, and provide limited support for rich media or require a customer
to contract with a separate rich media vendor. Moreover, marketing automation
solutions typically track only summary statistics about the overall success of a
campaign such as how many recipients opened the email or clicked through. We
track every recipient individually so a client knows who opened the message,
number of unique viewers, content selected, information entered into forms and
surveys, etc. And, in addition to providing digital marketing solutions, we
allow sales organizations and dealers to create and deliver personalized,
dynamic messages from any Internet browser by accessing the client's multimedia
and digital document catalog.

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

Intellectual Property

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

     Our first patent, "Method and Apparatus for Facilitating Computer Network
Transactions," U.S. Patent No. 6,247,047, was issued in June 2001, after our
acquisition of Control Commerce, Inc. This is a method and apparatus patent
designed to cover the intellectual property associated with a system for
delivering from a database using a URL as a database record pointer, with
specific transactional content to a daughter window superimposed over a user's
current browser location, generally for e-commerce transactions. The patent
describes the way in which the system can be implemented over a computer network
without restrictions to a proprietary technology (such as Java) using industry
standard protocols and the lowest common denominator technology.

     We have nineteen other patent applications on file with the U.S. Patent and
Trademark Office (USPTO) under the Patent Cooperation Treaty designating all
member countries, including the United States, essentially all of Europe, Japan,
Korea, China, Canada and Mexico. These patent applications were filed beginning
in October 1999, with prior art dating back several years, and cover aspects of
our proprietary authoring software and our network architecture, as well as
methods of using interactive


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multimedia in sales and marketing communications. We plan to file additional
patent applications in the future with respect to various additional aspects of
these and other technologies.

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

Research and Development

     We have developed several proprietary technologies that are used in a
variety of Internet-related products and services. These products and services
are continually being enhanced to meet the needs of our clients. Our research
and development department is organized by area of interest including software
development, campaign services, and network management. Each development area
requires highly specialized individuals with extensive backgrounds in their
respective disciplines.

     Our network includes an advanced, high-bandwidth systems operation center
that hosts the Messenger solution and delivers and tracks messages. We co-locate
our servers in a secure class 5 data center operated by Exodus Communications,
and use the global network of Akamai servers to deliver our streaming video
products. Our network is designed for 24/7 message delivery, detailed tracking,
with highly redundant systems for fail-over support.

     From our inception through September 30, 2001, we had incurred $5,337,758
of research and development expenses in the engineering of our software tools
and our network.

Government Regulation

     Although there are currently relatively few laws and regulations directly
applicable to the Internet, it is likely that new laws and regulations will be
adopted in the United States and elsewhere covering issues such as broadcast
license fees, copyrights, privacy, pricing, sales taxes and characteristics and
quality of Internet services. The adoption of restrictive laws or regulations
could slow Internet growth. The application of existing laws and regulations
governing Internet issues such as property ownership, libel and personal privacy
is also subject to substantial uncertainty. There can be no assurance that
current or new government laws and regulations, or the application of existing
laws and regulations (including laws and regulations governing issues such as
property ownership, taxation, defamation and personal injury), will not expose
us to significant liabilities, slow Internet growth or otherwise hurt us
financially.

     In addition, the Child Online Privacy Protection Act ("COPPA") became
effective as of April 21, 2000. COPPA requires operators of commercial Web sites
and online services directed to children (under 13), and general audience sites
that know that they are collecting personal information from a child, to:

     .    provide parents notice of their information practices;

     .    obtain verifiable parental consent before collecting a child's
          personal information, with certain limited exceptions;

     .    give parents a choice as to whether their child's information will be
          disclosed to third parties;

     .    provide parents access to their child's personal information and allow
          them to review it and/or have it deleted;

     .    give parents the opportunity to prevent further use or collection of
          information; not require a child to provide more information than is
          reasonably necessary to participate in an activity; and

     .    maintain the confidentiality, security, and integrity of information
          collected from children.

     We do not knowingly collect and disclose personal information from such
minors, and therefore believe that we are fully compliant with COPPA. However,
the manner in which COPPA may be


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

Employees

     As of December 15, 2001, we had 65 full-time employees, including 19 in our
Hong Kong office. None of our employees are subject to a collective bargaining
agreement and we believe that our relations with our employees are good.

RISK FACTORS

We will need additional financing

     The capital requirements associated with developing our network and
corporate infrastructure have been and will continue to be significant. We have
been substantially dependent on private placements of our equity securities to
fund such requirements.

     At December 15, 2001, we had available cash of approximately $343,000 and
negative working capital of approximately $2.4 million. This negative working
capital balance includes as current liabilities approximately $1 million of
deferred revenues as well as a payment of $500,000 due October 1, 2002 on a
promissory note issued in connection with our acquisition of substantially all
of the assets of Radical Communication, Inc. this past September. After December
15, 2001, we raised approximately $1.2 million in a private placement of our
common stock. Although we have taken steps to reduce our monthly cash operating
expenses, we currently estimate that our cash operating expenses are
approximately $650,000 per month. Over the past year our revenues have averaged
nearly $300,000 per month. Although we believe that as a result of an existing
backlog of contracts and anticipated new contracts, our monthly revenues will
increase, there can be no assurance that this will happen. If revenues do not
increase over historical levels, we anticipate that based on our current
operating plan and available cash, including the cash raised in our recent
private placement, we will need to obtain additional financing in mid-2002. We
have no current arrangements with respect to sources of additional financing and
there is no certainty that we will be able to raise additional funds at that
time. Moreover, the market for privately placed equity securities of companies
like ours can be very difficult. In their report on our consolidated financial
statements for the year ended September 30, 2001, our auditors expressed
significant doubt about our ability to continue as a going concern. THERE CAN BE
NO ASSURANCE THAT ANY ADDITIONAL FINANCING WILL BE AVAILABLE ON ACCEPTABLE
TERMS, IF AT ALL. IF WE ARE UNSUCCESSFUL IN RAISING ADDITIONAL FUNDS, OUR
LIQUIDITY POSITION WILL BE MATERIALLY AND ADVERSELY AFFECTED AND WE COULD BE
REQUIRED TO MAKE DRASTIC COST REDUCTIONS, WHICH COULD NEGATIVELY IMPACT OUR
OPERATIONS.

     Although we believe our assumptions underlying our operating plan to be
reasonable, we lack the operating history of a more seasoned company and there
can be no assurance that our forecasts will prove accurate. In the event that
our plans change, our assumptions change or prove inaccurate, or if future
private placements, other capital resources and projected cash flow otherwise
prove to be insufficient to fund operations, we could be required to seek
additional financing sooner than currently anticipated. To the extent that we
are able to raise additional funds and it involves the sale of our equity
securities, the interests of our shareholders could be substantially diluted.

Recent actions that we have taken may negatively impact our ability to achieve
our business objectives

     In order to manage our liquidity and cash position, over the past year we
have had to implement certain cost cutting measures, including reductions in
force of 50 employees. After these staff reductions, as of December 15, 2001, we
had 65 full time employees worldwide. Although these cost cutting measures have
improved our short-term cash position, they may negatively impact our ability to
grow our business and achieve our business objectives.

We cannot assure you that our common stock will continue to be listed on the
Nasdaq SmallCap Market

     The Nasdaq Stock Market retains discretion over whether to continue listing
our common stock on the Nasdaq SmallCap Market. Although our common stock closed
at $1.00 per share on December 17,


                                       Page 10

<PAGE>

2001, our share price has been below $1.00 from time to time. On September 27,
2001, Nasdaq implemented a moratorium on the minimum bid requirement, but that
moratorium will expire on January 2, 2002. After such time, if our common stock
falls below a required minimum bid price of $1.00 over a period of 30
consecutive trading days, we expect to be notified by Nasdaq that we need to
meet this requirement. If we do not regain compliance within 90 days of
receiving such notice, or if we do not meet other qualification listing
standards, our common stock could be delisted from trading on the Nasdaq
SmallCap Market. If our common stock is delisted from the Nasdaq SmallCap
Market, it may become significantly less liquid and may decline significantly in
price.

Our limited operating history makes evaluation of our business difficult

     Our business was formed as eCommercial.com in March 1999 and we were a
development-stage company through December 31, 1999. In January 2000, principal
operations commenced. We have recorded a cumulative net loss of approximately
$55 million through September 30, 2001 (including $18.6 million attributable to
the non-cash portion of the non-operating loss on transfer agent fraud) and
anticipate recording losses in the near term. Accordingly, we have a limited
operating history on which to base our evaluation of current business and
prospects. Our short operating history makes it difficult to predict future
results, and there are no assurances that our revenues will increase, or that we
will achieve or maintain profitability or generate sufficient cash from
operations in future periods.

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

     .    fail to effectively market and sell our services;

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

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

     .    fail to respond to competitive developments;

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

     .    fail to attract and retain qualified personnel.


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

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

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

     Because of our limited operating history and the emerging nature of our
markets, we are unable to reliably forecast our revenues.

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

     .    the demand for our services;

     .    the addition or loss of individual clients;

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

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

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


                                       Page 11

<PAGE>

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

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

If we are unable to obtain funding, our customers and vendors may decide not to
do business with us

     If we are unable to continue funding our operations at our current levels,
and if customers and vendors become concerned about our business prospects, they
may decide not to conduct business with us, or may conduct business with us on
terms that are less favorable than those customarily extended by them. In that
event, our revenues would decrease and our business will suffer significantly.

We are not sure if the market will accept our systems

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

     .    the effectiveness of our marketing and sales efforts;

     .    market acceptance of our current and future offerings; and

     .    the reliability of our networks and services.

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

We may make acquisitions of complementary technologies or businesses, which may
disrupt our business and be dilutive to our existing stockholders.

     We intend to consider acquisitions of businesses and technologies on an
opportunistic basis, for example, our recent acquisitions of Control Commerce,
Inc. and Radical Communication, Inc. Acquisitions of businesses and technologies
involve numerous risks, including the diversion of management attention,
difficulties in assimilating the acquired operations, loss of key employees from
the acquired company, and difficulties in transitioning key customer
relationships. In addition, these acquisitions may result in dilutive issuances
of equity securities, the incurrence of additional debt, large one-time expenses
and the creation of goodwill or other intangible assets that result in
significant amortization expense. Any acquisition may not provide the benefits
originally anticipated, and there may be difficulty in integrating the service
offerings and customer and supplier relationships gained through acquisitions
with our own. Although we attempt to minimize the risk of unexpected liabilities
and contingencies associated with acquired businesses through planning,
investigation and negotiation, such unexpected liabilities nevertheless may
accompany such acquisitions. We cannot guarantee that we will successfully
identify attractive acquisition candidates, complete and finance additional
acquisitions on favorable terms, or integrate the acquired businesses or assets
into our own. Any of these factors could materially harm our business or our
operating results in a given period.

Network and system failures could adversely impact our business

     The performance, reliability and availability of our Web sites and network
infrastructure is critical to our reputation and ability to attract and retain
clients. Our systems and operations are vulnerable to damage or interruption
from earthquake, fire, flood, power loss, telecommunications failure, Internet
breakdowns, break-ins, tornadoes and similar events. We carry business
interruption insurance to compensate for losses that may occur, but insurance is
not guaranteed to remove all risk of loss. Services based on sophisticated
software and computer systems often encounter development delays and the


                                       Page 12

<PAGE>

underlying software may contain errors that could cause system failures. Any
system failure that causes an interruption could result in a loss of clients and
could reduce the attractiveness of our services.

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

Circumvention of our security measures and viruses could disrupt our business

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

We depend on continued growth in use of the Internet

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

     .    inadequate development of the necessary infrastructure;

     .    inadequate development of enabling technologies;

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

     .    inadequate commercial support for Web-based advertising.

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

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

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

     The development of our business entails significant technical and business
risks. To remain competitive, we must continue to enhance and improve the
functionality and features of our technology. The Internet and the ecommerce
industry are characterized by: o rapid technological change; o changes in client
requirements and preferences; o frequent new product and service introductions
embodying new technologies; and o the emergence of new industry standards and
practices.

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

     .    develop and enhance technologies useful in our business;


                                       Page 13

<PAGE>

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

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

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

We could face liability for Internet content

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

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

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

     .    user privacy;

     .    pricing, usage fees and taxes;

     .    content;

     .    copyrights;

     .    distribution;

     .    characteristics and quality of products and services; and

     .    online advertising and marketing.

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

Our stock price has been and may continue to be volatile

     The trading price of our common stock has been and is likely to continue to
be highly volatile. For example, on January 22, 2001, our common stock closed at
$5.81 per share, and on August 22, 2001, our common stock closed at $0.40 per
share. On December 17, 2001, our common stock closed at $1.00 per share. Our
stock price could be subject to wide fluctuations in response to factors such
as:

     .    the average daily trading volume of our common stock;

     .    actual or anticipated variations in quarterly operating results and
          our need for additional financing to fund our continuing operations;


                                       Page 14

<PAGE>

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

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

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

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

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

     .    legal or regulatory developments;

     .    additions or departures of key personnel;

     .    sales of our common stock;

     .    our failure to obtain additional financing on satisfactory terms, or
          at all; and

     .    general market conditions.

     The historical volatility of our stock price may make it more difficult for
investors in our securities to resell shares at prices they find attractive. See
also "Risk Factors - We cannot assure you that our common stock will continue to
be listed on the Nasdaq SmallCap Market."

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

Future sales of our common stock may depress our stock price

     Sales of a substantial number of shares of our common stock in the public
market, or the appearance that such shares are available for sale, could
adversely affect the market price for our common stock. As of December 17, 2001,
we had 14,493,906 shares of common stock outstanding. A significant number of
these shares are not publicly traded but are available for immediate resale to
the public, subject to certain volume limitations under the securities laws. We
also have reserved shares of our common stock as follows:

     .    952,158 shares are reserved for issuance upon the conversion of our
          outstanding shares of Series B preferred stock;

     .    1,832,571 shares are reserved for issuance upon the conversion of our
          outstanding shares of Series C preferred stock;

     .    4,988,083 shares are reserved for issuance upon the exercise of
          warrants;

     .    3,000,000 shares are reserved for issuance under our 1999 Stock Option
          Plan; and

     .    2,000,000 shares are reserved for issuance under our 2000 Stock Option
          Plan.

     Shares underlying vested options are generally eligible for immediate
resale in the public market.

     We expect to file with the SEC a registration statement on Form S-3
covering the resale by the selling security holders to be named therein of the
following shares:

     .    Up to 2,011,604 shares of Common Stock issuable upon the conversion of
          Series C Preferred Stock;

     .    Up to 1,980,000 shares of Common Stock issued to Radical
          Communication, Inc. in connection with our acquisition of
          substantially all of the assets of Radical Communication, Inc. in
          September 2001;


                                       Page 15

<PAGE>

     .    Up to 800,000 shares of Common Stock issued to a representative for
          certain former shareholders of Control Commerce, Inc. in connection
          with our acquisition of Control Commerce, Inc. in June 2001;

     .    Up to 1,350,000 shares of Common Stock issuable upon the exercise of
          warrants and convertible notes issued as part of a bridge financing in
          September 2001;

     .    Up to 3,050,000 shares of Common Stock issued (or issuable in
          connection with the exercise of warrants issued) in a private
          placement in December 2001; and

     .    Up to 3,724,841 shares of Common Stock issued in the past year, or
          issuable upon the exercise of warrants issued in the past year.

Our Series B and Series C Preferred Shareholders have a substantial preference
over Common Stock in the event of a liquidation, dissolution or a merger, asset
sale or other transaction that results in a change of control of our Company

     Under the terms of our Restated Certificate of Incorporation, in the event
of a liquidation, dissolution or a merger, asset sale or other transaction that
results in a change in control of our Company, holders of Series B and Series C
Preferred Stock are entitled to a liquidation preference before any payments are
made on account of the Common Stock. As of December 17, 2001, this liquidation
preference was approximately $29.9 million. After this liquidation preference is
paid, any remaining proceeds will be shared by the holders of Common Stock,
Series B Preferred Stock and Series C Preferred Stock on an as converted basis.

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

     We have filed nineteen patent applications and we plan to file additional
patent applications in the future with respect to various additional aspects of
our technologies. In addition, we have received one patent on technology we
obtained in the Control Commerce acquisition. We mark our software with
copyright notices, and intend to file copyright registration applications where
appropriate. We have also filed several federal trademark registration
applications for trademarks and service marks we use. There can, however, be no
assurance that any patents, copyright registrations, or trademark registrations
applied for by us will be issued, or if issued, will sufficiently protect our
proprietary rights.

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

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

     Our intellectual property may be misappropriated or infringed upon.
Consequently, litigation may be necessary in the future to enforce our
intellectual property rights, to protect our confidential information or trade
secrets, or to determine the validity or scope of the rights of others.
Litigation could result in substantial costs and diversion of management and
other resources and may not successfully protect our intellectual property.
Additionally, we may deem it advisable to enter into royalty or licensing


                                       Page 16

<PAGE>

agreements to resolve such claims. Such agreements, if required, may not be
available on commercially reasonable or desirable terms or at all.

Our technology may infringe on the rights of others

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

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

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

     As of December 17, 2001, our officers and directors beneficially owned
approximately 12% of our outstanding common stock and 27% of our Series B
preferred stock. This level of ownership could have a substantial impact on
matters requiring the vote of the stockholders, including the election of our
directors and most of our corporate actions. This control could delay, defer or
prevent others from initiating a potential merger, takeover or other change in
our control, even if these actions would benefit our stockholders and us. This
control could adversely affect the voting and other rights of our other
stockholders and could depress the market price of our common stock.

The length of our sales cycle increases our costs

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

We have a limited operating history in international markets

     We have only limited experience in operating in international markets.
Although we have distributed our products and services internationally since
August 1999, we had no experience in international operations prior to the
acquisition of our Hong Kong-based subsidiary, Fusionactive Ltd., in April 2000.
Through September 2001, we have recognized approximately $1.2 million of revenue
related to


                                       Page 17

<PAGE>

our international operations in eastern Asia. There can be no assurance that our
international operations will be successful.

There are risks inherent in conducting international operations

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

     .    difficulties in collecting accounts receivable and longer collection
          periods;

     .    changing and conflicting regulatory requirements;

     .    potentially adverse tax consequences;

     .    tariffs and general export and customs restrictions;

     .    difficulties in staffing and managing foreign operations;

     .    political instability;

     .    fluctuations in currency exchange rates;

     .    the need to develop localized versions of our products;

     .    national standardization and certification requirements;

     .    seasonal reductions of business activity; and

     .    the impact of local economic conditions and practices.

