Yarc Systems Corp Inc – ‘10KSB40’ for 1/31/00

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Annual Report — Small Business — [x] Reg. S-B Item 405   —   Form 10-KSB
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 10KSB40     Form 10-K 405                                         45    190K 
 2: EX-27       Financial Data Schedule (Pre-XBRL)                     1      6K 

10KSB40   —   Form 10-K 405
Document Table of Contents

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 U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

 FORM 10-KSB

(Mark One)                                                                    

[X]     ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT  
OF 1934                                                         
(FEE REQUIRED)                                                  

For the fiscal year ended JANUARY 31, 2000

[ ]     TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  
ACT OF 1934                                                     
(NO FEE REQUIRED)                                               

For the transition period from _________ to _________ 

Commission file number 000-29969

YARC SYSTEMS CORPORATION, INC.
(Name of small business issuer in its charter)

CALIFORNIA                                     77-0185650   
(State or other jurisdiction of                (IRS Employer Identification No.)
incorporation or organization)                                                  

900 CALLE PLANO, UNITS J, K, CAMARILLO, CA                     93012            
(Address of principal executive offices)                     (Zip Code)         

(805) 482-1879
(Issuer's telephone number, including area code)

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

     Securities registered under Section 12(g) of the Exchange Act: COMMON
STOCK (NO PAR VALUE)                                                            

      Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such  
shorter period that the registrant was required to file such reports), and (2)  
has been subject to such filing requirements for the past 90 days.              
Yes [ ] No [X]                                                                  

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

     For the fiscal year ended January 31, 2000 the Issuer's revenues were
approximately $478,546                                                          

   As of April 28, 2000, the aggregate market value of Issuer's voting
stock held by non-affiliates was approximately $5,113,330 (based upon the       
average bid and asked prices of such shares).                                   

    As of April 28, 2000, the Registrant had 19,046,871 shares of common
stock outstanding.                                                              

Transitional Small Business Disclosure Format: Yes [ ] No [X]   

================================================================================

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Certain matters discussed herein may constitute forward-looking statements,     
within the meaning of the Private Securities Litigation Reform Act of 1995 and  
as such may involve risks and uncertainties. These forward-looking statements   
relate to, among other things, expectations of the business environment in which
the Company operates, projections of future performance, perceived opportunities
the market and statements regarding the Company's mission and vision. The       
Company's actual results, performance, or achievements may differ significantly 
from the results, performance, or achievements expressed or implied in such     
forward-looking statements.                                                     

PART I

ITEM 1. DESCRIPTION OF BUSINESS                                                 

OVERVIEW                                                                        

YARC Systems Corporation, Inc., (the "Company"), produces software and systems  
for the Printing industry, including LINUX servers which have been designed     
specifically for total integration with the Internet. Not only can the servers  
be sent images over the Internet, but they can be configured and upgraded from  
any standard Internet browser. The Company's proprietary Postscript Raster Image
Processor (RIP) software, allows a computer image, whether it comes from a      
digital camera, a scanner, or from a Desktop Publisher, to be professionally    
printed using desktop proofers, laser copiers, or the large format printers that
make display signage.                                                           

Incorporated in California in 1988, YARC has for most of its history been       
accumulating a portfolio of advanced technology and products. Its decision in   
the mid-1990's to adopt Open Source software environments, including the LINUX  
Operating System, has enabled YARC's products to include Internet technologies  
which are recognized as some of the best in the Printing Industry.              

These products include YARC's XP(TM) Color Server, its RIP Software, and its    
YARC-RIP(TM) and YARC-EZ(TM) Mac(TM) devices.                                   

STRATEGY FOR GROWTH                                                             

INTERNET FOCUS                                                  
E-Commerce in the Printing Industry has been slow to take off, primarily because
of the delayed arrival of Broadband technologies, which are essential for       
handling large file sizes. Broadband is at the heart of YARC's Internet         
strategy. While YARC's competitors are still focusing on Old-Economy concepts,  
and producing web products which are essentially Internet adaptations of the    
traditional "brokerage" concept, YARC has been producing technologies and       
products which are ready to take advantage of the explosion in Broadband        
delivery. YARC's products enable the entire communication path between Graphic  
Artists and the Printing Presses to be effected over the Internet.              

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MERGER AND ACQUISITION STRATEGY                                 
YARC intends to grow by merger and acquisition. It intends to acquire           
Corporations who have fallen a little behind with their technology and whose    
product range can be quickly made more competitive with the infusion of YARC's  
LINUX, Internet and Postscript RIP technologies. The Company also intends to use
the merged sales forces to assist YARC to more effectively market its own       
product range.                                                                  

INTERNET PROPERTIES                                                             

The Company's primary website is located at the following domain names:         

                                                                [Download Table]
                                                       
yarc.com  yark.com  yarc.net  yark.net  visual-edge.com

The company also operates a  B2C and B2B E-Commerce site at:                    
SecureShop.yarcrip.com                                        

Sites for engineering and technology information are at:                        

                                                                [Download Table]
                                                    
ftp.yarcrip.com  yarcrip.com  yarcxp.com  yarcez.com

The following domain names are currently inactive:                              

                                                                [Download Table]
                                                           
epsononlineshop.com  epsononlinestore.com  epson-online.com
onlineepsonshop.com  onlineepsonstore.com  epsononline.com 

YARC's showcase for 3D Printing and Signage is at:                              

                                                                [Download Table]
                                                                 
photo-motion.com     3-Ddisplays.com                             
3D-signs.com         3Dsigns.com       3-Dsigns.com              
3-Dsign.com          flip-signs.com    lenticular-signs.com      
lenticularsigns.com  motion-signs.com  lenticular-development.com
big3-D.com           big-3D.com        superiorgrafics.com       
superiorgraphix.com  3Dprints.com      3-Dprints.com             
3-Dposters.com       3Dposter.com      3-Dposter.com             
3Dsigns.net          3-Dsigns.net      3Dsign.net                
3Dprints.net         3-Dprints.net                               

None of the material on any of these domains, including their subdomains such as
"www.*", is incorporated by reference into this Registration Statement.         

PRINCIPAL TECHNOLOGIES AND PRODUCTS                                             

POSTSCRIPT RASTER IMAGE PROCESSOR (RIP) SOFTWARE.                               

When a printed page is stored in a computer it consists of bit-mapped images,   
text, and drawn objects. The page layout in the computer is sent out to a       
printer using a format known as a Page Description Language ("PDL"), which is a 
software language that describes the layout and contents of the final printed   
page. Like the storage format used in the computer itself, the PDL data is      
usually                                                                         

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created in what is called an object-oriented, or vector graphics format; meaning
that the image elements are described in terms of geometrical objects, such as  
lines, arcs, and circles. "Postscript" is the PDL that has become the standard  
in the professional printing and pre-press industries.                          

When Postscript data is sent to a printer or a monitor it is necessary to       
convert the image from the vector data to a form in which the objects in the    
image can be displayed as a "raster" pattern of dots. This is the function of   
the Raster Image Processor ("RIP"). The RIP software interprets the Postscript  
vector data and converts it to bit-mapped data for printing or display. Although
desktop printers often simply output a rasterized version of the monitor display
using "Printer Drivers", this approach does not yield sufficiently high         
resolution for the Professional pre-press marketplace. Consequently, the vast   
majority of professional printers use Postscript RIP software. The quality of a 
print-out is governed to a large extent by the quality of the Postscript        
software.                                                                       

Adobe Systems Inc. defined the Postscript language, and it has proven a very    
difficult language to implement. Only a handful of companies, worldwide, have   
produced Postscript Interpreters capable of being used by printing industry     
professionals. YARC is one of those companies.                                  

The vast majority of printer manufacturers license their Postscript             
interpretation software from Adobe Systems Inc.                                 

Because YARC has developed its own Postscript PDL, YARC does not have to pay    
royalty fees to Adobe. Additionally, YARC can license its own Postscript PDL to 
printer companies in the same way as Adobe, and generate revenues from the      
licensing market.                                                               

The advantage to YARC that accrues from having its own Postscript PDL, is that  
YARC does not pay royalties on the printing products that YARC itself           
manufactures. This gives YARC a significantly higher gross margin on its LINUX  
based Servers and Macintosh Software RIP products.                              

COMPETITORS FOR THE POSTSCRIPT RIP SOFTWARE.                                    

The company believes that there are three other public companies licensing      
Postscript RIP software which produce substantially the same results as YARC's  
RIP in the professional digital color output marketplace. These are Xionics Inc 
(recently acquired by Oak Technologies, Inc, Harlequin Ltd. and Adobe Systems   
Inc.                                                                            

THE YARC-XP LINUX COLOR SERVER                                                  

The Company's XP SERVER(TM) is primarily sold to the Printing and Pre-press     
industries. It uses the LINUX operating system to improve connectivity and      
reliability by comparison with most of YARC's competition, whose products are   
most often based on variants of Windows NT. The XP Server connects directly to  
the Internet, as well as to Corporate networks of Windows, Macintosh or Unix    
workstations. The XP is the only server currently available where all of the    
server's internal functions, including color management, are made available to  
the user, over the network, using a standard Internet browser.                  

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Any XP Server can also be accessed by YARC's staff over the Internet, or via a  
PPP dial-in line. Technical support or problem diagnosis can be offered to the  
customer at a distance, considerably lowering the overhead associated with      
maintaining a worldwide force of service technicians.                           

In 1998 YARC placed one of its XP Servers on the Internet at http://yarcxp.com  
to allow easy evaluation of its Internet connectivity by potential customers and
investors.                                                                      

COMPETITORS FOR THE YARC XP SERVER                                              

The Company believes that there are two other public companies that offer Color 
Servers which offer similar functionality to the Company's XP Server.           
Electronics for Imaging, Inc, (NASDAQ: EFII) sells the Windows-NT-based         
"Fiery(TM)" servers, aimed primarily at the Office user but also now supporting 
Proofing functionality for the Pre-press industry. Splash Technology Holdings,  
Inc., (NASDAQ: SPLH) has a range of servers based on the Macintosh computer     
platform. Splash primarily partners with a single printer manufacturer, Xerox   
(NYSE: XRX)                                                                     

Splash has recently announced that it has LINUX based servers, and that it      
intends to grow its business during 2000 by expanding that part of its product  
range.                                                                          

The Company believes that its Color Server is the only one of its kind that has 
fully integrated communication over the Internet.                               

THE YARC-EZ AND YARC-RIP SOFTWARE RIPs FOR MACINTOSH COMPUTERS                  

YARC ships non-server versions of its RIP software for Macintosh users, who     
comprise much of the professional publishing marketplace. The YARC-EZ(TM)       
Postscript Software RIP, is a low cost Macintosh Application, primarily being   
used for proofing by the Printing and Pre-press industries. The YARC-RIP(TM)    
Postscript RIP is similar to the YARC-EZ but includes its own PowerPC Computing 
Coprocessor for improved multi-tasking and better networking.                   

COMPETITORS FOR THE YARC-EZ AND YARC-RIP SOFTWARE RIP PRODUCTS                  

The Company believes that there are four public companies who can be regarded as
competitors for the Company's software RIP products. There are also a number of 
small private companies with products in the printing and pre-press segment of  
the industry. Adobe Systems Press ready(TM) software RIP competes in the        
Proofing segment of the market. Onyx Graphics, recently acquired by Europe's    
Greta Imaging, sells the "Pastorship(TM)" software RIP product, primarily aimed 
at the Signaling marketplace. The Scanvec Company Ltd. sells the AccuPrint(TM)  
and PhotoPrint(TM) Software RIP products for both PC and Macintosh              
Personal Computers. The Harlequin software RIP has been licensed by several     
private OEM's, who sell and support products in the retail marketplace.         

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MARKETING AND DISTRIBUTION CHANNELS                                             

E-COMMERCE                                                    
The Company's operates an E-Commerce website, at http://SecureShop.yarcrip.com/,
which was launched in October of 1998. In April, 1999, the Company enhanced the 
site with the capability to handle B2B transactions from dealers and            
distributors as well as end-user transactions. Most of YARC's U.S. RIP sales    
result from contacts generated by this E-Commerce website.                      

