INTERACTIVE OBJECTS INC, 424B3, 1999-06-21

INTERACTIVE OBJECTS INC
424B3, 1999-06-21
COMPUTER INTEGRATED SYSTEMS DESIGN

Previous: DUN & BRADSTREET CORP /DE/, S-8, 1999-06-21

Next: ADVISORS FUND, 497, 1999-06-21

<PAGE>

FILED PURSUANT TO RULE 424(B)(3)
REGISTRATION NO. 333-62345

Prospectus

2,925,018 Shares

[LOGO APPEARS HERE]
INTERACTIVE OBJECTS, INC.

Common Stock
-----------------------------------------

1,946,617 Shares currently issued and outstanding
978,401 Shares subject to outstanding stock purchase warrants

Trading Symbol: NASD OTC Bulletin Board - OBJX

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

The Shares are owned by the persons named in this Prospectus under the
caption "Selling Shareholders." The Shares were acquired by the Selling
Shareholders in various transactions, all of which were exempt from the
registration provisions of the Securities Act of 1933, as amended. These sales
included (1) sales of Shares in private placements by Interactive Objects, (2)
issuance of Shares as compensation and (3) Shares issuable upon the exercise of
the Warrants by some of the Selling Shareholders.

Interactive Objects will receive no part of the proceeds of any sales of
Shares made under this Prospectus. If the Warrants were fully exercised and we
issued stock for the Warrants, we would receive approximately $2,941,604. This
amount would be used for general corporate purposes and working capital. See
"Use of Proceeds." We do not expect the Warrants to be exercised until the
trading price for our Common Stock is greater than the exercise prices for the
Warrants.

All expenses of registration incurred for this offering are being paid by
the Company, but all selling and other expenses incurred by the Selling
Shareholders will be paid by the Selling Shareholders.

The Shares have not been registered for sale by the Selling Shareholders
under the securities laws of any state as of the date of this Prospectus.

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

SEE "RISK FACTORS" ON PAGE 4 FOR IMPORTANT INFORMATION THAT SHOULD BE CONSIDERED
BY PROSPECTIVE INVESTORS

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

Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of the Prospectus. Any representation to the contrary is a
criminal offense.

-----------------------------------------
The date of this Prospectus is June 21, 1999
-----------------------------------------
<PAGE>

WHERE YOU CAN FIND MORE INFORMATION

We file annual, quarterly and special reports, proxy statements and other
information with the SEC. You may read and copy the documents we file at the
SEC's public reference rooms in Washington, D.C., New York, New York and
Chicago, Illinois. Please call the SEC at 1-800-SEC-0330 for further information
on the public reference rooms. Our SEC filings are also available to the public
from the SEC's web site at http://www.sec.gov.

You may request a copy of these filings or a copy of any or all of the
documents referred to above which have been or may be incorporated in this
prospectus by reference, at no cost, by writing us at the following address:
Corporate Secretary, 217 Pine Street, Suite 800, Seattle, Washington 98101. Our
telephone number is (206) 464-1008.

Statement of Forward-Looking Information

Statements contained herein that are not based on historical fact,
including without limitation statements containing the words "believes," "may,"
"will," "estimate," "continue," "anticipates," "intends," "expects" and words of
similar import, constitute "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995. Such forward-looking
statements involve known and unknown risks, uncertainties and other factors that
may cause the actual results, events or developments to be materially different
from any future results, events or developments expressed or implied by such
forward-looking statements. Such factors include, among others, the following:
general economic and business conditions, both nationally and in the regions in
which the Company operates; technology changes; competition; changes in business
strategy or development plans; the ability to attract and retain qualified
personnel; liability and other claims asserted against the Company; and other
factors referenced in the Company's filings with the Securities and Exchange
Commission. Given these uncertainties, readers are cautioned not to place undue
reliance on such forward-looking statements. The Company disclaims any
obligation to update any such factors or to publicly announce the result of any
revisions to any of the forward-looking statements contained herein to reflect
future results, events or developments.

2
<PAGE>

PROSPECTUS SUMMARY

This summary highlights selected information contained elsewhere in this
Prospectus. It is not complete and may not contain all of the information that
is important to you. To understand this offering fully, you should read the
entire Prospectus carefully, including the risk factors and financial
statements. You should not assume that the information is this Prospectus or any
supplement to this Prospectus is accurate as of any date other than the date on
the front of this Prospectus.

About Interactive Objects, Inc.

Interactive Objects is committed to developing software using emerging
technology, including developing products using an embedded platform and object-
oriented software. We also provide information technology consulting,
development and training services to Fortune 1000 companies.

We intend to become a premier provider of quality solutions in the Internet
and distributed PC environments. Our strategy is three-fold. First, we intend to
develop software solutions using embedded platforms to be marketed for use by
consumers in everyday products and to continue to market our historically
object-oriented products. Second, we plan to be involved in mergers and
acquisitions that will expand our capabilities to provide products and
consulting services. Finally, we are continuously looking for strategic
partnerships with hardware, software and platform providers to increase our
available resources.

Historically, our products were designed for use by professional developers
using Microsoft visual programming languages in the intranet, extranet and
Internet environments. Our original products were reusable, modular software
components that gave developers an easy-to-use framework for their development
work. Sales of these products have historically been insignificant. We have
recently expanded our focus to include developing software using an embedded
systems platform. To that end, we formed an Information Appliances division. The
first product from this new division was a Mobile Audio Player, which is a
digital music player for Windows CE (Microsoft's new portable palm-sized PC
operating system). The technology in this product we hope will transcend into
other products such as cellular telephones, car stereos and answering machines.
We plan to market these products through strategic relationships, on our website
and with the assistance of positive media and analyst reports and articles.

In March 1999, we expanded our consulting services by acquiring Avatar
Interactive, Inc. With this acquisition, we are now able to offer a broader
range of consulting and development services to our clients. We now provide a
full range of consulting services including software design, development,
testing and training. Most of our consulting services are centered around our
Internet development expertise. We also use our consulting services to provide
us market research of the current needs of the information services market so we
may develop new products to meet those needs.

Interactive Objects was formed in 1995 as a Washington corporation under
the name Neoteric Media, Inc. d/b/a Interactive Objects. In the past four years,
we have grown primarily through two acquisitions. The first acquisition was in
August 1997 with Asia Pacific Chemical Engineering Corp. and the second
acquisition was in March 1999 with Avatar Interactive, Inc.

Our executive offices are located at: 217 Pine Street, Suite 800, Olympic
Tower Building, Seattle, WA 98101 and our telephone number is (206) 464-1008.
Our web site address is www.iobjects.com. Information accessed on or through
----------------
our website should not be considered a part of this Prospectus.

3
<PAGE>

RISK FACTORS

Investing in Interactive Objects Common Stock involves a high degree of
risk. You should be prepared to bear a complete loss of your investment. Prior
to making an investment, you should carefully read this entire Prospectus and
consider the following discussion of risks as well as other information in this
Prospectus.

We have a limited operating history and have not had profitable operations.

Interactive Objects was founded in 1995. Because of our limited history,
there is little information that investors can use to analyze our financial
results relating to our business.

Since incorporation, we have not been profitable. We lost $769,550 for the
quarter ended March 31, 1999 and $4,145,514 for the year ended December 31,
1998. We lost $1,685,266 for the year ended December 31, 1997. We cannot assure
you that Interactive Objects will ever operate profitably.

Our ability to make a profit, if at all, is dependent upon:

. the success of our Information Appliances division to develop
software applications that address the needs of the modern consumer;
. our ability to successfully grow and expand our consulting division;
and
. the successful acquisition of companies with compelling intellectual
properties and an established, talented and skilled team of
employees.

We believe we can fund our operations without additional capital through
the end of 1999. If we decide to seek additional capital by issuing additional
shares of our stock, the number of shares we issue will dilute our stockholders'
holdings. We cannot be certain that we will be able to obtain such capital on
acceptable terms, if at all.

We have a concentration of a few customers and limited marketing experience with
our consulting services.

Our primary consulting clients have been Fortune 1000 companies including:
Microsoft Corporation, SAFECO Insurance Companies of America, Eddie Bauer Inc.,
Airborne Express, Paccar, Inc., Pinnacle, CourtLink, Port Townsend Paper
Corporation, and Labor Ready, Inc. Nearly all of our revenue for 1997 and the
first nine months of 1998 was from our work for SAFECO. We cannot assure you
that we will be able to market our consulting services successfully to Fortune
1000 companies in the future. If we are unsuccessful in marketing our consulting
services, it could have a serious adverse effect on our financial condition and
business.

Our new products may not be introduced into the market successfully.

We cannot assure you that sales of our current or future products will meet
our expectations. For example:

. we may introduce products later to market than expected or later to
market than our competitors introduce their products; or
. competitors may introduce competitive products at lower prices.

When we make announcements about our expected new products and product
updates, we are not promising that the new products and product updates will be
shipped on time, as expected. These announcements are made to provide customers
with a general idea of the expected availability of our products for planning
purposes. Further, we could experience delays in our expected product
availability because:

4
<PAGE>

. a third party may fail to enhance their products or delay
enhancement of their products and our products are based on
technology from third parties; or
. key employees may leave Interactive Objects.

You should not consider our announcements as a factor to predict our
profitability for any specific future period. If we delay shipment of our
products or product enhancements, it may have an adverse impact on our financial
condition. Without new products and product enhancements, our products may
become technologically outdated. As a result, our business could be adversely
affected. We cannot assure you that our future product development efforts will
be successful.

The embedded platform market in which we compete is evolving and our success
depends in part on the success of this market.

The success of our new Information Appliances division depends on the
success of the embedded software market and on the continued market acceptance
of the incorporation of multimedia applications into embedded system
technologies. We believe that the currently successful embedded system software
application market is expanding. We cannot assure you that the embedded systems
market will continue to gain further acceptance in the future.

The market for embedded platform applications is successful and continues
to evolve. It is difficult to assess or predict with any assurance the size or
growth rate, if any, of this market. We cannot assure you that the embedded
system market will continue to develop, or that our products will be successful
in this market. Our business, operating results and financial condition could be
adversely affected if any of the following occur:

. the markets do not remain successful or do not continue to develop;
. the markets develop more slowly than we expect;
. the markets attract new competitors; or
. our products do not achieve market acceptance.

Even if our products gain broader market acceptance, our competitors have many
advantages over us and there are no assurances that we can be successful in this
competitive market.

The market for embedded system software applications is increasingly
competitive and subject to rapid change. Further, the market can be
significantly affected by the introduction of new products and other activities
of companies in this market. Our competitors offer a variety of products and
services to address the needs of the market in which we sell our products. We
believe that the principal competitive factors in this market are:

. product quality,
. flexibility,
. performance,
. functionality and product features,
. company reputation, and
. price.

Direct and indirect competitors in the embedded systems market include
Audible, BSQUARE Corporation, Sierra Imaging, Ilium Software, Ruksun, and
XAudio. We expect to face competition in the future from these and other
companies. Some of these competitors and future competitors have an advantage
over us because they:

. have significantly greater financial, technical, and other
resources,
. have greater name recognition, and

5
<PAGE>

. have well-established relationships with our potential customers.

As a result, our current and future competitors may be able to devote
greater resources to the development of their products than we can. We cannot
assure you that we will be able to compete successfully against current and
future competition, and the failure to do so would have a materially adverse
effect upon our business, operating results and financial condition.

We also face competition from other software vendors, many of whom may
already have a reputation among potential customers for offering software
solutions for embedded platforms. There can be no assurance that these third
parties, most of whom have significantly greater resources than we do, will not
develop competitive software solutions in the future. It is also possible that
new competitors or alliances among competitors will emerge and rapidly acquire
significant market share.

The market for our consulting and training services is extremely competitive.

The market for IT consulting and contract development/software system
design services and training services is extremely competitive. Companies are
judged in this market on thoroughness and ingenuity of solutions proposed,
responsiveness to client proposal requests, reputation and price. Many of our
competitors in the consulting arena have substantially greater financial,
management, marketing and technical resources than we do. We cannot assure you
that we will be able to compete successfully against our competitors. Failure to
compete successfully would have a materially adverse affect upon our business,
operating results and financial condition.

Our consulting business depends on Microsoft's products and standards.

Our consulting services are dependent upon the continued success of
Microsoft's products and standards. As a Microsoft Certified Solution Provider,
our engineers create solutions that rely on Microsoft products and standards.

Because we depend heavily on Microsoft, our consulting services could be
adversely affected if Microsoft:

. changes its programming languages, programming standards, or product
family,
. withholds information regarding such changes or other changes to its
Windows(R) or Windows NT(R) operating systems,
. changes the manner in which it markets its development languages,
products or standards, or
. does not provide us with pre-release information about such changes.

Such impacts could result in the retraining of our consulting staff, and we
may be required to expend significant resources to modify our consulting
priorities and direction.

6
<PAGE>

We currently have limited distribution of our products and will continue to sell
our products via our web site and through our existing online distribution
channels.

Future revenues from product sales are substantially dependent upon our
success as an Independent Software Vendor developing embedded system
applications for corporations seeking software development expertise. To a much
lesser degree, we also expect to receive insignificant revenues from the sale of
our existing component products through our web site and online distribution
channels via electronic software distribution. Through March 31, 1999, sales of
our products via our web site have been limited and have generated insignificant
revenues. We believe that the use of the Internet for software sales and
distribution will continue to grow. As we refocus our energy toward
strengthening our position as an Independent Software Vendor, we hope to take
advantage of the significant savings in overhead we will realize by reducing our
internal sales, marketing and advertising budget. We cannot assure you that we
will be successful in attracting such Independent Software Vendor contracts or
in the sale of our products online. Failure to accomplish any of these tasks
could materially and adversely affect our financial condition and results of
operation.

Future operating results are uncertain and we expect to see fluctuations in our
quarterly operating results.

We cannot accurately forecast our revenues because of our limited operating
history and the evolving nature of the markets in which we compete, both in
consulting and software development. Our revenues from consulting fluctuate as
the consulting contracts are started, renewed, completed or terminated. The
revenue we will receive from future product sales is also difficult to forecast
because we have not generated significant revenue from our individual software
component sales. Future sales of software will rely on the successful completion
of Independent Software Vendor contracts with large corporations for the
development of embedded system applications. Revenues generated from
successfully completed Independent Software Vendor contracts depend on a number
of factors including our ability to win development contracts and our ability to
develop compelling software applications in a given time frame and with
acceptable functionality and performance.

We may experience significant fluctuations in our quarterly operating
results due to many factors which are outside our control, including the
following:

. timing of consulting engagements and payment terms,
. demand for our services,
. level of competition in the industry,
. budget cycles of our customers,
. timing of new product introductions and product enhancements,
. mix of products and services sold,
. activities of and acquisitions by competitors,
. analysts' reports about the Company, its components and application
framework technology,
. hiring new employees,
. our ability to develop and market new products and control costs,
and
. general economic conditions and economic conditions specific to the
Internet, on-line commerce and the software component industry.

We depend on application development contracts for product and marketing
research.

Our development strategy depends in part on our continued ability to
acquire development, research and marketing skills from our ongoing consulting
and development contracts, in order to develop future marketable products. We
generally negotiate our consulting agreements to enable us to retain
intellectual property rights to portions of the software being developed, while
the client retains rights to the entire program developed. To be successful in
growing our consulting business, we must be able to negotiate consulting
agreements which allow us to retain rights to portions of the developed
software. If we are unsuccessful in achieving desirable consulting

7
<PAGE>

situations, we may be required to expend significant amounts of resources, or
contract with third-parties, to perform research and development for new product
offerings. This could materially and adversely affect our financial condition
and results of operation. While we utilize our consulting services for marketing
research, the needs of our consulting customers may not be representative of the
needs of the professional software developer community in general. There can be
no assurances that we will be successful in obtaining sufficient information
through our consulting services to be able to develop software applications that
are desirable to independent hardware vendors.

To successfully compete in the software development industry, we must continue
to develop new products and continue to train our engineers in the latest
technologies.

Our existing technology and systems can become obsolete because:

. the embedded system market is rapidly evolving and we might not be
able to keep up with the changes,
. new products and services with new technology are introduced to the
market, and
. new industry standards may be developed which are different than the
standards upon which our products are based.

To successfully compete, we plan to:

. develop or license state-of-the-art technologies;
. enhance our existing services;
. develop or acquire new services and technologies that address the
increasingly sophisticated needs of our prospective customers; and
. respond to technological changes and emerging industry standards and
practices on a cost-effective and timely basis.

We cannot assure you that we will be successful in continuing to develop
new products, securing consulting and development contracts, or responding to
the technological advances of industry standards. We also cannot assure you that
our new products will achieve market acceptance. If we are not successful (for
technical, legal, financial or other reasons) in responding in a timely manner
to changes in technology and customer preferences, significant delays in product
development or introduction of new products would have a seriously negative
affect on our business.

Our success depends in a large part on the continuing service of key personnel.
Changes in management could have a negative impact on our business.

The loss of service of one or more of our executive officers or key
technical personnel could have a materially adverse affect on our business. To
insure that we do not lose the services of these personnel, we have entered into
employment contracts with some of our executive officers and key technical
personnel. For more details on these employment contracts, see "Management -
Executive Compensation and Other Information - Employment Contracts."

We are also looking to expand the management team by adding new executives
who have the skills necessary to growing our business. As part of an overall
restructuring of the company, effective October 27, 1998, Steve Wollach, our
Chief Financial Officer, Treasurer and Director was appointed President.
Effective April 23, 1999, Mr. Wollach was named Chief Executive Officer. The
cost and management time we spend in expanding our management team and the
resulting change in management structure could have materially adverse affect on
our business, our product launches, and our business strategy.

8
<PAGE>

We are controlled by a number of existing shareholders.

A large percentage of our outstanding Common Stock (35.8%) is owned by
current and former directors and officers of Interactive Objects or our
affiliates. If these shareholders were to vote together, they could
significantly influence the outcome of items that are submitted to a vote of the
shareholders, including the election of directors to our Board of Directors. For
more information on the stock ownership of these current and former directors
and officers, see "Principal Shareholders."

We may be sued for software defects or liability claims.

Software products frequently contain errors or defects, especially when
first introduced or when new versions or enhancements are released. While to
date we have not been sued because of our software products, we cannot guarantee
that defects and errors will not be found in current versions, new versions or
enhancements of our products. If this were to occur, we would suffer a loss of
revenues, delay in market acceptance of our products, or unexpected re-
programming costs. Any of these things would have a materially adverse affect on
our business, operating results and financial condition.

Our license agreements with our customers generally contain provisions that
are intended to limit our exposure to product liability claims. But it is
possible that our customers could still sue us. Any such lawsuit could have a
materially adverse affect on our business, operating results, and financial
condition.

We rely on various intellectual property laws, confidentiality procedures and
contractual provisions to protect our proprietary rights.

Protection for our software, documentation and other written materials is
limited. Trade secret, trademark and copyright laws provide only limited
protection. Unauthorized persons may attempt to copy part of our products or to
obtain and use information that we believe is proprietary. We cannot assure you
that these laws will adequately protect our proprietary rights in the United
States or abroad.