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

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

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

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

     .    privacy concerns;

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

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

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

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

     We are subject to general business laws and regulations. These laws and
regulations, as well as new laws and regulations that may be adopted in the
United States and other countries with respect to the Internet, may impede the
growth of the Internet. These laws may relate to areas such as advertising,
taxation, personal privacy, content issues (such as obscenity, indecency, and
defamation), copyright and other intellectual property rights, encryption,
electronic contracts and "digital signatures," electronic commerce liability,
email, network and information security, and the convergence of traditional
communication services with Internet communications, including the future
availability of broadband transmission capability. Other countries and political
organizations are likely to impose or favor more and different regulation than
that which has been proposed in the United States, thus furthering the
complexity


                                       Page 18

<PAGE>

of regulation. In addition, state and local governments may impose regulations
in addition to, inconsistent with, or stricter than, federal regulations. The
adoption of such laws or regulations, and uncertainties associated with their
validity, applicability, and enforcement, may affect the available distribution
channels for and costs associated with our products and services, and may affect
the growth of the Internet. Such laws or regulations may therefore harm our
business.

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

     .    limit the growth of the Internet;

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

     .    increase our cost of doing business;

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

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

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

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

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

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

     In addition, the Child Online Privacy Protection Act ("COPPA") became
effective as of April 21, 2000. COPPA requires operators of commercial Web sites
and online services directed to children (under 13), and general audience sites
that know that they are collecting personal information from a child, to:

     .    provide parents notice of their information practices;

     .    obtain verifiable parental consent before collecting a child's
          personal information, with certain limited exceptions;

     .    give parents a choice as to whether their child's information will be
          disclosed to third parties;

     .    provide parents access to their child's personal information and allow
          them to review it and/or have it deleted;

     .    give parents the opportunity to prevent further use or collection of
          information; not require a child to provide more information than is
          reasonably necessary to participate in an activity; and

     .    maintain the confidentiality, security, and integrity of information
          collected from children.

     We do not knowingly collect and disclose personal information from such
minors, and therefore believe that we are fully compliant with COPPA. However,
the manner in which COPPA may be interpreted and enforced cannot be fully
determined, and thus COPPA and future legislation such as COPPA could subject us
to potential liability, which in turn would harm our business.


                                       Page 19

<PAGE>

ITEM 2. PROPERTIES

     Our headquarters and production facilities are located at 101 Enterprise,
Aliso Viejo, California 92656. The base rent is $40,492 per month and the lease
expires in December 2004. In addition, we have offices in Huntington Beach,
California at a monthly rental rate of $4,886 per month expiring April 2003, and
a month to month lease in Marina del Rey, California at a rate of $1,700 per
month. In New York City, we are subleasing space for $10,000 per month. The
sublease terminates in April 2002. In Hong Kong, we lease space at a rate of
$5,576 per month, expiring in August 2003.

ITEM 3. LEGAL PROCEEDINGS

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

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

     On August 30, 2001, the annual meeting of stockholders was held. At the
meeting, Thomas J. Blakeley, Robert I. Webber, Joel Schoenfeld, Thomas C. Quick,
Joseph N. Matlock, Jr. and Bruce Maggin were elected directors of the Company.
In addition, the stockholders approved amendments to the 2000 Stock Option Plan,
increasing the number of shares reserved for issuance under the plan from
1,000,000 to 2,000,000 and increasing the annual individual grant limit under
the 2000 Plan by an additional 900,000 shares, for a new annual individual grant
limit of 1,000,000 shares.

1.   The nominees for director were approved by the following votes:

<TABLE>
<CAPTION>
                          Common Stock        Series B Preferred      Series C Preferred
       Name              For     Withheld      For     Withheld         For     Withheld
       ----              ---     --------      ---     --------         ---     --------
<S>                  <C>          <C>         <C>        <C>        <C>         <C>
Thomas J. Blakeley   7,389,131    142,566     118,500    253,937    1,000,000         -
Robert I. Webber     7,396,411    135,286     368,500      3,937    1,000,000         -
Bruce Maggin         7,397,606    134,091     368,500      3,937    1,000,000         -
Joel Schoenfeld             -          -      368,500      3,937           -          -
Thomas C. Quick             -          -           -          -     1,000,000         -
Joseph Matlock              -          -           -          -     1,000,000         -
</TABLE>

2.   The proposal to increase the aggregate share limit under the Company's 2000
     Stock Option Plan by an additional 1,000,000 shares from 1,000,000 to
     2,000,000 shares; and to increase the annual individual grant limit under
     the 2000 Plan by an additional 900,000 shares, for a proposed new annual
     individual grant limit of 1,000,000 shares, was adopted by the following
     vote:

<TABLE>
<CAPTION>
                           For      Against     Abstain     Broker Non-Vote
                           ---      -------     -------     ---------------
<S>                    <C>          <C>         <C>         <C>
Common Stock           2,834,741    351,820      11,320        4,333,816
Series B Preferred       330,500     41,937       -               -
Series C Preferred     1,000,000      -           -               -
</TABLE>

                                       Page 20

<PAGE>



                                     PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

(a)  Market Information

     The principal United States market for our common stock is the Nasdaq
SmallCap Market. Our common stock traded on the OTC Bulletin Board from April
29, 1999 through November 3, 2000. The high and low bid prices for shares of our
common stock for the past eight quarters were as follows:

                                                              Low    High
                                                             -----  ------
Fiscal 2000

     Quarter ended December 31, 1999 ....................... $7.13  $29.13

     Quarter ended March 31, 2000 .......................... 18.88   55.00

     Quarter ended June 30, 2000 ...........................  6.00   40.94

     Quarter ended September 30, 2000 ......................  4.00   10.25

Fiscal 2001

     Quarter ended December 31, 2000 ....................... $1.69   $8.69

     Quarter ended March 31, 2001 ..........................  2.75    5.81

     Quarter ended June 30, 2001 ...........................  1.15    4.50

     Quarter ended September 30, 2001 ......................  0.40    1.49

----------

     Source: www.otcbb.com and www.yahoo.com

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

(b)  Holders

     On December 17, 2001, there were approximately 220 holders of record of our
common stock and 110 holders of record of our preferred stock.

(c)  Dividends

     Since our inception, we have not paid any dividends and have no plans to
pay dividends in the foreseeable future. In addition, our ability to declare or
pay any dividends on our common stock is subject to limitations imposed by our
Restated Certificate of Incorporation with respect to the dividend preferences
of our Series B and Series C preferred stock.

(d)  Recent Sales of Unregistered Securities

     In September 2001, we issued 1,980,000 shares of our common stock and
135,000 shares of our Series C preferred stock to Radical Communication, Inc. as
partial consideration for the acquisition of substantially all of the assets of
Radical Communication, Inc. The securities were issued pursuant to an exemption
from registration provided by Rule 506 of Regulation D of the Securities Act of
1933, as amended (the "Securities Act").

     In September 2001, we issued 100,000 shares of our common stock to two
accredited investors as partial consideration for the acquisition of all of the
outstanding stock of MicroBroadcasting Corporation. The securities were issued
pursuant to an exemption from registration provided by Rule 506 of Regulation D
of the Securities Act.


                                     Page 21

<PAGE>


     In September 2001, in connection with a bridge financing, we issued (i)
89,904 shares of common stock in lieu of cash for commitment fees and interest
(ii) convertible notes convertible into up to 550,000 shares of our common stock
and (iii) warrants to purchase up to an aggregate of 1,310,000 shares of our
common stock to six accredited investors. The convertible notes and warrants are
convertible and/or exercisable at prices ranging from $0.50 to $1.00 per share.
These warrants and convertible notes were issued without registration under the
Securities Act in reliance upon the exemption from the registration requirements
set forth in Section 4(2) of the Securities Act.

                                     Page 22

<PAGE>



ITEM 6. SELECTED FINANCIAL DATA

     The following summary financial data should be read together with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our consolidated financial statements and the notes thereto
included elsewhere in this report. The Statement of Operations Data for the
periods ended September 30, 1999, 2000 and 2001 and the Balance Sheet Data as of
September 30, 1999, 2000 and 2001 are derived from, and are qualified by
reference to, our audited consolidated financial statements included elsewhere
in this report.

<TABLE>
<CAPTION>


                                                     For the period
                                                     from inception         For the year         For the year
                                                   (March 26, 1999) to          ended               ended
                                                   September 30, 1999    September 30, 2000  September 30, 2001
                                                   --------------------  ------------------  ------------------
<S>                                                <C>                   <C>                 <C>
Statement of Operations Data

Revenues .........................................     $     6,250          $  1,641,895        $  3,534,777
                                                       -----------          ------------        ------------
Operating expenses:
     Development .................................         320,766             2,220,276           2,796,716
     Production ..................................         139,674             1,038,963           1,977,973
     Sales and marketing .........................       1,060,795             7,666,936           6,279,039
     General and administration ..................         685,943             6,214,428           6,043,092
     Depreciation and amortization ...............         173,797             1,527,413           2,850,058
     Loss on disposal of assets ..................             --                    --              264,494
                                                       -----------          ------------        ------------
         Total operating expenses ................       2,380,975            18,668,016          20,211,372
                                                       -----------          ------------        ------------
     Operating loss ..............................      (2,374,725)          (17,026,121)        (16,676,595)
Interest income ..................................          24,274               537,321             230,676
Interest expense .................................             --                    --             (579,748)
Other income, net ................................             --                    --               31,993
Minority interest ................................             --                 20,029                 --
Loss on transfer agent fraud .....................             --                    --          (19,658,753)
                                                       -----------          ------------        ------------
     Net loss ....................................      (2,350,451)          (16,468,771)        (36,652,427)
Beneficial conversion feature on preferred stock..      (1,043,142)          (12,346,440)                --
                                                       -----------          ------------        ------------
     Net loss available to common stockholders ...     $(3,393,593)         $(28,815,211)       $(36,652,427)
                                                       ===========          ============        ============
Net loss per common share outstanding.............     $     (0.39)         $      (2.95)       $      (3.36)
                                                       ===========          ============        ============
Weighted average common shares outstanding........       8,751,760             9,759,222          10,923,506
                                                       ===========          ============        ============

                                                   September 30, 1999    September 30, 2000  September 30, 2001
                                                   ------------------    ------------------  ------------------
Balance Sheet Data

Cash and cash equivalents ........................     $ 4,744,741          $ 10,762,717         $ 1,524,026
Working capital (deficit) ........................       2,351,053            10,992,679          (3,868,143)
Total assets .....................................       6,820,236            18,607,386          11,455,212
Total liabilities ................................       2,543,090             1,932,746           7,134,462
Stockholders' equity .............................       4,277,146            16,674,640           4,320,750
</TABLE>




                                       Page 23

<PAGE>

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

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

Overview

     We were incorporated in April 1999 as eCommercial.com, and changed our name
to MindArrow Systems, Inc. effective March 31, 2000. On April 24, 2000, we
acquired majority control of Fusionactive, Ltd. in exchange for 150,000 shares
of our common stock. The results of operations of Fusionactive have been
included in the consolidated financial statements commencing April 1, 2000. On
June 18, 2001, we acquired Control Commerce, Inc., a developer of e-commerce
software. On September 12, 2001, we acquired Radical Communication, Inc., a
developer of rich media streaming video software.

     Through September 30, 2001, our revenues were derived from the production
and delivery of rich media messages as well as reseller fees and software
license fees. Production services include theme development, design and layout,
video production, special effects, hyperlink recommendations, hyperlink page
design and creation, reporting and sales cycle consultation.

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

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

     We currently sell our products and services through a direct sales force
and a small network of affiliates.

Need additional financing

     The capital requirements associated with developing our network and
corporate infrastructure have been and will continue to be significant. We have
been substantially dependent on private placements of our equity securities to
fund such requirements.

     At December 15, 2001, we had available cash of approximately $343,000 and
negative working capital of approximately $2.4 million. Our negative working
capital balance includes as current liabilities approximately $1 million of
deferred revenues as well as a payment of $500,000 due October 1, 2002 on a
promissory note issued in connection with our acquisition of substantially all
of the assets of Radical Communication, Inc. this past September. After December
15, 2001, we raised approximately $1.2 million in a private placement of our
common stock. Although we have taken steps to reduce our monthly cash operating
expenses, we currently estimate that our cash operating expenses are
approximately $650,000 per month. Over the past year our revenues have averaged
nearly $300,000 per month. Although we believe that as a result of an existing
backlog of contracts and anticipated new contracts, our monthly revenues will
increase, there can be no assurances that this will happen. If revenues do not
increase over historical levels, we anticipate that based on our current
operating plan and available cash, including the cash raised in our recent
private placement, we will need to obtain additional financing in mid-2002. We
have no current arrangements with respect to sources of additional financing and
there is no certainty that we will be able to raise additional funds. We plan to
seek additional financing but the market for privately placed equity securities
of companies like ours can be very difficult. In their report on our
consolidated financial statements for the year ended September 30, 2001, our
auditors expressed significant doubt about our ability to continue as a going
concern. THERE CAN BE NO ASSURANCE THAT ANY ADDITIONAL FINANCING WILL BE
AVAILABLE ON ACCEPTABLE TERMS, IF AT ALL. IF WE ARE UNSUCCESSFUL IN RAISING
ADDITIONAL FUNDS, OUR LIQUIDITY POSITION WILL BE


                                       Page 24

<PAGE>

MATERIALLY AND ADVERSELY AFFECTED AND WE COULD BE REQUIRED TO MAKE DRASTIC COST
REDUCTIONS, WHICH COULD NEGATIVELY IMPACT OUR OPERATIONS.

     Although we believe our assumptions underlying our operating plan to be
reasonable, we lack the operating history of a more seasoned company and there
can be no assurance that our forecasts will prove accurate. In the event that
our plans change, our assumptions change or prove inaccurate, or if future
private placements, other capital resources and projected cash flow otherwise
prove to be insufficient to fund operations, we could be required to seek
additional financing sooner than currently anticipated. To the extent that we
are able to raise additional funds and it involves the sale of our equity
securities, the interests of our shareholders could be substantially diluted.

Results of operations

     For the period from March 26, 1999 (inception) to September 30, 1999 and
for the years ended September 30, 2000 and 2001, revenues totaled $6,250,
$1,641,895 and $3,534,777, respectively. The increase from the previous periods
was due to our expanded product and service offerings and the overall growth of
our customer base.

     For the periods ended September 30, 1999, 2000 and 2001 our net loss was
$2,350,451, $16,468,771 and $36,652,427, respectively. The loss for all periods
can be attributed to development, marketing and selling, and general and
administrative expenses incurred to expand our operations. As a result of the
beneficial conversion feature on preferred stock of $1,043,142 and $12,346,440,
respectively, our net loss available to common stockholders was $3,393,593, or
$0.39 per share, and $28,815,211, or $2.95 per share, for the period ended
September 30, 1999 and the year ended September 30, 2000, respectively, and
$3.36 per share for the year ended September 30, 2001.

     In February 2001, the Company determined that between May 21, 1999 and
April 7, 2000 stock certificates representing 1,107,951 shares (the "Discrepant
Shares") were illegally authenticated by the Company's prior transfer agent or
others acting on its behalf. The Discrepant Shares were not recorded in the
stock ledger records kept by the former transfer agent. Following the discovery
of potential criminal activity, the Company contacted law enforcement officials,
Nasdaq and the SEC and assisted law enforcement in the investigation of this
matter. On February 5, 2001, Nasdaq halted trading of MindArrow's common stock
on the Nasdaq SmallCap Market. On May 1, 2001 trading resumed.

     In order to offset the impact of recognizing additional shares in the hands
of innocent purchasers, two significant shareholders entered into an agreement
with the Company pursuant to which they agreed to contribute for cancellation by
the Company 1,107,951 shares owned by them. This contribution of shares was made
concurrent with the exchange of new shares for the wrongly authenticated
certificates. The agreement provides that in the event that any of the
Discrepant Shares are recovered by the Company, an equivalent number of shares
shall be issued to the two contributing shareholders. In the event that the
Company recovers cash or property other than the Discrepant Shares, then the
Company shall issue shares of its common stock to the contributing shareholders
at a rate of one share of common stock for every $4.50 in property or cash
recovered. In no event shall the Company be obligated to issue more than
1,107,951 shares pursuant to the agreement.

     On March 30, 2001, the Company issued new shares in exchange for the
Discrepant Shares and the 1,107,951 shares agreed to be contributed by the two
significant shareholders were contributed to the Company and cancelled. No gain
or loss has been recognized by the Company as a result of the share
contribution.

     The Discrepant Shares entered the public float over a period of
approximately eleven months. In connection with the exchange, the Company
determined that under generally accepted accounting principles it should record
a non-recurring, non-cash charge of $18,682,398 at the time the exchange of new
shares for the Discrepant Shares occurs. Accordingly, this non-cash charge is
reflected in the accompanying consolidated financial statements for the year
ended September 30, 2001. This amount represents the estimated market value of
the Discrepant Shares at the time they entered the public float. The charge had
no impact on total stockholders' equity, as the Company concurrently recorded an
$18,682,398 increase to additional paid-in capital. Any amounts recovered by the
Company from the perpetrators of the


                                       Page 25

<PAGE>

fraud will be recorded as non-operating income at the time of the recovery. The
loss on transfer agent fraud of $19,658,753 on the accompanying consolidated
statement of operations includes legal and other costs associated with
investigating the fraud, implementing the share exchange, pursuing resolution of
the trading halt, and recovery of assets.

     On June 25, 2001, the former transfer agent and her accomplice were
convicted of crimes arising out of their fraudulent issuance of shares, and have
agreed as part of their plea agreement to pay restitution. In early 2001,
authorities seized $4.5 million in assets from the perpetrators. As the victim
of the crime, the Company has petitioned the Asset Forfeiture Division of the
U.S. Attorney's Office for remission of these funds. In October 2001, the
Company received approximately $3.6 million in cash of the $4.5 million in
seized assets and accordingly the Company issued an aggregate of 764,381 shares
to the contributing shareholders. The Company continues to pursue potential
sources of recovery of the loss it incurred as a result of the fraud and the
Audit Committee of the Company's Board of Directors has retained special counsel
to assist it in pursuing potential sources of recovery. The Company cannot
predict whether or when it will obtain any additional recovery, including any
recovery of the remaining seized assets held by the authorities. Because of the
uncertainties surrounding recoveries, the Company will not record the impact of
recoveries until amounts or assets are received.

     Development expenses consist primarily of salaries and related expenses for
software engineers and other technical personnel, including consultants, and
were focused on continued advancements in multimedia communication technology
and continued development of MindArrow Messenger, integrating technology
acquired in the Control Commerce and Radical Communication acquisitions. Total
development costs for the periods ended September 30, 1999, 2000 and 2001
amounted to $320,766, $2,220,276 and $2,796,716. We charge all research and
development expenses to operations as incurred. We believe that continued
investment in research and development is critical to our long-term success. We
expect development expenses to remain constant in absolute dollars but decrease
as a percentage of revenues.