INTERNATIONAL                                                 
YARC sells its product in the Far-east and Europe through both exclusive and    
non-exclusive distributors.                                                     

OEM BUSINESS                                                  
Several manufacturers have sold YARC's products as part of a complete system,   
usually badged with the OEM's own name. Principal OEM partnerships have been    
struck with Linotype AG, Dai Nippon Screen, DCA Inc., Honeywell Aerospace and   
Japan's Roland DG.                                                              

HISTORY OF THE BUSINESS                                                         

The Company was incorporated on January 27, 1988 to develop and market a new    
method of increasing the power of personal computers using UNIX based software  
tools.                                                                          

The Company's initial technology focus was "Computing Coprocessors", add-in     
cards containing an advanced CPU and proprietary YARC Operating System software,
that allowed the UNIX tools, especially C and Fortran Compilers, to operate in  
both MSDOS and Macintosh PC environments. This proprietary software was later   
extended to PC's running Microsoft Windows and Windows NT.                      

The Company's initial business model was to supply engineering services, and    
subsequently sell the proprietary Computing Coprocessors under OEM agreements.  

During the early 1990's YARC performed design services for Microsoft Inc.,      
working as an OEM partner on Microsoft's "TrueImage(TM)" Postscript Raster Image
Processor (RIP). YARC also shipped product to the German printing giant,        
Linotype AG. Other early Printing Industry partners included Pipeline Associates
(now acquired by Electronics For Imaging, Inc), Advanced Micro Devices, Inc.,   
and Agfa Compugraphic, a division of Europe's Agfa-Gevaert Group. YARC also     
entered into an agreement with Dai Nippon Screen for the supply of YARC         
Computing Coprocessors to be used in Screen DTP imagesetter controllers. These  
controllers were based on RIP software from Harlequin Ltd., in the UK. YARC     
continued to supply product against this contract until 1996.                   

YARC also achieved early recognition in sales of systems into the Macintosh 3D  
Graphics marketplace. YARC's formed alliances with several vendors, selling     
versions of their application software together with its Computing Coprocessors.
PIXAR produced a version of their "RenderMan(TM)" software specially adapted for
the YARC Coprocessor technology. The YARC                                       

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version of PIXAR's Renderman could use as many YARC CPU cards as the user wanted
to install, and the speed of the Rendering increased as each additional YARC CPU
was installed. This was achieved through YARC's innovative "Parallel Processing"
technology.                                                                     

In 1993, YARC was awarded the prestigious MacUser "Eddy" Statue for the "Best   
Accelerator Card of 1993".                                                      

in 1994 YARC decided to de-emphasize its 3D Graphics business and focus its     
engineering effort towards the goal of producing its own version of Adobe       
Systems Inc. Postscript RIP software, a feat which only a handful of companies  
worldwide have successfully accomplished.                                       

At the same time YARC started to become involved in the Open Software           
Foundation's Open Source project, the precursor to the LINUX operating system.  
By 1994 YARC had based its tools on the GNU C compiler, which in the subsequent 
years grew into the tools for the Operating System we now know as LINUX.        

YARC initially shipped its GNU based Hydra Multiprocessing coprocessor card in  
1995, and also released its first RIP software. Both were developed using the   
Open Software Foundation tools. YARC began to accumulate LINUX expertise within 
its Engineering group.                                                          

YARC shipped the first full Color versions of its Postscript RIP software in    
June 1995, when a Canon Laser Copier RIP controller was displayed at PC Expo in 
New York. Subsequently, in October 1995, YARC demonstrated its first wide-format
color RIP in the "Masters of Media" section of Seybold Seminars, in San         
Francisco.                                                                      

In November of 1996, YARC Systems Ltd. was Incorporated in the United Kingdom to
provide product and sales support for YARC's United Kingdom and European        
customer base.                                                                  

In December, 1997, YARC released and demonstrated the YARC-XP Color Server. This
was the first RIP Color Server in the industry which used the LINUX operating   
system, and which was designed for direct connectivity to the Internet.         

In January, 1998, after exhaustive testing of our Postscript software, Japan's  
Roland DG chose to OEM the YARC-EZ Postscript RIP software for sale with their  
new wide-format printers for the Japanese sign-making industry. This OEM        
partnership has continued to this date.                                         

In the hopes of improving its US Sales and Marketing performance, YARC appointed
Mr. Joseph P. LaBruna as President at the beginning of 1998. But the company was
unable to compete effectively against its larger competitors, and Mr. LaBruna   
left the company later that year.                                               

By this time the Company's customers were generally very happy with the level of
technology in the products they had bought, but the Company's Sales and         
Marketing outreach were still ineffective.                                      

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PLAN OF OPERATIONS                                                              

MERGERS AND ACQUISITIONS                                      
Early in 1999 Management therefore decided to concentrate on leveraging YARC's  
technological strengths by seeking Merger and Acquisition partners who already  
had strong sales channels, especially partners in market segments where sales   
growth of the Company's products could be more rapidly achieved.                

In August of 1999, the Company signed a merger agreement with Quik Pix Inc.,    
Buena Park, CA. On February 4th, 2000, Management of both companies decided not 
to proceed with the merger transaction. No merger documents were filed in the   
respective states. YARC is actively seeking an alternative partner for the      
Company's "3Dsigns.com" Internet properties.                                    

CTP STRATEGY                                                  
Computer-To-Plate technology (CTP) is a method for making Printing Press plates 
directly from the computer software output, without any intervening manual      
handling of photographic films or materials. The company believes that a        
business combination with a CTP manufacturer would create a symbiotic           
environment where YARC's software and Internet technologies would give the      
business combination a significant edge in the upcoming Internet economy. The   
same Graphic Arts professional who creates the artwork can be empowered with    
control over all phases of the printing of that artwork. After transmission of  
the files to a YARC Internet Server, a proof can automatically be created, and, 
upon verification of that proof, the CTP plates manufactured for the printing   
press. The Company believes that this workflow will ensure optimal quality and  
minimal delay by comparison with today's workflow, where a broker is typically  
used to interface between the Graphic Artist and the Printing Press operators.  

During 1999, YARC entered into a relationship with CTI Imaging Systems Inc., and
its Principal, Mr. Hank Bechard. Many years ago Mr. Bechard founded Autologic,  
which is now Autologic Information International, Inc. YARC and CTI agreed to   
join forces in order to pursue an acquisition of Autologic, and discussions     
commenced. Autologic manufactures printers which use CTP technology. In January 
2000 the Company made an offer to Volt Information Sciences Inc (VIS) to acquire
a majority interest in Autologic. The Company subsequently received a letter    
from a law firm representing VIS stating that VIS "will not enter into any      
negotiations with YARC". YARC has subsequently retained legal counsel to advise 
on the best strategy for the Company to use in moving forward with this proposed
acquisition.                                                                    

The Company has entered into discussions Printware Inc, who also manufacture CTP
products, regarding a possible business combination. No agreement has been      
signed at this time, and no assurance can be given that any such agreement will 
be achieved.                                                                    

INTERNET STRATEGY                                             
Brochures, catalogs and newspapers, are all created by Graphic artists using    
computer software. The files associated with commercial publishing are very     
large, typically in the range of 20 Megabytes to 100 Megabytes. Consequently,   
E-Commerce in the Printing Industry has been slow to take off,                  

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awaiting the infrastructure that can move such file sizes quickly and           
economically. Such infrastructure is commonly known as "Broadband" technology.  
Broadband is at the heart of YARC's Internet strategy.                          

The Company believes that YARC's competitors are still focusing on Old-World    
concepts, producing products which are essentially Internet versions of the     
conventional "brokerage" concept, where a broker acts as a specialist           
intermediary between the graphic artist and the printing press professionals.   
YARC has been producing technologies and products which are ready to take       
advantage of the explosion in Broadband delivery. They allow total communication
between the Graphic Artists and the Printing Presses to be effected over the    
Internet. The Company believes that YARC is in a unique position to produce such
technologies, as it has produced its own proprietary RIP software, and thus has 
total control over all phases of the communication between the Desktop          
Publishing software and the printing presses.                                   

MANUFACTURING                                                                   

The Company currently contracts with outside suppliers for certain components,  
including but not limited to, circuit boards. Assembly, quality control and     
shipping are all done at the Company's headquarters.                            

DEPENDENCE UPON KEY SUBCONTRACTORS.                                             

YARC uses subcontractors to handle assembly of printed circuit boards and       
computer chassis. YARC has, from time to time, used a variety of local          
subcontractors to perform its manufacturing, and is not dependent on any        
particular manufacturing partner.                                               

DEPENDENCE UPON KEY SUPPLIERS.                                                  

YARC's product range has been designed to use as many "off-the-shelf" components
as possible. Although industry conditions may change, especially due to normal  
product life cycles, YARC has little dependence upon any particular supplier.   
YARC is currently using Power-PC.(TM) Microprocessors which are manufactured    
only by IBM Microelectronics and Motorola. YARC also uses MACH(TM) FPGA devices 
designed by Advanced Micro Devices and Vantis. Vantis has recently been acquired
by Lattice Inc., but no interruptions of supplies has been observed to date.    

DEPENDENCE UPON KEY CUSTOMERS.                                                  

The nature of the OEM business is a reliance from time to time on relationships 
with manufacturers and business partners which amount to a significant          
proportion of YARC's income in any one year. Over the last five years YARC's    
income has significant depended on the relationships with Dai Nippon Screen,    
D.C.A., Inc., and Honeywell Commercial Aviation Systems.                        

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YEAR 2000 COMPLIANCE                                                            

During 1999, the company completed a comprehensive review of its computer       
systems and its products to identify all software that could be affected by the 
inability of many existing computer systems to process time-sensitive data      
accurately beyond the rollover from the 20th to the 21st centuries. No problems 
with operation of the Company's products were reported related to the rollover  
of the Calendar from 1999 to 2000. Minimal disruption occurred to the Company's 
MRP and Accounting systems, and no significant remedial costs have been         
incurred.                                                                       

RESEARCH AND DEVELOPMENT SPENDING                                               

In proportion to its revenues, YARC has spent heavily on Research and           
Development throughout its history. During Fiscal 1998 and 1999 YARC spent      
$277,773 and $272,862 respectively.                                             

NUMBER OF EMPLOYEES                                                             

YARC maintains a core staff of experienced managers, technical experts and      
marketing professionals. This core management currently numbers seven. The      
Company augments this staff with up to twenty (20) additional employees as      
needed to satisfy project needs. None of the employees are subject to a         
collective bargaining agreement, and the Company believes that its relations    
with its employees is good.                                                     

ENVIRONMENTAL COMPLIANCE                                                        

YARC does not discharge any controlled materials, nor are any used in its       
premises, and the Company is in compliance with relevant federal, state and     
local environmental laws.                                                       

INTELLECTUAL PROPERTY                                                           

The Company does not currently hold patents, copyright marks or service marks on
any of its products. The Company does, however, own a portfolio of Internet     
Domain names to help it promote its business. The most significant of these were
listed at the head of this document. It also uses a number of Trademarks to help
provide market identification for its product range.                            

ITEM 2. DESCRIPTION OF PROPERTY                                                 

The Company's corporate headquarters are housed in a 4,537 square foot facility 
located in Camarillo, California. The premises are used for all of the Company's
general office and administrative purposes, as well as research, design and     
production of computer products. The lease terminates on December 31, 2000.     

ITEM 3. LEGAL PROCEEDINGS                                                       

In January 2000, the Company received a letter from Seiko Epson Corporation and 
Epson America, Inc. (collectively "Epson"), alleging that certain Internet      
domain names registered by the Company                                          

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in March 1999 constituted the unlawful use of the EPSON trademark. The domain   
names cited included onlineepsonshop.com, onlineepsonstore.com,                 
epson-online.com, epsononline.com, epsononlineshop.com, and                     
epsononlinestore.com. The letter requested that the Company desist from using   
these domain names and that it transfer ownerships of such domain names to      
Epson. The Company believes this disagreement will be settled amicably in light 
of the working relationship between the parties.                                

In June, 1999, the Company received a letter from Visual Edge Technologies Inc.,
alleging that an Internet domain name registered by the Company in November 1998
constituted the unlawful use of two trademarks. The domain name cited was       
"visual-edge.com". The letter requested that the Company desist from using this 
domain name. The Company last heard from counsel for Visual Edge in July,1999,  
and believes this disagreement will be settled amicably.                        