We do not believe we are infringing on the proprietary rights of others.
However, we cannot guarantee that third parties will not claim that we are
infringing on their rights. In fact, we expect that software product developers
will have more claims of infringement as the number of products and competitors
in our industry grows and the software begins to overlap into other industry
segments. If we were subject to an infringement claim, it would have a
materially adverse impact on our business because it would:

. be time consuming to defend;
. result in costly litigation;
. divert our management's attention and resources;
. cause our product shipments to be delayed; or
. require that we enter into royalty or licensing agreements, which
may not be available to us on favorable terms, if at all.

As part of our business strategy, we are looking at potential acquisitions to
complement our products and consulting services but there are risks associated
with such acquisitions.

On March 31, 1999, we acquired Avatar Interactive, an IT consulting and
software development company. We do not have any additional agreements or
negotiations that are underway, but we intend to continue to review prospects
for additional acquisitions of businesses, products or technologies. As we enter
into additional acquisitions, there are certain risks, such as:

. potentially diluting our common stock;

9
<PAGE>

. incurring debt; or
. incurring contingent liabilities and/or amortization expenses
related to goodwill and other intangible assets.

Other risks include:

. difficulties in assimilation of acquired operations, technologies
and products;
. diversion of our management's attention to other business concerns;
. risks of entering markets where we have no or limited prior
experience; and
. potential loss of key employees of acquired organizations.

We cannot assure you that we will be successful in integrating any new
businesses, products, technologies or personnel into our Company. Our failure to
do so could have a materially adverse affect on our business.

It is possible that we may have Year 2000 problems.

The Year 2000 problem is the potential for system and processing failures
of date-related data and the result of computer-controlled systems using two
digits rather than four digits to define the applicable year. For example,
computer programs that have time-sensitive software may recognize a date using
00 as the year 1900 rather than the year 2000. This could result in system
failure or miscalculations causing disruptions of operations including, among
other things, a temporary inability to process transactions, send invoices or
engage in other normal business activities.

We could be affected by the Year 2000 problem indirectly because companies
that would normally buy our products or secure our consulting services may be
spending their resources on correcting their existing Year 2000 problems.

Our business could also be affected because the products of other
companies, upon which we rely, could have complications with the Year 2000
problem. Our business could be materially and adversely affected by costs or
complications relating to:

. code changes,
. testing and implementation for our own systems, or
. similar issues faced by our distributors, suppliers, customers,
vendors and the financial service organizations with which we
interact.

The Year 2000 issue could also affect our products. We have reviewed our
current products and believe that they are Year 2000 compliant and that the Year
2000 issue will not materially impact us. But if our products are non-compliant
or if there is a dispute with any customer regarding whether our products are
compliant, our business, results of operations and financial condition could be
materially and adversely affected.

For more information about the Year 2000 issue, see "Management's Discussion
and Analysis of Financial Condition and Results of Operation."

Our success depends on recruiting and retaining highly skilled technical and
consulting personnel.

We must be able to hire highly skilled software engineers, programmers and
trainers, as employees and as independent contractors. If we are unsuccessful in
hiring skilled independent contractors and subcontractors for our consulting
services, we may be unable to complete our contracts in a timely manner and may
be unable to bid for contracts which we cannot perform with our existing
employees.

10
<PAGE>

The technological and creative skills of our employees are also factors
which influence our success in securing key software development or consulting
contracts. The competition for skilled technical employees is intense and we
cannot assure you that we will be successful in retaining or recruiting such
personnel. We must compete with companies that possess greater financial and
other resources than we do, and that may be more attractive to potential
employees and contractors. To be competitive, we may have to substantially
increase the compensation, bonuses, stock options and other fringe benefits
offered to employees in order to attract and retain such personnel. The
additional costs in retaining or attracting new personnel may have a materially
adverse affect on our business, our product launches, and our operating results.

We do not plan to pay cash dividends.

We intend to keep all of our earnings, if any, for use in our business and
do not plan to pay cash dividends in the foreseeable future. Our Articles of
Incorporation and Bylaws allow for dividends to be subject to the discretion of
our Board of Directors and any terms and conditions imposed by law.

We have anti-takeover provisions in our Articles of Incorporation.

Our Articles of Incorporation authorize the Board of Directors to issue up
to ten million shares of preferred stock and to determine the rights and
restrictions (including voting rights) of those shares without a vote or action
of our shareholders. The shareholders of our Common Stock will be subject to the
rights of holders of the preferred stock, if it is issued. If we issue preferred
stock, the holders of such stock could delay or prevent a change in control of
our company and it may adversely affect the voting rights of the holders of our
Common Stock. We have no present plans to issue shares of preferred stock.

We also have other provisions in our Articles of Incorporation and Bylaws
that could make a merger, tender offer or proxy contest more difficult. One of
these provisions is a staggered Board of Directors - our Board of Directors is
divided into three classes and each class serves for three year terms. Because
they are elected on staggered years, it is more difficult for a third party to
attempt to take control of our Board of Directors by nominating a new slate of
directors at one time. See "Description of Securities."

If our Warrants and Options are exercised, the holders of our Common Stock
will experience dilution of their shares.

Currently, there are approximately 978,401 shares of Common Stock reserved
for issuance upon the exercise of Warrants offered in this Prospectus at a
weighted average exercise price of $3.01 per share. There is also an aggregate
of 2,000,000 shares of Common Stock reserved for issuance upon exercise of
options granted under our 1998 Stock Option Plan. We have granted a total of
1,708,000 options to purchase as of June 1, 1999 at a weighted average exercise
price of approximately $1.51 per share.

If any outstanding Warrants or options are exercised, holders of Common
Stock will be diluted. Also, sales in the public market of the Common Stock
underlying these Warrants or options may adversely affect prevailing market
prices for our Common Stock and may adversely affect our ability to obtain
additional equity financing. For more information, see "Description of
Securities."

Because we have a large number of shares eligible for future sale, we may
experience price fluctuation if any significant amount are traded in the public
market. These sales would also impair our ability to raise capital through the
sale of our securities.

There are 14,616,952 shares of Common Stock outstanding as of the date of
this Prospectus. 1,946,617 Shares are being offered through this Prospectus (not
including 978,401 shares issuable upon exercise of the

11
<PAGE>

Warrants and which are also being registered through this Prospectus). There are
currently 5,165,526 previously issued shares that are freely tradable without
restriction or further registration.

Other than the Shares being registered by this Prospectus, we have not
granted any registration rights with regard to any additional shares of Common
Stock. All of the remaining 6,526,408 shares of Common Stock outstanding are
"restricted securities." Restricted securities are securities acquired by the
Company, either directly or indirectly, in a transaction not associated with a
public offering. These restricted securities will become eligible for sale on
various dates following the date of this Prospectus.

We cannot predict the affect, if any, that sales of shares of Common Stock
or even the availability of such shares for sale will have on the market prices
of our Common Stock prevailing from time to time. The possibility that
restricted Common Stock may be sold in the public market at future dates may
adversely affect the prevailing market price for the Common Stock and could
impair our ability to raise capital through the sale of our equity securities.
For more information, see "Shares Eligible for Future Sale."

We may experience extreme changes in our stock price.

Like other emerging software and high technology companies, the market
price of our Common Stock has been and may continue to be extremely volatile.
Since our Common Stock began listing on the OTC Bulletin Board in September
1997, the bid price of the Common Stock has ranged from a high of $9.94 to a low
of $0.9375. This is the result of a number of factors including:

. quarterly fluctuations in our results of operations,
. the announcement of technological innovations,
. the introduction of new products by Interactive Objects or our
competitors,
. general conditions in the computer software and hardware
industries, and
. the extreme price and volume fluctuations of the stock market in
general.

These market fluctuations may materially and adversely affect the market
price of our Common Stock.

Because we are traded on the OTC Bulletin Board, we cannot guarantee there is an
orderly public market for our Common Stock. We intend to apply for listing on
the Nasdaq SmallCap Market but there is no assurance we will gain such listing.
Further, there are numerous risks related to buying low-priced stocks (stocks
that are less than $5.00 per share).

Our Common Stock is currently traded on the OTC Bulletin Board. As a
result, you may find it more difficult to sell the Common Stock or to obtain
accurate quotations of the market value of our Common Stock as compared to
shares that are traded on the Nasdaq trading market or an exchange. We cannot
assure you that a regular trading market will develop or be sustained after the
date of this Prospectus.

We intend to apply for listing on the Nasdaq SmallCap Market when we are
able to qualify for such listing. The minimum listing requirements to qualify
for listing on the Nasdaq SmallCap Market include:

. either $4 million in net tangible assets (total assets, excluding
goodwill, less total liabilities),
. $750,000 in net income or $50 million in market capitalization,
. $5 million market value of the public float,
. three market makers, and
. a minimum bid price of $4.00 per share.

As of the date of this Prospectus, we do not satisfy the initial listing
requirements for listing on the SmallCap Market. If we are not able to apply for
listing on the SmallCap Market or are not accepted for listing on the SmallCap
Market, we will attempt to maintain the listing of the Common Stock on the OTC
Bulletin Board.

12
<PAGE>

For as long as our Common Stock is traded on the OTC Bulletin Board and the
trading price of the Common Stock is below $5.00 per share, trading in our
securities will be subject to the requirements of certain "penny stock" rules of
the Securities and Exchange Commission. These rules require additional
disclosure to investors by broker-dealers for any trades involving a penny
stock.

Penny stock rules require that the broker-dealer deliver to the investor a
disclosure statement explaining the penny stock market and the associated risks
with the market prior to any penny stock transaction. There are also sales
practice requirements for broker-dealers who sell penny stocks to most persons.
For these types of transactions, the broker-dealer must make a determination
that the purchaser is suitable for the transaction and must receive the
purchaser's written consent to the transaction prior to sale.

These additional burdens on brokers and dealers may discourage them from
making transactions in our Common Stock. This could severely limit the market
price and liquidity of our securities and the ability of purchasers to sell any
of the Shares acquired in this offering in the secondary market. That, in turn,
could materially and adversely affect the market price and severely limit the
liquidity of our Common Stock.

USE OF PROCEEDS

All of the Shares offered hereby are being offered by the Selling
Shareholders. The Company will not receive any of the proceeds from the sale of
the Shares. See "Selling Shareholders." Assuming exercise in full of the
Warrants, the Company would receive approximately $2,941,604 upon such exercise,
which would be used for general corporate purposes and working capital. The
Warrants are currently out of the money and until the trading price for the
Common Stock is greater than the exercise price for the Warrants, the Company
does not expect the Warrants to be exercised

SELLING SHAREHOLDERS

The information with respect to ownership is as of approximately February
10, 1999, and does not reflect changes thereto subsequent to such date.

The following tables set forth certain information about the Selling
Shareholders, including the number of shares of Common Stock being registered
hereunder and that may be offered for sale from time to time by the Selling
Shareholders. The Shares listed below consist of 1,946,617 shares of Common
Stock that are currently issued and outstanding, and 978,401 shares of Common
Stock that are subject to certain outstanding Warrants and that may be issued
upon exercise of such Warrants. Except as noted below, the Shares offered for
sale constitute all of the shares of Common Stock known to the Company to be
beneficially owned by the respective Selling Shareholders, and following the
offering and sale of the Shares, to the best of the Company's knowledge, none of
the Selling Shareholders will beneficially own more than one percent of the
issued and outstanding shares of Common Stock. In addition, other than as
described below, none of the Selling Shareholders has held any position or
office with the Company or had or have any material relationship with the
Company.

Of the 2,925,018 Shares being offered hereunder on behalf of the Selling
Shareholders, 1,534,010 shares were originally issued and sold to certain
foreign investors in a private offering in May 1998 at a price of $4.00 per
share, 112,607 shares were issued upon conversion of certain Company debt in
September 1997 at a conversion rate of $.65 per share, 200,000 shares were
issued in May 1998 as consideration for consulting services to the Company at a
deemed price per share of $4.00 and the Company issued 100,000 shares at a price
of $1.50 per share upon exercise of warrants granted in September 1997 as part
of a Company financing. In addition, this Prospectus includes 978,401 shares of
Common Stock issuable upon exercise of certain outstanding Warrants granted by
the Company to various third-parties in 1998 in consideration for services
provided to the Company. The Warrants consist of the following: (i) warrants for
200,000 shares granted to Berliner Freiverkehr AG in April

13
<PAGE>

1998 at an exercise price of $4.00 per share (the "Berliner Warrant") in
consideration for financial consulting services valued at approximately $77,000
rendered to the Company in Germany; (ii) warrants for 500,000 shares granted to
National Day Corporation in May 1998 at an exercise price of $4.00 per share
(the "National Day Warrant") in consideration for its efforts and assistance in
raising capital for the Company, in providing certain short-term bridge loans to
the Company, and making introductions to foreign brokers and investors, which
services were valued at approximately $50,000; (iii) warrants for 153,401 shares
granted to certain foreign brokers and their affiliates in May 1998 at an
exercise price of $4.00 per share (the "Brokers' Warrants") in consideration for
their assistance in connection with the Company's private offering of Common
Stock to foreign investors in May 1998, which services were valued at
approximately $15,340; and (iv) warrants for 175,000 shares granted to
GlobeMedia AG in June 1998 at an exercise price of $4.00 per share (the
"GlobeMedia Warrants") in consideration for certain media, marketing and
publication relation services for the Company in Europe, which services were
valued at approximately $22,500. See "Description of Securities." Subsequently,
in January 1999, the Company repriced the National Day Warrant to an exercise
price of $1.406 per share, in consideration for on-going consulting services
performed by the consultant. If the market price of the Common Stock does not
exceed the applicable exercise prices for the Warrants, the Company does not
believe that any such Warrants will be exercised.

The Company has agreed with each of the Selling Shareholders, pursuant to
the terms of the Warrants, the purchase agreements by which certain of the
Selling Shareholders acquired their Shares and otherwise, to use its best
efforts to register the Shares. Pursuant to these arrangements, the Company will
pay all expenses in connection with the registration and sale of the Shares,
except any selling commissions or discounts allocable to sales of the Shares,
fees and disbursements of counsel and other representatives of the Selling
Shareholders, and any stock transfer taxes payable by reason of any such sale.

Shares Issuable Upon Exercise of Outstanding Warrants

<TABLE>
<CAPTION>
Number of Shares
Underlying Warrants
Beneficially Owned Number of Shares
Name of Selling Shareholder Before Offering Offered for Sale
--------------------------- --------------- ----------------
<S> <C> <C>
National Day Corporation........................... 629,057 500,000
Berliner Freiverkehr AG............................ 200,000 200,000
GlobeMedia AG...................................... 125,000 125,000
Alexander Nill..................................... 26,700 26,700
Jan Nicolaus Voswinckel............................ 1,000 1,000
Stefan Kallabis.................................... 11,625 11,625
Martin Lechner..................................... 13,545 13,545
Thorsten Wagner.................................... 5,000 5,000
ACP Venture AG..................................... 5,500 5,500
International Investment Management Limited........ 25,000 25,000
Nick Nugent........................................ 25,000 25,000
Value Management & Research GmbH................... 25,000 25,000
Walter Edgar Seiz.................................. 3,977 3,877
Simon Ford......................................... 3,877 3,877
Edward C. Henschel................................. 3,877 3,877
ECM Securities Services GmbH....................... 3,400 3,400
--------- -------
TOTAL:............................................. 1,107,558 978,401
========= =======
</TABLE>

14
<PAGE>

Shares Issued in Debt Conversion

Thad E. Wardall is a director of the Company. In September 1996, the
Company borrowed $125,000 from Mr. Wardall evidenced by a secured promissory
note. Subsequently, in August 1997, the Company cancelled the promissory note
and reissued to Mr. Wardall a new convertible promissory note for the
outstanding principal on the prior note. In October 1997, Mr. Wardall converted
the principal plus accrued interest on the new note into 112,607 shares of
Common Stock, which shares are being registered for resale hereunder. Following
the offering of all of the Shares hereunder (including the shares issuable upon
exercise of the Warrants), Mr. Wardall will beneficially own approximately 7.6%
of then issued and outstanding shares of Common Stock. See "Management" and
"Principal Shareholders."

Shares Issued for Consulting/Financing Services

Number of Shares
Beneficially Owned Number of Shares
Name of Selling Shareholder Before Offering Offered for Sale
--------------------------- --------------- ----------------
<S> <C> <C>
Starward Securities, Ltd............... 208,386 200,000
Matrix Securities Pty., Ltd............ 121,700 100,000
------- -------
TOTAL:................................. 330,086 300,000
======= =======
</TABLE>

Shares Issued in May 1998 Private Placement

<TABLE>
<CAPTION>
Number of Shares
Beneficially Owned Number of Shares
Name of Selling Shareholder Before Offering Offered for Sale
--------------------------- --------------- ----------------
<S> <C> <C>
Bankers Trust International PLC......... 500,000 500,000
Prime Asset Management Ltd.............. 100,000 100,000
Bank Vontobel & Co. AG.................. 145,000 145,000
Oyster SICAV-Europe Value............... 80,000 80,000
ACP Ventures AG......................... 55,000 55,000
Alexander Nill.......................... 55,000 55,000
Dieter Nill............................. 50,000 50,000
Sigi Piel............................... 50,000 50,000
VMR Fund-Strategie Quadrat.............. 50,000 50,000
Thorsten Wagner......................... 50,000 50,000
Martin Lechner.......................... 30,000 30,000
Karsten Schiebler....................... 27,500 27,500
Abakus Fonds UI......................... 25,000 25,000
Patrik Cohn............................. 25,000 25,000
VMR Fund-Shareholder Value.............. 20,000 20,000
Fred Kompauer........................... 15,000 15,000
Peter Gorg.............................. 10,000 10,000
Joachin Paech........................... 10,000 10,000
Mathias von Marcard..................... 8,000 8,000
Rudolf Fichtner......................... 7,900 7,900
Siegfried Piel.......................... 7,500 7,500
Dr. Olaf Hein........................... 7,000 7,000
Claes Smith-Solbakken................... 5,000 5,000
Eckbrecht Belka......................... 5,000 5,000
Dr. Hans-Christian Donnerstag........... 5,000 5,000
Markus Gies............................. 5,000 5,000
</TABLE>