     Production efforts focused on building a team of creative design and client
service personnel to produce rich media messages and help our clients implement
our MindArrow Messenger and RadicalMail software suites. Total production costs
for the periods ended September 30, 1999, 2000 and 2001 amounted to $139,674,
$1,038,963 and $1,977,973, respectively.

     Sales and marketing expenses for the periods ended September 30, 1999, 2000
and 2001 amounted to $1,060,795, $7,666,936 and $6,279,039, respectively, and
consisted primarily of salaries and related expenses for developing our direct
and affiliate organizations, as well as marketing expenses designed to create
and promote brand awareness. Included in this amount for the period ended
September 30, 1999 is a non-cash charge of $240,000, which represents the value
of the common stock issued upon the signing of an agreement with Lockheed Martin
Corporation, and a non-cash charge of $78,780, which represents compensation
expense related to the issuance of stock options. Included in the totals for the
years ended September 30, 2000 and 2001 are non-cash charges of $1,787,035 and
$167,521, which represent compensation expense related to the issuance of stock
options and warrants. We have invested in a sales and marketing organization
that we believe will help add customers and expand revenues. We intend to
leverage this investment while aggressively managing our costs of selling.
Accordingly, we expect cash-based sales and marketing expenses to remain
constant in absolute dollars but decrease as a percentage of revenues. We do not
anticipate recording significant stock-based compensation in the future.

     General and administrative costs of $685,943, $6,214,428 and $6,043,092 for
the periods ended September 30, 1999, 2000 and 2001, respectively, primarily
included salaries and related expenses for administrative, finance and human
resources personnel, professional fees and other costs of operating as a public
company. Included in these amounts are non-cash charges of $86,455, $1,811,299
and $331,770 for the periods ended September 30, 1999, 2000 and 2001, which
represent compensation expense related to the issuance of stock options and
warrants. We do not anticipate recording significant stock-based compensation in
the future. Also included in the balance for the year ended September 30, 2001
are charges of $1.2 million for settlement of consulting and employment
contracts that were terminated as of December 31, 2000, and a charge of
approximately $400,000 to reserve for the doubtful collection of amounts due
from former related parties.


                                       Page 26

<PAGE>

     Stock-based compensation increased to $3,611,679 for the year ended
September 30, 2000 from $167,923 for the period ended September 30, 1999 and
decreased to $521,101 for the year ended September 30, 2001. These fluctuations
were attributable to the fair value of warrants as calculated using the
Black-Scholes option pricing model. Amortization of unearned stock-based
compensation represents the difference between the exercise price of stock
option grants and the deemed fair value of our stock at the time of such grants.
Such amounts are amortized over the vesting period for such grants, which is
typically three years. At September 30, 2001 we had no unearned stock-based
compensation remaining to be amortized.

Recent financings

     In September 2001, the Company received a $1 million bridge loan from an
investor. The bridge loan accrued interest at the rate of 15% per annum, was
secured by the amounts recovered in connection with the transfer agent fraud,
and matured on the earlier of December 31, 2001 or the release of those
forfeiture proceeds. As consideration for entering into the bridge loan the
Company issued warrants to purchase 400,000 shares of common stock at an
exercise price of $0.50 per share, paid a commitment fee of $50,000 and issued
50,000 shares of common stock. The bridge loan was repaid in full in October
2001.

     In September 2001, the Company received a $500,000 bridge loan from an
investor. The bridge loan accrued interest at the rate of 24.9% per annum and
matured on the earlier of November 13, 2001, or the release of the proceeds of
forfeiture related to the transfer agent fraud. The note was secured by the
amounts recovered in connection with the transfer agent fraud. As consideration
for entering into the bridge loan the Company paid a commitment fee of $50,000.
All interest charges were paid by issuing 39,904 shares of our common stock in
lieu of cash. The bridge loan was repaid in full in October 2001.

     In September 2001, the Company received a $550,000 bridge loan from a group
of investors. The bridge loan accrued interest at the rate of 15% per annum and
matured on the earlier of March 31, 2001or the release of the proceeds of
forfeiture related to the transfer agent fraud. Upon maturity, the holders of
$40,000 of the notes elected to defer repayment of the principal amount. The
deferred portion is due on demand and is convertible into common stock at a
price of $1 per share. Any deferred portion not converted prior to March 31,
2002 shall be paid in full on that date. The remainder of this bridge loan was
repaid in full in October 2001. As consideration for entering into the bridge
loan the Company granted warrants to purchase 550,000 shares of common stock at
an exercise price of $0.50 per share.

     In December 2001, we received a $350,000 bridge loan, accruing interest at
10% per annum. As consideration for entering into the bridge loan, we issued a
warrant to purchase up to 50,000 shares of our common stock at an exercise price
of $1.15 per share, and paid a placement fee of $17,500.

     In December 2001, we conducted a private placement of our common stock to
raise capital in which we offered up to 2,500,000 shares of our common stock at
a price of $0.60 per share. We consummated closings under this private placement
on December 20 and 28, 2001 in which we sold a total of 2,415,000 shares of our
common stock, raising gross proceeds of $1,449,000. The net proceeds from the
offering, after repayment of the $350,000 bridge loan and payment of offering
fees and expenses of approximately $185,000, will be used by the Company for
general working capital purposes. KSH Investment Group, Inc. acted as the
placement agent for the private placement. As partial consideration for KSH's
services, we are obligated to issue to KSH warrants to purchase 500,000 shares
of our common stock at an exercise price of $1.00 per share.

Liquidity and sources of capital

     At September 30, 2001, our cash position required that we actively seek
additional sources of capital. At December 15, 2001, we had available cash of
approximately $343,000 and negative working capital of approximately $2.4
million. Our negative working capital balance includes as current liabilities
approximately $1 million of deferred revenues as well as a payment of $500,000
due October 1, 2002 on a promissory note issued in connection with our
acquisition of substantially all of the assets of Radical Communication, Inc.
this past September. After December 15, 2001, we raised approximately $1.2
million in a private placement of our common stock. Although we have taken steps
to reduce our monthly cash operating expenses, we currently estimate that our
cash operating expenses are approximately $650,000 per month. Over the past year
our revenues have averaged nearly $300,000 per month. Although we believe that
as a result of an existing backlog of contracts and anticipated new contracts,
our monthly revenues will


                                       Page 27

<PAGE>

increase, there can be no assurances that this will happen. If revenues do not
increase over historical levels, we anticipate that based on our current
operating plan and available cash, including the cash raised in our recent
private placement, we will need to obtain additional financing in mid-2002. We
have no current arrangements with respect to sources of additional financing and
there is no certainty that we will be able to raise additional funds. We plan to
seek additional financing but the market for privately placed equity securities
of companies like ours can be very difficult.

     As of September 30, 1999, 2000 and 2001, we had current assets of
$4,894,143, $12,925,425 and $2,266,319, respectively, and current liabilities of
$2,543,090, $1,932,746 and $6,134,462, respectively. This represents working
capital of $2,351,053 at September 30, 1999, $10,992,679 at September 30, 2000,
and a deficit of $3,868,143 at September 30, 2001.

     For the periods ended September 30, 1999, 2000 and 2001, we used
$2,013,188, $12,442,859 and $11,283,957, respectively, of cash for operating
activities, which were primarily focused on growing our organizational
infrastructure to be able to service our clients. For the periods ended
September 30, 1999 and 2000, $1,263,133 and $3,416,157, respectively, was used
in investing activities, primarily for acquisitions of fixed assets used to
expand our technology infrastructure and network. During the year ended
September 30, 2001, $209,415 was provided by investing activities, primarily
from our acquisition of Control Commerce, Inc. During the periods ended
September 30, 1999, 2000 and 2001, $8,021,062, $21,728,172 and $1,806,021 was
provided by financing activities, primarily from issuance of preferred stock and
proceeds from notes payable.

Recent accounting pronouncements

     On July 20, 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) 141, Business Combinations,
and SFAS 142, Goodwill and Other Intangible Assets. SFAS 141 is effective for
all business combinations completed after June 30, 2001. SFAS 142 is effective
for fiscal years beginning after December 15, 2001; however, certain provisions
of this Statement apply to goodwill and other intangible assets acquired between
July 1, 2001 and the effective date of SFAS 142. Major provisions of these
Statements and their effective dates for the Company are as follows:


     .    All business combinations initiated after June 30, 2001 must use the
          purchase method of accounting. The pooling of interest method of
          accounting is prohibited except for transactions initiated before July
          1, 2001.

     .    Identifiable intangible assets acquired in a business combination must
          be recorded separately from goodwill if they arise from contractual or
          other legal rights or are separable from the acquired entity and can
          be sold, transferred, licensed, rented or exchanged, either
          individually or as part of a related contract, asset or liability.

     .    Goodwill, as well as other intangible assets with indefinite lives,
          acquired after June 30, 2001, will not be amortized. Effective October
          1, 2002, all previously recognized goodwill and other intangible
          assets with indefinite lives will no longer be subject to
          amortization.

     .    Effective October 1, 2002, goodwill and other intangible assets with
          indefinite lives will be tested for impairment annually and whenever
          there is an impairment indicator.

     All acquired goodwill must be assigned to reporting units for purposes of
impairment testing and segment reporting.

     The Company will continue to amortize goodwill and other intangible assets
recognized prior to July 1, 2001, under its current method until October 1,
2002, at which time goodwill amortization will no longer be recognized. By
September 30, 2003 the Company will have completed a transitional fair value
based impairment test of goodwill as of October 1, 2002. By December 31, 2002,
the Company will have completed a transitional impairment test of all other
intangible assets with indefinite lives. Impairment losses, if any, resulting
from the transitional testing will be recognized in the quarter ended December
31, 2002, as a cumulative effect of a change in accounting principle.

     In August 2001, the Financial Accounting Standards Board issued SFAS 144,
"Accounting for the


                                       Page 28

<PAGE>

Impairment or Disposal of Long-lived Assets". This statement supersedes SFAS
121, "Accounting for the Impairment of Long-lived Assets and for Long-lived
Assets to be Disposed Of" and Accounting Principles Board Opinion No. 30,
"Reporting Results of Operations - Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions". This Statement retains the fundamental provisions of
SFAS 121 for recognition and measurement of impairment, but amends the
accounting and reporting standards for segments of a business to be disposed of.
The provisions of this statement are required to be adopted no later than fiscal
years beginning after December 31, 2001, with early adoption encouraged. The
Company is currently evaluating the impact of the adoption of SFAS 144 but does
not expect its impact to be material.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     We do not believe that we currently have material exposure to interest
rate, foreign currency exchange rate or other relevant market risks.

     Interest Rate and Market Risk. Our exposure to market risk for changes in
interest rates relates primarily to our investment profile. As of November 30,
2001, our investment portfolio consisted primarily of cash and cash equivalents,
substantially all of which were held at one financial institution. We do not use
derivative financial instruments in our investment portfolio.

     Foreign Currency Exchange Risk. We do not believe that we currently have
material exposure to foreign currency exchange risk because of the relative
insignificance of our foreign subsidiaries. We intend to assess the need to use
financial instruments to hedge currency exposures on an ongoing basis. We do not
use derivative financial instruments for speculative trading purposes.

                                       Page 29

<PAGE>


ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

        MINDARROW SYSTEMS, INC. AND SUBSIDIARIES

        Report of Independent Certified Public Accountants................... 31
        Consolidated Balance Sheets.......................................... 32
        Consolidated Statements of Operations................................ 33
        Consolidated Statement of Changes in Stockholders' Equity............ 34
        Consolidated Statements of Cash Flows................................ 35
        Notes to Consolidated Financial Statements........................... 36


                                     Page 30

<PAGE>



               Report of Independent Certified Public Accountants

Board of Directors
MindArrow Systems, Inc. and Subsidiaries

     We have audited the accompanying consolidated balance sheets of MindArrow
Systems, Inc. and Subsidiaries as of September 30, 2000 and 2001 and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the period from inception (March 26, 1999) through September 30, 1999 and for
the years ended September 30, 2000 and 2001. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

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

     In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of MindArrow
Systems, Inc. and Subsidiaries as of September 30, 2000 and 2001, and the
consolidated results of their operations and their consolidated cash flows for
the period from inception (March 26, 1999) through September 30, 1999 and for
the years ended September 30, 2000 and 2001, in conformity with accounting
principles generally accepted in the United States of America.

     The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note B to the
financial statements, the Company has a net working capital deficiency and has
experienced substantial operating losses since inception that raise substantial
doubt about its ability to continue as a going concern. Continuation is
dependent upon the success of future operations and obtaining additional
financing. Management's plans in regards to these matters are also described in
Note B. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.

Grant Thornton LLP
Irvine, California
November 2, 2001, (except for the last paragraph
of Note G as to which the date is December 1, 2001)

                                     Page 31


<PAGE>

                    MindArrow Systems, Inc. and Subsidiaries
                           Consolidated Balance Sheets

<TABLE>
                                                                                            September 30,   September 30,
                                                                                                2000            2001
                                                                                            ------------    ------------
<S>                                                                                         <C>             <C>
                                   ASSETS
Current Assets:
  Cash                                                                                       $10,613,897      $1,345,376
  Cash, pledged                                                                                  148,820         178,650
  Accounts receivable, net of allowance for doubtful accounts of
      $30,000 and $23,555 at September 30, 2000 and 2001, respectively.                          704,862         515,309
  Prepaid expenses                                                                               289,536         128,230
  Due from related parties                                                                       586,522          71,949
  Other current assets                                                                           581,788          26,805
                                                                                            ------------    ------------
    Total current assets                                                                      12,925,425       2,266,319
Fixed Assets, net                                                                              2,891,808       2,833,737
Intangible Assets, net                                                                         2,615,288       6,210,576
Investments                                                                                      100,000              -
Deposits                                                                                          74,865         144,580
                                                                                            ------------    ------------
    Total assets                                                                             $18,607,386     $11,455,212
                                                                                            ============    ============


                      LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities:
  Accounts payable and accrued liabilities                                                    $1,356,410      $2,443,333
  Deferred revenue                                                                               576,336       1,075,221
  Capital lease obligations                                                                           -          328,700
  Notes payable, current portion                                                                      -        2,100,000
  Due to related parties                                                                              -          187,208
                                                                                            ------------    ------------
    Total current liabilities                                                                  1,932,746       6,134,462
                                                                                            ------------    ------------
Note payable, long term portion                                                                       -        1,000,000
                                                                                            ------------    ------------
  Total liabilities                                                                            1,932,746       7,134,462
                                                                                            ------------    ------------

Stockholders' Equity:
  Series B Convertible Preferred Stock,
    $0.001 par value; 1,750,000 shares authorized; 1,476,698 and 971,387 shares
    issued and outstanding as of September 30, 2000 and 2001; $11,813,584 and
    $7,771,096 aggregate liquidation preference as of September 30, 2000 and 2001                  1,477             971

  Series C Convertible Preferred Stock,
    $0.001 par value; 3,000,000 shares authorized; 725,775 and 897,000 shares issued
    and outstanding as of September 30, 2000 and 2001; $18,144,375 and $22,425,000
    aggregate liquidation preference as of September 30, 2000 and 2001                               726             897

  Common Stock,
    $0.001 par value; 30,000,000 shares authorized; 10,110,760 and 13,695,682 shares
    issued and outstanding as of September 30, 2000 and 2001                                      10,111          13,696
Additional paid-in capital                                                                    49,181,513      73,166,417
Accumulated deficit                                                                          (32,208,804)    (68,861,231)
Unearned stock-based compensation                                                               (310,383)             -
                                                                                            ------------    ------------
  Total stockholders' equity                                                                  16,674,640       4,320,750
                                                                                            ------------    ------------
    Total liabilities and stockholders' equity                                               $18,607,386     $11,455,212
                                                                                            ============    ============

</TABLE>

        The accompanying notes are an integral part of these statements.

                                     Page 32

<PAGE>


                    MindArrow Systems, Inc. and Subsidiaries
                      Consolidated Statements of Operations

<TABLE>
<CAPTION>
                                                     For the period
                                                     from inception        For the           For the
                                                    (March 26, 1999)     year ended        year ended
                                                    to September 30,    September 30,     September 30,
                                                          1999              2000              2001
                                                    ---------------    --------------    --------------
<S>                                                 <C>                <C>               <C>
Revenues                                              $      6,250     $   1,641,895     $   3,534,777
                                                    ---------------    --------------    --------------
Operating expenses:
Development                                                320,766         2,220,276         2,796,716
Production                                                 139,674         1,038,963         1,977,973
Sales and marketing                                      1,060,795         7,666,936         6,279,039
General and administration                                 685,943         6,214,428         6,043,092
Depreciation and amortization                              173,797         1,527,413         2,850,058
Loss on disposal of assets                                       -                 -           264,494
                                                    ---------------    --------------    --------------
                                                         2,380,975        18,668,016        20,211,372
                                                    ---------------    --------------    --------------
Operating loss                                          (2,374,725)      (17,026,121)      (16,676,595)
Interest income                                             24,274           537,321           230,676
Interest expense                                                 -                 -          (579,748)
Minority interest                                                -            20,029                 -
Other income, net                                                -                 -            31,993
Loss on transfer agent fraud                                     -                 -       (19,658,753)
                                                    ---------------    --------------    --------------
  Net loss                                              (2,350,451)      (16,468,771)      (36,652,427)
Beneficial conversion feature on preferred stock        (1,043,142)      (12,346,440)                -
                                                    ---------------    --------------    --------------
  Net loss available to common stockholders            $(3,393,593)     $(28,815,211)    $ (36,652,427)
                                                    ===============    ==============    ==============
Basic and diluted loss per share                            $(0.39)           $(2.95)           $(3.36)
                                                    ===============    ==============    ==============
Shares used in computation of basic and diluted
loss per share                                           8,751,760         9,759,222        10,923,506
                                                    ===============    ==============    ==============
</TABLE>

        The accompanying notes are an integral part of these statements.