In April 1999, a lawsuit entitled LaBruna v. Yarc Systems Corp, et al., No.     
PAS-L1796-99 was filed against the Company and its officers in Passaic County   
Superior Court in New Jersey. The lawsuit by Joseph LaBruna, the Company 's     
former President, alleges that the Company breached its employment agreement    
with Mr. LaBruna. The complaint did not specify the damages sought. On January  
19, 2000, the parties attended a mandatory non-binding arbitration the result of
which was an award in favor of Mr. LaBruna in the amount of $37,560 in back     
wages and 100,000 shares of the Company's common stock. The Company does not    
intend to contest the arbitrator's award, however, no assurance can be made that
Mr. LaBruna will not contest the award. In May 1998, the Company received a     
letter from Electronics For Imaging, Inc. ("EFII") alleging that the Company's  
ColorSync technology infringed on patents commonly referred to as the "919"     
patent and "048" patent. The Company believes that EFII is the assignee/owner of
both patents. These patents cover the technology used to match the color on     
printer paper with the color in the original image on the user's monitor. The   
Company responded by noting that: (i) the Company developed the ColorSync       
technology in conjunction with Apple Computers, Inc. ("Apple"), (ii) ColorSync  
was the subject of a valid license agreement between EFII and Apple, and (iii)  
the settlement between EFII and Apple in early 1996 extended protection to      
certain third parties such as the Company using ColorSync technology. On August 
7, 1998, the Company received an email from EFII acknowledging that the         
Company's ColorSync technology was subject to a valid license agreement between 
EFII and Apple, but that using this licensed technology beyond the MAC platform 
would not be. Since August 1998, the Company has not received any correspondence
from EFII regarding its ColorSync technology or patents 919 and 048.            

In addition, the Company is involved from time to time in litigation arising in 
the normal course of its business. The Company believes that the ultimate       
resolution of such claims will not materially affect the Company's business or  
financial condition.                                                            

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

None.                                                                           

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 PART II

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

Our Common Stock is quoted Over the Counter on the electronic Bulletin Board.   
The following table sets forth the range of high and low bid quotations for the 
Company's Common Stock for the periods indicated as reported by the National    
Association of Securities Dealers, Inc. Such market quotations reflect          
inter-dealer prices, without retail mark-up, mark-down or commission and may not
necessarily represent actual transactions.                                      

                                                                [Download Table]

YEAR              CALENDAR PERIOD                   HIGH             LOW  
----              ---------------                   ----             ---  
                                                                          
1998              First Quarter                    $0.875           $0.468
                  Second Quarter                    0.875            0.40 
                  Third Quarter                     1.04             0.28 
                  Fourth Quarter                    0.50             0.28 

1999              First Quarter                     0.41             0.18 
                  Second Quarter                    0.42             0.23 
                  Third Quarter                     0.32             0.19 
                  Fourth Quarter                    2.906            0.19 

2000              First Quarter                     1.593            0.689

In April 24, 2000, the closing bid price of the Common Stock as reported on the 
OTC Bulletin Board was $0.375 per share. As of April 24, 2000, there were       
approximately 87 holders of record of the Common Stock. This does not include   
beneficial shareholders whose Common Stock is held in street name.              

To date, the Company has not paid or declared any dividends with respect to its 
Common Stock. The current policy of the Board of Directors is to retain         
earnings, if any, in order to provide for growth of the Company. Consequently,  
no cash dividend or any other dividend is expected to be paid on the common     
stock in the foreseeable future. Furthermore, there can be no assurance that the
future operations of the Company will generate the revenues and cash flow       
necessary to declare a cash dividend or that the Company will have legally      
available funds to pay dividends.                                               

The Company's Transfer Agent is Jersey Transfer and Trust Corporation located in
Verona, New Jersey.                                                             

RECENT SALES OF UNREGISTERED SECURITIES                                         

During the period from February 1997 through February 2000, the Company         
exchanged 1,917,256 shares of its Common Stock in full and complete satisfaction
of outstanding notes and debts with existing security holders. Upon issuance of 
the shares, the notes and debts were canceled. No                               

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commission or remuneration was paid directly or indirectly for soliciting such  
exchange. All of the common stock issued contained restrictive legends. The     
common stock was issued pursuant to an exemption from registration under Section
3(9) of the Act.                                                                

Pursuant to the Company's 1992 Nonstatutory Stock Option Plan, the Company      
issued options to purchase 4,220,000 shares of its common stock to certain key  
employees from December 1998 through January 2000 at prices ranging from $0.20  
to $0.44. As of this date options totaling 1,905,645 shares have been exercised.
The shares were issued subject to an exemption from registration under Section  
4(2) and Rule 701 of the Act. All of the securities issued in such transactions 
contained restrictive legends.                                                  

During the period from July 1997 through March 1998, the Company sold 1,756,000 
shares of its common stock at $0.57 per share to accredited investors only. The 
offering was not underwritten, and there were no underwriting discounts or      
commissions. Investors acquired the shares for their own account and not with a 
view to resale. The sales were made in reliance upon an exemption from          
registration pursuant to Regulation D under the Act.                            

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

The following discussion of financial condition and results of operations should
be read in conjunction with the audited Consolidated Financial Statements and   
the notes thereto, included elsewhere in this report. This discussion contains  
Forward-Looking Statements that involve risks and uncertainties.                

Overview:                                                                       

YARC Systems Corporation, Inc., (the "Company" or "YARC"), develops, produces   
and markets software and color servers that connect desktop computers with many 
printing engines. The Company's products enable those printers to produce high  
quality printouts at high speeds. More information about the current product    
range is contained in Item 1 of this document.                                  

The Company expended considerable effort and capital during the fiscal year     
ending (hereafter `Fy') January 31, 1999 in an attempt to form significant OEM  
partnerships within the printing industry, but was unable to effectively compete
with larger and better financed competitors, such as Electronics For Imaging,   
Inc.                                                                            

Early in calendar 1999 the Company initiated aggressive restructuring. It was   
clear that the Company had to achieve a critical mass sufficient to give our OEM
customers confidence in our financial stability. The Company therefore decided  
to implement fundamental changes to its strategic focus, as described in Item 1,
under the section entitled "Strategy", and is expending a majority of its       
efforts and capital on using its technology base to enhance growth by merger and
acquisition. This restructuring involves a recognition that the quality of the  
Company's software RIP products allows the Company to address other more        
lucrative market segments, such as Computer To Plate (CTP), even though those   
segments are technically more demanding than the Company's traditional market   
base.                                                                           

The company is applying its software expertise in related fields and            
technologies, such as LINUX and CTP, and intends to expand its market presence  
by pursuing an aggressive strategy of mergers and acquisitions within those     
fields and technologies.                                                        

Merger and Acquisition Activities                                               

In May of 1999 YARC commenced discussions with a view to the acquisition by YARC
of 100% of the common stock of Quik Pix Inc, of Buena Park, California, in a    
stock-for-stock merger transaction. Even though YARC's Due Diligence was        
incomplete, a definitive merger agreement was executed by both companies in     
August 1999, and a modified definitive agreement shortly thereafter. The        
shareholders of Quik Pix Inc subsequently agreed to the terms of the merger. On 
4th February 2000, however, YARC gave Quik Pix notice that it was exercising its
right under the merger agreement to withdraw from the transaction. The reasons  
for the withdrawal included (a) Quik Pix management had requested termination   
(b) The revenues being generated by Quik Pix Inc were significantly less than   
YARC had been led to expect, and (c) YARC had been forbidden to use its Standby 
Letter of Credit to guarantee any funds advanced to                             

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Quik Pix Inc because of item (b). Both YARC and Quik Pix agreed to discontinue  
the merger at that time, and no substantive discussions have occurred since that
date.                                                                           

During December 1999 YARC formed an alliance with CTI Imaging Inc, a private    
company headed by Mr. Hank Bechard, the founder of Autologic Information        
International Inc. The object of this alliance is to achieve a merger           
relationship between the three companies. During January, 2000, YARC met with Mr
William Shaw, Chairman and CEO of Autologic, and Chairman and President of Volt 
Information Sciences, Autologic's majority owner. Subsequent to these meetings  
both Volt and Autologic publicly withdrew from further discussions. YARC        
continues to believe that, together with CTI Imaging, it has key technologies   
and management expertise needed for the future growth of Autologic, and is      
continuing attempts to reopen discussions between the respective organizations, 
but can give no assurances that these attempts will be successful.              

During January 2000, YARC was approached by the management of Printware Inc, St.
Paul, Minnesota, to initiate merger negotiations with the aim of preventing what
that management perceived as a threat from a group of dissident shareholders.   
Printware is a company in the CTP segment of the printing market that YARC has  
targeted as a strategic focus under its reorganization strategy. The two        
companies were unable to agree on terms, however, and, YARC subsequently has    
pursued informal discussions with the dissident shareholders. YARC is currently 
awaiting the outcome of the proxy contest between Printware management and their
dissident shareholders. No assurance can be given that any agreement will ever  
be struck with Printware, but YARC is continuing to pursue all avenues of       
communication.                                                                  

Customer Base                                                                   

YARC's customer base consists of both OEM and End-User customers. Most of the   
Company's End-User customers bought their products from dealers and             
distributors. They can generally be described as graphic artists and pre-press  
contractors whose work is sophisticated and complex, requiring software         
reliability and accurate color matching. YARC believes that its RIP products    
excel in both these characteristics. YARC has an International customer base,   
and the majority of its end-user revenues comes from customers located outside  
North America. Even though the total level of sales achieved has dropped during 
the reorganization, the Company has detected no significant erosion of its      
current customer base, and no major customers have been lost during Fy 2000.    

YARC's OEM customers fall into two groups, those within the printing industry,  
and those outside of it. At this time the Company has three significant OEM's,  
Roland DG of Japan, who ships a YARC Macintosh Software RIP under the name      
"RY-RIP" to the Japanese marketplace, Honeywell Commercial Aviation Systems, who
uses the Company's product as a component of Commercial Flight Simulators, and  
DCA, Inc., a supplier of multi-media infrastructure including the glass master  
disks used in Digital Video Disk (DVD) manufacture.                             

Although the revenue derived from the contract with Roland DG is quite small,   
management believes the continuing sales of YARC's software product by Roland DG
demonstrates both the                                                           

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excellence of our printing industry technologies, and more particularly our     
ability to address the export marketplace.                                      

All income from the Company's OEM's is intermittent, orders are placed with     
little or no notice, and no assurance can be given that any future orders will  
be forthcoming from any of these customers. Approximately 73% of YARC's revenues
in Fy 2000, and approximately 52% in Fy 1999, were derived from these three OEM 
customers.                                                                      

All YARC's OEM customers have historically paid promptly, and have 30 day       
payment terms. The Accounts Receivable balance of $65,158 outstanding at Jan 31,
2000, was primarily due to one invoice from an OEM customer, which was          
subsequently paid following Fy, January 31, 2000, and within terms.             

The two most significant printing industry OEM's lost by YARC during its history
are Dai Nippon Screen, which ceased ordering product in 1997, and Linotype AG,  
who last bought product in 1991.                                                

YARC's Internet and LINUX Products                                              

Sales of YARC's LINUX Internet Print Servers have yet to become a significant   
proportion of revenues. To date, only a handful of YARC's LINUX servers have    
been connected to the Internet, the majority have been connected to Appletalk   
and Windows based networks. Management believes that the printing industry, as a
whole, has yet to accept Internet technologies, and that the general            
availability of low-cost Broadband data distribution will be a necessary        
precursor to the generation of significant revenues from the sale of Internet   
Print Servers (the significance of Broadband distribution is discussed in more  
detail in Item 1).                                                              

The majority of YARC's current end-user sales still come from conventional      
sources, including YARC's Internet presence, but only a minority of those sales 
are placed through YARC's Internet based "On-Line Store". Management believes   
this is a reflection of the sophistication of the RIP products that the Company 
is selling, and the high level of product support demanded by the customer base.
Sales through the On-Line Store are not expected to increase until the          
expenditures on advertising and sales promotion are increased, which will not   
occur until when and if the Company secures additional funding.                 