15
<PAGE>

<TABLE>
<CAPTION>
Number of Shares
Beneficially Owned Number of Shares
Name of Selling Shareholder Before Offering Offered for Sale
--------------------------- --------------- ----------------
<S> <C> <C>
Maria Gies.............................. 5,000 5,000
Aloys Korioth........................... 5,000 5,000
Gunter Kramer........................... 5,000 5,000
Norbert Tingelhoff...................... 5,000 5,000
Leonhard Teutrine....................... 5,000 5,000
Ernst Wild.............................. 5,000 5,000
Christian Zehendner..................... 5,000 5,000
Bernarda Bole-Vekar..................... 4,500 4,500
Horst Bernges........................... 4,000 4,000
Kurt Koenig............................. 4,000 4,000
Ulf Lesemann............................ 4,000 4,000
Harald & Marianne Britz................. 3,500 3,500
Dr. Ernst Fischer....................... 3,500 3,500
Gerhard and Hannelore Goldschmitt....... 3,500 3,500
Cherno Jobatey.......................... 3,500 3,500
Thorsten Wobig.......................... 3,500 3,500
Fritz Gutschmitt........................ 3,000 3,000
Wolfgang Heichel........................ 3,000 3,000
Klaus Heidenreich....................... 3,000 3,000
Gunter and Anita Hornung................ 3,000 3,000
Dr. Rainer and Andrea Marquart.......... 3,000 3,000
Fritz Oehler............................ 3,000 3,000
Dr. Marcus Optiz........................ 3,000 3,000
Dr. Walter Reinhard..................... 3,000 3,000
Irmtraut Becker......................... 2,500 2,500
Christoph Brunning...................... 2,500 2,500
Walter Cullmann......................... 2,500 2,500
Siegfried Drautz........................ 2,500 2,500
Jurgen Gebhardt......................... 2,500 2,500
Walter Karitzki......................... 2,500 2,500
Helga Marienfeld........................ 2,500 2,500
Wolfgang Pfeiffer....................... 2,500 2,500
Schabin Sattari......................... 2,500 2,500
Thomas Schinogel........................ 2,500 2,500
Helmut Senft............................ 2,500 2,500
Hermann Huber........................... 2,110 2,110
Christoph Baer.......................... 2,000 2,000
Andreas Bernd........................... 2,000 2,000
Juergen Braun........................... 2,000 2,000
Hans Jurgen Eschmann.................... 2,000 2,000
Karin Figge............................. 2,000 2,000
Andreas Gunther......................... 2,000 2,000
Charlotta Heuer......................... 2,000 2,000
Roland und Maike Konig.................. 2,000 2,000
Kurt Kosse.............................. 2,000 2,000
Michael Roussinos....................... 2,000 2,000
Roland und Waltraut Schuster............ 2,000 2,000
Wienfried Siebert....................... 2,000 2,000
Josef Stiefvater........................ 2,000 2,000
Edwin Thoma............................. 2,000 2,000
Jurgen Wagner........................... 2,000 2,000
Ada Wilcke.............................. 2,000 2,000
Peter Nosek............................. 1,800 1,800
John Mantle............................. 1,500 1,500
Michael Karow........................... 1,100 1,100
Reiner Balzer........................... 1,000 1,000
Elisabeth Baumgartner................... 1,000 1,000
Dieter Bidlingmaier..................... 1,000 1,000
Manfred Breu............................ 1,000 1,000
Gabriele Cuno........................... 1,000 1,000
Matthias Eckert......................... 1,000 1,000
Bernd Heimburger........................ 1,000 1,000
Guido Jesemann.......................... 1,000 1,000
Nicolaus Loibl.......................... 1,000 1,000
Ermias Mekasha.......................... 1,000 1,000
</TABLE>

16
<PAGE>

DIVIDEND POLICY

The Company has never declared or paid any cash dividends on the Common
Stock. The Company currently anticipates that it will retain future earnings for
use in the operation and expansion of its business and does not anticipate
paying cash dividends on the Common Stock in the foreseeable future. Any future
determination with regard to the payment of dividends will be at the discretion
of the Board of Directors and will be dependent upon the Company's future
earnings, financial condition, applicable dividend restrictions and capital
requirements and other factors deemed relevant by the Board of Directors.

CAPITALIZATION

The following table sets forth the short-term debt and capitalization of
the Company as of March 31, 1999:

<TABLE>
<CAPTION>
March 31,
1999
-----------
<S> <C>
Short-term debt $ 564,982
Long-term liabilities 255,924
Shareholders' equity:
Common Stock, $.01 par value, 50,000,000 authorized shares
and 14,616,952 shares issued and outstanding at March 31, 1999 146,169
Preferred Stock, $.01 par value, issuable in series: 10,000,000 shares
authorized; no shares issued and outstanding --
Additional paid-in capital 8,537,409
Retained deficit (6,554,090)
-----------
Total shareholders' equity 2,129,488
-----------
Total capitalization $ 2,950,394
===========
</TABLE>

17
<PAGE>

INTERACTIVE OBJECTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION

Statement of Forward-Looking Information

Overview

The Company was incorporated in the State of Washington in October 1995 and
operated under the name Neoteric Media, Inc., d/b/a Interactive Objects, until
August 1997. In August 1997, pursuant to the terms of an acquisition agreement
with Asia Pacific Chemical Engineering Corp., a publicly-held Utah corporation
with nominal assets and liabilities ("APEC"), Neoteric Media entered into a
business combination with APEC. In the Neoteric Acquisition, the shareholders of
Neoteric Media exchanged their stock for a majority of the then-outstanding
common stock of APEC and Neoteric Media became a wholly-owned subsidiary of APEC
(which changed its name to Interactive Objects). For accounting purposes, the
Neoteric Acquisition was accounted for as a reverse purchase, with Interactive
Objects as the continuing entity. The Company's audited financial statements
include, since August 1997, the results of APEC operations, which were
insignificant.

From January 1, 1999 to March 31, 1999, substantially all of the Company's
revenues were derived from software consulting services. To date, the Company
has provided consulting services to predominately Fortune 1000 companies,
including Microsoft Corporation, SAFECO Insurance Companies of America, Eddie
Bauer Inc., Airborne Express, Paccar, Inc., Pinnacle, CourtLink, Port Townsend
Paper Corporation, and Labor Ready, Inc. During this period, the Company created
a new Information Appliances division which focuses on emerging technology and
strategic partnering with hardware, software and platform providers to deliver
to consumers the tools they want to work, play, and function more efficiently.
The development of the Microsoft Mobile Audio Player, the first digital audio
player software for the Microsoft Windows CE operating system, is a product
resulting directly from this division's talent and focus. In addition, the
Company has signed an ongoing contract with Microsoft for the continuing
development of streaming technology for the Windows CE operating system. With
support for Windows Media Technologies, the Windows Media Audio (WMA) codec, as
well as MP3, the Information Appliances division is positioned on the cutting
edge of digital audio software technology.

The Company anticipates that it will begin to devote further resources to
product development in fiscal 1999. All costs incurred in the research and
development of software products and enhancements to existing products have been
expensed as incurred and the cost of acquired software products have been
capitalized. The Company's capitalized software is amortized as required by GAAP
principles beginning in the first quarter of 1998 when the product was released
for sale to the public.

18
<PAGE>

In the first quarter of 1998, the Company released two software component
products and acquired a Novell-based software component product. Subsequent to
such acquisition, the Company decided to focus exclusively on Microsoft-based
software component products. The Company also released a suite of seven
components in October 1998. Until recently, the Company has marketed its
products solely through the Internet. As a result of low product sales, the
Company is focusing more attention in 1999 on development and licensing of its
intellectual property, building strategic relationships, and enhancing its
software consulting group.

Effective October 1998, the Company announced a corporate restructuring
plan. As part of this plan, the Company reduced its employee base from 23 to 13
employees, most of whom were first-level supervisors and administrative staff.
In addition, the Company promoted Steve Wollach, the Company's Chief Financial
Officer and Director, to serve as the Company's President, replacing Matthew
Schiltz. Mr. Schlitz was a consultant hired by the Company in October 1998 to
serve as the interim Chief Executive Officer in connection with the resignation
of Ryan Smith, the former Chief Executive Officer of the Company. Mr. Schiltz
will continue to serve as an advisor to the Company and its Board of Directors
through June, 1999. In connection with the restructuring plan, the Company
included a provision for up to $310,000 for severance and settlement payments in
connection with the resignations of Ryan Smith and John Guarino from their
positions as officers and directors of the Company. In the first quarter of
1999, the Company settled all disputes with Messrs. Smith and Guarino. Also in
connection with the restructuring plan, the Company repriced all outstanding
stock options held by current Company employees and directors to $1.406 per
share, the closing trading price of the Common Stock on the OTC Bulletin Board
on November 4, 1998.

Effective March 31, 1999, the Company acquired Avatar Interactive, Inc., a
Washington corporation ("Avatar"). The acquisition of Avatar was effected by
means of a forward merger of a newly formed Washington corporation and wholly-
owned subsidiary of the Company with and into Avatar. Avatar became a wholly-
owned subsidiary of the Company. The merger was accounted for as a pooling-of-
interests.

Results of Operations

All comparisons within the following discussion are with the corresponding
periods in the previous year, unless otherwise stated.

Three Months Ended March 31, 1999 and 1998

Revenues. Revenues for the three-month periods ended March 31, 1998 and
1999 increased by 22.4% from $476,302 to $582,830, respectively. During the
three-month period ended March 31, 1999, substantially all of the Company's
revenue was generated by its software consulting services. The increase in gross
revenue is attributable primarily to consulting services and the Avatar Merger.
During the first quarter of 1999, the Company had insignificant revenue from
product sales. In prior periods, the Company had no revenues from product sales.

Labor and Benefits Expenses. Labor and benefits includes all internal labor
costs and other direct costs related to project performance, such as project
specific independent contractor fees, labor costs, supplies and specific project
related expenditures. The Company's labor and benefits expenses for the three-
month periods ended March 31, 1998 and 1999 increased by 29.2% from $685,223 to
$885,228, respectively. Labor and benefits consisted exclusively of salaries,
taxes and benefits. The increase in labor and benefits expenses from the first
quarter of 1999 to the same period in 1998 was directly attributable to the
increase in consulting services and contract labor for those services and the
investment into the Information Appliances division.

At March 31, 1999, the Company had ten employees in software consulting
services and product development, four employees in sales and marketing and nine
employees in general and administrative. In addition, the Company hires
independent contractors to service project demand for the Company's consulting

19
<PAGE>

services on a project by project basis, and expects to continue to staff
projects with both company employees and independent contractors. The Company
expects that it will hire additional staff if and as needed to meet demand from
current clients and prospective clients whose projects are anticipated to
commence within ninety days after hiring.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the three-month periods ended March 31, 1998 and
1999 increased by 20.5% from $410,009 to $494,169, respectively. In each period,
these expenses consisted primarily of employee recruiting, travel, professional
fees, occupancy costs, telephone and related Internet connectivity fees,
computer network costs, office expenses and supplies, marketing, advertising and
new business development costs. Overall, selling, general and administrative
expenses as a percentage of gross revenue were 86.1% for the three-month period
ended March 31, 1999 as compared to 84.8% for the same period in 1998. Selling,
general and administrative expenses have increased due to increased staffing,
investment in infrastructure and associated expenses necessary to manage and
support the Company's growing operations. The Company believes that its selling,
general and administrative expenses will increase in dollar amount for fiscal
1999 as a result of an anticipated expansion of the Company's administrative
staff required to support its growing operations and as a result of an increase
in expenses associated with being an Exchange Act reporting company.

Interest Income/Expense. Interest expense represents interest expense on
Company debt. Interest income for the three-month period ended March 31, 1999
was $27,017 compared with interest expense for the three-month period ended
March 31, 1998 of $3,414. This change was primarily due to earnings from
interest bearing savings accounts attributable to the proceeds from the
Company's 1998 private placement of Common Stock.

Net Loss. The Company recognized a net loss for the three-month periods
ended March 31, 1998 and 1999, of $622,344 and $769,550, respectively. The net
loss as a percentage of gross revenue were 130.7% for the three month period
ended March 31, 1999 as compared to 132.0% for the same period in 1998. The
increase in net loss on an absolute basis is due primarily to increased general
and administrative costs and investment into the Information Appliances
division.

Years Ended December 31, 1998 and 1997

Revenue. Revenue for the years ended December 31, 1998 and 1997 was
approximately $2,123,000 and $366,000 respectively. During the year-ended
December 31, 1998, substantially all of the Company's revenue was generated by
its software consulting services. The Company released its first product in the
first quarter of 1998, did not make any product sales prior to January 1, 1998
and has had insignificant product sales through 1998. The 580% increase in gross
revenue is attributable primarily to the Company's software consulting agreement
with SAFECO, which accounted for substantially all of the Company's revenue in
the year-ended December 31, 1998. During the year-ended December 31, 1998, the
Company had insignificant revenue from product sales. In prior periods, the
Company had no revenues from product sales. See "Risk Factors.

Labor and Benefits Expenses. Labor and benefits includes all internal labor
costs and other direct costs related to project performance, such as project
specific independent contractor fees, labor costs, supplies and specific project
related expenditures. The Company's labor and benefits expenses increased by
436% from approximately $787,000 for the year-ended December 31, 1997 to
approximately $3,428,000 for the year-ended December 31, 1998. Labor and
benefits consisted exclusively of salaries, taxes and benefits. The increase in
labor and benefits expenses from fiscal 1997 to fiscal 1998 was directly
attributable to increased costs and independent contractor fees arising out of
the Company's consulting contract with SAFECO, as well as the Company's hiring
of new employees and increasing salaries to senior management. In addition, the
Company hired additional employees during the second half of 1997 and year-ended
December 31, 1998 to meet increased demand and had ten full-time employees at
December 31, 1998, a decrease of 12 from 22 on December 31, 1997.

20
<PAGE>

On December 31, 1998, the Company had seven employees in product
development and software consulting services, one employee in sales and
marketing and two employees in general and administrative. In November 1998 the
Company implemented a restructuring plan, including a reduction in the number of
employees from 23 to 13 total employees. In addition, the Company hires
independent contractors to service project demand for the Company's consulting
services on a project by project basis, and expects to continue to staff
projects with independent contractors. The Company believes that staffing client
projects with independent contractors results in the Company incurring costs
that are less than those the Company would experience if projects were
internally staffed. The Company expects that it will hire additional staff if
and as needed to meet demand from current clients and prospective clients whose
projects are anticipated to commence within ninety days after hiring. The
Company expects that its independent contractor costs will remain relatively
constant as it takes on additional consulting contracts that offset decreases
resulting from the termination of its consulting agreement with SAFECO.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses were approximately $2,957,000 and $1,256,000 for the
years-ended December 31, 1998 and 1997, respectively. The amounts for fiscal
1998 includes approximately $1,085,000 as a one-time non-cash compensation
expense for the value of Company securities issued during such period in
exchange for consulting and other services. In each period, the other expenses
consisted primarily of employee recruiting, travel, professional fees, occupancy
costs, telephone and related Internet connectivity fees, computer network costs,
office expenses and supplies, marketing, advertising and new business
development costs. Overall, selling, general and administrative expenses as a
percentage of gross revenue were 139% for the year-ended December 31, 1998 as
compared to 343% for fiscal 1997. The increase in selling, general, and
administrative expenses was primarily a result of the one-time non-cash
compensation expense recorded for securities issued for consulting services and
other services in connection with the Company's financing and investor relations
efforts and, secondarily, of an increase in the Company's sales, marketing and
advertising efforts in anticipation of growth and its 1998 product releases and,
secondarily, of increased professional fees in connection with its financing
efforts in 1998 and the Company entering into a lease for additional office
space. The decrease as a percentage of gross revenue was due to the Company's
increased revenues growing at a greater rate than expenses.

Management believes that selling, general, and administrative expenses will
decrease as a percentage of gross revenue in future periods. General and
administrative expenses have increased due to increased staffing, investment in
infrastructure and associated expenses necessary to manage and support the
Company's growing operations. The Company believes that its general and
administrative expenses will increase in dollar amount for fiscal 1998 as a
result of an anticipated expansion of the Company's administrative staff
required to support its growing operations and as a result of an increase in
expenses associated with being an a Exchange Act reporting company. The Company
anticipates that it will begin to devote further resources to product
development in fiscal 1998. All costs incurred in the research and development
of software products and enhancements to existing products have been expensed as
incurred and the cost of acquired software products have been capitalized. The
Company's capitalized software will be amortized as required by GAAP principles
beginning in the first quarter of 1998 when the product was released for sale to
the public.

Interest Expense. Interest expense represents interest expense on Company
debt. Interest expense increased to approximately $16,000 in fiscal 1998 from
$7,000 for fiscal 1997, due to increased borrowings during 1998.

Income Tax. From inception until August 1997, the Company operated as an S-
corporation. As a result, the Company's earnings have been taxed directly to the
Company's shareholders at their individual federal income tax rates, rather than
the Company. The Company became a taxable C-corporation in August 1997. To date,
the Company has not paid income taxes.

21
<PAGE>

As of December 31, 1998, the Company had net operating loss carry-forwards
for federal income tax purposes of approximately $1,297,000. The federal net
operating loss carry-forwards expire in 2012.

Net Loss. The Company recognized a net loss of approximately $(4,146,000)
(representing 195% of gross revenue) for fiscal 1998 as compared to a net loss
of $(1,685,000) (representing 461% of gross revenue) for fiscal 1997. The
increase in net loss on an absolute basis is due primarily to the increased
expenses described above which have been only partially offset by increased
revenues from the Company's consulting services.

Liquidity and Capital Resources

As a result of hiring additional employees, increasing marketing and
product development efforts in anticipation of product releases in 1998, the
Company's capital requirements have been and will continue to be significant and
its cash requirements have been and will continue to exceed cash flows from
operations. As a result, the Company has been substantially dependent on sales
of its equity securities, cash flow from operations, and borrowings from
affiliates.

At March 31, 1999, the Company had cash in the aggregate amount of
approximately $2,268,107, primarily attributable to the private placement
financing from May 1998. The Company's working capital increased by $2,456,625
from $(654,813) to $1,801,812 at March 31, 1998 and 1999, respectively. This
increase was primarily due to the receipt of cash proceeds from the 1998 private
placement.

Net cash used in operating activities was $485,112 for the three months
ended March 31, 1998, as compared to $606,355 for the three months ended March
31, 1999. The increase in net cash used in operating activities was primarily
attributable to the Company's operating loss of $769,550 and an increase in
accrued expenses from $11,044 to $109,695 for the three months ended March 31,
1998 and 1999, respectively.

Net cash used in investing activities was $138,223 for the three months
ended March 31, 1999, as compared to $96,881 for the three months ended March
31, 1998. The increase in net cash used in investing activities was primarily
attributable to a higher level of equipment purchases in the first quarter of
1999 compared to the first quarter of 1998.

Net cash provided by financing activities was $333,850 for the three months
ended March 31, 1999, as compared to $476,000 for the three months ended March
31, 1998. The increase in net cash provided by financing activities was
primarily attributable to the Company's redemption of Common Stock from two
shareholders and a decline in the amount of proceeds from notes payable.

Based on the Company's current proposed plans and assumptions relating to
product releases and sales, the Company anticipates that it will not require
additional capital financing through fiscal 1999. If the Company's plans change
or its assumptions prove to be inaccurate, the Company may be required to seek
additional equity and/or debt financing sooner than currently anticipated. The
Company has no current arrangements related to additional financing. In as much,
there can be no assurance that any additional financing will be available to the
Company when needed, on commercially reasonable terms, or at all. See "Risk
Factors."

The net amount of cash used in operating activities was $2,861,000 for
fiscal 1998, as compared to $728,000 for fiscal 1997. The increase in net cash
used in operating activities was primarily attributable to the Company's net
operating loss.

Net cash used in investing activities was $129,000 for fiscal 1998, as
compared to $279,000 for fiscal 1997. The decrease in net cash used in investing
activities was primarily attributable to decreases in purchases of equipment,
offset by increased capitalized software costs.

22
<PAGE>

Net cash provided by financing activities for fiscal 1998 was $6,074,000,
as compared to $1,206,000 for fiscal 1997. The increase in net cash provided by
financing activities was primarily attributable to the Company's sales of equity
securities in May 1998.