                                       Page 33

<PAGE>



                    MindArrow Systems, Inc. and Subsidiaries
            Consolidated Statement of Changes in Stockholders' Equity

<TABLE>
<CAPTION>


                                                     Series B Preferred  Series C Preferred
                                                           Stock               Stock               Common Stock
                                                     ------------------ -------------------  ----------------------    Additional
                                                      Shares    Amount   Shares     Amount     Shares      Amount   Paid-In Capital
                                                     --------- -------- --------   --------  ----------  ---------- ----------------
<S>                                                  <C>       <C>      <C>        <C>       <C>         <C>        <C>

Balance, March 26, 1999                                     -    $   -        -       $  -           -    $      -      $        -
Sale of common stock, net of issuance costs                 -        -        -          -    4,000,000       4,000             595
Issuance of common stock for acquistion of Zap
   International, Inc.                                      -        -        -          -    2,640,000       2,640              -
Reclassifications of $.001 common stock                     -        -        -          -   (6,640,000)     (6,640)           (595)
Issuance of common stock in connection with
   reclassification of equity                               -        -        -          -    8,758,033       8,758             595
Assumption of liabilities and subscription
   receivable in connection with recapitalization           -        -        -          -           -           -       (2,570,000)
Sale of common stock, net of issuance costs                 -        -        -          -      475,118         475         941,929
Issuance of common stock pursuant to warrants               -        -        -          -      233,613         234          23,123
Issuance of common stock at a discount as
   compensation for services                                -        -        -          -       39,859          40          54,028
Issuance of common stock as compensation for
   services                                                 -        -        -          -       30,000          30         239,970
Sales of preferred stock, net of issuance costs      1,085,573    1,086       -          -           -           -        7,759,406
Compensation expense on option and warrant
   grants                                                   -        -        -          -           -           -          167,923
Unearned compensation on option and warrant
   grants                                                   -        -        -          -           -           -          594,475
Collection of subscriptions receivable                      -        -        -          -           -           -               -
Beneficial conversion feature on Series B preferred
   stock                                                    -        -        -          -           -           -        1,043,142
Net loss                                                    -        -        -          -           -           -               -
                                                     --------- -------- --------   --------  ----------- ---------- ---------------

Balance, September 30, 1999                          1,085,573    1,086       -          -    9,536,623       9,537       8,254,591
Sales of preferred stock, net of issuance costs        427,500      427  725,775        726          -           -       21,536,203
Issuance of common stock pursuant to exercise
   of options and warrants                                  -        -        -          -      322,526         323         188,977
Issuance of common stock for acquistion of
   Fusionactive, Ltd.                                       -        -        -          -      150,000         150       2,624,850
Issuance of common stock as compensation for
   services                                                 -        -        -          -       65,236          65         402,220
Conversion of preferred stock to common stock          (36,375)     (36)      -          -       36,375          36              -
Reduction in acquired liabilities                           -        -        -          -           -           -          500,645
Compensation expense on option and warrant
   grants                                                   -        -        -          -           -           -        3,327,587
Beneficial conversion feature on Series B preferred
   stock                                                    -        -        -          -           -           -        2,131,466
Beneficial conversion feature on Series C preferred
   stock                                                    -        -        -          -           -           -       10,214,974
Net loss                                                    -        -        -          -           -           -               -
                                                     --------- -------- --------   --------  ----------- ---------- ---------------

Balance, September 30, 2000                          1,476,698    1,477  725,775        726   10,110,760     10,111      49,181,513
Conversion of preferred stock
   to common stock                                    (505,311)    (506) (23,775)       (24)     552,861        553             (23)
Issuance of common stock pursuant
   to exercise of options                                   -        -        -          -       358,334        358         357,976
Compensation expense on option
   and warrant grants                                       -        -        -          -            -          -          210,718
Stockholder repayment per
   indemnification agreement                                -        -        -          -            -          -          348,068
Adjustment for Discrepant Shares                            -        -        -          -            -          -       18,682,398
Share contribution and cancellation                         -        -        -          -    (1,107,951)    (1,108)          1,108
Exchange of Discrepant Shares                               -        -        -          -     1,107,951      1,108          (1,108)
Shares cancelled pursuant to
   indemnification agreement                                -        -        -          -      (296,177)      (296)            296
Issuance of common stock for
   acquisition of Control Commerce, Inc.                    -        -    60,000         60      800,000        800       1,535,540
Issuance of common stock for
   acquisition of MicroBroadcasting Corp.                   -        -        -          -       100,000        100          66,900
Issuance of common stock for
   acquisition of Radical Communication, Inc.               -        -   135,000        135    1,980,000      1,980       2,292,885
Issuance of common stock pursuant
   to bridge financing agreements                           -        -        -          -        89,904         90          76,646
Proceeds from notes payable attributable
   to warrants                                              -        -        -          -           -           -          413,500
Net loss                                                    -        -        -          -           -           -               -
                                                     --------- -------- --------   --------  ----------- ---------- ----------------
Balance, September 30, 2001                            971,387   $  971  897,000       $897   13,695,682  $  13,696  $   73,166,417
                                                     ========= ======== ========   ========  =========== ========== ================


<CAPTION>



                                                                                     Unearned
                                                     Subscriptions   Accumulated   Stock-Based
                                                       Receivable      Deficit     Compensation      Total
                                                     -------------  ------------   ------------   ------------
<S>                                                  <C>            <C>            <C>            <C>
Balance, March 26, 1999                                  $      -   $         -       $      -    $         -
Sale of common stock, net of issuance costs                     -             -              -           4,595
Issuance of common stock for acquistion of Zap
   International, Inc.                                          -             -              -           2,640
Reclassifications of $.001 common stock                         -             -              -          (7,235)
Issuance of common stock in connection with
   reclassification of equity                                   -             -              -           9,353
Assumption of liabilities and subscription
   receivable in connection with recapitalization          (47,000)           -              -      (2,617,000)
Sale of common stock, net of issuance costs                     -             -              -         942,404
Issuance of common stock pursuant to warrants                   -             -              -          23,357
Issuance of common stock at a discount as
   compensation for services                                    -             -              -          54,068
Issuance of common stock as compensation for
   services                                                     -             -              -         240,000
Sales of preferred stock, net of issuance costs                 -             -              -       7,760,492
Compensation expense on option and warrant
   grants                                                       -             -              -         167,923
Unearned compensation on option and warrant
   grants                                                       -             -        (594,475)            -
Collection of subscriptions receivable                      47,000            -              -          47,000
Beneficial conversion feature on Series B preferred
   stock                                                        -     (1,043,142)            -            --
Net loss                                                        -     (2,350,451)            -      (2,350,451)
                                                      ------------  ------------   ------------   ------------

Balance, September 30, 1999                                     -     (3,393,593)      (594,475)     4,277,146
Sales of preferred stock, net of issuance costs                 -             -              -      21,537,356
Issuance of common stock pursuant to exercise
   of options and warrants                                      -             -              -         189,300
Issuance of common stock for acquistion of
   Fusionactive, Ltd.                                           -             -              -       2,625,000
Issuance of common stock as compensation for
   services                                                     -             -              -         402,285
Conversion of preferred stock to common stock                   -             -              -              -
Reduction in acquired liabilities                               -             -              -         500,645
Compensation expense on option and warrant
   grants                                                       -             -         284,092     3,611,679
Beneficial conversion feature on Series B preferred
   stock                                                        -     (2,131,466)            -              -
Beneficial conversion feature on Series C preferred
   stock                                                        -    (10,214,974)            -              -
Net loss                                                        -    (16,468,771)            -     (16,468,771)
                                                      ------------  ------------   ------------   ------------

Balance, September 30, 2000                                     -    (32,208,804)      (310,383)    16,674,640
Conversion of preferred stock
   to common stock                                              -             -              -              -
Issuance of common stock pursuant
   to exercise of options                                       -             -              -         358,334
Compensation expense on option
   and warrant grants                                           -             -         310,383        521,101
Stockholder repayment per
   indemnification agreement                                    -             -              -         348,068
Adjustment for Discrepant Shares                                -             -              -      18,682,398
Share contribution and cancellation                             -             -              -              -
Exchange of Discrepant Shares                                   -             -              -              -
Shares cancelled pursuant to
   indemnification agreement                                    -             -              -              -
Issuance of common stock for
   acquisition of Control Commerce, Inc.                        -             -              -       1,536,400
Issuance of common stock for
   acquisition of MicroBroadcasting Corp.                       -             -              -          67,000
Issuance of common stock for
   acquisition of Radical Communication, Inc.                   -             -              -       2,295,000
Issuance of common stock pursuant
   to bridge financing agreements                               -             -              -          76,736
Proceeds from notes payable attributable
   to warrants                                                  -             -              -         413,500
Net loss                                                        -    (36,652,427)            -     (36,652,427)
                                                       -----------  ------------   ------------   ------------
Balance, September 30, 2001                               $     -   $(68,861,231)     $      -    $  4,320,750
                                                       ===========  ============   ============   ============
</TABLE>



        The accompanying notes are an integral part of these statements.

                                       Page 34

<PAGE>


                    MindArrow Systems, Inc. and Subsidiaries
                     Consolidated Statements of Cash Flows

<TABLE>
<CAPTION>

                                                                        For the period
                                                                        from inception       For the          For the
                                                                       (March 26, 1999)     year ended      year ended
                                                                       to September 30,    September 30,   September 30,
                                                                            1999               2000             2001
                                                                       ----------------   --------------   --------------
<S>                                                                    <C>                <C>              <C>
Cash flows from operating activities:
  Net loss                                                                 $(2,350,451)    $(16,468,771)   $ (36,652,427)

  Adjustments to reconcile net loss to net cash used in operations:
    Depreciation and amortization                                              173,797        1,527,413        2,850,058
    Loss on disposal of assets                                                      -                -           264,494
    Amortization of discount on notes payable                                       -                -           563,500
    Non-cash charges due to stock issuances                                    294,068          402,285               -
    Non-cash charges due to stock option and warrant grants                    167,923        3,611,679          521,101
    Minority interest                                                               -           (20,029)              -
    Non-cash charges due to contract settlements                                    -                -         1,191,701
    Non-cash charge due to investment write-down                                    -                -           100,000
    Non-cash charge for discrepant share adjustment                                 -                -        18,682,398
    Non-cash charge for trade shows                                                 -                -            49,145
    Non-cash forgiveness of amount due from related party                           -                -            28,333
    (Increase) decrease in accounts receivable                                 (24,500)        (373,983)         243,688
    (Increase) decrease in prepaid expenses                                    (98,743)        (180,575)         165,159
    (Increase) decrease in other current assets                                (14,941)        (566,847)         534,953
    (Increase) decrease in deposits                                            (76,975)           2,110           15,783
    Decrease in judgment payable from acquired company                              -        (1,500,000)              -
    Increase (decrease) in accounts payable and accrued liabilities            400,412          777,790         (439,592)
    Decrease in accounts payable from acquired companies                      (514,278)        (199,767)              -
    Increase in deferred revenue                                                30,500          545,836          597,749
                                                                       ----------------   --------------   --------------
      Net cash used in operations                                           (2,013,188)     (12,442,859)     (11,283,957)
                                                                       ----------------   --------------   --------------

Cash flows from investing activities:
    (Increase) decrease in cash-pledged                                       (233,890)          85,070          (29,830)
    Cash acquired in acquisitions                                                2,898          122,415          938,536
    Cash used in acquisition                                                        -                -          (180,350)
    Purchases of fixed assets                                                 (987,915)      (2,797,880)        (734,248)
    Proceeds from sale of assets                                                    -                -            19,777
    Increase in investments                                                         -          (100,000)              -
    (Increase) decrease in due from related parties                                 -          (586,522)         381,560
    Purchases of patents and trademarks                                        (44,226)        (139,240)        (186,030)
                                                                       ----------------   --------------   --------------
       Net cash (used in) provided by investing activities                  (1,263,133)      (3,416,157)         209,415
                                                                       ----------------   --------------   --------------

Cash flows from financing activities:
    Principal payments on notes payable                                       (756,786)              -                -
    Proceeds from notes payable, net of issuance costs                              -                -         1,950,000
    Payment received on subscriptions receivable                                47,000               -                -
    Proceeds from issuance of preferred stock                                7,760,492       21,537,356               -
    Proceeds from issuance of common stock                                     970,356          184,916          183,334
    Issuance of stock by subsidiary                                                 -             5,900               -
    Decrease in due to related parties                                              -                -          (327,313)
                                                                       ----------------   --------------   --------------
       Net cash provided by financing activities                             8,021,062       21,728,172        1,806,021
                                                                       ----------------   --------------   --------------
Net increase (decrease) in cash                                              4,744,741        5,869,156       (9,268,521)
Cash, beginning of period                                                           -         4,744,741       10,613,897
                                                                       ----------------   --------------   --------------
Cash, end of period                                                       $  4,744,741      $10,613,897     $  1,345,376
                                                                       ================   ==============   ==============
Cash paid for income taxes                                                $         -       $        -      $         -
                                                                       ================   ==============   ==============
Cash paid for interest                                                    $         -       $        -      $         -
                                                                       ================   ==============   ==============

</TABLE>

        The accompanying notes are an integral part of these statements.

                                       Page 35

<PAGE>



                    MindArrow Systems, Inc. and Subsidiaries
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        September 30, 1999, 2000 and 2001

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

     MindArrow Systems, Inc. ("MindArrow" or the "Company") provides direct
digital marketing software and services that can help companies reduce costs,
shorten sales cycles, and improve retention by automating and enhancing sales
and marketing communications. The Company's patented and patent-pending
technologies deliver interactive multimedia content, including streaming video,
downloadable video, Flash, audio, HTML, graphics, and animation, combined with
the in-depth information of web links, digital documents and e-commerce
capabilities. Our technology platform allows our clients to create, deliver,
track and manage email marketing campaigns as well as individual one-to-one
communications. Our products and services can be deployed on a stand-alone
basis, or used to augment existing customer relationship management ("CRM")
software.

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

     On April 16, 1999, the Company acquired all of the outstanding common stock
of Zap International, ("Zap"), in exchange for 2,640,000 shares of our common
stock. The transaction was recorded using the purchase method of accounting.

     On April 19, 1999, Wireless Netcom, Inc. (a non-operating Nevada
corporation) acquired all of the outstanding shares of the Company. For
accounting purposes, the acquisition was treated as a recapitalization with the
Company as the acquirer (a reverse acquisition).

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

     On April 24, 2000, the Company acquired majority control of Fusionactive,
Ltd. ("Fusionactive") in exchange for 150,000 shares of common stock. The
transaction was recorded using the purchase method of accounting (see Note J).

     On June 18, 2001, the Company acquired Control Commerce, Inc. in exchange
for 800,000 shares of common stock, 60,000 shares of Series C preferred stock
and a warrant to purchase 12,000 shares of common stock. The transaction was
recorded using the purchase method of accounting (see Note J).

     On September 12, 2001 the Company acquired substantially all of the assets
of Radical Communication, Inc. in exchange for 1,980,000 shares of common stock,
135,000 shares of Series C preferred stock and an unsecured subordinated
promissory note in the aggregate principal amount of $1,000,000. The transaction
was recorded using the purchase method of accounting (see Note J).

     On September 28, 2001, the Company acquired MicroBroadcasting Corp. for
100,000 shares of common stock, a cash payment of $180,350 and short-term notes
payable in the amount of $50,000. The transaction was recorded using the
purchase method of accounting (see Note J).

1. Principles of Consolidation

     The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany balances and transactions
have been eliminated.

                                     Page 36

<PAGE>


2. Revenue Recognition

     Revenues are recognized when the consulting or production services are
rendered and messages are delivered. Software license fees are recognized when
pervasive evidence of an agreement exists, the product has been delivered, no
significant obligations regarding implementation remain, the license fee is
fixed or determinable and collection of the fee is probable. Revenue from
consulting services is recognized as the services are rendered. Through
Fusionactive, which is based in Hong Kong, revenue from media is recognized upon
placing of advertisements with the media.

     Customers are generally billed in advance of production and delivery of
messages. Accordingly, deferred revenue includes the customer prepayments less
the portion of service that has been completed.

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

3. Product Development

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

4. Depreciation and Amortization

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

5. Income Taxes

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

     At September 30, 2000 and 2001, the Company had a deferred tax asset of
approximately $2,823,000 and $8,321,000, respectively, resulting from cumulative
net operating losses for the period March 26, 1999 through September 30, 2000
and March 26, 1999 through September 30, 2001. The Company has provided for a
valuation allowance of $2,823,000 and $8,321,000 at September 30, 2000 and 2001,
respectively.


                                     Page 37

<PAGE>


6. Stock-Based Compensation

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

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

     In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44 ("FIN 44"), "Accounting for Certain Transactions involving
Stock Compensation," an interpretation of Accounting Principles Board Opinion
No. 25 ("Opinion 25"). FIN 44 clarifies (a) the definition of "employee" for
purposes of applying Opinion 25, (b) the criteria for determining whether a plan
qualifies as a noncompensatory plan, (c) the accounting consequence of various
modifications to the terms of a previously fixed stock option or award, and (d)
the accounting for an exchange of stock compensation awards in a business
combination. FIN 44 was effective July 1, 2000, except requirements regarding
certain events that occur after December 15, 1998 or January 12, 2000 but before
the effective date should be applied prospectively. FIN 44 has not had a
material impact on the Company's financial position, results of operations or
cash flows.

7. Basic and Diluted Net Loss Per Share

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

8. Use of Estimates

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

9. Cash and Cash Equivalents

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

     The Company had a $230,400 certificate of deposit account that was pledged
to collateralize an irrevocable letter of credit related to the lease for the
Company's headquarters. The letter of credit amount decreased by $115,000 in
September 2000 and expires in December 2001. Additionally in July 2001 a
certificate of deposit for $92,000 was pledged to collateralize an irrevocable
letter of credit for the Company's New York office space. The letter decreased
to $63,250 on September 15, 2001, decreases to $28,750 on December 15, 2001, and
expires on May 31, 2002.


                                     Page 38

<PAGE>


10. Concentration of Credit Risk

     Financial instruments that potentially subject the Company to significant
concentration of credit risk consist primarily of cash, cash equivalents, and
accounts receivable. Substantially all of the Company's cash and cash
equivalents are held in one financial institution. As of September 30, 2000 and
2001, the carrying amounts of cash were $10,762,717 and $1,524,026,
respectively, and the bank balances were $11,239,780 and $1,764,047,
respectively, of which $100,000 was FDIC insured. Accounts receivable are
typically unsecured and derived primarily from customers located in the United
States and Hong Kong. The Company performs ongoing credit evaluations of its
customers and will maintain reserves for potential credit losses as the need
arises.

11. Comprehensive Income

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

12. Segments

     The Company has adopted Statement of Financial Accounting Standards No. 131
"Disclosures about Segments of an Enterprise and Related Information" (SFAS
131). SFAS 131 establishes standards for reporting information regarding
operating segments in annual financial statements and requires selected
financial information for those segments to be presented in interim financial
reports. SFAS 131 also establishes standards for related disclosures about
products and services, and geographic areas. To date the Company has viewed
their operations as principally one segment. The following is a summary of
significant geographic markets:

<TABLE>
<CAPTION>


                                                          North
                                                         America         Asia Pacific
                                                         -------         ------------
     <S>                                               <C>               <C>
     For the period ended September 30, 1999:
         Net revenues................................  $    6,250         $     --
         Long lived assets...........................   1,615,228               --
     For the year ended September 30, 2000:
         Net revenues................................   1,223,926           417,969
         Long lived assets...........................   3,419,000         2,088,096
     For the year ended September 30, 2001:
         Net revenues................................   2,706,585           828,192
         Long lived assets...........................   7,789,215         1,255,098
</TABLE>

13. Investments

     Investments in companies in which the Company has less than a 20% interest
are carried at cost (see Note E).