Known Trends Affecting Liquidity                                                

The main factors affecting the Company's ongoing liquidity are a lack of working
capital, declining sales, and restrictions on the use of the credit line that   
was made available for mergers and acquisitions. The Company was unprofitable   
during the fiscal years ending in 1999 and 2000 and does not expect to return to
a profitable level in Fy 2001. There can be no assurance that the Company will  
be profitable in the future.                                                    

The Company believes that falling sales cannot be attributed to any market      
saturation, or to any pressing need to expend Research and Development funds on 
producing new products. The Company believes the current product range, provided
it is continually enhanced in line with                                         

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prevailing industry requirements, is capable of sustaining a much higher level  
of sales than was achieved during Fy 2000. The Company believes that the fall in
sales has been due to the reduced amount being spent on Sales and Marketing due 
to the implementation of the restructuring plan (see `Overview' above). During  
Fy 2000 the amount spent by the Company on on Advertising, Trade Show Exhibits, 
and Travel, was reduced to a bare minimum, so as to more effectively concentrate
the available capital resources, as well as management's attention, on enhancing
OEM relationships and nurturing symbiotic Merger and Acquisition prospects.     

Sources of Liquidity                                                            

Internal Sources                                                

Loans from Officers of the Company totalled $518,699 at January 31, 2000 (see   
Item 12 below). Cash flow has also been generated from the exercise of stock    
options by the same Officers. Although it is expected that the exercise of      
options is likely to continue during Fy 2001, no assurances can be given that   
internal sources of liquidity will continue to make a significant contribution  
to the Company's liquidity.                                                     

Sales of RIP products are expected to remain slow until when and if the Company 
commits to increasing its advertising and promotional expenditures.             

External Sources:                                               

During 1997 and 1998 the Company secured $1,000,000 of capital in an offering of
its common stock to accredited investors (see Item 5 above). The company is     
continuing to negotiate Private Placements of its common stock during the       
current fiscal year, but no assurances can be given that any funds from private 
placements will be available, or will be on terms favorable to the Corporation. 

The Company has also begun to explore the possibility of a Public Offering of   
its common stock during Fy 2000, but no assurances can be given that any funds  
from public sources will be available, or will be on terms favorable to the     
Corporation.                                                                    

Credit Enhancement for Mergers and Acquisitions                 

On December 5, 1999, the Company announced that it had secured a $10,000,000    
Standby Letter of Credit to help finance future mergers and acquisitions. On    
December 15, 1999, the Company announced that an additional $25,000,000 had been
pledged by the same source for specific mergers and acquisitions, to be made    
available on a case by case basis. On February 4th, 2000, the Company had to    
withdraw from a merger with Quik Pix Inc., in part because its financial backers
refused to allow any expenditure of funds for that specific acquisition.        
Additionally, the Company has experienced difficulty locating a bank that will  
initiate a loan using the $10,000,000 SLC as credit enhancement, and no         
assurances can be given that a suitable Bank will be found. Additionally, the   
Letter of Credit may only be used to secure funds to be used for Merger and     
Acquisition activities, and not for general business activities. YARC has been  
seeking to renegotiate the terms of this credit enhancement, but no assurance   
can be given that such renegotiations would result in terms satisfactory to the 
Company.                                                                        

Conversion of Debt                                              

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In December 1999 and January 2000, the Company's balance sheet was materially   
improved by the conversion of $759,732 in debt and notes, in exchange for       
1,897,256 shares of its common stock. During Fy 2000, the Company also issued   
300,000 shares of restricted common stock in exchange for services rendered. The
Company will continue to enhance liquidity in this manner whenever such         
transactions are in the best interests of the Company and its shareholders.     

As a result of this conversion the Company's primary creditors are its          
employees, past and present, and the Internal Revenue Service. The Company owes 
withholding taxes dating back to 1996. The Company has managed to pay back some 
of the arrears, but $357,824, including interest and penalties, still remains on
the books. In March of 2000, several officers of the Corporation executed       
waivers of the Statute of Limitations with respect to the money owed to the     
Service. As a result, management expects that a revised repayment plan can be   
negotiated, but no assurance can be given that the negotiations will be         
successful.                                                                     

Additionally, Management is seeking to persuade past and present employees to   
renegotiate the terms for repayment of the unpaid salary. Of the stock options  
granted to the Company's staff during Fy 1999, 955,000 of the underlying shares 
may only be exercised in exchange for reduction of debt, such as unpaid salary, 
carried on the books of the Company in the name of the optionee.                

Material Commitments for Capital Expenditure                                    

During its history YARC has spent relatively little on Capital Equipment.       
Although some of the Company's computers are aging, the cost of their           
replacement is not expected to be a material drain on cashflow.                 

Material Changes in Financial Statement Line Items                              

Total revenues for Fy January 31, 2000, were $478,546, representing a 38%       
decrease from revenues of $766,562 for the prior Fy January 31, 1999. The       
Company sustained a net loss of $506,437 during Fy 2000, down from a net loss of
$1,442,037 in Fy 1999. Reduced revenues primarily result from the factors       
discussed above under "Known trends affecting liquidity".                       

Operating expenses decreased to $867,562 in Fy 2000, from $1,875,184 during Fy  
1999, with most of the decrease resulting from reduced expenditures on salaries 
and other overheads.                                                            

The Company's Gross Margin in Fy 2000 was 75%, up from 57% in Fy 1999. The      
increased margin in fiscal 2000 over 1999 was primarily due to the increased    
proportion of OEM sales during Fy 2000, and is a one-time phenomenon not        
expected to be repeated during the current fiscal year. Historically, the Gross 
Margin was 69% in Fy 1998 and 65% in Fy 1997, but the change of the product mix 
towards a lower proportion of software based products, and a higher proportion  
of hardware based products, is expected to reduce future Gross Margins below    
these historical levels.                                                        

Selling, General and Administrative expense decreased from $1,602,322 in Fy 1999
to $727,632 in Fy 2000. This was due primarily to the reduction in salaries, and
associated costs, which                                                         

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resulted from the restructuring, and lower rent payments following the Company's
move to Camarillo. It is expected that these expenses can be reduced only a     
little further, in the short term, without unduly affecting the restructuring   
objectives. As a result of these economies, advertising and marketing of YARC's 
existing product range has been reduced to a bare minimum. This has resulted in 
reduced sales of existing products, but has not, to date, noticeably affected   
prospective OEM relationships or the goodwill of the Company's current customer 
base. The consummation of potential OEM relationships, and the ultimate growth  
of product sales, will be dependent on YARC maintaining its technological       
leadership while it simultaneously achieves growth from the changes in its      
strategic focus.                                                                

Limited Working Capital, Financial Instability                  

As of January 31, 2000, the Company had a negative stockholder's equity of      
$1,531,083, an accumulated deficit of $5,993,468, and a working capital deficit 
of $23,944. Various factors affecting the Company's operations raise doubt as to
the Company's ability to continue as a going concern. There can be no assurance 
that the Company will be able to continue as a going concern or achieve material
revenues or profitable operations. (see "Sources of Liquidity" above)           

Research and Development                                        

YARC spent $139,930 on Research and Development during Fy 2000, down from       
$272,862 in Fy 1999. This expenditure has primarily been on enhancements and    
improvements to YARC's RIP software products, and enhancement of our LINUX      
server expertise. Management believes that although this expenditure is         
relatively high, 29% of Fy 2000 revenues, it is essential to implement the      
strategic objectives of the restructuring.                                      

Inventory                                                       

Inventory in Fy 2000 was $173,472, down from $194,375 in Fy 1999 On January 31, 
1999, there was a writedown of inventory made obsolete by YARC's changing       
product focus. Additionally management has tried to reduce inventory levels in  
line with the reduced levels of product shipments. At this point there is no    
significant aging of the inventory and further writedowns are not expected      
during Fy 2001. The Company has adequate inventory to maintain its current level
of shipments, but additional financing of accounts receivable or inventory will 
be necessary to keep pace with any increase in the level of sales.              

Elements of Income or Loss not resulting from Continuing Operations             

In March of 1999, as part of its restructuring plan, the Company ceased         
providing operating capital to its wholly owned UK subsidiary, YARC Systems     
Limited. This subsidiary had been established in 1996 to provide Sales and      
Support for European customers, but had failed to achieve profitability. In Fy  
1999 the Company took a charge of $281,290 in writing off all receivables and   
advances due from this subsidiary. The Company does not anticipate any          
additional charges relating to this subsidiary, but no assurance can be given   
that the Company may not be held liable for some of its unsatisfied debts, which
total around 30,000 pounds. Subsequent to the cessation of operations, European 
customers have been supported from our Head Office, primarily using e-mail and  
other Internet based services, such as FTP. YARC Systems Limited is still a UK  
Company in good standing, and could be restored to trading if working capital   
was available, and if suitable arrangements were made with its creditors.       

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Seasonal Aspects                                                                

The company does not receive scheduled orders from its customer base. The orders
are intermittent, and the Company cannot rely upon orders being received during 
any particular period of its financial year. However, the flow of orders does   
not follow any obvious pattern that could be described as "seasonal".           

Property Lease                                                                  

The lease on the Company's corporate headquarters terminates on December 31,    
2000. The Company intends to negotiate an extension to the existing lease if the
Company's merger and acquisition activities have not dictated a move to         
alternative premises by qtr 3, 2000. Should a transfer of 25% or more of the    
voting control of the Company occur, this would constitute an assignment        
requiring the Lessor's consent. There can be no assurance that such consent     
would be forthcoming.                                                           

Financial Encumbrances                                                          

From time to time YARC's accounts receivable and inventory have been pledged as 
security for financings, loans, and leases. As of April 28th, 2000, all of the  
Company's commitments under the Uniform Commercial Code's on the public record  
have been discharged. Should YARC draw down against its Standby Letter of Credit
(see later), or obtain additional financing from other sources, it can be       
expected that its accounts receivable and inventory would again become          
encumbered.                                                                     

Dependence on Key Customers                                                     

One domestic customer accounted for $242,000 or 51% and $366,700 or 48% of the  
year ended January 31, 2000 and 1999 sales respectively. One other domestic     
customer accounted for $81,400 or 17% of the year ended January 31, 2000. No    
assurances can be given that either of these customers will continue to purchase
product from the Company, and the loss of their business could have a material  
adverse effect on the Company's operating results.                              

Dependence on Key Personnel                                                     

The Company is largely dependent upon the skills and efforts of its senior      
management and other officers and key employees. The Company believes that its  
future success will depend in large part upon its ability to attract and retain 
highly personnel, many of whom are in great demand. Competition for such        
personnel recently has increased significantly. The loss of key personnel or the
inability to hire or retain qualified personnel could have a material adverse   
effect on the Company's operating results.                                      

ITEM 7. FINANCIAL STATEMENTS                                                    

The following financial statements are filed as a part of this Form 10-KSB:     

                                                                [Download Table]

Financial Statements:                                                      Page
---------------------                                                      ----
                                                                               
Report of Independent Auditor                                              F-2 

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                                                                [Download Table]
                                                                              
Balance Sheets at January 31, 2000 and 1999 (audited)                      F-3

Statements of Operations for fiscal years ended                               
January 31, 1999 and 2000 (audited)                                        F-4

Statement of  Stockholders' Equity for fiscal years                           
ended January 31, 1999 and 2000 (audited)                                  F-5

Statements of Cash Flows for the fiscal years                                 
ended January 31, 1999 and 2000 (audited)                                  F-6

Notes to Financial Statements                                              F-7

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

During the last two fiscal years there have been no changes in or disagreements 
with the Company's principal independent accountant on accounting or financial  
disclosure. No principal independent accountant or subsidiary's independent     
accountant on whom the principal accountant has expressed reliance has resigned 
or been dismissed.                                                              

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 INDEX TO FINANCIAL STATEMENTS

                                                                [Download Table]

Financial Statements:                                                       PAGE
                                                                            ----
                                                                                
Report of Independent Auditor                                                F-2

Balance Sheets at January 31, 2000 and 1999 (audited)                        F-3

Statements of Operations for fiscal years ended                                 
January 31, 1999 and 2000 (audited)                                          F-4

Statement of Stockholders' Equity for fiscal                                    
years ended January 31, 1999 and 2000 (audited)                              F-5

Statements of Cash Flows for the fiscal years ended                             
January 31, 1999 and 2000 (audited)                                          F-6

Notes to Financial Statements                                                F-7


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YARC SYSTEMS CORPORATION, INC.
 FINANCIAL STATEMENT
 JANUARY 31, 2000 AND 1999

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[BARRY GLASSER & COMPANY LETTERHEAD]

 REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Shareholders of                                   
Yarc Systems Corporation                                                        
Camarillo, California                                                           

We have audited the balance sheets of Yarc Systems Corporation as of January 31,
2000 and 1999 and the related statements of operations, shareholders' equity,   
and cash flows for each of the two years in the period ended January 31, 2000.  
These financial statements are the responsibility of the Company's management.  
Our responsibility is to express an opinion on these financial statements based 
on our audits.                                                                  

We conducted our audits in accordance with generally accepted auditing          
standards. Those standards require that we plan and perform the audits 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 financial position of Yarc Systems Corporation as of 
January 31, 2000 and 1999, and the results of it's operations and cash flows for
each of the two years in the period ended January 31, 2000 in conformity with   
generally accepted accounting principles.                                       

The accompanying financial statements have been prepared assuming that the      
Company will continue as a going concern. Note 2 to the financial statements    
describes various factors that raise substantial doubt about its ability to     
continue as a going concern. Management's plans in regard to these matters are  
also described in Note 2. The financial statements do not include any           
adjustments that might result from the outcome of this uncertainty.             