During May 1998, the Company sold 1,534,010 shares of Common Stock to
approximately 117 foreign investors in a private offering. The Company received
gross proceeds of approximately $6,136,040 from such offering, before costs
associated with the offering.

Additionally, in the first half of 1998, the Company borrowed and repaid
$600,000. National Day Corporation loaned such funds to the Company pursuant to
three demand promissory notes which bore interest at 12% per annum. The Company
used part of the proceeds from the Common Stock offering in May 1998 to repay
this loan.

New Accounting Pronouncements

Statement of Financial Standards No. 133 ("SFAS 133"), "Accounting for
Derivative Instruments and Hedging Activities" established accounting and
reporting standards for derivative instruments and for hedging activities. SFAS
133 has no impact on the Company's financial statements, because the Company
does not currently engage in any derivatives or hedging activities.

Statement of Financial Standards No. 134, "Accounting for Mortgage-Backed
Securities Retained after the Securitization of Mortgage Loans Held for Sale by
a Mortgage Banking Enterprise" does not apply to the Company.

Year 2000 Compliance

Many companies are currently expending significant resources in order to
address the "Year 2000" issue. Expenditures to address the Year 2000 issue often
involve the modification of legacy and other existing software systems rather
than the development of new systems. Because of the size of such expenditures,
companies may defer or cancel other new software development projects for which
such companies might otherwise have purchased products from the Company or
engaged the Company for consulting. Any reductions in revenues to the Company
resulting from other companies' focus on the Year 2000 issue could have a
materially adverse affect on the Company's business, results of operations and
financial condition.

The Company has commenced a review of its internal IT and non-IT systems.
The objective of the review is to address necessary code changes, testing and
implementation with the objective of taking corrective action based on the
results of such review. The Company could be materially and adversely affected
by costs or complications relating to code changes, testing and implementation
for its own systems or similar issues faced by its distributors, suppliers,
customers, vendors and the financial service organizations with which the
Company interacts. At this time, the Company does not expect the costs related
to achieving Year 2000 compliance will be significant.

The Year 2000 issue could affect the products that the Company sells. The
Company has reviewed its current products and believes that its products are
Year 2000 compliant and that the Year 2000 issue will not materially impact the
Company. However, to the extent that the Company's products prove to be non-
compliant or in the event of any dispute with any customer regarding whether the
Company's products are compliant, the Company's business, results of operations
and financial condition could be materially and adversely affected.

23
<PAGE>

accuracy of Year 2000 testing methods and that remediation of Year 2000 issues
will be correctly implemented. The Company does not have a contingency plan to
address unexpected Year 2000 issues.

BUSINESS

The Company

The Company's business is focused on facilitating the rapid development and
delivery of quality solutions in the Internet and distributed PC environments
through its products and consulting services. The Company's newly-formed
Information Appliances division produces software products specifically designed
for embedded platforms, and the Business Objects division focuses on the
Company's historically object-oriented component products. The Consulting
Division provides consulting services to Fortune 1000 companies creating
sophisticated business solutions involving the intranet, extranet and Internet
development environments.

The Company was formed in 1995 as a Washington corporation under the name
Neoteric Media, Inc. d/b/a Interactive Objects ("Neoteric Media"). Since 1995,
the Company has grown primarily through two acquisitions. In August 1997,
pursuant to the terms of an acquisition agreement with Asia Pacific Chemical
Engineering Corp., a publicly-held Utah corporation with nominal assets and
liabilities ("APCEC"), Neoteric Media entered into a business combination with
APCEC (the "Neoteric Acquisition"). In the Neoteric Acquisition, the
shareholders of Neoteric Media exchanged their stock for a majority of the then-
outstanding common stock of APCEC and Neoteric Media became a wholly-owned
subsidiary of APCEC (which changed its name to Interactive Objects, Inc.).
Effective March 31, 1999, the Company acquired Avatar Interactive, Inc., a
Washington corporation ("Avatar"). The acquisition of Avatar was effected by
means of a forward merger of a newly formed Washington corporation and wholly-
owned subsidiary of the Company with and into Avatar, pursuant to the terms of
an Agreement and Plan of Merger dated March 31, 1999. Following the merger,
Avatar became a wholly-owned subsidiary of the Company.

Information Appliances Division

The Company's newly formed Information Appliances division develops
software that provides consumers with the tools they want to work, play, and
function more efficiently in today's modern environment. The focus of the
Information Appliances division is on developing applications specifically
designed for embedded platforms including devices such as portable palm-sized
PCs.

Mobile Audio Player

With the creation of the Information Appliances division, the Company's
engineering focus has expanded to the embedded systems platform. The Company
recently announced its new product, the Mobile Audio Player, a digital music
player for Windows CE, which contains the embedded systems platform. Mobile
Audio Player software was developed by the Company for Microsoft in March 1999,
and is the first stereo playback software for the Palm-size PC market in the
digital music industry. The Company sold the rights to its Multimedia Player
Technology for the Windows CE platform, which includes the Mobile Audio Player,
to Microsoft in March 1999. The Company has retained rights to this technology
for other platforms.

The Company integrated Windows Media Audio ("WMA") into the Mobile Audio
Player. With almost twice the compression of MP3 and half the file size, the
Mobile Audio Player's support of WMA effectively doubles the storage capacity of
music files on Windows CE while increasing the device's multi-tasking abilities.

In addition to codec support for MP3 and WMA, the Mobile Audio Player was
developed to support content protection technology. Digital Rights Management
technology enables encryption of copyrighted audio files to ensure authenticity
of the audio files as well as the legal right to use these files. By
incorporating this new technology into the Mobile Audio Player, the Company is
actively engaged in the fight against digital music

24
<PAGE>

piracy. Taking advantage of advances in Microsoft Windows CE, the Mobile Audio
Player has a vivid color "skin" interface. Skins, interchangeable color
interface designs, provide the end-user with player customization currently
available only on the desktop PC.

Future Development Technologies

Embedded systems can be found in the appliances consumers use every day:
cellular phones, car stereos, VCRs, televisions, refrigerators, elevators, and
answering machines. The Information Appliances division intends to make a strong
contribution to the future of embedded system devices by focusing development
efforts on making the devices consumers use in their lives better and smarter,
and by enhancing their usefulness with improved functionality.

Business Objects Division

Historically, the Company's products have been designed for use primarily
on the Microsoft suite of visual programming languages including Visual
Basic(R), Visual C++(R) and Visual FoxPro(R) and have been marketed to corporate
and professional developers for use in a variety of environments, including
multi-tier client-server, intranet, extranet and Internet environments. The
Company's original products are reusable, modular software components designed
to work across multiple operating platforms. As a result, corporate and
professional developers are able to focus on the core functionality of the
applications they are developing -- designing and constructing their
applications more efficiently. The Company released two components in the first
quarter of 1998 and released a suite of four additional components in October
1998.

Visual Gateway Interface ("VGI"), the Company's first product released in
the first quarter of 1998 is a fully integrated, object-oriented Microsoft-based
development tool. VGI allows developers to create server-independent, Web-based
applications able to run on any NT Web server, without having to learn a new
scripting language. VGI was created to solve a problem Web programmers
consistently encounter: the fact that different gateways and Web servers support
different scripting languages and/or protocol specifications. As a result,
visual programmers were required to learn and use multiple tool sets to create
separate versions of the same application for deployment across the different
servers. VGI provides a familiar, standards-based interface that visual
programmers can use to create a single version of a Web application that runs on
all popular Web servers without needing to learn and use the Web server specific
scripting language (e.g., VBScript, JavaScript, Perl, etc.). This tool allows
visual programmers to concentrate on the development and enhancement of the Web
application itself rather than on the protocols necessary to run them. By
simplifying the method for integrating standard Web protocols into the
developer's native visual application environment, VGI provides an easy-to-use
framework for creating and porting visual applications to the Web. Sales of VGI,
to date, have been insignificant.

The Visual Mail Interface ("VMI") product suite is a series of four
reusable, object-oriented components that give developers the ability to create
and implement a variety of electronic mail applications without having to learn
specific e-mail protocols. Interactive Objects released VMI in October 1998.
Componentized and reusable, VMI allows for the easy assimilation of e-mail
capabilities into existing or new applications from either the client or server
side. From requisition and form routing, to automatic response mechanisms, VMI
lets developers quickly and easily add innovative e-mail functionality to their
applications. Designed for COM-compliant development environments including
Visual Basic(R), Visual C++(R), Visual J++(R) and Delphi(R), VMI supports the
leading Internet and communication protocols: POP3, SMTP, MIME and Uuencode. The
Company markets VMI both as a suite and as individual components. Sales of VMI,
to date, have been insignificant.

25
<PAGE>

Consulting Division

With the acquisition of Avatar in March 1999, the Company expanded its
range of consulting services. Avatar, which became the consulting arm of
Interactive Objects, works from a client-centric business model encompassing the
complete software design, development, training and test cycle. Avatar is a
Microsoft Certified Solutions Provider with an established pool of talented
engineers skilled in Microsoft technologies. The Company intends to use the
combination of Avatar's training services, software development, testing lab and
IT consulting division to offer clients a full range of development services.

The Company has historically derived substantially all of its revenue from
its consulting services group. In 1998, substantially all of the Company's
revenues were the result of consulting contracts. These contracts provided
Interactive Objects valuable insight into the technology problems confronting
medium and large companies. With the acquisition of Avatar, the Company believes
that its consulting services division is able to create sophisticated software
business solutions involving intranet, extranet and Internet development
environments. In addition to providing business solutions to enterprise
companies, the Company's consultants will be able to provide valuable
intellectual property research and development information for creation of new
and innovative products.

Specializing in Internet-based technologies and protocols, the Company
targets primarily large enterprise-caliber companies. Through its object-
oriented, standards-based architectures, the Company can provide sophisticated
solutions and interfaces connecting enterprise corporations to relevant
communities of interest, their distributors, sales force, employees, clients and
business partners. The Company believes that, with a thorough understanding of
re-useable, modular application architecture, the Company's consultants can
deliver enterprise business solutions that bridge the gap between legacy
information and today's cutting-edge Web technology. Emphasizing collaboration,
coordination and communication, the Company intends to be a premium service
provider of complex business solutions to predominately Fortune 1000 companies.
The Company is currently dependent upon a few major customers, including
Microsoft Corporation, SAFECO Insurance Companies of America, Eddie Bauer Inc.,
Airborne Express, Paccar, Inc., Pinnacle, CourtLink, Port Townsend Paper
Corporation, and Labor Ready, Inc. See "Risk Factors."

Because Internet development expertise is in demand, many companies do not
have the resources in-house to tackle particularly challenging applications. In
these cases, the Company intends to use its consultants to provide the technical
guidance on a project basis and solve the complex problems presented to them. By
working directly with the clients, the Company's consultants are able to see
first-hand the problems confronting corporate IS departments. The Company
believes that it creates a competitive advantage by developing the tools to
solve those problems. The customized tools created by the Company's consultants
to solve a particular problem today may serve to inspire or enhance the
Company's future products. See "Risk Factors."

The Company believes knowledge, technical skill and education play an
important role on a return of corporate investments. The Company's software
training services and experienced technical staff deliver leading-edge training
on Microsoft technologies that benefit the IT workforce and create a rewarding
learning environment for every student. The Company's most recently completed
consulting contract included 120 hours of Visual Basic 6.0 advanced training on
developer tools such as Active Server Pages, COM/DCOM, Visual InterDev and
enterprise development using Visual Basic for SAFECO in April 1999. The
Company's Consulting division, Avatar, successfully trained seven employees from
SAFECO's Information Services Department. The Company also has signed a long-
term consulting contract with Microsoft to develop Internet solutions for the
Desktop Finance Division. Under the terms of the contract, Avatar will provide
project management, design, planning, implementation, testing and support
services for an unnamed commercial Internet product within the Desktop Finance
Division at Microsoft. In addition, Avatar has an ongoing testing contract with
Microsoft and continues working on smaller projects for SAFECO. The Company has
a new consulting agreement to provide instructor-led training on Microsoft
technologies for the nation's leading provider of temporary manual labor to

26
<PAGE>

the light industrial and small business markets. This new consulting engagement
provides 160 hours of instructor-led training on the Microsoft Windows NT and
Windows 95 operating systems to 15 corporate MIS Department employees. Avatar
will hold training sessions at the new client's headquarters, allowing the
employees in training to focus on their specific business needs and to trouble
shoot in a real-world environment. See "Risk Factors."

The Company is cognizant of the competitive nature in the professional IS
services arena. In an effort to provide the highest level of flexibility and
responsiveness to its clients and to limit the growth of its employee base, the
Company assembles teams of independent programmers for each project based on the
individual requirements of that project. Utilizing this business model, the
Company can limit the risks inherent in assembling large teams of low-level
programmers while maintaining management of the project and the ability to
provide the highest level of service. See "Risk Factors."

The Company believes that its consulting services provide many
opportunities and benefits to the Company, including:

. Market Research--By working directly with large corporations, the Company
gains timely insight into the needs of the information services market. The
Company analyzes and utilizes this market research information to identify
opportunities for the development of new components. The Company believes
that consulting projects will not only enable the Company to further
develop its core expertise while keeping apprised of the needs of the
market, but will also foster a competitive advantage for the Company since
this market research is not an added expense. See "Risk Factors."

. Development--The customized tools created to solve business problems on
consulting engagements can be further developed to inspire or enhance
products to be developed by the Company. See "Risk Factors."

. Product Exposure--The solutions implemented to business problems
encountered on a particular consulting engagement may require the use of
the Company's existing products, resulting in increased awareness and
exposure of the Company, its products, and personnel.. See "Risk Factors."

The Interactive Objects Strategy

The Company's objective is to leverage the collective intellectual property
and talent of multiple organizations to generate research, consulting, and
licensing revenue. The Company's direction is to target strategic partners,
develop intellectual property, be involved in complimentary merger and
acquisitions, and to implement a communications infrastructure to support
multiple member organizations' requirements for information exchange and group
collaboration. The Company intends to achieve these objectives by leveraging the
intellectual properties resulting from strategic mergers and acquisitions,
consulting relationships and software development. The Company intends to
develop a pool of valuable intellectual property to be shared among all its
divisions.

Sales, Distribution and Support

The Company distributes its VGI and VMI products through Digital River,
Inc. and its network of over 500 reseller sites. The Company also has a
distribution relationship with Developer.com and Developer Direct, on-line
distribution channels that target professional software developers. The Company
intends to increase awareness of its products, to provide customer and technical
support and to encourage dialogue regarding its products by maintaining a World
Wide Web site: http://www.iobjects.com. The Company's current sales and support
strategy for its software components relies almost exclusively on the Internet
and electronic software

27
<PAGE>

distribution. This marketing strategy enables the Company to eliminate most of
the manufacturing, distribution and inventory costs traditionally associated
with selling software. See "Risk Factors."

Marketing

The Company's marketing activities focus on two objectives: raising
awareness of the Company's development efforts and products, while providing
current and accurate information about the consulting services and corporate
focus. The Company intends to establish an easily recognized brand image and an
easy-to-navigate, fast and efficient web site, with a redesigned image, logo and
web site, to provide its partners, clients, customers and investors with
accurate information. The Company's website provides cost-effective publicity of
the Company and products while advertising the services and investment
opportunity. The website also provides the public with accurate, timely, and
compelling information about the Company by highlighting its latest press
releases, consulting activities, investor relations information and extensive
developments relating to past, current and future engineering efforts.

Media and analyst relations will remain a core component to the Company's
promotional campaign. The Company believes that press coverage of the Company is
a cost-efficient way to increase visibility and establish credibility. The
Company has already received positive coverage in Web Techniques, The Seattle
Times, The Seattle Post-Intelligencer, Washington CEO magazine, Puget Sound
Business Journal, Business Week, and CNET's electronic magazine AnchorDesk. The
Company intends to continue to invest in this channel through press/analyst
tours with the objective of generating further interest and visibility in
industry, general business and regional publications.

Acquisitions

The software industry has experienced and is expected to continue to
experience a significant amount of consolidation. While the Company expects that
it will grow internally, the Company continually evaluates potential
acquisitions of complementary businesses, products and technologies, that among
other things, could expand the breadth and depths of its products and
organization. See "Risk Factors."

Competition

The market for IT consulting and contract development/software system
design services and training is extremely competitive. The principal competitive
factors in this market are thoroughness and ingenuity of solution proposed,
responsiveness to client proposal requests, reputation and price. Many of the
Company's competitors in the consulting arena have substantially greater
financial, management, marketing and technical resources than the Company. See
"Risk Factors."

The market for the Company's products is intensely competitive, subject to
rapid change, and can be significantly affected by new product introductions and
related marketing activities of industry participants. The Company's products
are targeted at the successful and emerging embedded systems market and, to a
lesser degree, the reusable component market. Development in the embedded
systems markets are not currently dominated by any single company. See "Risk
Factors."

Direct and indirect competitors in the embedded systems market include, but
are not limited to: Audible, BSQUARE Corporation, Sierra Imaging, Ilium
Software, Ruksun, and XAudio. Direct competitors of the Company's reusable
software components include Progress Software Corporation (Crescent division)
and Sheridan Software Systems, Inc., both of which produce components targeted
directly at visual developers and were early leaders in the visual component
market.

28
<PAGE>

The Company believes the principal competitive factors in these markets to
be: product quality, flexibility, performance, functionality and product
features, company reputation and price. While price is less significant than
other factors for corporate customers, price can be a significant factor for
individual developers.

Many of these direct and indirect competitors have longer operating
histories, more resources (financial, technical, and marketing), greater name
recognition and a larger installed base of customers than the Company. As a
result, these competitors may be able to respond more quickly to new or emerging
technologies and changes in customer requirements, or devote greater resources
to the development, promotion and sale of their products than the Company. The
Company believes that its product positioning and its dedication to high
quality, reliable products will enable it to gain competitive advantage in the
market. In addition, the Company's business objects are designed to interact
smoothly with established software systems.

The Company also faces competition from systems integrators and internal
development efforts. Some systems integrators possess industry-specific
expertise that may enable them to offer a single vendor solution where they
already have a reputation among potential customers. It is also possible that
new competitors or alliances among competitors will emerge and rapidly acquire
significant market share. The Company also expects that competition will
increase as a result of software industry consolidation. Increased competition
may result in price reductions, reduced gross margins and loss of market share,
any of which could materially and adversely affect the Company's business,
operating results and financial condition. See "Risk Factors."

Research and Development

The Company's consultants also serve as part of its research and
development arm identifying and defining new and innovative products that may
ultimately be sold. The Company did not incur any material research and
development expenses in the past 2 fiscal years.

Year 2000 Compliance

Many companies are currently expending significant resources in order to
address the "Year 2000" issue. Addressing the Year 2000 issue often involves the
modification of legacy and other existing software systems rather than the
development of new systems. Because of the size of such expenditures, companies
may defer or cancel other new software development projects for which such
companies might otherwise have purchased products from the Company or engaged
the Company for consulting. Any reductions in revenues to the Company resulting
from other companies' focus on the Year 2000 issue could have a materially
adverse effect on the Company's business, results of operations and financial
condition.