14. Fair Value of Financial Instruments

     The fair value of financial instruments approximates their carrying
amounts. In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (SFAS 133), and in July 1999 issued Financial Accounting
Standard No. 137,"Accounting for Derivative Instruments and Hedging
Activities--Deferral of the Effective Date of FASB Statement No. 133, an
Amendment of FASB Statement No. 133" (SFAS 137). SFAS 137 delayed the effective
date for SFAS 133 to fiscal years beginning after June 15, 2000. The statement
has not had a material effect on the Company's financial position or results of
operations.


                                     Page 39

<PAGE>


15. Business Combinations

     On July 20, 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) 141, Business Combinations,
and SFAS 142, Goodwill and Other Intangible Assets. SFAS 141 is effective for
all business combinations completed after June 30, 2001. SFAS 142 is effective
for fiscal years beginning after December 15, 2001; however, certain provisions
of this Statement apply to goodwill and other intangible assets acquired between
July 1, 2001 and the effective date of SFAS 142. Major provisions of these
Statements and their effective dates for the Company are as follows:

 .    All business combinations initiated after June 30, 2001 must use the
     purchase method of accounting. The pooling of interest method of accounting
     is prohibited except for transactions initiated before July 1, 2001.

 .    Identifiable intangible assets acquired in a business combination must be
     recorded separately from goodwill if they arise from contractual or other
     legal rights or are separable from the acquired entity and can be sold,
     transferred, licensed, rented or exchanged, either individually or as part
     of a related contract, asset or liability.

 .    Goodwill, as well as other intangible assets with indefinite lives,
     acquired after June 30, 2001, will not be amortized. Effective October 1,
     2002, all previously recognized goodwill and other intangible assets with
     indefinite lives will no longer be subject to amortization.

 .    Effective October 1, 2002, goodwill and other intangible assets with
     indefinite lives will be tested for impairment annually and whenever there
     is an impairment indicator.

 .    All acquired goodwill must be assigned to reporting units for purposes of
     impairment testing and segment reporting.

     The Company will continue to amortize goodwill and other intangible assets
recognized prior to July 1, 2001, under its current method until October 1,
2002, at which time goodwill amortization will no longer be recognized. By
September 30, 2003 the Company will have completed a transitional fair value
based impairment test of goodwill as of October 1, 2002. By December 31, 2002,
the Company will have completed a transitional impairment test of all other
intangible assets with indefinite lives. Impairment losses, if any, resulting
from the transitional testing will be recognized in the quarter ended December
31, 2002, as a cumulative effect of a change in accounting principle.

16. Long-lived Assets

     In August 2001, the Financial Accounting Standards Board issued SFAS 144,
"Accounting for the Impairment or Disposal of Long-lived Assets". This statement
supersedes SFAS 121, "Accounting for the Impairment of Long-lived Assets and for
Long-lived Assets to be Disposed Of" and Accounting Principles Board Opinion No.
30, "Reporting Results of Operations - Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions" for disposals of a segment of a business. This
Statement retains the fundamental provisions of SFAS 121 for recognition and
measurement of impairment, but amends the accounting and reporting standards for
segments of a business to be disposed of. The provisions of this statement are
required to be adopted no later than fiscal years beginning after December 15,
2001 and interim periods within these fiscal years, with early adoption
encouraged. The Company is currently evaluating the impact of the adoption of
SFAS 144 but does not expect its impact to be material.

17. Reclassifications

     Certain reclassifications have been made to the September 30, 1999 and 2000
consolidated financial statements to conform to the September 30, 2001
presentation. The reclassifications had no effect on the consolidated results of
operations.

18. Gain Contingencies

     It is the Company's policy to not record gain contingencies until at such
point amounts are awarded and substantive uncertainties surrounding collection
are removed. (See Note I).

                                     Page 40

<PAGE>


Note B--Liquidity

     At September 30, 2001, the Company's cash position required that it
actively seek additional sources of capital. As of September 30, 2001, the
Company had current assets of $2,266,319 and current liabilities of $6,134,462,
respectively. This represents a working capital a deficit of $3,868,143. The
negative working capital balance includes as current liabilities approximately
$1 million of deferred revenues.

     Although the Company has taken steps to reduce monthly cash operating
expenses, management currently estimates that cash operating expenses will be
approximately $650,000 per month beginning in December 2001. Over the past year,
revenues have averaged nearly $300,000 per month. Although the Company believes
that as a result of an existing backlog of contracts and anticipated new
contracts, monthly revenues will increase, there can be no assurances that this
will happen. If revenues do not increase over historical levels, management
anticipates that based on the current operating plan and available cash, the
Company will need to obtain additional financing soon. There is no certainty
that the Company will be able to raise additional funds and the market for
privately placed equity securities of companies like MindArrow can be very
difficult.

     The accompanying consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the United States of
America, which contemplate continuation of the company as a going concern.

     In view of the Company, recoverability of a major portion of the recorded
asset amounts shown in the accompanying balance sheet is dependent upon
continued operations of the Company, which in turn is dependent upon the
Company's ability to meet its financing obligations on a continuing basis. The
consolidated financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or amounts and
classification of liabilities that might be necessary should the Company be
unable to continue in existence.

Note C--Fixed Assets

     Fixed assets, at cost, consist of the following:

                                                 September 30,     September 30,
                                                     2000               2001
                                                 -------------     -------------

     Computer equipment.......................    $2,250,357        $2,827,344
     Office equipment.........................       167,745           210,425
     Furniture and fixtures...................       554,382           599,311
     Leasehold improvements...................       458,076           467,068
     Production equipment.....................       244,487           247,557
     Software.................................       238,728           843,389
                                                  ----------        ----------
                                                   3,913,775         5,195,094
     Less accumulated depreciation............    (1,021,967)       (2,361,357)
                                                  ----------        ----------
                                                  $2,891,808        $2,833,737
                                                  ==========        ==========

Fixed assets included $328,700 of fixed assets under capital lease at September
30, 2001. Accumulated depreciation of assets under capital lease totaled $28,878
at September 30, 2001.

                                     Page 41

<PAGE>



Note D--Intangible Assets

     Intangible assets consist of the following:

                                                  September 30,    September 30,
                                                      2000             2001
                                                  -------------    -------------

     Patents and trademarks.....................    $  183,466       $  442,894
     Goodwill...................................     3,208,387        7,712,504
                                                    ----------        ---------
                                                     3,391,853        8,155,398
     Less accumulated amortization..............      (776,565)      (1,944,822)
                                                     ---------       ----------
                                                    $2,615,288       $6,210,576
                                                    ==========       ==========

     Goodwill is being amortized on a straight-line basis over three years.
Amortization expense of goodwill was $114,583 for the period from inception
(March 26, 1999) to September 30, 1999. Amortization expense of goodwill was
$654,674 and $1,163,574 for the years ended September 30, 2000 and 2001,
respectively.

Note E--Investments

     In January 2000, the Company made an equity investment of $100,000 into
eContributor.com, Inc., an Internet-based fundraising management and
donation-processing firm. During the quarter ended December 31, 2000, the
Company determined that the investment had no fair market value and wrote the
asset value down to zero.

Note F--Capital Lease Obligations

Future minimum lease payments under capital lease obligations at September 30,
2001 are as follows:

                                                                   September 30,
                                                                       2001
                                                                   -------------

     For the year ending September 30, 2002......................     $ 346,010
     Less amount representing interest...........................       (17,310)
                                                                      ---------
     Present value of minimum lease payments.....................     $ 328,700
                                                                      =========

Note G--Notes Payable

     In September 2001, the Company received a $1 million bridge loan from an
investor. The bridge loan accrued interest at the rate of 15% per annum, was
secured by any amounts recovered in connection with the transfer agent fraud
(Note I), and matured on the earlier of December 31, 2001, or the release of
those forfeiture proceeds on October 4, 2001. As consideration for entering into
the bridge loan the Company issued detachable warrants to purchase 400,000
shares of common stock at an exercise price of $0.50 per share. The warrants
were valued at $232,000 as computed using the Black-Scholes option pricing
model. The Company also paid a commitment fee of $50,000 and issued 50,000
shares of common stock valued at $1.00 per share. The bridge loan was repaid in
full in October 2001.

     In September 2001, the Company received a $500,000 bridge loan from an
investor. The bridge loan accrued interest at the rate of 24.9% per annum and
matured on the earlier of November 13, 2001, or the release of the proceeds of
forfeiture related to the transfer agent fraud. The note was secured by (i)
MindArrow's receivables, (ii) MindArrow's patent, and (iii) any amounts
recovered in connection with the transfer agent fraud. As consideration for
entering into the bridge loan the Company paid a commitment fee of $50,000. In
September 2001, interest charges were paid by issuing 39,904 shares of common
stock at a value of $0.67 per share to the lender in lieu of cash. The value of
the shares was recorded as prepaid interest and amortized using the effective
interest rate over the term of the note. The bridge loan was repaid in full in
October 2001.

     In September 2001, the Company received a $550,000 bridge loan from a group
of investors. The bridge loan was secured by (i) MindArrow's receivables, (ii)
MindArrow's patent, and (iii) any amounts

                                     Page 42

<PAGE>


recovered in connection with the transfer agent fraud. The bridge loan accrued
interest at the rate of 15% per annum and matured on the earlier of March 31,
2002, or the release of the proceeds of forfeiture related to the transfer agent
fraud. Upon maturity, the holders of $40,000 of the notes elected to defer
payment of the principal amount. The deferred portion is due on demand and is
convertible into common stock at a price of $1 per share. Any deferred portion
not converted prior to March 31, 2002 shall be paid in full on that date. The
remainder of this bridge loan was repaid in full in October 2001. As
consideration for entering into the bridge loan the Company granted warrants to
purchase 550,000 shares of common stock at an exercise price of $0.50 per share.
The warrants were valued at $170,500 as computed using the Black-Scholes option
pricing model.

     For the year ended September 30, 2001, the Company included in interest
expense on the accompanying consolidated statement of operations a discount on
the bridge financing of $563,500 based on the fair value of warrants as computed
using the Black-Scholes option pricing model, the beneficial conversion features
and the commitment fees paid.

     In September 2001, as partial consideration for the acquisition of
substantially all of the assets of Radical Communication, Inc. (Note J), the
Company issued a $1,000,000 subordinated promissory note. The note bears
interest at the rate of 5% per annum and is due in two equal installments of
$500,000 on October 1, 2002 and October 1, 2003.

     In September 2001, as partial consideration for the acquisition of
MicroBroadcasting Corp. (Note J), the Company issued two promissory notes for
$25,000 each. The notes bear interest at the rate of 8% per annum and are due in
two equal installments of $12,500 on November 1, 2001 and December 1, 2001.
These notes were repaid in full in December 2001.

Note H--Due to Related Parties

     The Company terminated, effective December 31, 2000, an employment
agreement with a former executive officer, resulting in a charge to the Company
of approximately $483,000. The transaction was recorded as the reduction of a
$100,000 note receivable plus interest, payment of the exercise price on 175,000
options at $1 per share, and the balance payable in the form of cash plus a
$120,000 one year, non-interest bearing note payable. The note payable is due in
monthly installments of $10,000. All unpaid amounts as of September 30, 2001 are
included in "Due to related parties" on the accompanying consolidated balance
sheet.

     The Company terminated, effective December 31, 2000, a consulting contract
with a former executive officer and significant stockholder resulting in a
charge to the Company of approximately $442,000. The amount was paid as follows:
$44,167 in cash, payable in two monthly installments through February 28, 2001,
the exchange of fixed assets with a net book value of $49,432, and a reduction
of $348,068 due under the terms of an indemnity agreement. All amounts were paid
as of March 31, 2001.

     The Company terminated, effective December 31, 2000, a consulting contract
with a former executive officer, current director, and significant stockholder,
resulting in a charge to the Company of $267,250. The transaction was recorded
as a non-interest bearing note payable with payments due through March 2002, and
is included in "Due to related parties" on the accompanying consolidated balance
sheet. Additionally, in January 2001, options to purchase 57,000 shares of
common stock at an exercise price of $5 per share were granted in connection
with this contract cancellation, resulting in compensation expense of $76,380.

Note I--Commitments and Contingencies

1. Operating Leases

     In June 1999, the Company entered into a non-cancelable five-year operating
lease for its primary facilities in Aliso Viejo, California and took occupancy
in December 1999. In January 2001, the Company signed an amendment to the lease,
which resulted in an increase in rent expense of $12,170 per month. Rent expense
through May 2002 is $40,492 per month, increases to $42,111 per month through
the

                                     Page 43

<PAGE>


remaining term of the lease, and expires in December 2004. The lease contains a
five-year renewal option from the date of expiration.

     In June 2000, the Company entered into a non-cancelable 22-month lease for
a satellite office in Aliso Viejo, California. The lease called for monthly
rental payments of $3,895 through March 2002. The lease was terminated in June
2001 in exchange for a $5,591 early termination fee.

     As a result of the acquisition of Control Commerce, Inc. the Company
assumed two leases for office space in New York City and Encinitas, California.
The New York office lease requires monthly rent payments of $10,000 per month
and expires in April 2002. The Encinitas space requires monthly rent payments of
$7,834 per month through April 2002, and $8,064 per month through May 2003, when
the lease expires. Effective July 1, 2001 the Company entered into a sublease
for the Encinitas space which provides for rental income of $8,064 per month
through April 2002, and $8,525 per month through May 2003, when the lease
expires.

     As a result of the acquisition of Radical Communication, Inc. the Company
assumed a lease for office space in Huntington Beach, California. The monthly
payments are $4,886 through April 30, 2002 and $5,102 through the expiration of
the lease, April 30, 2003.

     In August 2001, the Company entered into a two year non-cancelable lease in
Hong Kong. The lease calls for monthly rental payments of $5,576 and expires in
August 2003.

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

     Year ending September 30,
     -------------------------
     2002............................................................  $ 689,011
     2003............................................................    602,382
     2004............................................................    505,332
     2005............................................................    126,333
                                                                      ----------
                                                                      $1,923,058
                                                                      ==========

     Rent expense for the period from inception (March 26, 1999) to September
30, 1999 amounted to $43,148. Rent expense for the years ended September 30,
2000 and 2001 amounted to $655,971 and $703,764, respectively.

2. Legal Proceedings

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

3. Transfer Agent Fraud

     In February 2001, the Company determined that between May 21, 1999 and
April 7, 2000 stock certificates representing 1,107,951 shares (the "Discrepant
Shares") were illegally authenticated by the Company's prior transfer agent or
others acting on its behalf. The Discrepant Shares were not recorded in the
stock ledger records kept by the former transfer agent. Following the discovery
of potential criminal activity, the Company contacted law enforcement officials,
Nasdaq and the SEC and assisted law enforcement in the investigation of this
matter. On February 5, 2001, Nasdaq halted trading of MindArrow's common stock
on the Nasdaq SmallCap Market. On May 1, 2001 trading resumed.

     In order to offset the impact of recognizing additional shares in the hands
of innocent purchasers, two significant shareholders entered into an agreement
with the Company pursuant to which they agreed to contribute for cancellation by
the Company 1,107,951 shares owned by them. This contribution of shares was made
concurrent with the exchange of new shares for the wrongly authenticated
certificates. The

                                     Page 44


<PAGE>


agreement provides that in the event that any of the Discrepant Shares are
recovered by the Company, an equivalent number of shares shall be issued to the
two contributing shareholders. In the event that the Company recovers cash or
property other than the Discrepant Shares, then the Company shall issue shares
of its common stock to the contributing shareholders at a rate of one share of
common stock for every $4.50 in property or cash recovered. In no event shall
the Company be obligated to issue more than 1,107,951 shares pursuant to the
agreement.

     On March 30, 2001, the Company issued new shares in exchange for the
Discrepant Shares and the 1,107,951 shares agreed to be contributed by the two
significant shareholders were contributed to the Company and cancelled. No gain
or loss has been recognized by the Company as a result of the share
contribution.

     The Discrepant Shares entered the public float over a period of
approximately eleven months. In connection with the exchange, the Company
determined that under generally accepted accounting principles it should record
a non-recurring, non-cash charge of $18,682,398 at the time the exchange of new
shares for the Discrepant Shares occurs. Accordingly, this non-cash charge is
reflected in the accompanying consolidated financial statements for the year
ended September 30, 2001. This amount represents the estimated market value of
the Discrepant Shares at the time they entered the public float. The charge had
no impact on total stockholders' equity, as the Company concurrently recorded an
$18,682,398 increase to additional paid-in capital. Any amounts recovered by the
Company from the perpetrators of the fraud will be recorded as non-operating
income at the time of the recovery. The loss on transfer agent fraud of
$19,658,753 on the accompanying consolidated statement of operations includes
legal and other costs associated with investigating the fraud, implementing the
share exchange, pursuing resolution of the trading halt, and recovery of assets.

     On June 25, 2001, the former transfer agent and her accomplice were
convicted of crimes arising out of their fraudulent issuance of shares, and have
agreed as part of their plea agreement to pay restitution. In early 2001,
authorities seized $4.5 million in assets from the perpetrators. As the victim
of the crime, the Company has petitioned the Asset Forfeiture Division of the
U.S. Attorney's Office for remission of these funds. In October 2001, the
Company received approximately $3.6 million in cash of the $4.5 million in
seized assets and accordingly the Company issued an aggregate of 764,381 shares
to the contributing shareholders. The Company continues to pursue potential
sources of recovery of the loss it incurred as a result of the fraud and the
Audit Committee of the Company's Board of Directors has retained special counsel
to assist it in pursuing potential sources of recovery. The Company cannot
predict whether or when it will obtain any additional recovery, including any
recovery of the remaining seized assets held by the authorities. Because of the
uncertainties surrounding recoveries, the Company will not record the impact of
recoveries until amounts or assets are received.