BARRY GLASSER & COMPANY                                                         

Agoura Hills, California                                                        
April 6, 2000                                                                   

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YARC SYSTEMS CORPORATION
 BALANCE SHEET
 JANUARY 31,

                                                        [Enlarge/Download Table]

                                                                2000          1999     
                                                             -----------   ----------- 
                                                                                       
                                     ASSETS                                            
Current Assets                                                                         
        Cash                                                 $     1,746   $     4,330 
        Accounts Receivable, Less Allowance for                                        
          Doubtful Accounts of $1,758 (2000) and                                       
          $0 (1999) (Note 3)                                      65,158        16,282 
        Inventories (Note 4)                                     173,472       194,375 
                                                             -----------   ----------- 
               Total Current Assets                              240,376       214,987 
Property and Equipment at Cost, Less Accumulated                                       
  Depreciation of $419,235 (2000) and $388,186 (1999)                                  
  (Note 5)                                                        46,877        78,951 
Deposit                                                                0         3,600 
                                                             -----------   ----------- 
               Total Assets                                  $   287,253   $   297,538 
                                                             ===========   =========== 

                      LIABILITIES AND STOCKHOLDER'S EQUITY                             
Current Liabilities                                                                    
        Bank Overdraft                                       $    25,690   $         0 
        Accounts Payable                                         396,895       643,785 
        Accrued Payroll and Payroll Taxes (Note 8)               645,573       697,472 
        Dividend Payable (Note 15)                               170,265       144,402 
        Loans From Stockholders                                  132,297             0 
        Bridge Loan (Note 7)                                      35,109       544,161 
        Due to Stockholder (Note 10)                             408,249       174,219 
        Current Portion of Obligation Under                                            
          Capital Leases (Note 9)                                  1,480         8,270 
                                                             -----------   ----------- 
               Total Current Liabilities                       1,815,558     2,212,309 
                                                             -----------   ----------- 

Obligation Under Capital Leases, Less Current Portion                                  
  (Note 9)                                                         2,778         4,258 
                                                             -----------   ----------- 
Stockholder's Equity (Note 7, 13 and 15)                                               
  Preferred Stock Series A, $1 Par Value 10% Cumulative                                
    Voting Shares, Authorized 15,000,000 Shares:  Issued                               
    and Outstanding 258,638 Shares                               258,638       258,638 
  Preferred Stock Series B, No Par Value, Non-Voting                                   
    Shares; Issued and Outstanding 68,334 Shares                  42,667        42,667 
  Common Stock, No Par Value, Authorized 25,000,000                                    
     Shares, 19,046,871 Shares and 16,293,809 Issued and                               
     Outstanding at January 31, 2000 and 1999, Respectfully    4,161,080     3,206,348 

Retained Earnings (Deficit)                                   (5,993,468)   (5,426,682)
                                                             -----------   ----------- 

Total Stockholder's Equity (Deficit)                          (1,531,083)   (1,919,029)
                                                             -----------   ----------- 

Total Liabilities and Stockholders Equity                    $   287,253   $   297,538 
                                                             ===========   =========== 

See Accompanying Notes to These Financial Statements.                           

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YARC SYSTEMS CORPORATION
 STATEMENT OF OPERATIONS
YEAR ENDED JANUARY 31,

                                                                [Download Table]

                                                        2000           1999     
                                                    ------------   ------------ 
                                                                                

Revenue, Net of Returns and Allowances              $    478,546   $    766,562 

Cost of Sales                                           (117,421)      (333,415)
                                                    ------------   ------------ 

Gross Profit                                             361,125        433,147 
                                                    ------------   ------------ 

Operating Expenses                                                              
        Selling Expenses                                  26,701        204,213 
        Research and Development                         139,930        272,862 
        General and Administrative Expenses              700,931      1,398,109 
                                                    ------------   ------------ 
               Total Operating Expenses                  867,562      1,875,184 
                                                    ------------   ------------ 

Operating Income (Loss)                                 (506,437)    (1,442,037)

Interest Expense                                         (33,686)       (58,009)
                                                    ------------   ------------ 

Income (Loss) Before Extraordinary Loss                 (540,123)    (1,500,046)

Write-off of Investment and Advances                                            
  To Unconsolidated Subsidiary (Note 6)                        0       (281,290)
                                                    ------------   ------------ 

Income (Loss) Before Income Taxes                       (540,123)    (1,781,336)

Provision (Benefit) for Income Taxes (Note 12)               800            800 
                                                    ------------   ------------ 

Net Income (Loss)                                   $   (540,923)  $ (1,782,136)
                                                    ============   ============ 

(Loss) per Common Share                                                         

        Basic                                       $       (.03)  $       (.12)
                                                    ============   ============ 

        Diluted                                     $       (.03)  $       (.12)
                                                    ============   ============ 

Weighted Average Common Shares                        16,785,144     15,092,688 
                                                    ============   ============ 

Weighted Average Common Shares - Assuming Dilution    16,785,144     15,092,688 
                                                    ============   ============ 

See Accompanying Notes to These Financial Statements.                           

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YARC SYSTEMS CORPORATION, INC.
 STATEMENT OF STOCKHOLDER'S EQUITY (DEFICIT)

                                                        [Enlarge/Download Table]

                                                    Preferred Stock              Preferred Stock                                
                                                       Series A                     Series B                Common Stock        
                                              --------------------------  --------------------------  --------------------------

                                              Shares Issued               Shares Issued               Shares Issued             
                                              & Outstanding    Amount     & Outstanding     Amount    & Outstanding    Amount   
                                              -------------  -----------  -------------  -----------  -------------  -----------
                                                                                                                                
Balance at January 31, 1998                        258,638   $   258,638        68,334   $    42,667    13,853,370   $ 2,321,898

Net Loss                                                                                                                        
Issuance of Stock Under Conversion From                                                                                         
  Bridge Loan at $.50 Per Share                                                                            240,000       120,000
Sale of Common Stock at $.50 Per Share                                                                     785,600       392,800
Exercise of Employee Stock Options at:                                                                                          
     $.20 Per Share                                                                                        290,000        58,000
     $.31 Per Share                                                                                        429,839       133,250
     $.44 Per Share                                                                                        410,000       180,400
Issuance of Shares to Previous Purchases of                                                                                     
  Stock Who Paid $1 Per Share                                                                              285,000             0
Dividend - Preferred Stock at $.10 Per Share                                                                                    

Balance at January 31, 1999                        258,638   $   258,638        68,334   $    42,667    16,293,809   $ 3,206,348

Net Loss                                                                                                                        
Exercise of Employee Stock Options at:                                                                                          
     $.20 Per Share                                                                                        530,000       106,000
     $.31 Per Share                                                                                         25,806         8,000
Issuance of Stock Under Conversion From                                                                                         
  Loan at:                                                                                                                      
     $.10 Per Share                                                                                        325,000        32,500
     $.20 Per Share                                                                                        220,000        44,000
     $.25 Per Share                                                                                         48,000        12,000
     $.50 Per Share                                                                                        745,940       372,970
     $.55 Per Share                                                                                         50,000        27,500
     $1.00 Per Share                                                                                        28,208        28,208
Issuance of Stock in Exchange for Services                                                                 300,000        81,000
Issuance of Stock in Payment of                                                                                                 
  Outstanding Invoices                                                                                     480,108       242,554
Dividends-Preferred Stock at $.10 Per Share                                                                                     

Balance at January 31, 2000                        258,638   $   258,638        68,334   $    42,667    19,046,871   $ 4,161,080

                                                        [Enlarge/Download Table]


                                                            Retained                 
                                                Treasury    Earnings                 
                                                 Stock      (Deficit)       Total    
                                              -----------  -----------   ----------- 
                                                                                     
Balance at January 31, 1998                             0  ($3,618,683)  ($  995,480)

Net Loss                                                   ($1,782,136)  ($1,782,136)
Issuance of Stock Under Conversion From                                              
  Bridge Loan at $.50 Per Share                                              120,000 
Sale of Common Stock at $.50 Per Share                                       392,800 
Exercise of Employee Stock Options at:                                               
     $.20 Per Share                                                           58,000 
     $.31 Per Share                                                          133,250 
     $.44 Per Share                                                          180,400 
Issuance of Shares to Previous Purchases of                                          
  Stock Who Paid $1 Per Share                                                      0 
Dividend - Preferred Stock at $.10 Per Share               ($   25,863)  ($   25,863)

Balance at January 31, 1999                             0  ($5,426,682)  ($1,919,029)

Net Loss                                                   ($  540,923)  ($  540,923)
Exercise of Employee Stock Options at:                                               
     $.20 Per Share                                                      $   106,000 
     $.31 Per Share                                                      $     8,000 
Issuance of Stock Under Conversion From                                              
  Loan at:                                                                           
     $.10 Per Share                                                      $    32,500 
     $.20 Per Share                                                      $    44,000 
     $.25 Per Share                                                      $    12,000 
     $.50 Per Share                                                      $   372,970 
     $.55 Per Share                                                      $    27,500 
     $1.00 Per Share                                                     $    28,208 
Issuance of Stock in Exchange for Services                               $    81,000 
Issuance of Stock in Payment of                                                      
  Outstanding Invoices                                                   $   242,554 
Dividends-Preferred Stock at $.10 Per Share                ($   25,863)  ($   25,863)

Balance at January 31, 2000                             0  ($5,993,468)  ($1,531,083)

See Accompanying Notes to These Financial Statements.                           

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YARC SYSTEMS CORPORATION
 STATEMENT OF CASH FLOWS
YEAR ENDED JANUARY 31,

                                                        [Enlarge/Download Table]

                                                                   2000          1999     
                                                                -----------   ----------- 
                                                                                          
Operating Activities:                                                                     
        Net Income (Loss)                                       $  (540,923)  $(1,782,136)
        Adjustments to Reconcile Net Income (Loss)                                        
          to Net Cash Provided by (Used in) Operating                                     
          Activities:                                                                     
               Write-off of Contract and Licenses                         0        25,000 
               Write-off of Investment and Advances                                       
                 to Subsidiary                                            0       281,290 
               Sales to Unconsolidated Subsidiary Not Paid For            0       (67,099)
               Stock Issued for Payment of Services                  81,000             0 
               Allowance for Doubtful Accounts                        1,758         3,048 
               Depreciation and Amortization                         33,549        44,538 
               Accrued Interest on Bridge Loans                      24,360        32,432 
               Decrease (Increase) in Accounts Receivable           (50,634)       60,937 
               Decrease (Increase) in Inventories                    20,903       121,512 
               Decrease (Increase) in Deposits                        3,600         6,126 
               (Decrease) Increase in Accounts Payable               (4,336)      149,189 
               (Decrease) Increase in Accrued Expenses              (51,899)      182,528 
                                                                -----------   ----------- 
Net Cash (Used in) Operating Activities                            (482,622)     (942,635)
                                                                -----------   ----------- 
Investing Activities:                                                                     
        Advances to Unconsolidated Subsidiary                             0       (40,045)
        Acquisition of Property and Equipment                        (1,475)       (7,478)
                                                                -----------   ----------- 
Net Cash (Used in) Provided by Investing Activities                  (1,475)      (47,523)
                                                                -----------   ----------- 
Financing Activities:                                                                     
        Unsecured Loans From Stockholders                           119,000             0 
        Proceeds From Bridge Loans                                        0       246,420 
        Net Advances (Payment) From Stockholder                     234,030        19,504 
        Net Borrowing (Payment) Under Capital                                             
          Lease Obligation                                           (8,270)      (33,126)
        Proceeds From Sale of Stock                                       0       392,800 
        Repayment of Bridge Loans                                    (2,937)      (15,019)
        Proceeds From Exercise of Employee Stock Options            114,000       371,650 
                                                                -----------   ----------- 
Net Cash Provided (Used) by Financing Activities                    455,823       982,229 
                                                                -----------   ----------- 
Increase (Decrease) in Cash                                         (28,274)       (7,929)
Cash at Beginning of Period                                           4,330        12,259 
                                                                -----------   ----------- 
Cash (Overdraft) at End of Period                               $   (23,944)  $     4,330 
                                                                ===========   =========== 

Cash Paid For:                                                                            
        Interest                                                $    14,952   $    40,576 
                                                                ===========   =========== 
        Income Taxes                                            $       800   $       800 
                                                                ===========   =========== 
        Non Cash Conversion of Loans to Capital Stock           $   517,178   $   120,000 
                                                                ===========   =========== 

        Non Cash Transaction From Dividend on                                             
          Preferred Stock Series A                              $    25,863   $    25,863 
                                                                ===========   =========== 
        Non Cash Conversion of Accounts Payable to                                        
          Common Stock                                          $   242,554   $        -- 
                                                                ===========   =========== 

See Accompanying Notes to These Financial Statements.                           

