INTERACTIVE OBJECTS INC, 10KSB, 2000-03-30

INTERACTIVE OBJECTS INC
10KSB, 2000-03-30
COMPUTER INTEGRATED SYSTEMS DESIGN

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

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

FORM 10-KSB

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

For the fiscal year ended December 31, 1999

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

For the transition period from _____________ to ___________________

Commission file number _______________________________________

Interactive Objects, Inc.
--------------------------
(Name of Small Business Issuer in Its Charter)

<TABLE>
<S> <C>
State of Washington 87-0434226
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(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
</TABLE>

12600 SE 38th Street, Suite 150, Bellevue, Washington 98006
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(Address of principal executive offices) (Zip Code)

(425) 653-5505
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Issuer's telephone number

Securities registered under Section 12(b) of the Exchange Act:

None.

Securities registered under Section 12(g) of the Exchange Act:

Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Common Stock, $.01 par value Nasdaq OTC Bulletin Board

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

Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ ]

The registrant's revenues for its most recent fiscal year were $3,202,367.

As of December 31, 1999, there were 14,616,952 shares of the Registrant's common
stock issued and outstanding and the aggregate market value of such common stock
held by non-affiliates (13,589,559 shares) was approximately $16,558,877 based
on the average of the bid ($1.187) and ask ($1.25) prices on that date of
$1.2185.

Transitional Small Business Disclosure Format (check one): [ ] Yes [x] No
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PART I
BUSINESS

Item 1. Description of Business

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.

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 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 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.

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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, which includes the Mobile Audio Player, to Microsoft in March 1999.

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
for music files on devices running Windows CE while simultaneously increasing
the device's multi-tasking abilities.

In addition to codec support for MP3 and WMA, the Mobile Audio Player was
also 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 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

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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.

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 1999 and 1998, Interactive Objects sold
computer consulting services and electronic computer related-devices it
developed. Revenue from three international companies (Microsoft, SAFECO, and
Labor Ready) accounted for almost all of the total revenue during each of the
last two years. 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 "Item 1. Description of Business - Risk
Factors."
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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 "Item 1. Description of Business - 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 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 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 "Item 1. Description of Business - 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 "Item 1. Description of Business -
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 "Item 1. Description of
Business - Risk Factors."
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. 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 "Item 1. Description of
Business - 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 "Item 1.
Description of Business - 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 distribution. This marketing strategy enables the
Company to eliminate most of the manufacturing, distribution and inventory costs
traditionally associated with selling software. See "Item 1. Description of
Business - 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 website 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

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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 "Item 1. Description of Business - 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
"Item 1. Description of Business - 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 "Item 1.
Description of Business - 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.

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
<PAGE>

affect the Company's business, operating results and financial condition. See
"Item 1. Description of Business- 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.

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.

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
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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 "Item 1. Description of Business - 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 December 31, 1999, the Company and its subsidiary Avatar had a total
of 15 employees, all of whom were based in the Bellevue, 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 "Item 1.
Description of Business - Risk Factors."

Risk Factors

In addition to the other information in this Report, the following risk
factors should be considered carefully in evaluating the Company and its
business. This registration statement may contain forward-looking statements
that involve risks and uncertainties. When used in this registration statement,
the words "anticipate," "believe," "effect," "estimate," "expect" and similar
expressions as they relate to the Company or its management are intended to
identify such forward-looking statements. The Company's actual results,
performance or achievements could differ materially from the results expressed
in or implied by these forward-looking statements. Factors that might cause such
differences include, but are not limited to, those discussed in "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business" as well as those discussed elsewhere in this Report.
<PAGE>

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

Our company 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, on an annual basis we have not been profitable. We
lost $761,091 for the year ended December 31, 1999. We lost $3,952,777 for the
year ended December 31, 1998. We cannot assure you that we 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 second quarter of 2000. 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 revenues for the first
nine months of 1998 was from our work from consulting services for one client.
In 1999, our revenues were primarily from product development and consulting
services. 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:
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. 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
<PAGE>

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
. 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.
<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 December 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
<PAGE>

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
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 certain of these employment contracts, see "Item
10. Management - Executive Compensation - Employment Contracts."
<PAGE>

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.