                                     Page 45


<PAGE>



     The following is a schedule of unaudited as reported and pro forma net loss
and loss per share, illustrating the impact the Discrepant Shares would have had
if the loss of $18,682,398 associated with the Discrepant Shares had been
recorded in the periods in which the Discrepant Shares entered the public float:

<TABLE>
<CAPTION>



                                                                                     Net Loss             Loss Per Share
                                                                                     --------             --------------
                                                Discrepant                         (Unaudited)              (Unaudited)
         Period                                  Shares         Value      As Reported   Pro Forma    As Reported Pro Forma/1/
         ------                                  ------         -----      -----------   ---------    ----------- ------------
     <S>                                      <C>          <C>            <C>            <C>             <C>        <C>
     Period from inception (March 26, 1999)
          to June 30, 1999                       326,742   $ (3,880,061)  $   (799,762)  $ (4,679,823)   $(0.10)    $(0.57)
     Quarter ended September 30, 1999            237,000     (1,925,626)    (2,593,831)    (4,519,457)    (0.30)     (0.46)
                                              ----------   ------------   ------------   ------------
     Period from inception (March 26, 1999)
          to September 30, 1999                  563,742   $ (5,805,687)  $ (3,393,593)  $ (9,199,280)    (0.39)     (1.02)
                                              ==========   ============   ============   ============

     Quarter ended December 31, 1999             256,414   $ (4,827,209)  $ (2,252,585)  $ (7,079,794)    (0.23)     (0.69)
     Quarter ended March 31, 2000                274,810     (7,536,594)   (17,765,937)   (25,302,531)    (1.82)     (2.35)
     Quarter ended June 30, 2000                  12,985       (512,908)    (3,813,814)    (4,326,722)    (0.38)     (0.39)
     Quarter ended September 30, 2000                -              -       (4,982,875)    (4,982,875)    (0.49)     (0.49)
                                              ----------   ------------   ------------   ------------
     Year ended September 30, 2000               544,209   $(12,876,711)  $(28,815,211)  $(41,691,922)    (2.95)     (3.97)
                                              ==========   ============   ============   ============

     Quarter ended December 31, 2000                 -     $        -     $ (5,380,664)  $ (5,380,664)    (0.53)     (0.53)
     Quarter ended March 31, 2001             (1,107,951)    18,682,398    (23,130,340)    (4,447,942)    (2.16)     (0.42)
     Quarter ended June 30, 2001                     -              -       (3,292,632)    (3,292,632)    (0.30)     (0.30)
     Quarter ended September 30, 2001                -              -       (4,848,791)    (4,848,791)    (0.41)     (0.41)
                                              ----------   ------------   ------------   ------------

     Year ended September 30, 2001            (1,107,951)  $ 18,682,398   $(36,652,427)  $(17,970,029)    (3.36)     (1.65)
                                              ==========   ============   ============   ============
</TABLE>


/1/Non-cumulative

     The pro forma charges above would have no impact on total stockholders'
equity, as the Company would concurrently record a corresponding increase to
additional paid-in capital.

Note J--Acquisitions

1. Acquisition of Fusionactive Ltd.

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

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

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

                                     Page 46

<PAGE>


2. Acquisition of Control Commerce, Inc.

     In June 2001, the Company completed its acquisition of Control Commerce,
Inc. ("Control Commerce"), a privately-held Delaware corporation. Under the
terms of the merger agreement, a wholly-owned subsidiary of the Company was
merged with and into Control Commerce, with Control Commerce surviving the
merger and becoming a wholly-owned subsidiary of the Company.

     In the merger, the shareholders of Control Commerce received in exchange
for all of their issued and outstanding capital stock of Control Commerce an
aggregate of 60,000 shares of the Company's Series C preferred stock, 800,000
shares of the Company's common stock and warrants to purchase 12,000 shares of
the Company's common stock at a price of $12.50 per share (collectively, the
"Merger Consideration").

     The Merger Consideration was valued at $1,536,400 which was allocated to
the assets acquired and the liabilities assumed based on their estimated fair
values. Goodwill has resulted from the excess costs over fair value of net
assets acquired.

     Goodwill...................................................    $   930,177
     Tangible assets acquired...................................      1,025,268
     Liabilities assumed........................................       (419,045)
                                                                    -----------
                                                                    $ 1,536,400
                                                                    ===========

3. Acquisition of Radical Communication, Inc.

     On September 12, 2001, the Company acquired privately-held Radical
Communication, Inc. ("Radical"). Under the terms of the transaction, the Company
acquired substantially all of the assets of Radical in exchange for 1,980,000
shares of common stock, 135,000 shares of Series C preferred stock, an unsecured
subordinated promissory note in the aggregate principal amount of $1,000,000,
and the assumption of certain liabilities of Radical. The promissory note is
payable in two annual installments of $500,000, with the first installment due
October 1, 2002. The purchase price was allocated to the assets acquired and the
liabilities assumed based on their estimated fair values. Goodwill has resulted
from the excess costs over fair value of net assets acquired.

     Goodwill...................................................    $ 3,634,592
     Tangible assets acquired...................................      1,278,084
     Liabilities assumed........................................     (1,617,676)
                                                                    -----------
                                                                    $ 3,295,000
                                                                    ===========
                                     Page 47


<PAGE>


     The following unaudited pro forma results of operations assume the
acquisition discussed above occurred on October 1, 1999 and both companies had
the same fiscal year end. The pro forma results have been prepared using the
historical financial statements of the Company and Radical.

<TABLE>
<CAPTION>


                                                                   For the year         For the year
                                                                       ended                ended
                                                                   September 30,        September 30,
                                                                       2000                 2001
                                                                   -------------        -------------
                                                                    (unaudited)          (unaudited)
     <S>                                                         <C>                  <C>
     Revenues.................................................     $  2,823,958         $  4,557,162
     Net loss.................................................      (27,448,263)         (46,016,019)
     Beneficial conversion feature on preferred stock.........      (12,346,440)               -
     Net loss available to common stockholders................      (39,794,703)         (46,016,019)
     Basic and diluted loss per share.........................     $      (3.39)        $      (3.57)
</TABLE>

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

4. Acquisition of MicroBroadcasting Corporation

     On September 28, 2001, the Company acquired privately-held
MicroBroadcasting Corporation in exchange for $180,350 in cash, promissory notes
totaling $50,000, and 100,000 shares of common stock valued at $0.67 per share.
No goodwill resulted from the transaction.

Note K--Stockholders' Equity

1. Series B and C Convertible Preferred Stock

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

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

     As of September 30, 2000, the Company had issued 725,775 shares of Series C
preferred stock for $25 per share. Proceeds were $18,144,375. Dividends are
payable to holders of Series B and C preferred stock when and if declared by the
Company and will be non-cumulative. No dividends (other than those payable
solely in common stock) will be declared or paid with respect to shares of
common stock until dividends in the aggregate amount of at least $0.90 and $2.25
per share, have been paid or declared on the Series B and C preferred,
respectively.

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

     Each share of Series B preferred may be converted into common stock at any
time upon the stockholder's election. In October 2001, the conversion price was
reduced to from $8.00 to $7.89 per share, effectively increasing the conversion
ratio from 1:1 to 1.014 :1. During the years ended September 30, 2000 and 2001,
36,375 and 505,311 shares of Series B preferred stock were converted into 36,375
and 505,311 shares of common stock, respectively. The remaining shares of Series
B preferred will be automatically converted into shares of common stock upon (i)
the effective date of a firm commitment,

                                     Page 48

<PAGE>


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

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

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

     In response to a decline in the market price of its common stock following
the issuance of the Series C preferred, the Company reduced the conversion price
of the Series C preferred from $25 to $12.50 per share. In consideration for
such reduction of the conversion price, holders of Series C preferred stock
executed a general release of all claims. Although the Series C shareholders
executed a general release, no actual claims have been asserted against the
Company, and the Company does not believe that any claims released are
meritorious or that the Company has any liability with respect to the Series C
offering. In October 2001, the conversion price of the Series C preferred was
reduced from $12.50 to $12.24 per share, effectively increasing the conversion
ratio from 2:1 to 2.043:1.

     The change in conversion terms on the Series C preferred stock had no
impact on the financial statements since the conversion feature on the date of
the change was in excess of the fair market value of the underlying common
stock. During the year ended September 30, 2001, 23,775 shares of Series C
preferred were converted into 47,550 shares of common stock. The shares of
Series C preferred will be automatically converted into shares of common stock
upon (i) the effective date of a firm commitment, underwritten public offering
of common stock pursuant to an effective registration statement under the
Securities Act, other than a registration relating solely to a transaction under
Rule 145 of the Securities Act or to any employee benefit plan of the Company,
generating aggregate proceeds to the Company of not less than $25,000,000
(before deducting underwriters' discounts and all expenses relating to the
offering) and with a per share offering price (prior to underwriters' discounts
and expenses) of not less than $40.00 per share, as such per share price may be
adjusted to reflect stock subdivisions, combinations or dividends with respect
to such shares, or (ii) the date specified by affirmative vote or written
consent or agreement of the holders of not less than two-thirds (2/3) of the
then outstanding shares of Series C preferred.

     In connection with the issuance of the Series C preferred stock for the
period ended September 30, 2000, the Company evaluated whether a beneficial
conversion feature existed on the date of issuance, as defined in the EITF 98-5.
The proceeds received in conjunction with the issuance were first allocated to
the $1,234,346 fair value of the warrants, as calculated using the Black-Scholes
model. The remaining

                                     Page 49


<PAGE>


proceeds of $16,997,434 were allocated to the preferred stock. This amount was
then compared to the fair market value of the shares determined by the market
price on the date of issuance. The difference of $10,214,974 has been recognized
as a beneficial conversion feature on the Series C preferred stock which
increases the net loss available to common stockholders and increases additional
paid in capital.

     If, while any Series B or Series C preferred shares are outstanding, the
Company issues any common stock or securities convertible into common stock for
a price that is less than the Conversion Price of either the Series B or Series
C preferred shares at that time (currently $7.89 and $12.24 per share,
respectively), then the Conversion Price of the Series B and Series C preferred
shares shall be adjusted downward. The amount by which the respective Conversion
Prices will be adjusted downward depends upon how many securities are
subsequently issued at below the respective Conversion Prices, and how far below
those Conversion Prices those additional securities are issued: the more
securities issued, and the lower the price at which they are issued, the greater
downward adjustment will be made in the respective Conversion Prices.
Specifically, the adjusted Conversion Price will be determined by multiplying
the existing Conversion Price by a fraction, the numerator of which shall be the
total number of shares outstanding on a fully diluted basis, plus the total
number of additional shares that could be purchased at the Conversion Price with
the aggregate consideration paid for the additional shares, and the denominator
of which shall be the total number of shares outstanding on a fully diluted
basis, plus the number of additional shares of common stock so issued.

     In the event of liquidation, or a change of control, as defined, which has
been approved by the Company's board of directors, the holders of the Series B
and C preferred shall be entitled to receive, prior to and in preference to any
distributions to the holders of common stock, $8.00 per share of Series B and
$25.00 per share of Series C preferred plus any accrued but unpaid dividends if
and when declared by the Board of Directors.

     In connection with the private placement of Series B preferred stock,
warrants to purchase 397,591 shares of common stock at $8 per share were granted
to investors and the placement agent. 104,248 of these warrants expired by
September 30, 2001, and the remainder expire through March 2002.

     In connection with the private placement of Series C preferred stock,
warrants to purchase 145,156 shares of common stock at $12.50 per share were
granted to investors. These warrants expired in April 2001.

2. Common Stock

     During the year ended September 30, 2000, 322,526 shares were issued upon
warrant and option exercises. Total proceeds amounted to $189,300.

     During the year ended September 30, 2000, 65,236 shares were issued as
compensation for services. The Company recorded $402,285 of compensation
expense.

     During the year ended September 30, 2001, 358,334 shares were issued upon
option exercises. Total proceeds amounted to $358,334.

     During the year ended September 30, 2001, 296,177 shares of common stock
were contributed to the Company and cancelled pursuant to an indemnity
agreements with a significant stockholder, in full settlement of an amount due
under the indemnity agreement.

3. Warrants

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

                                     Page 50

<PAGE>


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

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

     Warrants to purchase 397,591 shares of common stock at $8 per share were
issued in connection with the placement of the Series B preferred stock. At
September 30, 2001, warrants to purchase 104,248 shares had expired unexercised,
and the remaining warrants were due to expire on various dates through March
2002. Warrants to purchase 250,000 shares of common stock at $7 per share were
also issued in connection with the placement of the Series B preferred stock.
The warrants expire in October 2004.

     In addition, warrants to purchase 145,156 shares of common stock at $12.50
per share were issued in connection with the placement of the Series C preferred
stock. These warrants expired unexercised in April 2001.

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

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

     During the period ended September 30, 1999, the Company issued warrants to
purchase 231,000 shares of common stock to several consultants. The warrants are
exercisable at prices ranging from $1 per share to $10 per share, vest based on
achieving various performance criteria and expire at various dates through April
2005. The Company recognizes compensation expense based on the fair value of the
warrants as computed using the Black-Scholes option pricing model. The Company
recognized compensation expense of $132,028 for the period ended September 30,
1999 and $1,772,600 for the year ended September 30, 2000. During the year ended
September 30, 2000, 87,207 of these warrants had been exercised and 42,793 had
been forfeited. At September 30, 2001, 101,000 vested warrants remained
outstanding.

     During the year ended September 30, 2000, the Company issued warrants to
purchase 1,136,000 shares of common stock to several consultants. The warrants
are exercisable at various prices ranging from $5.25 per share to $30 per share,
vest generally over three years and expire at various dates through May 2006.
The Company recognizes compensation expense based on the fair value of the
warrants, as computed using the Black-Scholes option pricing model. The Company
recognized compensation expense of $1,675,198 for the year ended September 30,
2000. At September 30, 2001, 869,660 of these warrants had vested, 114,467 of
the warrants had been forfeited and the remaining 151,873 warrants remained
unvested and outstanding.

     During the year ended September 30, 2001, the Company issued warrants to
purchase 70,000 shares of common stock to several consultants. The warrants are
exercisable at various prices ranging from $5 per share to $6 per share, and
expire in at various dates through October 2005. The Company recognizes
compensation expense based on the fair value of the warrants, as computed using
the Black-Scholes option pricing model. The Company recognized compensation
expense of $74,302 for the year ended September 30, 2001. At September 30, 2001,
10,150 of these warrants had been forfeited, 39,850 of the warrants were vested
and the remaining 20,000 warrants remained unvested and outstanding.

                                     Page 51

<PAGE>



     As of September 30, 2000 and 2001, a total of 1,952,630 and 3,052,276
warrants were outstanding, with exercise prices ranging from $0.50 to $30.00 and
expiring at various times through September 2009.

4. Options

     In April 1999, the Company adopted the 1999 Stock Option Plan (the "1999
Plan"). As amended, the 1999 Plan reserves 3,000,000 shares of common stock for
grants to employees, directors and consultants to continue their service to the
Company. In August 2000, the Company adopted the 2000 Stock Option Plan (the
"2000 Plan"). The 2000 Plan, as amended in August 2001, reserves 2,000,000
shares of common stock for grants to employees, directors and consultants to
continue their service to the Company.

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

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

<TABLE>
<CAPTION>



                                                      Period ended         Year  ended          Year  ended
                                                   September 30, 1999  September 30, 2000   September 30, 2001
                                                   ------------------  ------------------   ------------------
     <S>                                              <C>                 <C>                  <C>
     Net loss--
         As reported..............................    $(2,350,451)        $(16,468,771)        $(36,652,427)
         Pro forma................................     (2,499,968)         (17,494,610)         (38,184,800)
     Net loss available to common stockholders--
         As reported..............................    $(3,393,593)        $(28,815,211)        $(36,652,427)
         Pro forma................................     (3,543,110)         (29,841,050)         (38,184,800)
     Basic and diluted loss per share--
         As reported..............................        $ (0.39)             $ (2.95)             $ (3.36)
         Pro forma................................          (0.40)               (3.06)               (3.50)
</TABLE>

     The fair value of the Company's stock options was estimated as of the grant
date using the Black-Scholes option pricing model with the following weighted
average assumptions for the periods ended September 30, 1999, 2000 and 2001:
dividend yield of 0.0%, expected volatility of 50%, risk free interest rate of
6.5%, and an expected holding period from 1 to 3 years.

                                     Page 52

<PAGE>



     The following table summarizes activity under the Company's stock option
plan:

<TABLE>
<CAPTION>


                                                                                           Weighted
                                                                                           Average
                                                                      Shares            Exercise Price
                                                                    ----------          --------------
     <S>                                                            <C>                   <C>

     Outstanding at March 26, 1999...............................         -               $  -
     Granted.....................................................   1,900,500                2.65
     Exercised...................................................         -                  -
     Forfeited/expired...........................................     (61,000)               1.11
                                                                   ----------

     Outstanding at September 30, 1999...........................   1,839,500                2.70
     Granted.....................................................   1,658,600                9.77
     Exercised...................................................    (129,166)               1.00
     Forfeited/expired...........................................    (367,100)               6.54
                                                                   ----------

     Outstanding at September 30, 2000...........................   3,001,834                6.19
     Granted.....................................................   1,916,516                3.62
     Exercised...................................................    (358,334)               1.00
     Forfeited/expired...........................................  (1,449,791)               6.10
                                                                   ----------

     Outstanding at September 30, 2001...........................   3,110,225             $  5.24
                                                                   ==========

Weighted average fair value of options granted during the period ended
     September 30, 1999..................................................................   $1.06
Weighted average fair value of options granted during the year ended
     September 30, 2000..................................................................   $2.57
Weighted average fair value of options granted during the year ended
     September 30, 2001..................................................................   $1.00
</TABLE>

<TABLE>
<CAPTION>


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

<CAPTION>

                                    Stock Options Outstanding at            Stock Options Exercisable at
                                          September 30, 2000                     September 30, 2000
                                 -------------------------------------      -----------------------------
   Range of                       Weighted Average    Weighted Average                 Weighted Average
 Exercise Prices      Shares      Contractual Life     Exercise Price        Shares     Exercise Price
-----------------    --------    ------------------   ----------------      --------   ------------------
<S>                 <C>                    <C>              <C>              <C>               <C>
$1.00 to $4.00      1,191,834              3.9              $1.13            931,761           $1.06
$7.00 to $10.00     1,391,000              5.3               7.37            123,834            7.80
$12.00 to $15.00      283,000              5.3              12.75             50,000           12.88
$23.00 to $25.00      136,000              5.4              24.81                -                -
                    ---------                                              ---------
                    3,001,834                               $6.19          1,105,595           $2.35
                    =========                                              =========

<CAPTION>

                                    Stock Options Outstanding at             Stock Options Exercisable at
                                          September 30, 2001                     September 30, 2001
                                 -------------------------------------      -----------------------------
   Range of                       Weighted Average    Weighted Average                 Weighted Average
 Exercise Prices      Shares      Contractual Life     Exercise Price        Shares     Exercise Price
-----------------    --------    ------------------   ----------------      --------   ------------------
<S>                 <C>                    <C>              <C>              <C>               <C>
$0.40 to $4.00      1,494,234              7.2             $ 1.27            800,734          $ 1.19
$7.00 to $10.00     1,292,656              6.4               6.86            450,515            7.16
$12.00 to $15.00      206,334              4.3              12.76            108,749           12.86
$23.00 to $25.00      117,001              4.4              24.85             51,669           24.86
                    ---------                                              ---------
                    3,110,225                             $  5.24          1,411,667          $ 4.86
                    =========                                              =========
</TABLE>

                                     Page 53

<PAGE>


     The Company recorded compensation expense in the amount of $35,895 related
to stock options for the period ended September 30, 1999, $163,883 for the year
ended September 30, 2000, and $186,817 for the year ended September 30, 2001.