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YARC SYSTEMS CORPORATION, INC.
 NOTES TO FINANCIAL STATEMENTS
 JANUARY 31, 2000 AND 1999

NOTE  1  -  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION    

      Yarc Systems Corporation (the Company) was founded in January, 1988 to
develop and market a new method of increasing the power of personal computers   
called "Computing Coprocessors". The Company designs and manufactures special   
purpose computer engines for major software OEM's. Its key technologies include 
a range of proprietary software and hardware packages which allow application   
developers to provide their users with more computing power.                    

        In September 1996, the Company formed a subsidiary in the Britain called
YARC Systems limited. The purpose of the subsidiary is to provide local sales   
and support within Europe.                                                      

      YARC Systems Limited has not been consolidated because through January
31, 1998, its operations were minor and the subsidiary did not operate for most 
of the 1999 fiscal year.                                                        
(See Note 6)                                                                    

Accounting Estimates                                                            

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

Revenue Recognition                                                             

The Company recognizes revenue from product sales at the time of
shipment or when a service is performed.                                        

Research and Development Costs                                                  

   The company follows the guidance provided in FASB-2, Accounting for
Research and Development Costs and FASB-86, Accounting for the Costs of Computer
Software to be Sold, Leased or otherwise Marketed. Accordingly, all costs       
related to research and development are expensed until such time that           
technological feasibility is established. Once technological feasibility is     
established all costs incurred in the production of the product matters are     
capitalized.                                                                    

Cash & Cash Equivalents                                                         

      The Company considers all highly liquid investments with a maturity of
three months or less, when purchased, to be cash equivalents.                   

Inventories                                                                     

      Inventories are stated at the lower of cost (determined on a first-in,
first-out basis) or market.                                                     

Property and Equipment                                                          

      Property and equipment is stated at cost. Depreciation is provided via
the straight-line method over the estimated useful lives of the assets,         
principally five (5) years.                                                     

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YARC SYSTEMS CORPORATION
 NOTES TO FINANCIAL STATEMENTS
 JANUARY 31, 2000 AND 1999

Note 1 - Continued                                                              

Income Taxes                                                                    

     Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement        
carrying amounts of existing assets and liabilities and their respective tax    
bases. Deferred tax assets and liabilities are measured using enacted tax rates 
expected to apply to taxable income in the years in which those temporary       
differences are expected to be recovered or settled. The effect on deferred tax 
assets and liabilities of a change in tax rates is recognized in income in the  
period that includes the enactment date.                                        

Advertising                                                                     

   The Company expenses advertising costs as incurred. During the year
ended January 31, 2000 and 1999, the Company incurred $1,877 and $50,214 in     
advertising costs.                                                              

Stock-Based Compensation                                                        

      In accordance with the provisions of Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation (FAS 123)", which   
the Company adopted in fiscal 1997, the Company has elected to follow Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"     
("APB 25") and related interpretations in accounting for its employee stock     
option plans. Under APB 25, if the exercise price of the Company's employee     
stock options equals or exceeds the fair value of the underlying stock on the   
date of grant, no compensation is recognized. Information regarding the         
Company's pro forma disclosure of stock-based compensation pursuant to FAS 123  
can be found in Note 13.                                                        

Fair Value of Financial Instruments                                             

      Statement of Financial Accounting Standards No. 107 "Disclosures about
Fair Value of Financial Instruments" requires the disclosure of fair value      
information about financial instruments, whether or not recognized in the       
balance sheet, for which it is practicable to estimate that value. The carrying 
value of the financial instruments on the balance sheets are considered         
reasonable estimates of the fair value.                                         

Reclassifications                                                               

Certain prior year financial statement classifications have been
reclassified to conform with the current year's presentation.                   

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YARC SYSTEMS CORPORATION
 NOTES TO FINANCIAL STATEMENTS
 JANUARY 31, 2000 AND 1999

Note 1 - Continued                                                              

Earnings (Loss) Per Common Share                                                

      Basic earnings (loss) per common share ("Basic EPS") excludes dilution
and is computed by dividing net income (loss) available to common shareholders  
(the "numerator") by the weighted average number of common shares outstanding   
(the "denominator") during the period. Diluted earnings (loss) per common share 
("Diluted EPS") is similar to the computation of Basic EPS except that the      
denominator is increased to include the number of additional common shares that 
would have been outstanding if the dilutive potential common shares had been    
issued. The computation of Diluted EPS does not assume exercise or conversion of
securities that would have an anti-dilutive effect on net earnings (loss) per   
share.                                                                          

                                                                [Download Table]

                               Earnings (loss)     Shares       Per-Share  
                                 (Numerator)    (Denominator)     Amount   
                               ---------------  -------------  ----------- 
                                                                           
January 31, 2000                                                           
        Net (loss)               $  (540,923)                              
        Preferred Dividends          (25,863)                              
                                 -----------                               

        Basic and Diluted EPS    $  (566,786)     16,785,144   $      (.03)
                                 ===========     ===========   =========== 

January 31, 1999                                                           
        Net (loss)               $(1,782,136)                              
        Preferred Dividends          (25,863)                              
                                 -----------                               

        Basic and Diluted EPS    $(1,807,999)     15,092,688   $      (.12)
                                 ===========     ===========   =========== 

NOTE 2  -  GOING CONCERN CONSIDERATIONS                                         

      The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. At January 31, 2000, the Company  
had a net loss, negative working capital, and a decline in net worth which raise
substantial doubt about its ability to continue as a going concern. The         
Company's losses have resulted primarily from an inability to achieve product   
sales and contract revenue targets due to insufficient working capital. Yarc's  
ability to continue operations will depend on positive cash flow, if any, from  
future operations and on the Company's ability to raise additional funds through
equity or debt financing. The Company has cut back and/or discontinued some of  
its operations and, if it is unable to raise or obtain needed funding, the      
Company may be forced to discontinue operations generally. To date, through     
further equity infusion into the Company, primarily in the form of the exercise 
of options by employees of the Company, operations have continued. Without      
additional funding sufficient to satisfy the creditors of the Company, as well  
as providing working capital for the Company, there can be no assurances that   
such operations can continue. The Company continues to actively work with       
entities capable of providing such funding. Management has continued to         
implement its restructuring plan including reductions of personnel,             
consolidation of facilities and disposal of subsidiaries. The financial         
statements do not include any adjustments that might result from the outcome of 
this uncertainty.                                                               

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YARC SYSTEMS CORPORATION
 NOTES TO FINANCIAL STATEMENTS
 JANUARY 31, 2000 AND 1999

NOTE  3  -  ACCOUNTS RECEIVABLE                                                 

Accounts receivable at January 31, consists of:                 

                                                                [Download Table]

                                             2000          1999  
                                           --------      --------
                                                                 
Accounts Receivable, Trade                 $ 63,542      $ 15,540
Accounts Receivable, Other                    3,374           742
                                           --------      --------
                                             66,916        16,282
Less: Allowance for Doubtful Accounts         1,758            --
                                           --------      --------

                                           $ 65,158      $ 16,282
                                           ========      ========

NOTE  4  -  INVENTORIES                                                         

Inventories at January 31, consists of:                         

                                                                [Download Table]

                                      2000          1999  
                                    --------      --------
                                                          
Raw Materials                       $173,472      $140,116
Work-in-Process                            0        51,938
Sales Demonstration                        0         2,321
                                    --------      --------

                                    $173,472      $194,375
                                    ========      ========

NOTE  5  -  PROPERTY AND EQUIPMENT                                              

Property and equipment at January 31, consists of:              

                                                                [Download Table]

                                     2000            1999    
                                   ---------       --------- 
                                                             
Machinery and Equipment            $ 120,642       $ 120,642 
Office Equipment                      44,798          44,798 
Engineering Equipment                 66,609          65,134 
Equipment Under Capital Lease        178,971         178,971 
Software                              55,092          55,092 
Leasehold Improvements                     0           2,500 
                                   ---------       --------- 
                                     466,112         467,137 
Less Accumulated Depreciation       (419,235)       (388,186)
                                   ---------       --------- 

                                   $  46,877       $  78,951 
                                   =========       ========= 

      Depreciation expense charged to operations was $33,549 and $44,538 for
January 31, 2000 and 1999, respectively.                                        

       Amortization of equipment under capital lease in the amount of $154,091
and $130,430 for January 31, 2000 and 1999, respectively, is included in        
accumulated depreciation.                                                       

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YARC SYSTEMS CORPORATION
 NOTES TO FINANCIAL STATEMENTS
 JANUARY 31, 2000 AND 1999

NOTE 6 - INVESTMENTS AND ADVANCES TO UNCONSOLIDATED SUBSIDIARY CARRIED AT COST  

      In September 1996, the Company formed a subsidiary in Great Britain by
the name of YARC Systems Limited. The purpose of the subsidiary is to provide   
local sales and support within Europe. Through January 31, 1997, the subsidiary 
was organizing and had very minor operations.                                   

        Following is a summary of the financial position of YARC Systems Limited
as of January 31, 1999:                                                         

                                                                [Download Table]
                                                               
Current Assets                                       $  13,715 
Property, Plant and Equipment (Net)                     37,052 
                                                     --------- 

       Total Assets                                  $  50,767 
                                                     ========= 

Current Liabilities                                  $ 342,324 
Noncurrent Liabilities                                   9,144 
                                                     --------- 
                                                       351,468 
Stockholder's (Deficiency)                            (300,701)
                                                     --------- 

                                                     $  50,767 
                                                     ========= 

    There is no market for the common stock of YARC Systems Limited and,
accordingly, no quoted market price is available.                               

    Sales to Yarc Systems Limited amounted to $ 0 in 2000 and $67,099 in
1999. The Company had not received payment on these sales and the receivable had
been included in the investment and advances to unconsolidated subsidiary. The  
Company sold product to Yarc Systems Limited at cost.                           

 During the 1999 fiscal year the subsidiary has ceased operations.
However, the subsidiary is still in good standing and operations could be       
recommenced upon approval of the board of directors                             

NOTE  7  -  BRIDGE LOAN/COMMON STOCK                                            

For the year ended January 31, 1997, there were no compensation 
arrangements involving common stock.                                            

      In June 1996, the Company borrowed $300,000 from 10 borrowers under an
intercreditor agreement. The notes are secured by the accounts receivable and   
inventory.                                                                      

        The notes draw interest at 10% per annum. The principal balance plus the
accrued interest was scheduled to be paid in 12 equal installments beginning    
June, 1997. The Company has partially repaid one of the notes. The Company has  
been accruing the interest on these notes. During the year ended January 31,    
1998, the Company received $40,000 as an additional bridge loan; $15,000 of     
which was converted into 15,000 shares of common stock. During the years ended  
January 31, 1999 and 2000, the Company converted $120,000 and $200,000          
respectively to common stock at $.50 per share. Thus at January 31, 2000, all of
the outstanding bridge loan obligation had been satisfied.                      