The Company is evaluating its third-party distribution and supply chain to
understand their ability to continue providing services and products through the
change to the year 2000. The Company is monitoring and working directly with key
vendors, product manufacturers, distributors and direct resellers to avoid any
business interruptions in the year 2000.

The Company has commenced a review of its internal IT and non-IT systems.
The objective of the review is to address necessary code changes, testing and
implementation with the objective of taking corrective action based on the
results of such review. The Company could be materially and adversely affected
by costs or complications relating to code changes, testing and implementation
of its own systems or similar issues faced by its distributors, suppliers,
customers, vendors and the financial service organizations with which the
Company interacts.

29
<PAGE>

or in the event of any dispute with any customer regarding whether the Company's
products are compliant, the Company's business, results of operations and
financial condition could be materially and adversely affected.

The forward looking statements referenced above are subject to a number of
risks and uncertainties, including the abilities of customers, vendors and other
third parties to solve timely their Year 2000 issues issues in a timely manner,
the accuracy of Year 2000 testing methods, and that remediation of Year 2000
issues will be correctly implemented. The Company does not have a contingency
plan to address unexpected Year 2000 issues.

Intellectual Property and Other Proprietary Rights

The Company relies primarily on a combination of copyright, trademark and
trade secret laws, confidentiality procedures and contractual provisions to
protect its proprietary rights. The Company also believes that factors such as
the technological and creative skills of its personnel, new product
developments, frequent product enhancements, name recognition and reliable
product maintenance are essential to establishing and maintaining a
technological leadership position. The Company seeks to protect its software,
documentation and other written materials under trade secret and copyright laws,
which afford only limited protection. The Company believes its current
intellectual property rights are sufficient to carry on its business as
currently conducted. Despite the Company's efforts to protect its proprietary
rights, unauthorized parties may attempt to copy aspects of the Company's
products or to obtain and use information that the Company regards as
proprietary. Policing unauthorized use of the Company's products is difficult,
and while the Company is unable to determine the extent to which piracy of its
software products exists, software piracy can be expected to be a persistent
problem. In addition, the laws of some foreign countries do not protect the
Company's proprietary rights as fully as do the laws of the United States. There
can be no assurance that the Company's means of protecting its proprietary
rights in the United States or abroad will be adequate or that competition will
not independently develop similar technology. See "Risk Factors."

The Company is not aware that it is infringing on the proprietary rights of
any third parties. There can be no assurance, however, that third parties will
not claim infringement by the Company of their intellectual property rights. The
Company expects that software product developers will increasingly be subject to
infringement claims as the number of products and competitors in the Company's
industry segment grows and the functionality of products in different industry
segments overlaps. Any such claims, with or without merit, could be time
consuming to defend, result in costly litigation, divert management's attention
and resources, cause product shipment delays, or require the Company to enter
into royalty or licensing agreements. Such royalty or licensing agreements, if
required, may not be available on terms acceptable to the Company, if at all. In
the event of a successful claim of product infringement against the Company and
failure or inability of the Company to license the infringed or similar
technology, the Company's business, operating results and financial condition
would be materially and adversely affected.

Employees

As of March 31, 1999, the Company and its subsidiary Avatar had a total of
23 employees, all of whom were based in the Seattle, Washington area. The
Company's future success depends, in part, upon the continued service of its key
technical and senior management personnel and its continuing ability to attract
and retain highly qualified technical and managerial personnel. Competition for
highly qualified personnel is intense and there can be no assurance that the
Company will be able to retain its key managerial and technical employees or
that it will be able to attract and retain additional highly qualified technical
and managerial personnel in the future. None of the Company's employees are
represented by a labor union. The Company has not experienced any work stoppages
and considers its relations with its employees to be good. See "Risk Factors."

30
<PAGE>

Facilities

In November 1998, the Company consolidated its corporate headquarters in
Seattle, Washington, where it leases approximately 8,141 square feet of office
space in the Olympic Tower Building. The Company has also sublet certain of its
Seattle office space to unaffiliated third parties. The Company believes that
its existing facilities will be adequate through fiscal 1999 and that sufficient
additional space will be available as needed thereafter on commercially
reasonable terms.

MANAGEMENT

Directors, Executive Officers, and Key Employees

The following table sets forth the names and ages of the current directors
and executive officers of the Company and the principal offices and positions
with the Company held by each person. The Company's Board of Directors is
divided into three classes, each with three year terms. The Board of Directors
currently consists of three directors and there are currently two vacancies from
the resignations of Ryan Smith and John Guarino in October 1998. The Company is
searching for qualified candidates to fill the Board vacancies that currently
exist; however, as of the date of this Prospectus, no persons have been
identified. The terms of office for Class I directors (Brent Nelson and Thad E.
Wardall) expire at the Annual Meeting of Shareholders to be held in 1999; the
term of office for the Class II director (Steven G. Wollach) expires at the
Annual Meeting of Shareholders to be held in 2000; and the terms of office for
Class III directors (currently vacant) expire at the Annual Meeting of
Shareholders to be held in 2001.

The executive officers of the Company are elected annually by the Board of
Directors and serve terms of one year or until their death, resignation or
removal by the Board of Directors. There are no family relationships between any
of the directors and executive officers. Pursuant to the terms of a consulting
agreement between the Company and Northwest Capital Partners, L.L.C., Northwest
Capital has the right to nominate one director for election to the Company's
Board of Directors. Northwest Capital's nominee is Brent Nelson. See "Certain
Transactions." Other than the foregoing right of Northwest Capital, there are no
arrangements or understandings between any director or executive officer and any
other person pursuant to which any person was selected as a director or
executive officer.

<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Steven G. Wollach......... 45 President, Chief Executive Officer and
Director
Steve Jackson............. 31 Executive Vice President
Mark Phillips............. 25 Chief Technology Officer
Robin L. Byrd............. 37 Corporate Secretary
Thad E. Wardall........... 53 Director
Brent Nelson.............. 37 Director
Kayleen A. Arafiles....... 37 Vice President of Consulting Services
And President, Avatar Interactive
</TABLE>

Brent Nelson, age 37, has served as a Director of the Company since
September 16, 1997. Mr. Nelson presently serves as the managing partner of
Northwest Capital Partners, L.L.C., a venture capital firm located in Bellevue,
Washington. Mr. Nelson presently serves on the boards of directors of PalmWorks,
Inc., a software company, Eclipse Entertainment Group, Inc., a film development,
production and distribution company; CybeRecord, Inc., a software company;
International Digital Technology, Inc., a software company; Multiple Dwelling
Television, Inc., a software company; Mobile PET Systems, Inc., a medical
company; and Polar Cargo Systems, Inc., a trucking company.

31
<PAGE>

Thad E. Wardall, age 53, has served as a Director of the Company since
September 16, 1997. From March 1996 to September 1997, Mr. Wardall served as a
Director of Neoteric Media, Inc., a web design firm. From June 1991 to February
1996, Mr. Wardall served as the International Facilities Project Manager for
Microsoft Corporation. During his time with Microsoft, Mr. Wardall traveled to
27 countries and had oversight responsibilities for 36 high-tech subsidiary
office projects. Mr. Wardall holds a Bachelor of Architecture degree from
Washington State University.

Steven G. Wollach, age 45, was recently appointed Chief Executive Officer
on April 23, 1999. Mr. Wollach was previously appointed President of the Company
on October 27, 1998 in connection with the Company's restructuring. He has
served as a Director of the Company since September 16, 1997. Mr. Wollach has
also served as Chief Financial Officer and Treasurer of the Company. From 1995
through 1997, Mr. Wollach served as an independent contractor for various
venture capital firms. Prior to 1995, for several years Mr. Wollach worked in
the accounting/audit/tax departments at Laventhol and Horwath and Seidman and
Seidman, both Certified Public Accounting firms. Mr. Wollach holds a B.S. in
Business, with a major in Accounting, from Wayne State University.

Executive Officers

In addition to Mr. Wollach, the following are the executive officers of the
Company:

Kayleen A. Arafiles, age 37, has been President of Avatar Interactive, Inc.
since its formation and through its merger with the Company, when Avatar became
the Company's wholly owned subsidiary. Ms. Arafiles was also appointed as Vice
President of the Company's Consulting Division effective with the merger of the
Company with Avatar in March 1999. Prior to forming Avatar, Ms. Arafiles worked
for Microsoft as a Senior Web Development Engineer for the Microsoft Network.
Ms. Arafiles has also served as a Director for the Small Business Administration
and served six years in the United States Army.

Robyn L. Byrd, age 37, was recently appointed as Corporate Secretary of the
Company in December 1998. Ms. Byrd has served a variety of administrative
positions with the Company since her date of employment in November 1997. Prior
to the Company, Ms. Byrd has served as office manager for Millstone Coffee,
Inc., a food and beverage company since 1996 and as a customer service manager
with Fukuda Denshi America., a medical software company from 1992 to 1996. Ms.
Byrd received her Bachelor of Arts from the University of Washington.

Steve Jackson, age 31, has served as Executive Vice President since January
1999. Prior to that, he served as Chief Technology Officer of the Company from
December 1997. From 1990 to 1996, Mr. Jackson served as Systems Engineer and
Program Manager of Microsoft Corporation. During his time at Microsoft, Mr.
Jackson managed several product development teams and was a lead member of the
Company's Desktop Management Task Force and Licensing Services Application
Programming Interface industry standards groups. From 1988 to 1990, Mr. Jackson
served as Systems Engineer, Network Architect, and Software Design Engineer of
O/E Systems, Inc., a software company. From 1987 to 1988, Mr. Jackson served as
Director of Training and Sales Representative of Entree Computer Systems, a
software company.

Mark Phillips, age 25, was recently appointed as Chief Technology Officer
of the Company in January 1999. Mr. Phillips has been employed with the Company
since January 1998, serving as a senior software engineer and developer. Prior
to the Company, Mr. Phillips served as a senior software engineer and developer
for Saltmine Creative, Inc., a software company, from July 1997 to January 1998,
for Oo-moja Software, a software company, from December 1996 to July 1997, and
for MetaBridge, Inc., a software company from June 1996 to July 1997. In
addition, Mr. Phillips worked as a developer with the University of Washington
Human Interface Technologies Lab from September 1996 to July 1998. Mr. Phillips
earned his B.S. in Comparative History of

32
<PAGE>

Ideas, with a minor in Computer Science Engineering and Architecture Design from
the University of Washington.

Information Regarding the Board of Directors and its Committees

The Board of Directors held 11 meetings during 1998. No director attended
less than 75% of the meetings of the Board and any committee of which the
director was a member.

The Board of Directors has designated two standing committees, the Audit
Committee and the Compensation Committee. The Company does not have a nominating
committee.

The Audit Committee, consisting of Messrs. Nelson, Wardall and Wollach,
reviews the Company's internal controls and recommends to the Board of Directors
the engagement of the Company's independent auditors, reviewing with such
accountants a plan for and the results of their examination of the Company's
financial statements and determining the independence of such accountants. The
Audit Committee held two meetings during 1998.

The Compensation Committee, consisting of Messrs. Nelson, Wardall and
Wollach, makes recommendations regarding the Company's 1998 Stock Option Plan
and decisions concerning the salaries and incentive compensation for employees
and consultants of the Company. The Compensation Committee held two meetings
during 1998.

Compensation of Directors

During 1998, Company directors were compensated for their service on the
Company's Board of Directors and any committees on which they served. The
Company's non-employee directors, Brent Nelson and Thad E. Wardall, each
received a one-time grant of stock options to purchase 25,000 shares of Common
Stock and were eligible to receive additional options to purchase 5,000 shares
of Common Stock for each Board meeting attended, up to a total of 50,000 shares
each. Steve Wollach received a one-time grant of stock options to purchase
50,000 shares of Common Stock and was eligible to receive additional options to
purchase 10,000 shares of Common Stock for each Board meeting attended, up to a
total of 100,000 shares. Ryan Smith and John Guarino, as employee directors,
each received a one-time grant of stock options to purchase 12,500 shares of
Common Stock and were eligible to receive additional options to purchase 2,500
shares of Common Stock for each Board meeting attended, up to a total of 25,000
shares each. All of the options granted Messrs. Smith and Guarino expired 90
days after their termination from the Company. Each of the Company's directors
received the maximum number of stock options that such director was eligible to
receive. All of such options vest one year from the date of grant.

In addition, during 1998, each member of the Compensation Committee
received options to purchase up to 5,000 shares (for non-employee directors) and
1,000 shares (for employee directors) for each committee meeting attended. Each
member of the Audit Committee received options to purchase up to 15,000 shares
(for non-employee directors) and 5,000 shares (for employee directors) for each
committee meeting attended.

Effective on August 19, 1998, the Board of Directors adopted a new
compensation policy for the directors. Under the new policy, each director of
the Company in office on such date and immediately following each annual
shareholders' meeting thereafter will receive an annual grant of stock options
to purchase 25,000 shares of Common Stock, at an exercise price equal to the
closing trade price on the date of grant. The stock options will vest 100% on
the one-year anniversary of the date of grant, provided that such director has
attended at least 75% of all meetings of the Board of Directors during such
period. In addition, each director who is a member of the Audit Committee and
the Compensation Committee will receive an annual grant of stock options to
purchase 5,000 shares of Common Stock for his participation on each committee,
at an exercise price equal to the

33
<PAGE>

closing trade price on the date of grant, which options will vest 100% on the
one-year anniversary of the date of grant.

Executive Compensation and Other Information

Summary Compensation Table

The following table sets forth all cash compensation paid or to be paid by
the Company, as well as certain other compensation paid or accrued, during each
of the Company's last three fiscal years to each person who served as Chief
Financial Officer during 1998. No other executive officers earned more than
$100,000 in salary and bonuses in 1998.

<TABLE>
<CAPTION>
Annual Compensation
Name and Principal Position Year Salary Bonus
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Steven G. Wollach (1) 1998 $117,500 $17,500
President and Chief Executive Officer 1997 15,385 ---
Ryan Smith (2) 1998 121,517 ---
Former Chief Executive Officer 1997 25,961 ---
</TABLE>

(1) Mr. Wollach was appointed by the Board of Directors on October 27, 1998 to
serve as the Company's President to replace Ryan Smith who resigned from
his positions as Chief Executive Officer and Director in October 1998. Mr.
Wollach was appointed Chief Executive Officer on April 23, 1999.
(2) Mr. Smith resigned from his positions as Chief Executive Officer and
Director in October 1998.

Employment Contracts

Effective November 1, 1998, the Company entered into a new employment
agreement with Mr. Wollach to serve as President and Chief Financial Officer of
the Company. The employment agreement runs through December 31, 1999 and
currently provides for an annual base salary to Mr. Wollach of $175,000, subject
to annual adjustment by the Board of Directors, together with an annual
discretionary bonus as determined by the Board. The agreement also provides for
performance-based bonus compensation for Mr. Wollach of up to a total of
$175,000 during calendar year 1999, based on the following performance criteria:
listing of the Common Stock on The Nasdaq SmallCap Market ($25,000 bonus);
effectiveness of the registration statement on Form SB-2 ($15,000); satisfaction
of Company quarterly financial goals as set in advance by the Board of Directors
($5,000 bonus per quarter, up to aggregate of $20,000); satisfaction of Company
yearly financial goals as set in advance by the Board of Directors ($5,000
bonus); closing of any acquisition by the Company, by purchase, merger or
otherwise, of on-going businesses, intellectual property, software or other
assets, which acquisition is accounted for using the purchase or pooling method
of accounting ($40,000 bonus per acquisition); and closing trade price of the
Common Stock as reported on the OTC Bulletin Board greater than or equal to
$4.00 (one-time $25,000 bonus). Upon termination of the employment agreement by
the Company without cause (as defined in the agreement), Mr. Wollach shall be
entitled to severance payments equal to the product of his then-current base
salary multiplied by a fraction, the numerator of which is the number of partial
and complete calendar quarters between his original date of hire (September
1997) and the date of termination (up to a maximum of 12), and the denominator
of which shall be 12. However, in the event of a change of control, Mr.
Wollach's amount of severance will be as determined by the Board, and at least
equal to his total salary and bonuses during the prior 12 months.

Mr. Wollach's employment agreement also provides for a grant of additional
stock options to purchase up to 400,000 shares of Common Stock, of which options
for 200,000 shares are immediately vested and options for 200,000 shares vest
monthly over a period

34
<PAGE>

of two years from the date of the employment agreement. All of Mr. Wollach's
options accelerate and become fully vested in the event of a merger, sale of
substantially all of the Company's assets, reorganization, liquidation or change
of control of the Company. All such stock options are exercisable at an exercise
price of $1.406, the price at which outstanding Company options were repriced as
of November 4, 1998.

On April 23, 1999, Mr. Wollach was appointed Chief Executive Officer of the
Company, and under his employment agreement, his annual salary was increased to
$175,000. At such time, Mr. Wollach was also granted additional options for
200,000 shares, to vest monthly over a period of nineteen months from April 23,
1999 through November 1, 2000.

In addition, Mr. Wollach serves as the Chief Executive Officer and as a
Director of Avatar.

The Company has entered into employment agreements with Messrs. Jackson and
Western, effective January 1, 1998 and October 12, 1998, respectively. Each of
the employment agreements is for a term of one year and provides for an annual
base salary to each of Messrs. Jackson and Western of $100,000 and $100,000,
respectively, subject to annual adjustment by the Board of Directors, together
with an annual discretionary bonus to be determined by the Board of Directors.
In addition, Mr. Western received a signing bonus in the form of stock options
to purchase up to 10,000 shares of Common Stock pursuant to the Company's 1998
Stock Option Plan, which options vest 90 days from his date of hire. Mr. Western
also received stock options to purchase up to an additional 100,000 shares of
Common Stock which options vest annually over four years. All such options are
exercisable at an exercise price of $1.093, the fair market value of the Common
Stock on the date of hire. The foregoing employment agreements with Messrs.
Jackson and Western also provide for severance payments to such executive
officers upon the termination of employment by the Company without cause. The
amount of severance payments will be equal to two months' salary for Mr. Jackson
and two weeks' salary for Mr. Western.

Additionally, pursuant to a non-competition agreement with the Company,
each of such executive officers has agreed not to compete with the Company for a
period of 12 months following the qualified termination of his employment, as
defined in his respective employment agreement. The Company, at its option, may
extend the non-compete period for an additional 12 months provided the Company
pays the employee an amount equal to 50% of the highest base salary rate the
Company paid him in the last year of employment.

On April 2, 1999, Mr. Western terminated his employment with the Company.
His options will expire 90 days after termination of his employment pursuant to
the terms of the Stock Option Plan.

On March 31, 1999, Kayleen Arafiles, the former principal and shareholder
of Avatar, entered into a one-year employment agreement with Avatar. Ms.
Arafiles serves as the President of Avatar and Vice President of the Company's
Consulting Division.