Note L--Profit Sharing Plan

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

Note M--Supplemental Disclosure of Cash Flow Information

Noncash investing and financing activities:

     In April 1999, the Company acquired all of the outstanding common stock of
Zap International, in exchange for 2,640,000 shares of common stock.

     In April 1999, in connection with the Company's recapitalization,
$2,570,000 of liabilities were assumed.

     In April 2000, the Company acquired Fusionactive, Ltd. for 150,000 share of
common stock (see Note J).

     In June 2001, the Company acquired Control Commerce, Inc. for 800,000
shares of common stock and 60,000 shares of Series C preferred stock (see Note
J).

     In September 2001, the Company acquired substantially all of the assets of
Radical Communication, Inc. in exchange for 1,980,000 shares of commons stock,
135,000 shares of Series C preferred stock, an unsecured subordinated promissory
note payable of $1,000,000, and the assumption of certain liabilities of Radical
(see Note J). As part of the transaction, the Company assumed capital lease
obligations in the amount of $328,700.

     In September 2001, the Company acquired MicroBroadcasting Corporation in
exchange for 100,000 shares of common stock, promissory notes totaling $50,000,
and a cash payment of $180,350.

     In September 2001, the Company issued 50,000 shares of common stock in
connection with a bridge loan received from an investor (see Note G).

     In September 2001, the Company issued 39,904 shares of common stock as
prepaid interest on a bridge loan (see Note G).

Note N--Quarterly Financial Information (Unaudited)

     Quarterly financial information for the years ended September 30, 2000 and
2001 is summarized below:

<TABLE>
<CAPTION>



                                                       Three Months Ended (dollars in thousands, except per share data)
                                           --------------------------------------------------------------------------------------
                                              Dec. 31,  March 31,  June 30,  Sept. 30,  Dec. 31,  March 31,  June 30,  Sept. 30,
                                                1999      2000       2000       2000      2000       2001      2001      2001
<S>                                          <C>       <C>        <C>       <C>       <C>        <C>        <C>         <C>

Total revenues.............................  $     29  $   286    $   606   $   721   $   999    $   918    $   823     $   795

Operating loss.............................    (2,305)  (5,460)    (4,036)   (5,225)   (5,401)    (3,795)    (3,156)     (4,325)

Net loss...................................    (2,253)  (5,419)    (3,814)   (4,983)   (5,381)   (23,130)    (3,293)     (4,848)

Net loss available to common stockholders..    (2,253) (17,765)    (3,814)   (4,983)   (5,381)   (23,130)    (3,293)     (4,848)

Basic and diluted loss per share...........  $  (0.23) $ (1.82)   $ (0.38)  $ (0.49)  $ (0.53)   $ (2.16)   $ (0.30)    $ (0.41)
</TABLE>


                                     Page 54



<PAGE>

SUPPLEMENTARY DATA

Quarterly Financial Information (Unaudited)

     The following table sets forth our unaudited quarterly consolidated
statements of operations data for the two fiscal years ended September 30, 2001.
In the opinion of management, this data has been prepared on a basis
substantially consistent with our audited consolidated financial statements
appearing elsewhere in this report, and include all adjustments necessary for a
fair presentation of data. The quarterly data should be read together with our
consolidated financial statements and related notes appearing elsewhere in this
report. The operating results are not necessarily indicative of the results to
be expected in any future period.

<TABLE>
<CAPTION>
                                                      Three Months Ended (dollars in thousands, except per share data)
                                                 ---------------------------------------------------------------------------
                                                 Dec. 31, March 31, June 30, Sept. 30,  Dec. 31, March 31, June 30, Sept. 30,
                                                   1999     2000      2000     2000       2000     2001      2001     2001
<S>                                              <C>      <C>       <C>       <C>       <C>      <C>       <C>       <C>
Revenues.......................................  $    29  $    286  $   606   $   721   $   999  $    918  $   823   $   795
                                                 -------  --------  -------   -------   -------  --------  -------   -------
Operating expenses:
     Development...............................      386       460      595       780       814       709      622       652
     Production................................       90       133      442       374       434       436      431       676
     Sales and marketing.......................      790     2,819    1,633     2,426     2,158     1,605    1,206     1,310
     General and administration................      910     2,095    1,438     1,770     2,325     1,298    1,022     1,399
     Depreciation and amortization.............      158       239      534       596       669       665      698       818
     Loss on disposal of assets................      -         -        -         -         -         -        -         265
                                                 -------  --------  -------   -------   -------  --------  -------   -------
                                                   2,334     5,746    4,642     5,946     6,400     4,713    3,979     5,120
Operating loss.................................   (2,305)   (5,460)  (4,036)   (5,225)   (5,401)   (3,795)  (3,156)   (4,325)
Interest income................................       52        41      207       237       120        71       31        10
Interest expense...............................      -         -        -         -         -         -        -        (580)
Other income (expense).........................      -         -        -         -        (100)       33        2        96
Loss on transfer agent fraud...................      -         -        -         -         -     (19,439)    (170)      (49)
Minority interest..............................      -         -         15         5       -         -        -         -
                                                 -------  --------  -------   -------   -------  --------  -------   -------
     Net loss..................................   (2,253)   (5,419)  (3,814)   (4,983)   (5,381)  (23,130)  (3,293)   (4,848)
Beneficial conversion on preferred stock.......      -     (12,346)     -         -         -         -        -         -
                                                 -------  --------  -------   -------   -------  --------  -------   -------
     Net loss available to common stockholders.  $(2,253) $(17,765) $(3,814)  $(4,983)  $(5,381) $(23,130) $(3,293)  $(4,848)
                                                 =======  ========  =======   =======   =======  ========  =======   =======
Basic and diluted loss per share...............  $ (0.23) $  (1.82) $ (0.38)  $ (0.49)  $ (0.53) $  (2.16) $ (0.30)  $ (0.41)
                                                 =======  ========  =======   =======   =======  ========  =======   =======
Shares used in computation of loss per share...    9,616     9,749    9,987    10,078    10,241    10,710   10,867    11,879
                                                 =======  ========  =======   =======   =======  ========  =======   =======
</TABLE>

Our quarterly operating results may fluctuate significantly in the future as a
result of a variety of factors, including:

     .    the demand for our services;

     .    the addition or loss of individual clients;

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

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

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

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

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

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE

        None.

                                     Page 55

<PAGE>

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     Our directors and executive officers, their respective ages and positions
with us as of December 15, 2001 are as follows:

<TABLE>
<CAPTION>
     Name                             Age   Position
     ----                             ---   --------
     <S>                              <C>   <C>
     Thomas J. Blakeley.............   42   Chairman of the Board
     Robert I. Webber...............   43   Chief Executive Officer, President, Director
     Joel Schoenfeld................   50   Director
     Joseph N. Matlock, Jr. ........   52   Director
     Thomas C. Quick................   46   Director
     Bruce Maggin...................   58   Director
     Bruce Stein....................   47   Director
     Michael R. Friedl..............   38   Chief Financial Officer, Secretary, Treasurer
</TABLE>

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

     Robert I. Webber, Chief Executive Officer, President, and Director. Mr.
Webber joined the Company in June 2000 as President, Chief Operating Officer and
a director of the Company and was appointed Chief Executive Officer on June 30,
2000. From 1998 until joining MindArrow, Mr. Webber served as president, CEO and
director of Silicon Film Technologies, a developer of digital imaging software
and hardware products. From 1997 to 1998, Mr. Webber was president and a
director of Inari Inc. (formerly Intelogis), a Novell spin-off that develops and
sells power-line networking products for the OEM and consumer markets. From 1993
to 1997, he was an executive at the international management consulting firm
McKinsey & Company. Previously, he worked as a corporate and securities attorney
at Skadden, Arps, Slate, Meagher & Flom. Mr. Webber holds a B.A. from Brigham
Young University, a J.D. from Columbia Law School, and an M.B.A. from the
Harvard Business School.

     Joel Schoenfeld, Director. Mr. Schoenfeld was elected to our board of
directors in June 2000. Mr. Schoenfeld has been a principal of Schoenfeld
Consulting since April 2000. From 1989 until March 2000, he served as Senior
Vice President and General Counsel of BMG Entertainment. From 1977 until 1989,
he served as Executive Vice President and General Counsel of the Recording
Industry Artists Association. He currently serves on the board of directors of
TouchTunes Music Corporation and he has been elected to the board of directors
of Thinkpath, Inc. Mr. Schoenfeld also currently serves as a member of the
executive board and central board of directors of IFPI, the international trade
federation for the worldwide music business and the Music for Youth Foundation.
He holds a B.A. in Political Science and International Relations from Syracuse
University and a J.D. from New York Law School. Mr. Schoenfeld was elected to
our board as a representative of the Series B preferred stockholders.

     Joseph N. Matlock, Jr., Director. Mr. Matlock, who joined our board in
February 2001, is the chairman and CEO of Iliad Partners, and is an active board
member of several Texas-based technology investment entities. Mr. Matlock also
serves as a director and on the audit and compensation committees of DSI Toys
Inc., and has served as a director and consultant for Texas Heritage Bank, which
was recently acquired by Regions Financial Corp. He is the founder of Afford
America Inc., which specializes in land development and home ownership for the
working poor. Prior to undertaking his present duties, Mr.

                                     Page 56

<PAGE>

Matlock served as chairman, president and CEO of Franklin Federal, and as
executive vice president of Bank of America-Texas. Mr. Matlock received his BBA
and MBA from the University of Texas at Austin, and now serves at his alma mater
as senior advisor to the College of Business Administration and advisor to the
College of Fine Arts.

     Thomas C. Quick, Director. Mr. Quick, who joined our board on August 3,
2000, is President, Chief Operating Officer and a director of Quick &
Reilly/Fleet Securities, Inc., successor to The Quick & Reilly Group, Inc., a
holding company for four financial services businesses. Mr. Quick has held this
position since 1996. From 1985 to 1996, he was President of Quick & Reilly,
Inc., a national discount brokerage firm. Mr. Quick serves as a trustee for the
Securities Industry Foundation for Economic Education. He is also a member of
the board of directors of Best Buddies, and a member of the board of trustees,
the investment advisory board and the endowment committee for St. Jude
Children's Hospital. He is a trustee and treasurer of the National Corporate
Theater Fund, the United World Colleges and the Alcoholism Council of New York,
and a Trustee of Fairfield University. He is a graduate of Fairfield University.

     Bruce Maggin, Director. Mr. Maggin joined our board in August 2001. He is
currently a principal of The H.A.M. Media Group, LLC, a media investment
company, and Chief Executive Officer of TDN, Inc. (d/b/a at TV Media, Inc.), a
marketer of interactive television advertising. Prior to forming The H.A.M.
Media Group, Mr. Maggin headed the Capital Cities/ABC Multimedia Group, one of
the five divisions of Capital Cities/ABC, Inc. Mr. Maggin joined ABC originally
in 1970 as part of the company's corporate planning department. He left ABC to
work as a merger and acquisition consultant for a major Wall Street bank and
subsequently became Vice President of Ziff Corporation, the parent company of
Ziff-Davis Publishing and Broadcasting. He returned to ABC in 1982. Mr. Maggin
has been a member of the Board of Directors of several companies including cable
networks Lifetime and ESPN, and the software companies Creative Wonders and O.T.
Sports. He is currently a Director of Phillips-Van Heusen Corporation (NYSE:
PVH) and NewStar Media, Inc. (NASDAQ:NWST), and Chief Executive of TDN, Inc. Mr.
Maggin is a member of the New York State Bar. He received a BA degree from
Lafayette College and JD and MBA degrees from Cornell University.

     Bruce Stein, Director. Mr. Stein joined our board in October 2001. From
September 1999 until it was acquired by MindArrow, he was the CEO of Radical
Communication, Inc. Prior to joining Radical, Mr. Stein served as Worldwide
President and a director of Mattel Inc. from August 1996 to March 1999, and
Chief Operating Officer of Mattel Inc. from September 1997 to March 1999. Mr.
Stein also served as President and Chief Executive Officer of SONY Interactive
Entertainment from July 1995 to August 1996. Previously, he served as President
of the Kenner Products division of Hasbro, Inc. from January 1987 to July 1994.

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

Board Composition

     We currently have authorized seven directors. All directors are elected to
hold office until our next annual meeting of stockholders and until their
successors have been elected. Officers are elected and serve at the discretion
of the board of directors. There are no family relationships among any of our
directors or executive officers.

                                     Page 57

<PAGE>

     Pursuant to our Amended and Restated Certificate of Incorporation, the
holders of our Series B preferred stock, voting as a class, are entitled to
designate one member of our board of directors and the holders of our Series C
preferred stock, voting as a class, are entitled to designate two members of our
board of directors. The remaining directors are designated by the holders of our
common stock, Series B preferred stock and Series C preferred stock, voting
together as a class. Joel Schoenfeld currently serves as the Series B nominee
and Thomas Quick and Joseph Matlock, Jr. currently serve as the Series C
nominees.

Board Committees

     We have established an audit committee, a compensation committee and a
litigation committee.

     Audit Committee

     The audit committee consists of Messrs. Matlock, Schoenfeld and Quick. The
audit committee recommends to the board of directors the appointment of
independent auditors, reviews and approves the scope of the annual audit and
other non-audit services performed by the independent auditors, reviews the
findings and recommendations of the independent auditors and periodically
reviews major accounting policies and significant internal accounting control
procedures.

     Compensation Committee

     The compensation committee consists of Messrs. Webber, Matlock and
Schoenfeld. The compensation committee reviews and approves compensation and
benefits for our executive officers. The compensation committee also makes
recommendations to the board of directors regarding the administration of our
stock plans.

     Litigation Committee

     The litigation committee consists of Mr. Schoenfeld. The litigation
committee reviews issues that may result in litigation, and in conjunction with
our Audit Committee has presided over the transfer agent fraud investigation and
related recovery efforts.

Compensation Committee Interlocks and Insider Participation

     Robert Webber, our chief executive officer and president, is a member of
the compensation committee. With the exception of Mr. Webber, none of the
current members of the compensation committee is currently, or has ever been at
any time since our formation, one of our officers or employees.

Director Compensation

     We may reimburse directors for reasonable expenses pertaining to attending
meetings, including travel, lodging and meals but we do not pay directors for
their services as directors. Messrs. Quick, Schoenfeld, Maggin, Stein and
Matlock have each been granted options to purchase 50,000 shares of our common
stock, vesting quarterly over three years, at prices ranging from $0.82 to $8.
In addition, Messrs. Quick, Schoenfeld and Matlock have each been granted
options to purchase 10,000 shares of our common stock, vesting quarterly over
one year, at a price of $2 per share for each committee on which they serve.

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

     Based upon our review of forms filed by directors, officers and certain
beneficial owners of our common stock (the "Section 16 Reporting Persons")
pursuant to Section 16 of the Securities Exchange Act of 1934, as amended, we
have identified the following filings that were filed late by the Section 16
Reporting Persons during and with respect to the fiscal year ended September 30,
2001: (i) Joseph N. Matlock, Jr., Bruce Maggin and Bruce Stein were each late in
filing a Form 3, (ii) Robert I. Webber and Michael R. Friedl each filed a late
Form 5 with respect to three transactions, (iii) Thomas C. Quick filed a late
Form 5 with respect to two transactions, and (iv) Thomas J. Blakeley and Joel
Schoenfeld were each late in filing a Form 5 with respect to one transaction. We
are not aware of any failures by the Section 16 Reporting Persons to file the
forms required to be filed by them pursuant to Section 16 of the Exchange Act.


                                     Page 58

<PAGE>

ITEM 11. EXECUTIVE COMPENSATION

     The following table sets forth information concerning compensation for the
period ended September 30, 1999 and the years ended September 30, 2000 and 2001,
respectively, received by our Chief Executive Officer; and our other most highly
compensated executive officer who were serving as executive officers during the
2001 fiscal year. These individuals are referred to as the "Named Executive
Officers" here and elsewhere in this report.

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>

Name and Principal Position                               Year      Salary         Bonus        Other       Options
---------------------------                               ----     --------        -----    ------------    --------
<S>                                                       <C>      <C>             <C>      <C>             <C>
Robert I. Webber(1)
President and Chief Executive Officer ..................  2001     $216,947         $--     $  28,333(2)    413,380
                                                          2000       80,000          --       100,000(3)    300,000

Michael R. Friedl(4)
Chief Financial Officer, Secretary and Treasurer .......  2001      166,267          --           --         42,780
                                                          2000      168,958          --           --         50,000
                                                          1999       38,333        3,000          --        100,000
</TABLE>

(1)Mr. Webber joined the Company in June 2000.
(2)Represents forgiveness of 1/3 of an $85,000 loan made to Mr. Webber upon
   his employment with the Company.
(3)Represents payment for consulting services rendered by Mr. Webber prior to
   his employment with the Company.
(4)Mr. Friedl joined the Company in May 1999.

Fiscal 2001 Stock Option Grants to Executives

     The following table sets forth for each of the Named Executive Officers
certain information concerning stock options granted during fiscal 2001.

<TABLE>
<CAPTION>

                                                                                      Potential Realizable
                                                                                        Value at Assumed
                           Number of        % of Total                                   Annual Rates of
                          Securities          Options                               Stock Price Appreciation
                          Underlying        Granted to    Exercise                       for Option Term
                            Options          Employees    Price Per   Expiration    ------------------------
         Name               Granted           in 2001       Share        Date            5%         10%
------------------------------------------------------------------------------------------------------------
<S>                       <C>               <C>           <C>         <C>             <C>           <C>

Robert I. Webber ........      3,600(1)         0.2%       $ 5.00        2011          11,320        28,687
                             150,000(2)         7.8          2.00        2011         188,668       478,123
                             100,000(3)         5.2          2.00        2011         125,779       318,748
                              75,000(4)         3.9          2.00        2011          94,334       239,061
                              50,000(5)         2.6          2.00        2011          62,889       159,374
                              34,780(6)         1.8          1.00        2011          21,873        55,430

Michael R. Friedl .......      3,000(1)         0.2%         5.00        2011           9,433        23,906
                              34,780(6)         1.8          1.00        2011          21,873        55,430
                               5,000(7)         0.3          0.40        2011           1,258         3,187

</TABLE>


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


                                       Page 59

<PAGE>

(1)These options were granted in January 2001 and are immediately vested.
(2)This option was granted in May 2001 and is fully vested.
(3)This option was granted in May 2001 and vests quarterly over one year.
(4)This option was granted in May 2001 and vests quarterly over nine
   months based on achieving quarterly performance targets. As of
   September 30, 2001, 50,000 of these options had expired without
   vesting.
(5)This option was granted in May 2001 and vests based on achieving annual
   performance targets.
(6)These options were granted in August 2001and are fully vested.
(7)This option was granted in August 2001 and will vest 2,500 shares on December
   31, 2001 and the remainder on March 31, 2002.