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YARC SYSTEMS CORPORATION
 NOTES TO FINANCIAL STATEMENTS
 JANUARY 31, 2000 AND 1999

NOTE  8  -  ACCRUED PAYROLL AND PAYROLL TAXES                                   

     Included in accrued payroll and payroll taxes at January 31, 1997 was
$210,000 in back payroll taxes. This sum had increased to approximately $420,000
by January 31, 1998. The company had negotiated with the taxing authorities a   
payment plan to pay the outstanding obligation. The Company has not fulfilled   
its obligations under the negotiated plan but has been in renegotiations with   
the tax authorities.                                                            

NOTE  9  -  OBLIGATION UNDER CAPITAL LEASES                                     

     The Company leases various equipment under capital leases expiring in
various years through 2003. The assets and liabilities under capital leases are 
recorded at the lower of the present value of the minimum lease payments or the 
fair value of the asset. Minimum future lease payments under capital leases as  
of January 31, 2000 for each of the future years in the aggregate are:          

                                                                [Download Table]
                                                         
Year Ended Jan 31,                                       
       2001                                        $1,480
       2002                                         1,618
       2003                                         1,160
                                                   ------
                                                    4,258
       Less: Current Portion                        1,480
                                                   ------

       Long-Term Portion                           $2,778
                                                   ======

        Interest rates on capitalized leases vary from 9% to 23% and are imputed
based on the lower of the Company's incremental borrowing rate at the inception 
of each lease or the lessor's implicit rate of return.                          

NOTE  10  -  DUE TO SHAREHOLDER                                                 

        Due to shareholder consists principally of business expenses paid for by
the Company's president and not reimbursed by the Company. All of the amounts   
are payable upon demand. The officer shareholder has agreed not to demand       
payment until at least February, 2001.                                          

NOTE  11  -  COMMITMENTS AND CONTINGENCIES                                      

     The Company was leasing its facilities under a five year lease, which
was due to expire on January 14, 2000.                                          

       During the year ended January 31, 1999, the landlord requested that the
Company vacate the facilities. Since the Company was not fully utilizing the    
space, the Company and the landlord mutually rescinded the lease effective      
March, 1999. In April, 1999, the Company moved into a new facility. The new     
lease expires on December 31, 2000 and requires monthly rent payments of $3,130.

Additionally, the Company is required to maintain a $ 1,000,000 
liability insurance policy and replacement cost fire and extended coverage      
insurance.                                                                      

    Rent expense under operating leases was $41,691 and $159,043 for the
year ended January 31, 2000 and 1999 respectively.                              

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YARC SYSTEMS CORPORATION
 NOTES TO FINANCIAL STATEMENTS
 JANUARY 31, 2000 AND 1999

NOTE  12  -  INCOME TAXES                                                       

 At January 31, 2000, the Company had approximately $5,089,000 and
$2,290,000 of net operating loss carryforwards for federal and state income tax 
purposes respectively. The carryforwards expire through 2019.                   

     The components of the provision (benefit) for income taxes at January
31, are as follows:                                                             

                                                                [Download Table]

                                                       2000          1999    
                                                   -----------   ----------- 
                                                                             
Current                                                                      
       Federal                                     $        --   $        -- 
       State                                               800           800 
                                                   -----------   ----------- 

                                                   $       800   $       800 
                                                   ===========   =========== 

Deferred tax asset consist of the following:                                 

       Net Operating Loss Carryforwards            $ 1,912,000   $ 1,728,000 
       Valuation Allowance - Net Operating Losses   (1,912,000)   (1,728,000)
                                                   -----------   ----------- 

       Net Deferred Tax Asset                      $         0   $         0 
                                                   ===========   =========== 

       There were no deferred tax liabilities at January 31, 2000 or 1999. The
reconciliation of federal income taxes computed at the statutory rate to the    
income tax provision (benefit) is as follows:                                   

                                                                [Download Table]

                                            Year Ending January 31, 
                                             2000            1999   
                                          ---------       --------- 
                                                                    
Income Tax Benefit at Statutory Rate      $(184,000)      $(660,000)
Increase in Valuation Allowance             184,000         660,000 
                                          ---------       --------- 

                                          $       0       $       0 
                                          =========       ========= 

NOTE  13  -  COMMON STOCK/PURCHASE PLAN                                         

 In August 1992, the Board of Directors approved an employee stock
purchase plan. The Board directed that a maximum of 2,000,000 shares be offered 
to the employees. This was increased to 8,000,000 in 1995. The Board has the    
authority to offer key employees the option of any number of shares up to the   
plan maximum. As of January 31, 2000, there were 5,955,000 shares remaining     
under this plan.                                                                

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YARC SYSTEMS CORPORATION
 NOTES TO FINANCIAL STATEMENTS
 JANUARY 31, 2000 AND 1999

Note 13 - Continued                                                             

     The following is a summary of the stock option activity for the years
ended January 31, 1999 and 2000:                                                

                                                                [Download Table]

                                                                Underlying  
                                       Price Per Share         Common Shares
                                       ---------------         -------------
                                                                            
January 31, 1999                                                            
        Granted                         $0.20 - $0.44            3,045,000  
        Exercised                       $0.20 - $0.44            1,265,000  
        Canceled                        $0.20 - $0.44              465,000  

January 31, 2000                                                            
        Granted                         $0.20                    1,650,000  
        Exercised                       $0.20                      640,000  
        Canceled                        $0.00                            0  
                                                                 ---------  

Exercisable at January 31, 2000                                  2,324,355  
                                                                 =========  

Accounting for Stock-Based Compensation                                         

  The Company applies Accounting Principles Board Opinion No. 25 and
related Interpretations in accounting for its stock option plans. The Company   
has opted under Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation" ("SFAS 123") to disclose its stock-based          
compensation with no financial effect. The pro forma effects of applying SFAS   
123 in this initial phase-in period are not necessarily representative of the   
effects on reported net income or loss for future years. Had compensation       
expense for the Company's stock option plans been determined based upon the fair
value at the grant date for awards under these plans consistent with the        
methodology prescribed under SFAS 123, the Company's pro forma net income (loss)
and net income (loss) per share would have been the same due to the high        
volatility of the Company's stock prices which yields a fair market value below 
the option price at the date of grant.                                          

   The fair value of the options granted during the fiscal years ended
January 31, 1999 and 2000 is estimated on the date of grant using the           
Black-Scholes option pricing model. The fair values and assumptions used in     
calculating the fair values were as follows for the year ended:                 

                                                                [Download Table]

                                        January 31, 1999            January 31, 2000
                               ----------------------------------   ----------------
                               07/24/98     08/20/98     01/07/99       12/02/99    
                               --------     --------     --------       --------    
                                                                                    
Fair Value of Options Granted  $   0.42     $   0.31     $   0.20       $   0.19    
Risk Free Interest Rate               6%           6%           6%             6%   
Expected Life (Years)                 3            3            3              3    
Expected Volatility                 209%         190%          84%           223%   

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YARC SYSTEMS CORPORATION
 NOTES TO FINANCIAL STATEMENTS
 JANUARY 31, 2000 AND 1999

NOTE  14  -  LITIGATION                                                         

     In the fourth quarter of 1993, Yarc filed a suit for libel against an
individual resident of Denmark, Mr. Flemming Stanley and his Danish company in  
formation, "Stantech." In December 1993, Yarc won a judgment in the Superior    
Court of California against the individual and his business in the amount of    
$843,000. This judgment is currently unsatisfied. Yarc also filed an action for 
libel in the Maritime and Commercial Court of Copenhagen against the same       
defendants. Thereafter, Stantech filed a cross-complaint against Yarc which     
alleged copying infringement under the Danish "Marketing Act" and claimed Yarc's
Linotronic RIP product infringed a Stantech product. In November, 1996 the      
Maritime and Commercial Court held that Flemming Stanley had committed libel and
that there was no evidence of infringement as there was no copyrightable        
material and imposed a fine against Mr. Stanley. The Maritime and Commercial    
Court also imposed a fine in the approximate amount of U.S.$ 112,000 against    
Yarc for disturbing Stantech's market under the Danish Marketing Act. If Yarc   
establishes a presence in Denmark the fine will have to be paid as the 843,000  
unsatisfied judgement can not be enforced in Denmark.                           

NOTE  15  -  DIVIDENDS AND PREFERRED STOCK                                      

     The Preferred Stock Series A was issued to the Company's president in
1992 as payment of reimbursements due the president for money advanced on behalf
of the Corporation.                                                             

      The holders of outstanding Series A Preferred shares shall be entitled
to receive, when and as declared by the Board of Directors of the corporation,  
out of any assets at the time legally available dividends at the annual rate of 
$ .10 per Series A Preferred Share, and no more, payable in cash quarterly on   
the last day of March, June, September, and December to the holders of Series A 
Preferred shares of record on a date not more than 60 nor fewer than 10 days    
preceding each respective payment date as specified by the Board of Directors   
or, if not so specified, as provided by law. Dividends shall accrue on each     
Series A Preferred Share form the date of its original issuance and shall accrue
from day to day, whether or not earned or declared. Dividends shall be          
cumulative so that if dividends in respect of any previous quarterly dividend   
period at that annual rate per share shall not have been paid on or declared and
set apart of all Series A Preferred shares at the time outstanding, the         
deficiency shall be fully paid on or declared and set apart for those shares    
before the Board of Directors of the corporation declares or pays any dividend  
to holders of Common shares.                                                    

At present, the dividends have not been declared by the Board of
Directors but it will be cumulative under dividend payable.                     

Dividend payable at January 31, 2000 and 1999 consist of:       

                                                                [Download Table]
                                                                
Balance at January 31, 1998                             $118,539
Dividend - for the year January 31, 1999                  25,863
                                                        --------
Balance at January 31, 1999                              144,402
Dividend - for the year January 31, 2000                  25,863
                                                        --------

Balance at January 31, 2000                             $170,265
                                                        ========

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YARC SYSTEMS CORPORATION
 NOTES TO FINANCIAL STATEMENTS
 JANUARY 31, 2000 AND 1999

Note 15 Continued                                                               

All of the outstanding Series A Preferred Shares are held by the
president of the Company. The president has agreed to forego payment of the     
dividends until such time as the Company has adequate resources.                

      The Preferred Stock Series B was purchased on behalf of the Company by
the president from a former officer during the period 1993 to 1995, pursuant to 
a legal settlement between the Company and a former officer. The Company has    
committed to repurchase those shares from the president at its redemption value 
of $2 per share when it is able.                                                

NOTE 16 - TRANSACTIONS WITH MAJOR CUSTOMERS                                     

       One domestic customer accounted for $242,000 or 51%, $366,700 or 48% of
the year ended January 31, 2000 and 1999 sales respectively. One other domestic 
customer accounted for $81,400 or 17% of the year ended January 31, 2000. No    
other customers accounted for more than 1% of sales.                            

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PART III

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

Officers and Directors of the Company are:                                      

                                                                [Download Table]

        NAME            AGE  POSITION                                        
        ----            ---  --------                                        
                                                                             
Dr. Trevor G. Marshall  51   Chairman of the Board, Chief Executive Officer  
                             and President                                   

Dr. Karsten Jeppesen    41   Director                                        

Frances E. Marshall     50   Director, Chief Financial Officer, and Secretary

Dr. Trevor G. Marshall has been Chairman of the Board, and Chief
Executive Officer, since he founded Yarc Systems Corporation, Inc. in 1988. Dr. 
Marshall has extensive experience starting and managing companies which         
specialize in electronic equipment and related parts. Mr. Marshall is also a    
Contributing Editor for BYTE.com. He is widely recognized as an industry expert 
on LINUX and Internet computing technology, writing a regular column titled     
"Trevor's Linux" In addition to Bachelors and Masters degrees in Engineering    
from the University of Adelaide, South Australia, Dr. Marshall holds a Doctorate
in Philosophy from the University of Western Australia.                         