We are controlled by a number of existing shareholders.

A large percentage of our outstanding Common Stock (16.6% as of March 24,
2000, assuming full exercise of all stock options which are exercisable within
60 days of the date hereof), is owned by current directors and executive
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 directors and executive officers, see "Item 11. Security Ownership of
Certain Beneficial Owners and Management."

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;
<PAGE>

. 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;
. 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
<PAGE>

. 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 "Item 6. 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.

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.
<PAGE>

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

At December 31, 1999, there were approximately 953,401 shares of Common
Stock reserved for issuance upon the exercise of Warrants at prices ranging from
$1.41 to $7.00 per share. There is also an aggregate of 4,000,000 shares of
Common Stock reserved for issuance upon exercise of options granted under our
1998 Stock Option Plan. We have granted a total of 3,219,500 options to purchase
as of March 1, 2000 at a weighted average exercise price of approximately $1.31
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.

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.

As of March 24, 2000, there are 14,616,952 shares of Common Stock
outstanding. There are 5,165,526 previously issued shares that are freely
tradable without restriction or further registration.

Other than the Shares being registered by our Form SB-2, we have not
granted any registration rights with regard to any additional shares of Common
Stock. All of the remaining 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.

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.

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 $0.91. 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.
<PAGE>

Because we are traded on the OTC Bulletin Board, we cannot guarantee there is an
orderly public market for our Common Stock. 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.

We have applied for listing on the Nasdaq National Market; however, for as
long as our Common Stock is traded on the OTC Bulletin Board and if our 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.

ITEM 2. DESCRIPTION OF PROPERTY.

In November 1999, we entered into a five-year lease in Bellevue, Washington
for 7,468 square feet of office space. We believe that our existing facilities
will be adequate for the foreseeable future and that sufficient additional space
will be available as needed thereafter on commercially reasonable terms.

ITEM 3. LEGAL PROCEEDINGS.

None.

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

No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year-ended December 31, 1999.

PART II

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

The Common Stock is traded on the OTC Bulletin Board under the symbol
"OBJX". On March 24, 1999, the closing bid and asked prices of the Common Stock
as reported on the OTC Bulletin Board were $6.47 and $6.53, respectively, and
the Common Stock was held of record by approximately 224 persons on such date
(excluding holders of shares issuable upon exercise of outstanding stock options
and Warrants). The Common
<PAGE>

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 .0937
Second Quarter 3.562 1.468
Third Quarter 2.718 1.25
Fourth Quarter 1.718 1.00
2000
First Quarter (through March 24, 2000) 9.687 1.125

</TABLE>

At March 24, 2000, there were 14,616,952 shares of Common Stock
outstanding.

No cash dividends have been paid on the capital stock of the Company and no
dividends are currently contemplated by management. There are no restrictions on
the payment of dividends.
<PAGE>

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

Statement of Forward-Looking Information

Overview

Former Microsoft employees founded Interactive Objects in 1995 to develop
object software for commercial Internet and intranet applications. Today, the
Company continues to evolve and expand its offerings by leveraging revenue
generating intellectual property and technical talent. Through its consulting
subsidiary, Avatar Interactive, the Company offers a full range of development
services including custom software solutions, Internet development, software
training, and testing. The Company's Information Appliances division continues
to develop and mature its research and development efforts for embedded systems.

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.

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 2000 on the expansion of its Information
Appliances division's development and licensing of its intellectual property,
building strategic relationships, and enhancing its software consulting group,
Avatar Interactive.

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
<PAGE>

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 served 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.

From June 30, 1999 to September 30, 1999, the Company's revenues were
derived from its Information Appliance division and its software consulting
division, Avatar Interactive. To date, the Company has provided consulting
services to predominately Fortune 1000 companies, including SAFECO, Microsoft,
Airborne Express, Paccar, Pinnacle, CourtLink, Eddie Bauer and Port Townsend
Paper. The Company's Information Appliances division 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 direct product of 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
devote further resources to product development for the Information Appliances
division of fiscal 2000. All costs incurred in the research and development of
products and enhancements to existing products have been expensed as incurred.