Stock Option Exercises And Year-End Value

     The following table reflects the number of shares covered by both
exercisable and non-exercisable stock options as of September 30, 2001 for the
Named Executive Officers. Values for "in-the-money" options represent the spread
between the exercise price of existing options and the market value for our
common stock on September 30, 2001, which was $0.67 per share.

<TABLE>
<CAPTION>

                                                               Number of Securities                 Value of
                                                              Underlying Unexercised        Unexercised In-the-Money
                                      Shares              Options at September 30, 2001  Options at September 30, 2001
                                   Acquired on    Value   -----------------------------  -----------------------------
       Name                          Exercise   Realized    Exercisable  Unexercisable     Exercisable  Unexercisable
-----------------------------------------------------------------------------------------------------------------------
<S>                                  <C>         <C>       <C>           <C>               <C>          <C>
Robert I. Webber ...................     --         --          313,380      400,000            --            --
Michael R. Friedl ..................     --         --          149,466       35,834            --           $1,350

</TABLE>


Employment Agreements

     As of September 30, 2001, each of the Named Executive Officers was a party
to a Change in Control Agreement with us, which provides for payment of two
years' salary to the executive if we are acquired by another company and he
loses his job for other than cause, as defined in the agreement.

     In addition, effective June 2000, we entered into a three-year employment
contract with Robert Webber, our President and CEO. Mr. Webber's employment
agreement provides for a base salary of $240,000 per year and payment in the
amount of one year's salary if we terminate his employment for other than cause.
In addition, the contract provides a $1 million life insurance policy. Further,
Mr. Webber received a payment of $100,000 for consulting services provided prior
to his employment and an $85,000 loan, which will be forgiven over the course of
three years. As of September 30, 2001, $28,333 of this loan had been forgiven
and $56,667 remained outstanding, which shall be due and payable if he leaves
prior to June 2003.

Stock Option Plans

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

     As of December 17, 2001, options to purchase 1,998,623 shares of common
stock at exercise prices ranging from $0.40 to $25 were issued and outstanding
under the 1999 Plan. Our board of directors administers the 1999 Plan.

     2000 Stock Option Plan. Our board of directors adopted our 2000 Stock
Option Plan (the "2000 Plan") in August 2000 and our stockholders approved
certain amendments to the 2000 Plan in August 2001. The 2000 Plan was
established to furnish incentives for employees, directors and consultants to
continue their service to us. We reserved 2,000,000 shares of common stock for
issuance upon exercise of options granted under the 2000 Plan, which have
vesting schedules up to 3 years. However, in the event we undergo a change in
control, as defined,


                                       Page 60

<PAGE>

unless, prior to such change of control, our board of directors determines that
vesting of the options will not accelerate, all unvested options become fully
vested. Under the 2000 Plan, options are granted at a price equal to or greater
than the fair market value on the date of grant.

     As of December 17, 2001, options to purchase 1,400,367 shares of common
stock at exercise prices ranging from $0.58 to $8 were issued and outstanding
under the 2000 Plan. Our board of directors administers the 2000 Plan. We intend
to issue additional options or other incentives to attract and retain qualified
management and directors. Such plans and incentives could have a dilutive effect
on our common stock.

Indemnification of Directors and Officers

     Our Restated Certificate of Incorporation limits the liability of our
directors to the maximum extent permitted by Delaware law, and our Bylaws
provide that we will indemnify our directors and officers and may indemnify our
other employees and agents to the fullest extent permitted by law. We also
entered into agreements to indemnify our directors, in addition to the
indemnification provided for in our Bylaws. Our board of directors believe that
these provisions and agreements are necessary to attract and retain qualified
directors.

                                       Page 61

<PAGE>


ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

                            SIGNIFICANT STOCKHOLDERS

     The following sets forth certain information as of December 17, 2001 (the
"Reference Date") with respect to the beneficial ownership of our common stock,
(i) by each person known by us to own beneficially more than five percent of our
common or preferred stock, (ii) by each executive officer and director, and
(iii) by all officers and directors as a group. Unless otherwise indicated, all
persons have sole voting and investment powers over such shares, subject to
community property laws. As of the Reference Date, there were 14,492,892 shares
of common stock, 939,012 shares of Series B Preferred Stock and 897,000 shares
of Series C Preferred Stock outstanding.

Common Stock:

<TABLE>
<CAPTION>
                                                               Number of   Percent
Name and Address of Owner (1)                                  Shares (2)  of Class
-----------------------------                                  ----------  --------
<S>                                                            <C>         <C>
Thomas J. Blakeley, Chairman (3) ...........................     860,176      5.9%

Robert I. Webber, President, CEO, Director (4) .............     697,880      4.6

Michael R. Friedl, CFO, Secretary, Treasurer (5) ...........     162,780      1.1

Joel Schoenfeld, Director (6) ..............................      56,922      0.4

Thomas C. Quick, Director (7) ..............................      63,138      0.4

Joseph N. Matlock, Jr., Director (5) .......................      16,667      0.1

Bruce Maggin, Director (5) .................................       4,167      0.0

Bruce Stein, Director (5) ..................................       4,167      0.0

All directors and executive officers taken as a group (8) ..   1,865,896     12.1

Radical Communication, Inc. (9) ............................   2,255,400     15.5
c/o Buchalter, Nemer, Fields & Younger
601 S Figueroa St Fl 24
Los Angeles, California 90017

SBI E2-Capital (USA), Ltd. (10) ............................   2,000,000     12.1
23 Corporate Plaza Drive, Suite 210
Newport Beach, California 92660

Control Simon LLC (11) .....................................     934,900      6.4
c/o William E. Simon & Sons
P.O. Box 1913
Morristown, New Jersey 07962

Lisa Blakeley ..............................................     803,176      5.5
2052 Via Teca
San Clemente, California 92673

Clyde Berg .................................................     800,333      5.5
10050 Bandley Drive
Cupertino, California   95014
</TABLE>


                                       Page 62

<PAGE>

Series B Preferred:

<TABLE>
<CAPTION>
                                                               Number of   Percent
Name and Address of Owner (1)                                  Shares (2)  of Class
-----------------------------                                  ----------  --------
<S>                                                            <C>         <C>
Robert I. Webber, President, CEO, Director .................     250,000     26.6%

Joel Schoenfeld, Director ..................................       3,375      0.4

All directors and executive officers taken as a group ......     253,375     27.0

Alignment Capital Management, LLC ..........................     125,000     13.3
One American Center
600 Congress Ave., Suite 200
Austin, Texas   78701
</TABLE>

Series C Preferred:

<TABLE>
<CAPTION>
                                                               Number of   Percent
Name and Address of Owner (1)                                  Shares (2)  of Class
-----------------------------                                  ----------  --------
<S>                                                            <C>         <C>
Thomas C. Quick, Director ..................................      20,000      2.2%

All directors and executive officers taken as a group ......      20,000      2.2

Privet Row, Inc (12) .......................................     180,000     20.1
950 Mo Pac Expressway
Barton Oaks Plaza, Suite 100
Austin, Texas 78746

Radical Communication, Inc. ................................     135,000     15.1
c/o Buchalter, Nemer, Fields & Younger
601 S Figueroa St Fl 24
Los Angeles, California 90017

Highline Capital (13) ......................................     100,000     11.1
1270 Avenue of the Americas
12th Floor, Rockefeller Center
New York, New York 10020

AC-eCom Two LP .............................................      80,000      8.9
One American Center
600 Congress Ave., Suite 200
Austin, Texas 78701

Privet MindArrow Partners LP (12) ..........................      80,000      8.9
950 Mo Pac Expressway
Barton Oaks Plaza, Suite 100
Austin, Texas 78746

PSINet Consulting Solutions Holdings, Inc ..................      80,000      8.9
4400 Post Oak Parkway, Suite 1100
Houston, Texas 77027-3413
</TABLE>


                                       Page 63

<PAGE>

Series C Preferred, continued:

<TABLE>
<CAPTION>
                                                               Number of   Percent
Name and Address of Owner (1)                                  Shares (2)  of Class
-----------------------------                                  ----------  --------
<S>                                                            <C>         <C>
Point West Ventures ........................................      60,000      6.7%
1700 Montgomery, Suite 250
San Francisco, California 94111

Control Simon LLC ..........................................      60,000      6.7
c/o William E. Simon & Sons
P.O. Box 1913
Morristown, New Jersey   07962
</TABLE>

(1)  Except as otherwise noted, the address for each person is c/o MindArrow
     Systems, Inc., 101 Enterprise, Suite 340, Aliso Viejo, California 92656.

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

(3)  57,000 of these shares results from options that are exercisable within 60
     days.

(4)  253,500 of these shares are issuable upon the conversion of 250,000 shares
     of Series B Preferred Stock acquired by Mr. Webber from an investor for a
     non-recourse note valuing the shares at $4.00 per share. 438,380 of these
     shares result from options that are exercisable within 60 days. 175,000 of
     the exercisable options are priced at $8 per share; 3,600 are priced at $5
     per share; 225,000 are priced at $2 per share; and 34,780 are priced at $1
     per share.

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

(6)  3,422 of these shares are issuable upon the conversion of 3,375 shares of
     Series B Preferred Stock. 52,500 of these shares result from options that
     are exercisable within 60 days.

(7)  40,860 of these shares are issuable upon the conversion of 20,000 shares of
     Series C Preferred Stock. 2,000 and 20,278 of these shares result from
     warrants and options, respectively, that are exercisable within 60 days.

(8)  256,922 and 40,860 of these shares are issuable upon the conversion of
     253,375 and 20,000 shares of Series B and C Preferred Stock, respectively.
     2,000 and 755,938 of these shares result from warrants and options,
     respectively, that are exercisable within 60 days.

(9)  275,400 of these shares are issuable upon the conversion of 135,000 shares
     of Series C Preferred Stock.

(10) All of the shares are issuable upon the exercise of a warrant that is
     exercisable within 60 days.

(11) 122,400 of these shares are issuable upon the conversion of 60,000 shares
     of Series C Preferred Stock. 12,500 of these shares result from warrants
     exercisable within 60 days. . (12) 80,000 of these shares are directly held
     by Privet MindArrow Partners LP. Privet Row, Inc. has voting and
     dispositive power over these shares.

(13) 30,000 of these shares are beneficially owned by Highline Capital
     International.


                                       Page 64

<PAGE>

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     In December 2000, we cancelled a consulting contract with Thomas J.
Blakeley and issued a non-interest bearing note payable through March 2002.
Additionally, in January 2001, options to purchase 57,000 shares of Common stock
at an exercise price of $5 per share were granted in connection with this
contract cancellation.

     In December 2000, we cancelled a consulting contract with Eric McAfee, who
was a director at the time. Mr. McAfee was paid $44,167 in cash and the amount
due from him under an the indemnity agreement was reduced by $348,068.

     In February 2001, the Company determined that between May 21, 1999 and
April 7, 2000 stock certificates representing 1,107,951 shares (the "Discrepant
Shares") were illegally authenticated by the Company's prior transfer agent. In
order to offset the impact of recognizing additional shares in the hands of
innocent purchasers, Messrs. Blakeley and McAfee entered into an agreement with
the Company pursuant to which they agreed to contribute for cancellation by the
Company 1,107,951 shares owned by them. This contribution of shares was made
concurrent with the exchange of new shares for the wrongly authenticated
certificates. The agreement provides that in the event that any of the
Discrepant Shares are recovered by the Company, an equivalent number of shares
shall be issued to Messrs. Blakeley and McAfee. In addition, as the Company
recovers cash or property other than the Discrepant Shares, then the Company
shall issue shares of its Common Stock for every $4.50 in property or cash
recovered. In no event shall the Company be obligated to issue more than
1,107,951 shares pursuant to the agreement. In October 2001, upon the recovery
of $3.6 million, the Company issued 764,381 shares to Messrs. Blakeley and
McAfee.

                                       Page 65

<PAGE>

                                     PART IV

ITEM 14.  EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON FORM 8-K


(A) THE FOLLOWING DOCUMENTS ARE FILED AS PART OF THIS REPORT:

    1.   FINANCIAL STATEMENTS:

         Reference is made to Part II, Item 8, for a listing of required
         financial statements filed with this report......................... 31

    2.   FINANCIAL STATEMENT SCHEDULES:

         Financial statement schedules are omitted either because they are
         not applicable or the required information is included in the
         accompanying consolidated financial statements or notes thereto.

    3.   EXHIBITS:

         The exhibits which are filed with this report are listed in the
         Exhibit Index.

(B) REPORTS ON FORM 8-K

         We filed reports on Form 8-K related to the acquisition of
         substantially all of the assets of Radical Communication on the
         following dates: August 1, 2001 and September 24, 2001.

                                     Page 66


<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 hereunto duly authorized.

                                                   MINDARROW SYSTEMS, INC.

Dated: December 28, 2001                           By   /S/ ROBERT I. WEBBER
                                                      --------------------------
                                                           Robert I. Webber
                                                       Chief Executive Officer

     Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant and
in the capacity and on the dates indicated.

<TABLE>
<CAPTION>


             Signature                              Title                                  Date
             ---------                              -----                                  ----
<S>                                         <C>                                      <C>

       /s/ THOMAS J. BLAKELEY               Chairman of the Board                    December 28, 2001
------------------------------------
         Thomas J. Blakeley

        /S/ ROBERT I. WEBBER                Chief Executive Officer, President,      December 28, 2001
------------------------------------         (Principal Executive Officer),
          Robert I. Webber                   and Director

         /s/ JOEL SCHOENFELD                Director                                 December 28, 2001
------------------------------------
           Joel Schoenfeld

         /s/ THOMAS C. QUICK                Director                                 December 28, 2001
------------------------------------
           Thomas C. Quick

     /s/ JOSEPH N. MATLOCK, JR.             Director                                 December 28, 2001
------------------------------------
       Joseph N. Matlock, Jr.

           /s/ BRUCE STEIN                  Director                                 December 28, 2001
------------------------------------
             Bruce Stein

          /s/ BRUCE MAGGIN                  Director                                 December 28, 2001
------------------------------------
            Bruce Maggin

        /s/ MICHAEL R. FRIEDL               Chief Financial Officer, Secretary,      December 28, 2001
------------------------------------         and Treasurer (Principal Financial
          Michael R. Friedl                  and Accounting Officer)

</TABLE>


                                     Page 67


<PAGE>

                                  EXHIBIT INDEX

Exhibit No.                        Description
-----------                        ------------

    2.1       Agreement and Plan of Merger, dated as of March 31, 2000, between
              MindArrow Systems, Inc. and eCommercial.com, Inc. (filed as
              Exhibit 2.1 to the Registration Statement on Form S-1
              (Registration No. 333-91819) filed with the Securities and
              Exchange Commission, as amended on April 3, 2000, and incorporated
              herein by reference)

    2.2       Stock Purchase Agreement--Fusionactive.com, Ltd. (filed as Exhibit
              2.2 to the Registration Statement on Form S-1 (Registration No.
              333-91819) filed with the Securities and Exchange Commission, as
              amended on July 20, 2000, and incorporated herein by reference)

    2.3       Asset Purchase Agreement, dated as of September 12, 2001, by and
              among MindArrow Systems, Inc., Radical Communication, Inc. and
              STREAMedia, LLC (incorporated by reference to Exhibit 2.1 of
              Registrant's Report on Form 8-K filed with the Securities and
              Exchange Commission on September 24, 2001)

    3.1       Restated Certificate of Incorporation of the Registrant
              (incorporated by reference to Exhibit 3.1 to Registrant's Report
              on Form 10-Q for the period ended June 30, 2001)

    3.2       Bylaws of the Registrant, as corrected (incorporated by reference
              to Exhibit 3.2 to Registrant's Report on Form 10-Q for the period
              ended June 30, 2001)

    9.1       Voting Agreement (filed as Exhibit 9.1 to the Registration
              Statement on Form S-1 (Registration No. 333-91819) filed with the
              Securities and Exchange Commission, as amended on June 27, 2000,
              and incorporated herein by reference)

   10.1       Stock Purchase Agreement, dated as of April 16, 1999, between the
              Company and Shareholders of Zap International (filed as Exhibit
              10.1 to the Registration Statement on Form S-1 (Registration No.
              333-91819) filed with the Securities and Exchange Commission on
              November 30, 1999 and incorporated herein by reference)

   10.2       Merger Agreement, dated as of April 19, 1999, between Wireless
              Netcom, Inc. and the Shareholders of eCommercial.com, Inc. (filed
              as Exhibit 10.2 to the Registration Statement on Form S-1
              (Registration No. 333-91819) filed with the Securities and
              Exchange Commission on November 30, 1999 and incorporated herein
              by reference)

   10.3       Employment Agreement--Robert I. Webber (filed as Exhibit 10.4 to
              the Registration Statement on Form S-1 (Registration No.
              333-91819) filed with the Securities and Exchange Commission, as
              amended on July 20, 2000, and incorporated herein by reference)

   10.4       Form of Change in Control Executive Retention Agreement (filed as
              Exhibit 10.6 to the Registration Statement on Form S-1
              (Registration No. 333-91819) filed with the Securities and
              Exchange Commission on November 30, 1999 and incorporated herein
              by reference)

   10.5       Registrant's 1999 Stock Option Plan (filed as Exhibit 10.7 to the
              Registration Statement on Form S-1 (Registration No. 333-91819)
              filed with the Securities and Exchange Commission on November 30,
              1999 and incorporated herein by reference)

   10.6       Form of Indemnification Agreement between Registrant and each of
              its directors (filed as Exhibit 10.9 to the Registration
              Statement on Form S-1 (Registration No. 333-91819) filed with the
              Securities and Exchange Commission on November 30, 1999 and
              incorporated herein by reference)

   10.7       Lease Agreement--Aliso Viejo, California (filed as Exhibit 10.10
              to the Registration Statement on Form S-1 (Registration No.
              333-91819) filed with the Securities and Exchange Commission on
              November 30, 1999 and incorporated herein by reference)


                                     Page 68

<PAGE>


Exhibit No.                        Description
-----------                        -----------

   10.8       Sublease Agreement--Cupertino, California (filed as Exhibit 10.11
              to the Registration Statement on Form S-1 (Registration No.
              333-91819) filed with the Securities and Exchange Commission, as
              amended on April 3, 2000, and incorporated herein by reference)

   10.9       Registrant's 2000 Stock Incentive Plan, as amended

   10.10      Subordinated Promissory Note, dated September 12, 2001, by
              MindArrow Systems, Inc. (incorporated by reference to Exhibit 4.1
              of Registrant's Report on Form 8-K filed with the Securities and
              Exchange Commission on September 24, 2001)

   10.11      Form of Registration Rights Agreement as entered into between the
              Registrant and the investors in the Registrant's December 2001
              private placement.


                                     Page 69