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       Dr. Karsten Jeppesen has served YARC as V.P.Engineering from 1993 until
1999, as a Director between 1996 and 1999, and he is again a Director in 2000.  
Dr. Jeppesen's extensive entrepreneurial experience began when he founded Dus   
A/S (Denmark) in 1980 with Venture funding from the LEGO Corporation. Dus       
manufactured UNIX-based computer-aided-instruction systems for schools and      
universities. Dr. Jeppesen has been developing RIP technology for the printing  
industry since 1983. He was an early contributor to the LINUX organization,     
introducing GNU into YARC's product range in 1994 and LINUX in 1995. Dr.        
Jeppesen has extensive experience with Multiple CPU computer systems and Array  
Processors, most recently using the LINUX operating system to control these     
arrays. Dr. Jeppesen received a Doctor of Dental Surgery degree from Aarhus     
University in 1985.                                                             

Frances E. (Liz) Marshall currently serves the Company as Chief 
Financial Officer, Secretary and Director. Ms. Marshall has been with the       
Company since it was founded in 1988, filling a number of key management roles, 
including those of Production Management and Financial Controller. During 1982  
she published a professional paper on Microprocessor Based Inventory Control in 
hospital pharmacy. In 1980 Ms. Marshall received her Graduate Diploma in        
Pharmacy from Curtin University, in Western Australia. Ms. Marshall is married  
to Dr. Trevor Marshall. The officers of the Company serve at the discretion of  
the Board. Each director of the Company serves until such director's successor  
is elected and qualified or until the director's death, retirement, resignation 
or removal.                                                                     

Section 16(a) of the Securities Exchange Act of 1934 requires our officers and  
directors, and persons who own more than ten percent of a registered class of   
our equity securities to file reports of ownership and changes in ownership with
the Securities and Exchange Commission. Officers, directors and greater than    
ten-percent shareholders are required by SEC regulation to furnish us with      
copies of all Section 16(a) forms they file. During the Company's most recent   
fiscal year all persons subject to Section 16(a) have complied therewith.       

ITEM 10. EXECUTIVE COMPENSATION                                                 

The following table sets forth compensation paid or accrued by the Company to   
all executive officers during the fiscal years ended January 31, 1998, 1999 and 
2000:                                                                           

SUMMARY COMPENSATION TABLE(1) 

                                                        [Enlarge/Download Table]

                   Annual Compensation                            Long-Term Compensation              
                   -------------------                            ----------------------              
                                                                                             (g)      
                                                                                          Securities  
                                                        (d)                (f)            Underlying  
         (a)                (b)             (c)        Other            Restricted        Options/SARs
Name and Position          Year         Salary ($)  Compensation      Stock Awards ($)         (#)    
-----------------          ----         ----------  ------------      ----------------    ------------
                                                                                                      
Dr. Trevor Marshall        1999          $ 7,375         0                   --                --     
CEO, Chairman              1998          $29,500         0                   --                --     
                           1997          $54,083         0                   --                --     

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                                                                [Download Table]
                                                         
Dr. Karsten Jeppesen  1999       --  0        --       --
V.P. Eng, Director    1998  $42,000  0        --  430,000
                      1997  $63,120  0        --       --

Frances E. Marshall   1999  $ 5,625  0  $122,480  300,000
CFO, Director         1998  $24,375  0  $ 30,000  430,000
                      1997  $39,375  0        --       --

(1)     Pursuant to the Regulations promulgated by the Commission, the table    
      omits columns reserved for types of compensation not applicable to us.

OPTION/SAR GRANTS IN LAST FISCAL YEAR(1)
 (Individual Grants)

                                                        [Enlarge/Download Table]

                           (b)                                                                           
                       Number of                                                                         
                       Securities           (c)                                                          
                       Underlying   % of Total Options/SARs                                    (e)       
       (a)            Options/SARs    Granted to Employees               (d)                Expiration   
       Name            Granted (#)      in Fiscal Year       Exercise or Base Price ($/Sh)     Date      
       ----            -----------      --------------       -----------------------------  ----------   
                                                                                                         
Dr. Trevor Marshall           --              --                           --                   --       

Dr. Karsten Jeppesen          --              --                           --                   --       

Frances E. Marshall      300,000            18.2%                       $0.20               December 2002

(1)     All options were granted at an Exercise Price which was equal to or     
       higher than the Fair market Value of the security at the date of grant.

AGGREGATE OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES 

                                                        [Enlarge/Download Table]

                                                            (d)                         (e)            
                           (b)                       Number of Securities      Value of Unexercised    
                         Shares         (c)         Underlying Unexercised    In-The Money Options/    
       (a)            Acquired on  Value Realized  Options/SARs at FY-End(#)     SARs at FY-End ($)    
       Name            Exercise #        $         Exercisable/Unexercisable  Exercisable/Unexercisable
       ----            ----------  --------------  -------------------------  -------------------------
                                                                                                       
Dr. Trevor Marshall          --            --                   --                   --/--             

Dr. Karsten Jeppesen    135,806      $ 18,566            181,613/0                   $294,213/$0       

Frances E. Marshall     300,000      $178,633                   --                   --/--             

16

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

As of February 11, 2000, there were approximately 19,046,871 shares of the      
Company's Common Stock outstanding. The table below sets forth, as of February  
11, 2000, the number of shares of the Company's Common Stock beneficially owned 
by each of the Company's current officers and directors, the named executive    
officers, any other person or group who owned of record or who was known to     
beneficially own more than five percent (5%) of the Company's outstanding shares
and the officers and directors as a group. Unless otherwise indicated, the      
address for all parties is c/o Yarc Systems Corporation, Inc., 900 Calle Plano, 
Suites J & K, Camarillo, California 93012.                                      

                                                                [Download Table]

                                             NUMBER OF SHARES          
TITLE OF     NAME AND ADDRESS                  BENEFICIALLY     PERCENT
CLASS       OF BENEFICIAL OWNER                    OWNED       OF CLASS
-----       -------------------                    -----       --------
                                                                       
Common    Dr. Trevor G. Marshall(1)              4,960,000      26.0%  

Common    Frances E. Marshall(1)                   730,000       8.0%  

Common    Dr. Karsten Jeppesen                     962,462       5.1%  

Common    Officers and Directors as a Group      6,652,462      34.9%  

      (1)     Dr. Trevor Marshall and M. Frances E. Marshall are husband and
wife.                                           

The table below sets forth, as of February 11, 2000, the number of shares of the
Company's Series A Preferred Stock beneficially owned by each of the Company's  
current officers and directors, the named executive officers, any other person  
or group who owned of record or who was known to beneficially own more than five
percent (5%) of the Company's outstanding Series A shares and the officers and  
directors as a group.                                                           

                                                                [Download Table]

                                         NUMBER OF SHARES          
     TITLE OF     NAME AND ADDRESS         BENEFICIALLY    PERCENT 
     CLASS        OF BENEFICIAL OWNER         OWNED        OF CLASS
     -----        -------------------         -----        --------
                                                                   
Preference A(2)  Dr. Trevor G. Marshall      258,638         100%  

The table below sets forth, as of February 11, 2000, the number of shares of the
Company's Series B Preferred Stock beneficially owned by each of the Company's  
current officers and directors, the named executive officers, any other person  
or group who owned of record or who was known to beneficially own more than five
percent (5%) of the Company's outstanding Series B shares and the officers and  
directors as a group.                                                           

17

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                                                                [Download Table]

                                             NUMBER OF SHARES            
TITLE OF           NAME AND ADDRESS            BENEFICIALLY      PERCENT 
CLASS              OF BENEFICIAL OWNER             OWNED         OF CLASS
-----              -------------------             -----         --------
                                                                         
Preference B(3)    Dr. Trevor G. Marshall          68,334          100%  

        (2) Preference A stock was issued to Dr. Marshall in 1992, to extinguish
           a debt on the Corporation's books resulting from reimbursements due
     Dr. Marshall for money advanced on behalf of the Corporation.

    (3) Preference B stock was purchased on behalf of the Company by Dr.
      Marshall from O. Harvey Raider during the period 1993 to 1995,
           pursuant to a legal settlement agreement between the company and O.
           Raider. The Corporation has committed to repurchase this Preference
B stock from Dr. Marshall when it is able.              

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.                        

Since the Company's inception, Dr. Jeppesen and Dr. Marshall were involved in a 
series of transactions with the Company in which the amount involved exceeded   
$60,000. Such transactions consisted of a series of payments made by Dr.        
Marshall and Dr. Jeppesen of business expenses on the Company's behalf. The     
outstanding balance of these transactions was $408,249 at January 31, 2000, a   
majority of which related to Dr. Marshall. These advances are not evidenced by a
written instrument.                                                             

During the past two years, Ms. Marshall has been involved in a series of        
transactions with the Company in which the amount involved exceeded $60,000.    
Such transactions consisted of a series of loans to the Company which were used 
to supplement cash flow. The outstanding balance of these transactions was      
approximately $110,450 at January 31, 2000. These loans are not evidenced by a  
written instrument, bear interest at 10% per annum, and have no maturity date.  

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K                                       

(a)      EXHIBITS                                                               

                                                                [Download Table]

Exhibit Number             Title of Exhibit                              
--------------             ----------------                              
                                                                         
    2.1*                   Articles of Incorporation                     

    2.2*                   Bylaws                                        

    3.1*                   Certificate of Determination of Preferences of
                           Series A Preferred Shares                     

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                                                                [Download Table]
                                                                           
3.2*                         Certificate of Determination of Preferences of
                             Series B Preferred Shares                     

3.3*                         Certificate of Determination of Preferences of
                             Series C Preferred Shares                     

6.1*                         Lease Agreement between CPBC, Ltd. and Yarc   
                             Systems Corporation, Inc., dated September 7, 
                             1999.                                         

6.2*                         Yarc Systems Corporation, Inc. 1992           
                             Nonstatutory Stock Option Plan                

6.3*                         Amendment No. 1 to Yarc Systems Corporation,  
                             Inc. 1992 Nonstatutory Stock Option Plan      

6.4*                         Letter of Credit                              

27.1                         Financial Data Schedule                       

    * Incorporated by reference to the Company's exhibit to Form 10-SB, as filed
with the Commission on March 15, 2000.                                  

(b) REPORTS ON FORM 8-K.                                                        

The Company did not file any reports on Form 8-K during the fourth quarter of   
the fiscal year ended January 31, 2000.                                         

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SIGNATURES

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

                                      YARC SYSTEMS CORPORATION, INC.

Date:  May 9, 2000                         By: /s/ Trevor Marshall              
                                               ---------------------------------
                                     Dr. Trevor G. Marshall,
                                       Chairman, Chief Operating
                                    Officer, and President

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

Date:  May 9, 2000                         By: /s/ Trevor Marshall              
                                               ---------------------------------
                                     Dr. Trevor G. Marshall,
                                               Chairman, Chief Operating Officer
                           and President

Date:  May 9, 2000                        By:  /s/ Frances E. Marshall          
                                               ---------------------------------
                                  Frances E. Marshall,
                                       Director, Chief Financial
                                    Officer, and Secretary

Date:  May 9, 2000                        By:  /s/ Karsten Jeppesen             
                                               ---------------------------------
                                   Dr. Karsten Jeppesen,
                      Director

 SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO
SECTION 15(d) OF THE EXCHANGE ACT BY NON-REPORTING ISSUERS

The issuer has not furnished any annual reports or proxy statements to its      
security holders.                                                               

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 INDEX TO EXHIBITS

                                                                [Download Table]

Exhibit Number  Title of Exhibit                                    Page
--------------  ----------------                                    ----
                                                                        
       2.1*     Articles of Incorporation                               

       2.2*     Bylaws                                                  

       3.1*     Certificate of Determination of Preferences             
                of Series A Preferred Shares                            

       3.2*     Certificate of Determination of Preferences             
                of Series B Preferred Shares                            

       3.3*     Certificate of Determination of Preferences             
                of Series C Preferred Shares                            

       6.1*     Lease Agreement between CPBC, Ltd. and Yarc             
                Systems Corporation, Inc., dated September 7, 1999.     

       6.2*     Yarc Systems Corporation, Inc. 1992 Nonstatutory        
                Stock Option Plan                                       

       6.3*     Amendment No. 1 to Yarc Systems Corporation, Inc.       
                1992 Nonstatutory Stock Option Plan                     

       6.4*     Letter of Credit                                        

       27.1     Financial Data Schedule                                 

      * Incorporated by reference to the Company's exhibit to Form 10-SB, as
filed with the Commission on March 15, 2000.                                    

21

Dates Referenced Herein   and   Documents Incorporated by Reference

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