In addition, in October 1997 the Company's Board of Directors adopted an
executive compensation policy for certain of its executive officers. This policy
provides for incentive-based equity compensation to the Company's executive
officers based on the Company's performance and its achieving certain financial
targets established by the Board of Directors for each fiscal year. Under the
policy, if the Company meets between 50 and 100 percent of its financial targets
for the fiscal year, the executive officers entitled to participate in the
policy, as determined by the Board of Directors, will receive stock options
under the Company's 1998 Stock Option Plan to purchase such number of shares of
Common Stock as determined by the Board of Directors. If the Company fails to
meet at least 50 percent of its financial targets, no additional equity
compensation will be paid. Eligible executive officers who serve less than the
full year may be entitled to receive their pro rata portion of any equity
compensation payable under the policy. For fiscal year 1998, the Company did not
pay any equity compensation to its officers under its executive compensation
policy.

In January 1999, the Board of Directors adopted a new executive bonus plan
for fiscal year 1999. The purpose of the plan is to provide incentive equity
compensation to the Company's executive management team

35
<PAGE>

and other employees based on the Company meeting certain financial performance
goals as set by the Board. Satisfaction of the financial performance goals will
be determined upon review of the Company's audited financial statements for
1999. The plan provides for the grant of stock options to purchase up to
1,500,000 shares of Common Stock, of which options for up to 750,000 shares will
be available to the management team and options for up to 750,000 shares will be
available for other Company employees. Additionally, on April 23, 1999, the
Board approved the reservation of 562,500 shares to be made available to
employees of Avatar at December 31, 1999 based on the performance of the
combined operations of the Company and Avatar. Options under the plan may be
granted upon satisfaction of the financial goals and at the then fair market
value of the Common Stock and at such vesting schedules as set by the Board.

1998 Stock Option Plan

A general description of some of the basic features of the Option Plan is
presented below, but such description is qualified in its entirety by reference
to the full text of the Option Plan, a copy of which may be obtained without
charge upon written request to the Company's Investor Relations Department at
the address listed on the last page of this Proxy Statement.

Term. The term of each option granted under the Option Plan may be no more
than ten years from the date of the grant. Options granted to employees expire
90 days following termination of employment (but in no event later than the date
of expiration of the option), except in the case of permanent disability or
death. In the case of termination of employment due to permanent disability or
death, the option terminates one year from the date that the employee ceases to
work as a result of disability or death (but in no event later than the date of
expiration of such option). The Board of Directors has the authority to extend
the expiration dates of any outstanding option in circumstances it deems
appropriate, provided that it may not extend an option beyond the original term
of such option.

Options. When an option is granted under the Option Plan, the Board of
Directors acting as the Administrator of the Option Plan, at its discretion,
specifies the option price and the number of shares of Common Stock which may be
purchased upon exercise of the option. The exercise price of an incentive stock
option set by the Administrator may not be less than 100% of the fair market
value of the Company's Common Stock. Unless otherwise determined by the
Administrator, the exercise price of a nonqualified stock option will be 100% of
the fair market value on the date of the grant. In no case, however, may
options (whether incentive stock options or nonqualified stock options) be
granted under the Option Plan at an exercise price which is less than the
initial public offering price of the shares of Common Stock offered thereby. In
the event of stock dividends, stock splits and similar capital changes, the
Option Plan provides for appropriate adjustments in the number of shares
available for options and the number of shares subject to and exercise prices of
outstanding options.

The closing bid and asked prices of the Company's Common Stock as reported
on the OTC Bulletin Board on May 27, 1999 was 1 13/16 and 2, respectively. On
November 4, 1998, the Company repriced all outstanding stock options held by
current employees and directors to a price of $1.406, representing the last
trade price of the Common Stock on the OTC Bulletin Board on such date. In
addition, as a result of the restructuring in November 1998 in which the Company
reduced its employee base from 23 to 13 employees and the resignations of
Messrs. Smith and Guarino as officers of the Company, options for 50,375 Common
Shares terminated because they were not exercised within 90 days after the date
of the restructuring.

The exercise price of options is generally payable in cash. For
nonqualified options, the option holder must also pay to the Company, at the
time of purchase, the amount of federal, state and local withholding taxes
required to be withheld by the Company. Under certain limited circumstances,
shares of Common Stock may be used for payment of the exercise price or
satisfaction of withholding obligations.

36
<PAGE>

Notwithstanding any vesting requirements of an option, in the event of a
merger, reorganization, sale of substantially all of the assets of the Company,
change of control of the Company, liquidation, dissolution or other corporate
transaction wherein the Company is not the surviving corporation, an option
holder typically has the right to immediately exercise all of his or her
options, whether vested or unvested.

The options are assignable only (i) by will or by the laws of descent and
distribution or (ii) in the case of a nonqualified stock option, by gift to
immediate family members of the optionee, to partnerships of which the only
partners are members of the optionee's immediate family and trusts established
solely for the benefit of such immediate family members.

Federal Income Tax Consequences of the Option Plan. Under present law, an
optionee will not realize any taxable income on the date a nonqualified stock
option is granted to the optionee pursuant to the Option Plan. Upon exercise of
the nonqualified stock option, however, the optionee will realize, in the year
of exercise, ordinary income to the extent of the difference between the option
price and the fair market value of the Company's Common Stock on the date of
exercise. Upon the sale of the shares, any resulting gain or loss will be
treated as capital gain or loss. The Company will be entitled to a tax
deduction in its fiscal year in which nonqualified stock options are exercised,
equal to the amount of compensation required to be included as ordinary income
by those optionees exercising such options.

Incentive stock options granted pursuant to the Option Plan are intended to
qualify for favorable tax treatment to the optionee under Code Section 422.
Under Code Section 422, an employee realizes no taxable income when the
incentive stock option is granted. If the employee has been an employee of the
Company or any subsidiary at all times from the date of grant until three months
before the date of exercise, the employee will realize no taxable income when
the option is exercised. If the employee does not dispose of shares acquired
upon exercise for a period of two years from the granting of the incentive stock
option and one year after receipt of the shares, whichever is later, the
employee may sell the shares and report any gain as capital gain. The Company
will not be entitled to a tax deduction in connection with either the grant or
exercise of an incentive stock option. If the employee should dispose of the
shares prior to the expiration of the two-year or one-year periods described
above, the employee will be deemed to have received compensation taxable as
ordinary income in the year of the early sale in an amount equal to the lesser
of (i) the difference between the fair market value of the Company's Common
Stock on the date of exercise and the option price of the shares, or (ii) the
difference between the sale price of the shares and the option price of shares.
In the event of such an early sale, the Company will be entitled to a tax
deduction equal to the amount recognized by the employee as ordinary income. The
foregoing discussion ignores the impact of the alternative minimum tax, which
may particularly be applicable to the year in which an incentive stock option is
exercised.

Plan Benefits. Future grants of stock options are subject to the
discretion of the Administrator. Therefore, the future benefits under the Option
Plan cannot be determined at this time.

CERTAIN TRANSACTIONS

On July 11, 1997, the Company entered into a three-year consulting
agreement with Northwest Capital Partners, L.L.C. to serve as the Company's
financial advisor. Brent Nelson, a director and shareholder of the Company, also
serves as president and managing partner of Northwest Capital. Pursuant to the
terms of the consulting agreement, the Company is obligated to pay Northwest
Capital a fee of $5,000 per month for 36 months from December 31, 1997, in
consideration for Northwest Capital's efforts and assistance in raising capital
for the Company. This monthly fee was decreased by mutual agreement of the
parties to $3,000 beginning November 1, 1998. Under the agreement, the Company
issued 1,200,000 shares of Common Stock to Northwest Capital in consideration
for its assistance with the Neoteric Acquisition and other financings for the
Company. In addition, for the three-year period from September 10, 1997, the
Company granted to Northwest Capital certain rights of first refusal on any
offering of Company securities by the Company involving more than 1,000 shares
of

37
<PAGE>

stock. Under the terms of the consulting agreement, Northwest Capital also has
the right for a period of five years to nominate one director for election to
the Company's Board of Directors, and its director nominee is Brent Nelson. In
addition, for a three-year period following the term of the consulting
agreement, the Company has granted to Northwest Capital a right of first refusal
to act as financial advisor to the Company.

On September 23, 1996, Thad E. Wardall, a director and shareholder of the
Company, loaned $125,000 to Neoteric Media to fund the acquisition of the
software application developed by Mr. Jackson. The loan was evidenced by a
promissory note, secured by a lien on certain of the Company's assets.
Subsequently, on August 25, 1997, the Company entered into a note exchange
agreement with Mr. Wardall for the exchange of the prior promissory note for a
new convertible promissory note in principal amount of $73,194 (the "Wardall
Note"). On October 7, 1997, Mr. Wardall exercised his option to convert all
outstanding principal and accrued interest on the Wardall Note into 112,607
shares of Common Stock (at a conversion rate of $0.65 per share) and the
security interest terminated.

In October 1998, Ryan Smith, the Company's former Chief Executive Officer
and Chairman of the Board, and John Guarino, the Company's former Senior Vice
President and a Director, resigned from their respective positions as officers
and directors of the Company. Effective March 1999, the Company entered into
settlement agreements with each of Messrs. Smith and Guarino releasing the
Company from all matters arising out of their prior employment with the Company.
Pursuant to the terms of the settlement agreements, each of Messrs. Smith and
Guarino has granted to the Company transferable rights to purchase up to
1,680,800 shares and 900,000 shares, respectively, currently held by such
shareholders at a purchase price of $.50 per share. As part of the settlement,
in April 1999, the Company repurchased, of such total shares, 550,000 shares
held by Mr. Smith and 400,000 shares held by Mr. Guarino, for cash payments by
the Company to Messrs. Smith and Guarino of $275,000 and $200,000, respectively.
The remaining shares subject to the Company's option rights have been placed in
an escrow, and may be released upon exercise of the options or upon expiration
of the option periods with respect thereto. Commencing on October 15, 1999, and
for every three months thereafter, up to 20% of the remaining shares will be
released from the escrow. Pursuant to the terms of the settlement agreements,
each of Messrs. Smith and Guarino have granted an irrevocable proxy to each of
the Company's three directors, Messrs. Wollach, Nelson and Wardall, to vote the
shares while held in the escrow. In addition, each of Messrs. Smith and Guarino
have also agreed to certain contractual restrictions on their ability to sell
shares of Company stock while the escrow is in effect.

The Company is currently in negotiations and expects to enter into
mediation and/or arbitration with Jay Paulson, a former officer and significant
shareholder of the Company, in connection with certain severance and other
matters arising out of his employment with the Company. In addition, the Company
has been served with a complaint filed by Mr. Paulson in King County Superior
Court in the State of Washington on November 18, 1998 (case no. 98-2-27751-1SEA)
for declaratory and injunctive relief and unspecified damages in connection with
a requested transfer of restricted securities held by Mr. Paulson. The Company
believes it has taken appropriate action and intends to vigorously defend this
lawsuit.

Except as described above, there have not been, nor is there currently
proposed, any transaction or series of similar transactions to which the Company
was or is to be a party in which the amount involved exceeds $60,000 and in
which any director, executive officer or holder of more than 5% of the Common
Stock of the Company had or will have a direct or indirect material interest.

PRINCIPAL SHAREHOLDERS

The following table sets forth the number of shares of the Company's Common
Stock beneficially owned by (i) each director and nominee for election to the
Board of Directors of the Company; (ii) each of the named executive officers in
the Summary Compensation Table; (iii) all directors and executive officers as a
group; and (iv) to the best of the Company's knowledge, all beneficial owners of
more than 5% of the outstanding shares of

38
<PAGE>

the Company's Common Stock as of June 18, 1999. Unless otherwise indicated, the
shareholders listed in the table have sole voting and investment power with
respect to the shares indicated. The Company has been provided such information
by its directors, nominees for directors, and executive officers.

<TABLE>
<CAPTION>
Common Shares
Name (and Address of 5% Beneficially Percent of
Holder) or Identity of Group Owned(1) Class(2)
- ---------------------------- -------- --------
<S> <C> <C>
Ryan Smith (3) 1,130,800 7.7%
1020 West Lake Sammamish Parkway NE
Bellevue, WA 98008
Jay R. Paulson 1,013,475 6.9%
1839 - 280th Avenue NE
Carnation, WA 98014
John J. Guarino (4) 800,000 5.5%
15515 - 184th Place NE
Woodinville, WA 98072
Thad E. Wardell (5) 3,783,407 25.8%
Brent Nelson (6) 3,245,800 22.1%
Steven G. Wollach (7) 3,196,228 21.0%
Kayleen A. Arafiles 858,025 5.9%
All Directors and Executive 5,515,503 35.8%
Officers as a Group (7 persons) (8)
</TABLE>

(1) Under the rules of the Securities and Exchange Commission, shares not
actually outstanding are nevertheless deemed to be beneficially owned by a
person if such person has the right to acquire the shares within 60 days.
Pursuant to such SEC rules, shares deemed beneficially owned by virtue of a
person's right to acquire them are also treated as outstanding when
calculating the percent of class owned by such person and when determining
the percentage owned by a group.

(2) Based on 14,616,952 shares of Common Stock issued and outstanding as of
June 18, 1999, after giving effect to the Company's redemption of 950,00
shares on March 26, 1999.

(3) All of Mr. Smith's shares are subject to the terms of that certain
settlement agreement between Mr. Smith and the Company dated March 4, 1999.

(4) Includes 500,000 shares held by Mr. Guarino that are subject to the terms
of that certain settlement agreement between Mr. Guarino and the Company
dated March 4, 1999.

(5) Includes an aggregate of 2,580,800 shares for which Mr. Wardall has the
right to vote, pursuant to the terms of the Company's settlement agreements
with each of Messrs. Smith and Guarino. Mr. Wardall disclaims beneficial
ownership of these shares. Also includes 50,000 shares of Common Stock
subject to Vested Options held by Mr. Wardall.

(6) Includes an aggregate of 2,580,800 shares for which Mr. Nelson has the
right to vote , pursuant to the terms of the Company's settlement
agreements with each of Messrs. Smith and Guarino. Mr. Nelson disclaims
beneficial ownership of these shares. Also includes 65,000 shares of
Common Stock subject to Vested Options held by Mr. Nelson and 600,000
shares of Common Stock held of record by Northwest Capital Partners,
L.L.C., for which Mr. Nelson serves as president and managing partner; Mr.
Nelson disclaims beneficiary ownership over all of such except to the
extent of his pecuniary interest therein.

39
<PAGE>

(7) Includes an aggregate of 2,580,800 shares for which Mr. Wollach has the
right to vote, pursuant to the terms of the Company's settlement agreements
with each of Messrs. Smith and Guarino. Mr. Wollach disclaims beneficial
ownership of these shares. Also includes 25,000 shares held directly and
stock options to purchase 590,428 shares of common stock, which stock
options are exercisable within 60 days of the date hereof.

(8) Consists of Messrs. Wollach, Nelson, Wardall, Phillips and Jackson and Ms.
Byrd and Ms. Arafiles. Includes an aggregate of 2,580,800 shares for which
each of Messrs. Wardall, Nelson and Wollach has the right to vote, pursuant
to the terms of the Company's settlement agreement with each of Messrs.
Smith and Guarino; over all of which shares Messrs. Wardall, Nelson and
Wollach disclaim beneficial ownership. Also includes 776,678 shares of
Common Stock subject to Vested Options held by the executive officers and
directors as a group.

DESCRIPTION OF SECURITIES

The following summary description of the Company's capital stock and of
certain provisions of the Company's Articles of Incorporation (the "Articles")
and Bylaws is not intended to be complete and is subject to and qualified in
this entirety by reference to, the Articles and the Bylaws, copies of each of
which are filed as exhibits to the Registration Statement on Form SB-2, of which
this Prospectus forms a part.

General

The Company's authorized capital stock consists of 50,000,000 shares of
Common Stock having a par value of $.01 and 10,000,000 shares of preferred stock
having a par value of $.01. As of May 27, 1999, there were issued and
outstanding 14,616,952 shares of Common Stock held by approximately 216 holders
of record (excluding shares issuable upon exercise of any outstanding stock
options or the Warrants) and no shares of preferred stock issued and
outstanding.

Common Stock

Holders of outstanding shares of Common Stock are entitled to one vote per
share on all matters submitted to a vote of the shareholders. There are no
cumulative voting rights. Holders of a majority of the outstanding shares of
Common Stock constitute a quorum at any meeting of shareholders and the vote by
the holders of a two-thirds of the outstanding shares of Common Stock is
required to effect certain fundamental corporate changes, including any
liquidation, merger or sale of substantially all of the Company's assets.

Holders of outstanding shares of Common Stock are entitled to receive
dividends, if, as, and when declared by the Board of Directors out of funds
legally available therefore, subject to dividend rights of holders of preferred
stock, if any. Upon liquidation of the Company, holders of outstanding shares of
Common Stock are entitled to share ratably in all assets of the Company
remaining after payment of liabilities. Holders of outstanding shares of Common
Stock have no preemptive rights or other rights to subscribe for unissued or
treasury shares or securities convertible into or exercisable or exchangeable
for shares of Common Stock. The outstanding shares of Common Stock are fully
paid and nonassessable.

Preferred Stock

Pursuant to the Articles, the Company is authorized to issue shares of
preferred stock, which may be issued from time to time in one or more series
upon authorization by the Company's Board of Directors. The Board of Directors,
without further approval of the Company's shareholders, is authorized to fix the
dividend rights and terms, conversion rights, voting rights, redemption rights
and terms, liquidation preferences, and any

40
<PAGE>

other rights, preferences, privileges and restrictions applicable to each series
of the preferred stock. The issuance of preferred stock, while providing
flexibility in connection with possible acquisitions and other corporate
purposes, among other things, could adversely affect the voting power of the
holders of Common Stock and, under certain circumstances, may make it more
difficult for a third party to gain control of the Company, discourage bids for
the Company Common Stock at a premium to the prevailing market price or
otherwise adversely affect the market price of the Common Stock. The Company has
no present plans to issue any shares of preferred stock.

Common Stock Purchase Warrants

From April 1998 through May 1998, the Company issued stock purchase
warrants to purchase up to an aggregate of 853,401 shares of Common Stock at an
exercise price of $4.00 per share, as follows: the Berliner Warrants to purchase
up to 200,000 shares were granted on April 9, 1998; the Brokers' Warrants to
purchase up to 153,401 shares were granted on May 22, 1998; and the National Day
Warrants to purchase up to 500,000 shares were granted on May 22, 1998. The
National Day Warrant was subsequently repriced by the Company in January 1999 to
an exercise price of $1.406 per share, in consideration for the consultant's on-
going services to the Company. The terms of these Warrants expire two years from
their respective dates of issuance. These Warrants are non-transferable and are
subject to appropriate adjustment upon any stock dividend, stock split,
subdivision, consolidation or reclassification of the Common Stock. In addition,
the Company has granted to the holders of the Berliner Warrants, Brokers'
Warrants and National Day Warrants certain registration rights on the shares
underlying the Warrants, which shares are included in the Registration Statement
on Form SB-2. As of the date of this Prospectus, none of the Berliner Warrants,
Brokers' Warrants or National Day Warrants has been exercised. See "Selling
Shareholders."

In July 1998, the Company issued an additional series of warrants to
purchase up to 200,000 shares of Common Stock. The GlobeMedia Warrants entitle
the holder to purchase shares of Common Stock at any time prior to July 15, 2000
at the following schedule: warrants to purchase 25,000 shares have an exercise
price of $5.00 per share and expired without being exercised on October 15,
1998; warrants to purchase 50,000 shares have an exercise price of $5.50 per
share and expired without being exercised on January 15, 1999; warrants to
purchase 25,000 shares have an exercise price of $6.00 per share and expire on
July 15, 1999; warrants to purchase 50,000 shares have an exercise price of
$6.50 per share and expire on January 15, 2000; and warrants to purchase 50,000
shares have an exercise price of $7.00 per share and expire on July 15, 2000.
The exercise prices are subject to appropriate adjustment upon any stock
dividend, stock split, subdivision, consolidation or reclassification of the
Common Stock. The holder of the GlobeMedia Warrants has certain registration
rights on the shares underlying the Warrants, which shares are included in the
Registration Statement on Form SB-2. As of the date of this Prospectus, none of
the GlobeMedia Warrants has been exercised. See "Selling Shareholders."

Anti-Takeover Legislation

The Company is subject to the Washington Business Corporation Act ("RCW
23B"), which contains provisions that have the effect of discouraging non-
negotiated takeover attempts. RCW 23B.19, as recently amended, generally
prohibits any "significant business transaction" within five years of the date a
person acquires 10% or more of the outstanding voting shares of a public
corporation, unless the transaction first receives the approval of a majority of
the disinterested directors prior to the time the 10% threshold is crossed.

RCW 23B.19, as recently amended, also imposes a fair price restriction on
public corporations. The statute provides, subject to certain exceptions, that
specified change-of-control transactions between a corporation and an interested
shareholder (defined as a person or affiliated group beneficially owning 20% or
more of a corporation's outstanding voting stock) will be prohibited unless a
majority of disinterested directors determine the price offered by the
interested shareholder to be fair or unless two-thirds of the shareholders of
each voting group entitled to vote separately on the transaction (not including
the interested shareholder) approve.

41
<PAGE>

Director and Officer Liability and Indemnification

The Company's Articles provide that the liability of the Company's
directors is limited and that the Company will indemnify its directors and
officers to the fullest extent permitted by law. Insofar as indemnification for
liability arising under the Securities Act may be permitted to directors,
officers and controlling persons of the Company pursuant to those provisions, or
otherwise, the Company has been advised that in the opinion of the Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable.

Transfer Agent and Registrar

The transfer agent and registrar for the Common Stock is American Registrar
and Transfer Co., whose address is 10 Exchange Place, Suite 705, P.O. Box 1798,
Salt Lake City, Utah 84110.

MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The Common Stock is traded on the OTC Bulletin Board under the symbol
"OBJX". On June 4, 1999, the closing bid and asked prices of the Common Stock as
reported on the OTC Bulletin Board were $2.4375 and $2.5625, respectively, and
the Common Stock was held of record by approximately 216 persons on such date
(excluding holders of shares issuable upon exercise of outstanding stock options
and Warrants). The Common Stock first began trading on the OTC Bulletin Board
under the "OBJX" trading symbol on September 25, 1997. The table below sets
forth, for the calendar quarters indicated since the date that the Common Stock
began trading, the high and low bid prices for the Common Stock as reported by
the OTC Bulletin Board. These prices reflect inter-dealer prices, without retail
mark-up, mark-down or commission and may not represent actual transactions.

<TABLE>
<CAPTION>
High Low
----- -----
<S> <C> <C>
1997
First Quarter - -
Second Quarter - -
Third Quarter (beginning September 25, 1997) $2.50 $1.88
Fourth Quarter 2.66 1.88

1998
First Quarter 4.50 1.88
Second Quarter 9.94 3.84
Third Quarter 4.72 1.41
Fourth Quarter 1.94 0.91
1999
First Quarter 1.875 0.937
Second Quarter (through June 4, 1999) 3.562 1.468
</TABLE>

SHARES ELIGIBLE FOR FUTURE SALE

The Company's Common Stock is currently traded on the OTC Bulletin Board
and there is a limited public market for the Common Stock. Sales of substantial
amounts of the Common Stock in the public market, or the perception that such
sales may occur, could adversely affect market price of the Common Stock from
time to time in the public market and could impair the Company's ability to
raise additional capital through the sale of its equity securities in the
future.

As of the date of this Prospectus, there are 14,616,952 shares of Common
Stock issued and outstanding (exclusive of shares reserved for issuance upon
exercise of outstanding stock options and the Warrants). Assuming exercise in
full of the Warrants to purchase up to 978,401 shares of Common Stock (which
shares are included in the Registration Statement on Form SB-2), there will be
15,687,328 shares of Common Stock issued

42
<PAGE>

and outstanding, consisting of 2,925,018 shares offered hereby, 7,596,784
restricted shares of Common Stock, and 5,165,526 shares of Common Stock that are
currently freely tradable without restriction. In addition, the Company has
reserved up to 2,000,000 shares of Common Stock for issuance upon exercise of
options which may be granted under the 1998 Stock Option Plan, as of June 4,
1999 there were outstanding options to purchase 1,648,750 shares of Common
Stock. The shares issuable upon exercise of any of such stock options will be
restricted until the Company files a registration statement on Form S-8, or any
successor form, with the Commission or until sold in accordance with Rule 144.

The 2,925,018 shares of Common Stock being offered hereby will be freely
tradable without restriction or further registration under the Securities Act by
persons other than affiliates of the Company. The 7,596,784 restricted shares
will become freely tradable if subsequently registered under the Securities Act
or to the extent permitted by Rule 144 or some other exemption from registration
under the Securities Act. Other than the Shares being registered hereunder, the
Company has not granted any registration rights with regard to any additional
shares of Common Stock.

In general, under Rule 144 as currently in effect, if one year has elapsed
since the date of acquisition of restricted shares from the Company or an
affiliate of the Company, the holder will be entitled to sell in the public
market, during any three month period, a certain amount of shares of Common
Stock. The maximum number of shares of Common Stock that may be sold during such
period will be the greater of 1% of the total number of the then outstanding
shares of Common Stock or the average weekly trading volume of shares of Common
Stock during the four calendar weeks preceding the date on which notice of the
sale is filed with the Commission. Sales under Rule 144 are also subject to
certain requirements as to the manner of sale, notice and availability of
current public information about the Company. If the holder of the shares has
held the Common Stock for at least two years, the shareholder, other than an
affiliate of the Company, will be entitled to sell the restricted shares in the
public market under Rule 144(k) without regard to the volume limitations, manner
of sale requirements, public information requirements or notice requirements.

Of the restricted shares, 5,984 shares of Common Stock are currently
eligible for resale under Rule 144 under the Securities Act without regard to
volume limitations. Approximately 6,960,800 restricted shares are eligible for
sale pursuant to Rule 144 (subject to volume limitations) having been held for
at least one year, of which 6,760,800 shares are held by affiliates of the
Company. The remaining 630,000 restricted shares will become eligible for sale
under Rule 144 (subject to volume limitations) upon the expiration of one-year
holding periods beginning in May and June 1999.

PLAN OF DISTRIBUTION

The Selling Shareholders may from time to time sell all or a portion of the
Shares in the over the counter market, on any other national securities exchange
on which the Common Stock is listed or traded, in negotiated transactions or
otherwise, at prices then prevailing or related to the then current market price
or at negotiated prices. The Shares will not be sold in an underwritten public
offering. The Shares may be sold directly or through brokers or dealers. The
methods by which the Shares may be sold include: (a) a block trade (which may
involve crosses) in which the broker or dealer so engaged will attempt to sell
the securities as agent but may position and resell a portion of the block as
principal to facilitate the transaction; (b) purchases by a broker or dealer as
principal and resale by such broker or dealer for its account pursuant to this
Prospectus; (c) ordinary brokerage transactions and transactions in which the
broker solicits purchasers; and (d) privately negotiated transactions. In
effecting sales, brokers and dealers engaged by Selling Shareholders may arrange
for other brokers or dealers to participate. Brokers or dealers may receive
commissions or discounts from Selling Shareholders (or, if any such broker-
dealer acts as agent for the purchaser of such shares, from such purchaser) in
amounts to be negotiated which are not expected to exceed those customary in the
types of transactions involved. Broker-dealers may agree with the Selling
Shareholders to sell a specified number of such shares at a stipulated price per
share, and, to the

43
<PAGE>

extent such broker-dealer is unable to do so acting as agent for a Selling
Shareholder, to purchase as principal any unsold shares at the price required to
fulfill the broker-dealer commitment to such Selling Shareholder. Broker-dealers
who acquire shares as principal may thereafter resell such shares from time to
time in transactions (which may involve crosses and block transactions and sales
to and through other broker-dealers, including transactions of the nature
described above) in the over-the-counter market or otherwise at prices and on
terms then prevailing at the time of sale, at prices then related to the then-
current market price or in negotiated transactions and, in connection with such
resales, may pay to or receive from the purchasers of such shares commissions as
described above.

In connection with the distribution of the Shares, the Selling Shareholders
may enter into hedging transactions with broker-dealers. In connection with such
transactions, broker-dealers may engage in short sales of the Shares in the
course of hedging the positions they assume with the Selling Shareholders. The
Selling Shareholders may also sell the Shares short and redeliver the Shares to
close out the short positions. The Selling Shareholders may also enter into
option or other transactions with broker-dealers which require the delivery to
the broker-dealer of the Shares. The Selling Shareholders may also loan or
pledge the Shares to a broker-dealer and the broker-dealer may sell the Shares
so loaned or upon a default the broker-dealer may effect sales of the pledged
shares. In addition to the foregoing, the Selling Shareholders may enter into,
from time to time, other types of hedging transactions.

The Selling Shareholders and any broker-dealers participating in the
distributions of the Shares may be deemed to be "underwriters" within the
meaning of Section 2(11) of the Securities Act and any profit on the sale of
Shares by the Selling Shareholders and any commissions or discounts given to any
such broker-dealer may be deemed to be underwriting commissions or discounts
under the Securities Act.

The Shares may also be sold pursuant to Rule 144 under the Securities Act
beginning one year after the Shares were issued.

The Company has filed the Registration Statement, of which this Prospectus
forms a part, with respect to the sale of the Shares. The Company has agreed to
use its best efforts to keep the Registration Statement current and effective
for a period commencing on the initial effective date of the Registration
Statement and terminating 24 months after the Registration Statement is filed
with the Commission on February 10, 2000. There can be no assurance that the
Selling Shareholders will sell any or all of the Shares offered hereunder.

Under the Exchange Act and the regulations thereunder, any person engaged
in a distribution of the shares of Common Stock of the Company offered by this
Prospectus may not simultaneously engage market making activities with respect
to the Common Stock of the Company during the applicable "cooling off" periods
prior to the commencement of such distribution. In addition, and without
limiting the foregoing, the Selling Shareholders will be subject to applicable
provisions of the Exchange Act and the rules and regulations thereunder, which
may limit the timing of purchases and sales of Common Stock by the Selling
Shareholders.

The Company will pay all of the expenses incident to the offering and sale
of the Shares, other than commissions, discounts and fees of underwriters,
dealers or agents.

LEGAL MATTERS

The validity of the issuance of the Shares of Common Stock offered hereby
has been passed upon for the Company by Cairncross & Hempelmann, P.S., Seattle,
Washington.

44
<PAGE>

EXPERTS

The financial statements and notes thereto at December 31, 1998, and for
each of the two years in the period ended December 31, 1998 and December 31,
1997 appearing in this Prospectus and the Registration Statement have been
audited by Peterson Sullivan P.L.L.C., independent auditors, as set forth in
their report thereon appearing elsewhere herein, and are included in reliance
upon such report given upon the authority of such firm as experts in accounting
and auditing.

45
<PAGE>

FINANCIAL STATEMENTS
OF
INTERACTIVE OBJECTS, INC.

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<S> <C>
Unaudited Financial Statements..................................................................... F-2

Consolidated Balance Sheets as of March 31, 1999 and 1998.......................................... F-2

Consolidated Statements of Operations for the Three Months ended March 31, 1999 and 1998........... F-4

Consolidated Statements of Cash Flows for the Three Months ended March 31, 1999 and 1998........... F-6

Notes to Unaudited Consolidated Financial Statements............................................... F-8

Independent Auditors' Report....................................................................... F-9

Balance Sheet as of December 31, 1998.............................................................. F-10

Statements of Operations for the Years ended December 31, 1998 and 1997............................ F-11

Statements of Stockholders' Equity for the Years ended December 31, 1998 and 1997.................. F-12

Statements of Cash Flows for the Years ended December 31, 1998 and 1997............................ F-13

Notes to Audited Financial Statements.............................................................. F-14
</TABLE>

F-1
<PAGE>

INTERACTIVE OBJECTS, INC.
CONSOLIDATED BALANCE SHEETS
March 31, 1999 and 1998

March 31, 199 March 31, 1998
(Unaudited) (Unaudited)
----------- ------------
<S> <C> <C>
ASSETS

Current Assets
Cash $ 2,268,107 $ 109,044
Certificate of Deposit 106,835 101,309
Accounts Receivable 62,887 --
Prepaid Expenses 123,281 36,155
----------- -----------
TOTAL CURRENT ASSETS 2,561,110 246,508

Furniture and Equipment, at cost,
less accumulated depreciation of
$120,031 and $31,111 381,104 239,570

Other Assets
Capitalized software costs -- 165,000
Deposits 8,180 11,429
----------- -----------
8,180 176,429
----------- -----------
$ 2,950,394 $ 662,507
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities
Accounts Payable $ 300,067 $ 310,971
Accrued Expenses 264,915 51,850
Current Portion Long-term Debt 194,316 538,500
----------- -----------

TOTAL CURRENT LIABILITIES 759,298 901,321

Long-term debt, less current portion 61,608 --

Stockholders' Equity
Preferred stock, $.01 par value;
2,000,000 authorized, no shares
issued and outstanding -- --
Common stock, $.01 par value; 50,000,000
authorized, 14,616,952 shares issued
and outstanding at March 31, 1999
and 12,944,917 shares issued and
outstanding at March 31, 1998 146,169 19,417
Additional paid-in-capital 8,537,409 1,353,965
Retained deficit (6,554,090) (1,612,196)
----------- -----------
2,129,488 (238,814)
----------- -----------
$ 2,950,394 $ 662,507
=========== ===========
</TABLE>

F-2
<PAGE>

See Notes to Consolidated Financial Statements.

F-3
<PAGE>

INTERACTIVE OBJECTS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended March 31, 1999 and 1998

<TABLE>
<CAPTION>
March 31, 1999 March 31, 1998
(Unaudited) (Unaudited)
----------- -----------
<S> <C> <C>
Revenues
Service Revenue $ 582,830 $ 476,302

Expenses
Labor and Benefits 885,228 685,223
Selling, general and administrative 494,169 410,009
----------- ------------
1,379,397 1,095,232

Loss from Operations (796,567) (618,930)

Interest Expense -- (3,414)
Interest Income 27,017 --
----------- ------------
Net Loss $ (769,550) $ (622,344)

Retained deficit, beginning of period $ (5,784,540) $ (989,852)
------------ ------------
Retained deficit, end of period (6,554,090) (1,612,196)
============ ============

Basic earnings (loss) per share of
common stock $ (.05) $ (.05)
============ ============
Weighted average common and common
equivalent shares outstanding 15,419,174 12,944,917
============ ============
</TABLE>

F-4
<PAGE>

See Notes to Consolidated Financial Statements.

F-5
<PAGE>

INTERACTIVE OBJECTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31, 1999 and 1998

<TABLE>
<CAPTION>
March 31, 1999 March 31, 1998
(Unaudited) (Unaudited)
---------- -----------
<S> <C> <C>
Cash Flows From Operating Activities
Net Loss $ (769,550) $ (622,344)

Adjustment to reconcile net loss
to net cash used in
operating activities

Depreciation 97,453 12,692

Changes in Operating Assets
and Liabilities
Accounts receivable (48,887) 10,698
Prepaid expenses 31,027 (147)
Accounts payable 195,233 125,033
Accrued expenses (109,695) (11,044)
Other (1,936) --
----------- ---------

Cash Flows from Operating Activities (606,355) (485,112)

Cash Flows From Investing Activities
Purchase of equipment (138,223) (61,811)
Capitalized software costs -- (35,000)
----------- ---------

Cash Flow from Investing Activities (138,223) (96,811)

Cash Flows From Financing Activities
Redemption of stock (475,000) --
Proceeds on notes payable 155,750 476,000
Payments on notes payable (14,600) --
----------- ---------

Cash Flows from Financing Activities (333,850) 476,000
----------- ---------

Net decrease in cash (1,078,428) (105,923)

Cash, beginning of period 3,346,535 214,967
----------- ---------

Cash, end of period $ 2,268,107 $ 109,044
=========== =========
</TABLE>

F-6
<PAGE>

See Notes to Consolidated Financial Statements.

F-7
<PAGE>

INTERACTIVE OBJECTS, INC.
Notes to Unaudited Consolidated Financial Statements

Note 1. Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared
in accordance with the instructions to Form 10-QSB and therefore do not include
all disclosures necessary for a fair presentation of financial position, results
of operations and cash flows in conformity with generally accepted accounting
principles. The unaudited consolidated financial statements include the
accounts of Interactive Objects, Inc. ("Interactive Objects") and its wholly-
owned subsidiary Avatar Interactive, Inc. ("Avatar"). Effective March 31, 1999,
Interactive Objects acquired all of the equity interests of Avatar in exchange
for 858,025 shares of Interactive Objects common stock. These consolidated
financial statements have been prepared under the pooling of interests method of
accounting and reflect the combined financial position and operating results of
Interactive Objects and Avatar as of and for the three month period ended March
31, 1999. Avatar began operations April 1, 1998, so the balance sheet as of
March 31, 1998, and the statement of operations for the three month period ended
March 31, 1998 do not include Avatar's financial activities. The operating
results for interim periods are unaudited and are not necessarily an indication
of the results to be expected for the full fiscal year. In the opinion of
management, the results of operations as reported for the interim period reflect
all adjustments which are necessary for a fair presentation of operating
results.

Note 2. Per Share Information

In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" ("FAS 128") which
is effective for interim and annual financial statements for periods ending
after December 15, 1997. Under FAS 128, basic and diluted earnings per share
are to be presented. Basic earnings per share is computed by dividing income
available to common shareholders by the weighted average number of common shares
outstanding in the period. Diluted earnings per share takes into consideration
common shares outstanding (computed under basic earnings per share) and
potentially dilutive common shares. Stock purchase warrants outstanding have
not been reflected as exercised for the purposes of computing diluted earnings
or loss per share since the exercise of such warrants, would be antidilutive.
Accordingly, basic and diluted earnings or loss per share are the same. The
weighted average number of shares was 15,419,174 and 12,944,917 for the three
month periods ended March 31, 1999 and 1998. For the purpose of calculating
consolidated loss per share, it is assumed that the 858,025 shares issued to
acquire Avatar were issued on January 1, 1999, the earliest date the results of
operations and cash flows of Avatar are included in the consolidated financial
statements.

F-8
<PAGE>

INDEPENDENT AUDITORS' REPORT

To the Board of Directors
Interactive Objects, Inc.
Seattle, Washington

We have audited the accompanying balance sheet of Interactive Objects, Inc. as
of December 31, 1998, and the related statements of operations, stockholders'
equity, and cash flows for the years ended December 31, 1998 and 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Interactive Objects, Inc. as of
December 31, 1998, and the results of its operations and its cash flows for the
years ended December 31, 1998 and 1997, in conformity with generally accepted
accounting principles.

/s/ Peterson Sullivan P.L.L.C.

February 10, 1999

F-9
<PAGE>

INTERACTIVE OBJECTS, INC.
BALANCE SHEET
December 31, 1998

<TABLE>
<S> <C>
ASSETS
---------------------
Current Assets
Cash $ 3,298,278
Certificate of deposit 106,145
Accounts receivable 14,000
Prepaid expenses 147,431
-----------
Total current assets 3,565,854

Furniture and Equipment, at cost, less accumulated
depreciation of $84,610 226,598

Other Assets
Deposits 6,934
-----------
Total Assets $ 3,799,386
===========

LIABILITIES AND STOCKHOLDERS' EQUITY
----------------------------------------

Current Liabilities
Accounts payable $ 85,395
Accrued expenses 255,095
-----------
Total current liabilities 340,490

Stockholders' Equity
Preferred stock, $.01 par value; 2,000,000 authorized,
no shares issued and outstanding
Common stock, $.01 par value; 50,000,000 shares authorized,
14,708,927 shares issued and outstanding 147,089
Additional paid-in capital 9,000,485
Retained deficit (5,688,678)
-----------
3,458,896
-----------
Total Liabilities and Stockholders' Equity $ 3,799,386
===========
</TABLE>

See Notes to Financial Statements

F-10
<PAGE>

INTERACTIVE OBJECTS, INC.
STATEMENTS OF OPERATIONS
Years Ended December 31, 1998 and 1997

<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
------------- -------------
<S> <C> <C>
Revenues
Service revenue $ 2,122,846 $ 365,631

Expenses
Labor and benefits 3,427,782 787,458
Selling, general and administrative 2,956,963 1,256,432
------------- ------------
6,384,745 2,043,890
------------- ------------

Loss from operations (4,261,899) (1,678,259)

Other income 24,800
Interest income 107,703
Interest expense (16,118) (7,007)
------------- ------------

Net Loss $ (4,145,514) (1,685,266)
============= ============
Basic loss per share of common stock $ (0.30) (0.18)
============= ============
</TABLE>

See Notes to Financial Statements

F-11
<PAGE>

INTERACTIVE OBJECTS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 1998 and 1997

<TABLE>
<CAPTION>
Additional
Common Common Paid-in Retained
Shares Stock Capital Deficit Total
----------- -------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Balances, December 31, 1996 782,600 $ 3,000 $ 83,830 $ (84,586) $ 2,244

Reclassification of undistributed losses on
effective date of change from S corporation
status to C corporation status (226,688) 226,688

Affect on capital structure resulting from
reverse purchase
Cancellation of shares of Interactive at
the time of reverse purchase (782,600)
Issuance of stock as consideration for
shares canceled above 7,460,800 8,191 (8,191)
Acquisition of Asia Pacific 1,100,082 1,650 (5,150) (3,500)

Exchange of note payable for common stock
The note was for $62,500 with accrued
interest of $12,502 112,607 169 74,833 75,002
Issuance of stock for cash 3,071,428 4,607 1,210,443 1,215,050
Issuance of stock in exchange for services 1,200,000 1,800 778,200 780,000
Net loss (1,685,266) (1,685,266)
---------- -------- ---------- ----------- -----------
Balances, December 31, 1997 12,944,917 19,417 1,907,277 (1,543,164) 383,530

Convert par value from $.0015 to $.01 per share 110,032 (110,032)

Issuance of stock in exchange for cash 1,534,010 15,340 6,120,700 6,136,040

Issuance of stock in exchange for services 230,000 2,300 917,700 920,000

Issuance of stock purchase warrants
in exchange for services 164,840 164,840

Net Loss (4,145,514) (4,145,514)
---------- -------- ---------- ----------- -----------
Balances, December 31, 1998 14,708,927 $147,089 $9,000,485 $(5,688,678) $ 3,458,896
========== ======== ========== =========== ===========
</TABLE>

See Notes to Financial Statements

F-12
<PAGE>

INTERACTIVE OBJECTS, INC.
STATEMENTS OF CASH FLOWS
Years Ended December 31, 1998 and 1997

<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
------------ ------------
<S> <C> <C>
Cash Flows from Operating Activities
Net loss $ (4,145,514) $ (1,685,266)
Adjustments to reconcile net loss to
Net cash used in operating activities:
Issuance of stock and stock purchase
warrants in exchange for services 1,084,840 780,000
Depreciation and amortization 53,499 17,023
Disposal of capitalized software costs 165,000
Changes in operating assets and liabilities:
Accounts receivable (3,302) (10,698)
Prepaid expenses and deposits (106,928) (43,893)
Accounts payable (100,543) 164,513
Accrued expenses 192,201 50,618
------------ ------------
Cash used in operating activities 2,860,747 (727,703)

Cash Flows from Investing Activities
Purchase of equipment (89,646) (177,862)
Investment in certificate of deposit (4,836) (101,309)
Capitalization of Software Costs (35,000)
------------ ------------
Cash used in investing activities (129,482) (279,171)
Cash Flows from Financing Activities
Issuance of common stock 6,136,040 1,286,552
Proceeds of notes payable 600,000
Payments on notes payable (662,500) (80,500)
------------ ------------
Cash provided by financing activities 6,073,540 1,206,052
------------ ------------
Net increase in cash 3,083,311 199,178
------------ ------------
Cash, beginning of year 214,967 15,789
------------ ------------
Cash, end of year $ 3,298,278 $ 214,967
============ ============
</TABLE>

See Notes to Financial Statements

F-13
<PAGE>

INTERACTIVE OBJECTS, INC.

NOTES TO FINANCIAL STATEMENTS

Note 1. Organization and Significant Accounting Policies

Organization
- ------------

Neoteric Media, Inc. d/b/a Interactive Objects, Inc. ("Neoteric") was
incorporated under the laws of Washington on October 20, 1995. Effective August
31, 1997, the stockholders of Neoteric exchanged their stock for the common
stock of another company named Asia Pacific Chemical Engineering Co., Ltd.
("Asia Pacific"). Because Neoteric is the continuing company, this business
combination has been accounted for as a reverse purchase. Asia Pacific had no
assets, but did have liabilities of $3,500. The assumption of these liabilities
was considered the cost of Asia Pacific. Asia Pacific's operations, which were
insignificant, have been included in these financial statements since the
effective date of the exchange.

Subsequent to the business acquisition, Neoteric merged into Asia Pacific and
Asia Pacific changed its name to Interactive Objects, Inc. ("Interactive
Objects").

Concentration of Market and Credit Risk
- ---------------------------------------

In 1997 and 1998, Interactive Objects sold computer consulting services. Revenue
from consulting services provided to two international companies (Microsoft and
SAFECO) accounted for almost all of total revenue during each of the last two
years.

In 1999, Interactive Objects is focusing more attention on development and
licensing of its intellectual property, building strategic relationships and
enhancing its software consulting group.

Use of Estimates
- ----------------

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

Software Consulting Services Revenue Recognition
- ------------------------------------------------

For most contracts, software consulting service revenue (including post-contract
customer support) is recognized as the services are performed and is determined
by multiplying the hours incurred by an established hourly rate. On occasion,
other contracts stipulate billings be made at certain points based on
performance of specified tasks. In these situations, software consulting revenue
is recognized as billings are made at the amount of the billing. This revenue
recognition method is not materially different than recognizing revenue as
services are performed.

Advertising Costs
- -----------------

Advertising costs are expensed as incurred and totaled $148,691 for 1998, and
$91,278 for 1997.

F-14
<PAGE>

Cash
- ----

Cash includes cash balances held at a bank and all highly liquid debt
instruments with original maturities of three months or less. Cash balances are
in excess of amounts insured by the Federal Deposit Insurance Corporation.

No cash payments for income taxes were made during the years ended December 31,
1998 and 1997. Interactive Objects paid $16,118 for interest during 1998 and
$7,007 in 1997.

Certificate of Deposit
- ----------------------

Certificates of deposit are stated at market value which approximates cost.

Accounts Receivable
- -------------------

Interactive Objects uses the allowance method for recognizing bad debts.
Management believes no allowance is necessary as of December 31, 1998.

Furniture and Equipment
- -----------------------

Furniture and equipment are depreciated using the straight-line method over the
estimated useful lives of the related assets.

Capitalized Computer Software
- -----------------------------

Interactive Objects purchased Visual Gateway Interface from a partnership
partially owned by a stockholder of Neoteric and recorded it at a cost of
$130,000. It was paid for with cash of $67,500, a note payable for $62,500, and
80,000 shares of common stock of Neoteric (due to the reverse purchase, this is
equivalent to 762,688 shares of Interactive Objects common stock at December 31,
1997). At the time of the transaction, the stock was determined to have an
insignificant value. The costs to acquire Visual Gateway Interface and other
software created and purchased during 1998 of $165,000 were written off during
1998.

Taxes on Income
- ---------------

Interactive Objects accounts for income taxes under an asset and liability
approach that requires the recognition of deferred tax assets and liabilities
for expected future tax consequences of events that have been recognized in
Interactive Objects' financial statements or tax returns. In estimating future
tax consequences, Interactive Objects generally considers all expected future
events other than enactments of changes in the tax laws or rates.

For a portion of 1997, Interactive Objects (then Neoteric) was an S-corporation
for income tax purposes, so income tax effects were recognized at the
stockholder level. Pro forma tax expense and related per share data if
Interactive Objects had been a C corporation for all periods presented would be
the same as that presented in the financial statements. Interactive Objects
incurred losses in 1997. If it were a C corporation, any benefit from these
losses would be fully reserved.

Earnings Per Share
- ------------------

F-15
<PAGE>

consideration common shares outstanding (computed under basic earnings per
share) and potentially dilutive common shares. Stock purchase warrants
outstanding have not been reflected as exercised for the purposes of computing
diluted earnings or loss per share since the exercise of such warrants would be
antidilutive. Accordingly, basic and diluted earnings or loss per share are the
same. The weighted average number of shares was 13,985,718 and 9,191,569 for the
years ended December 31, 1998 and 1997.

In order to be comparative, the number of shares of common stock outstanding
used to calculate earnings per share has assumed the Interactive Objects (then
Neoteric) shareholders had exchanged their 782,600 of Neoteric stock for
7,460,800 shares of Asia Pacific stock as of January 1, 1997.

Preferred Stock
- ---------------

The rights and restrictions of preferred stock is to be determined by
Interactive Objects when the stock is issued. Each preferred stock issuance will
be in a series, and each series will have the same rights and restrictions.

Stock-Based Compensation
- ------------------------

Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," encourages, but does not require, companies to record
compensation cost for stock-based employee compensation plans at fair value.
Interactive Objects has chosen to account for stock-based compensation using
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees." Accordingly, compensation cost for stock options granted to
employees is measured as the excess, if any, of the quoted market price of
Interactive Object's stock at the date of the grant over the amount an employee
is required to pay for the stock.

Comprehensive Income
- --------------------

Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income," is effective for years beginning after December 15, 1997. The primary
objective of this statement is to report and disclose a measure of all changes
in equity of an entity that result from transactions and other economic events
of the period other than transactions with owners. Interactive Objects had no
items that resulted in difference between comprehensive income and the net loss
as shown on the statement of operations.

New Accounting Standards
- ------------------------

Statement of Financial Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities," established accounting and reporting standards for
derivative instruments and for hedging activities. Because Interactive Objects
does not currently engage in any derivatives or hedging activities, there is no
impact on its financial statements.

Statement of Financial Standards No. 134, "Accounting for Mortgage-Backed
Securities Retained After the Securitization of Mortgage Loans Held for Sale by
a Mortgage Banking Enterprise," does not apply to the Company.

Note 2. Consulting Agreement

Interactive Objects has a consulting agreement with a company ("consultant")
that is a shareholder of Interactive Objects. The agreement provides for monthly
payments of $3,000 to the consultant until June 2000. The consultant acquired
common stock of Interactive Objects for services rendered as part of the
organizational changes described in Note 1 which resulted in total ownership of
1.2 million common shares. The consultant was not a shareholder when the
consulting agreement was signed, but became a shareholder when the 1.2 million
shares were issued.

F-16
<PAGE>

Compensation expense associated with the portion of the consulting agreement for
obtaining equity financing was based on a value of $.65 per share, which was
determined based on discounting the then-market price of Interactive Objects'
common stock, because the shares issued to the consultant were restricted and
because the volume of trading of Interactive Objects' stock that was not
restricted was relatively low. Finally, the value was discounted further because
of the risks involved with Interactive Objects being a relatively new company.
The resulting compensation expense recognized for the stock issuance was
$780,000 in 1997. In addition, Interactive Objects paid the consultant $18,000
during the year ended December 31, 1997 and $60,000 during the year ended
December 31, 1998.

Note 3. Notes Payable

A note payable (a convertible promissory note) to a stockholder for $73,194 was
converted into 112,607 shares of Interactive Objects common stock during 1997.
This conversion was made at the election of the stockholder. The conversion rate
was determined to be at $0.65 per share and was established by negotiations
between the stockholder and Interactive Objects. The market for Interactive
Objects common stock was very limited at the time the negotiations took place.

Note 4. Leases

Interactive Objects leases office space under an operating lease expiring in
November 2000. A portion of the office space is subleased. The following are the
future minimum rental payments required (and future sublease payments to be
received) for the years ending December 31:

<TABLE>
<CAPTION>
Sublease Net
Total Payments Payments
-------------- ----------- --------------
<S> <C> <C> <C>
1999 $ 130,663 $ 51,681 $ 78,982
2000 124,998 47,374 77,624
-------------- ----------- --------------

$ 255,661 $ 99,055 $ 156,606
============== =========== ==============
</TABLE>

Rent expense was $153,224, net of $23,504 in sublease rentals for the year ended
December 31, 1998. During the year ended December 31, 1997, there were no
sublease rentals and rent expense was $42,566.

Note 5. Warrants Outstanding

At December 31, 1998, Interactive Objects had stock purchase warrants
outstanding for the purchase of 1,028,401 shares of its common stock at prices
ranging from $4.00 to $7.00 per share. These warrants were issued in exchange
for services and were valued at the fair value of the services received. The
warrants are exercisable at any time. Of the total warrants outstanding, 75,000
warrants expire during 1999 and 953,401 expire during 2000.

Subsequent to December 31, 1998, the board of directors of Interactive Objects
repriced stock purchase warrants for the purchase of 500,000 shares of its
common stock from $4.00 to $1.41. The amount of expense attributable to the
repricing was not material.

F-17
<PAGE>

Note 6. Income Taxes

The reconciliation of income tax on income computed at the federal statutory
rates to income tax expense is as follows:

<TABLE>
<CAPTION>
1998 1997
----------------- ----------------
<S> <C> <C>
Tax at statutory rate $ 1,409,475 $ 572,990

Change in valuation allowance for deferred tax asset (1,036,320) (261,120)

Costs associated with raising capital (nondeductible) (373,155) (265,200)

Effect of loss being taxed at stockholder level (46,670)
----------------- ----------------

Income tax expense $ - $ -
================= ================
</TABLE>

Interactive Objects' deferred tax asset as of December 31, 1998, is as follows:

<TABLE>
<S> <C>
Net operating loss carryforwards $ 1,297,440

Accrued vacation deductible for tax when paid 9,180
---------------

1,306,620

Less valuation allowance for deferred tax asset (1,306,620)
---------------

Net deferred tax asset $ -
===============
</TABLE>

Interactive Objects has net operating loss carryforwards of $3,853,000 and
$768,000 at December 31, 1998 and 1997, respectively. These losses at December
31, 1998, expire in 2012 and 2018.

Note 7. Stock-Based Compensation

Interactive Objects established a fixed employee stock-based compensation plan
in 1998. Under this plan, Interactive Objects may grant options for up to
2,000,000 shares of common stock. The exercise price of each option is equal to
the market price of the Company's stock on the date of grant. Generally, the
maximum term of the options is ten years, and they vest over four years at a
rate of 25% per year on each anniversary date of the grant or according to
individual agreements.

The fair value of each option granted is estimated on the grant date using the
Black-Scholes model. The following assumptions were made in estimating fair
value:

<TABLE>
<CAPTION>
Assumption
-----------------------------
<S> <C>
Dividend yield 0.0%
Risk-free interest rate 4.5%
Expected life 3 years
Expected volatility 90.50%
</TABLE>

Interactive Objects applies APB Opinion 25 in accounting for its stock
compensation plan. Accordingly, no compensation expense has been recognized in
these financial statements. Had compensation expense been determined on the
basis of fair value pursuant to FASB Statement No. 123, net loss would have been
$(4,588,514)

F-18
<PAGE>

(reported amount was $(4,145,514)). Earnings per share (basic and diluted) would
have been $(.33) (reported amount was $(.30)).

The following is a summary of the status of the plan during 1998:

<TABLE>
<CAPTION>
Weighted
Number of Average
Shares Exercise Price
------------------ ----------------
<S> <C> <C>
Outstanding at January 1, 1998 - $ -

Granted 1,482,875 1.42
Exercised - -
Forfeited - -
------------------ ----------------

Outstanding at December 31, 1998 1,482,875 $ 1.42
================== ================

Weighted average fair value of options
granted during 1998 $ .32

==================
</TABLE>

At December 31, 1998, outstanding options had an exercise price range of $1.41
to $2.62. There were 1,482,875 options outstanding with a weighted average
remaining contractual life of ten years and a weighted average exercise price of
$1.42. There were 541,791 options exercisable with a weighted average exercise
price of $1.42 at December 31, 1998.

Subsequent to December 31, 1998, Interactive Objects established a performance-
based bonus plan whereby stock options are to be granted to employees based on
the financial performance of the company during 1999. According to the bonus
plan, the options will be granted at fair market value at the time of the grant
subject to vesting provisions under the employee stock compensation plan.

F-19
<PAGE>

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

No dealer, salesman or any other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus in connection with the offer made by this Prospectus and, if given or
made, such information or representations must not be relied upon as having been
authorized by the Company. This Prospectus does not constitute an offer of any
securities other than those to which it relates or an offer to sell, or a
solicitation of an offer to buy, to any person in any jurisdiction where such an
offer or solicitation would be unlawful. Neither the delivery of this Prospectus
nor any sale made hereunder shall, under any circumstances, create any
implication that there has been no change in the affairs of the Company since
the dates as to which information is given in this Prospectus.

____________________

TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Where You Can Find More Information 2
Statement of Forward Looking Information 2
Prospectus Summary 3
Risk Factors 4
Use of Proceeds 13
Selling Shareholders 13
Dividend Policy 17
Capitalization 17
Management's Discussion and Analysis of
Financial Condition and Results of
Operations 18
Business 24
Management 31
Certain Transactions 37
Principal Shareholders 38
Description of Securities 40
Market for Common Equity and Related
Stockholder Matters 42
Shares Eligible for Future Sale 42
Plan of Distribution 43
Legal Matters 44
Experts 45
Index to Financial Statements F-1
</TABLE>

____________________

2,925,018 Shares

[LOGO]

Common Stock

__________
PROSPECTUS
__________

June 10, 1999

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