Results of Operations

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

Results of Operation for fiscal years ended December 31, 1999 and 1998

Revenues. Revenues for fiscal 1999 and 1998 were approximately $3,202,367
and $3,586,191, respectively. During fiscal 1999, the Company's revenues were
primarily generated from product development and consulting services and during
1998, substantially all of the Company's revenues were 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 10.7% decrease in gross revenue is
attributable primarily to the decreased services provided by the Company. See
"Item 1. Description of Business - 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
<PAGE>

specific project related expenditures. Labor and benefits expenses were
approximately $2,818,664 and $4,451,430 for fiscal 1999 and 1998, respectively,
a decrease of 36.7%. Labor and benefits consisted exclusively of salaries, taxes
and benefits. The decrease in labor and benefits expenses from fiscal 1998 to
fiscal 1999 was primarily attributable to the Company's restructuring plan
implemented in November 1998.

On December 31, 1999, the Company had 10 employees in product development
and software consulting services, 2 employees in sales and marketing and 3
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 $1,232,216 and $3,202,245 for fiscal
1999 and 1998, respectively. The amounts for fiscal 1998 include 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 38.5% for the year ended December 31, 1999 as compared to 89.3% for fiscal
1998. The decrease in selling, general, and administrative expenses was
primarily a result of the absence in 1999 of the one-time charges incurred by
the Company in 1998 and the Company's restructuring plan implemented in November
1998. The decrease as a percentage of gross revenues was due to the Company's
revenues growing at a greater rate than expenses.

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 2000 as a result of an anticipated expansion of the Company's
administrative staff required to support its growing operations. The Company
anticipates that it will begin to devote further resources to product
development in fiscal 2000. 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 was 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 was $17,970 in fiscal 1998, due to increased borrowings
during 1998. The Company did not have interest expense in fiscal 1999.

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.
<PAGE>

As of December 31, 1999, the Company had net operating loss carry-forwards
for federal income tax purposes of approximately $1,627,523. The federal net
operating loss carry-forwards expire between 2012-2019.

Net Loss. The Company recognized a net loss of approximately $761,091
(representing 23.8% of gross revenue) for fiscal 1999 as compared to a net loss
of $3,952,777 (representing 110.2% of gross revenue) for fiscal 1998. The
decrease in net loss on an absolute basis is due primarily to the decreased
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 2000, 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 December 31, 1999, the Company had cash and cash equivalents in the
aggregate amount of $1,922,392. The Company's working capital was $1,676,944 at
December 31, 1999 and $3,225,364 at December 31, 1998, an aggregate decrease of
$1,548,420 primarily attributable to funding of new product development and
other working capital needs. 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 the third quarter of
2000. 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. 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 "Item 1. Description of Business - Risk
Factors."

Net cash used in operating activities was $682,358 for fiscal 1999 as
compared to $2,523,090 for fiscal 1998. The decrease in net cash used in
operating activities was primarily attributable to the Company's net operating
loss.

Net cash used in investing activities was $140,211 for fiscal 1999, as
compared to $256,061 for fiscal 1998. The decrease in net cash used in
investing activities was primarily attributable to decreases in purchases of
equipment, offset by increased capitalized software costs.

Net cash used in financing activities was $601,574, as compared to net cash
provided by $5,910,719 for fiscal 1998. The decrease in net cash provided by
financing activities in fiscal 1999 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.
<PAGE>

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 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, 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.
<PAGE>

ITEM 7. FINANCIAL STATEMENTS

FINANCIAL STATEMENTS
OF
INTERACTIVE OBJECTS, INC.

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<S> <C>
Audited Financial Statements

Independent Auditors' Report

Consolidated Balance Sheets as of December 31, 1999 and 1998

Consolidated Statements of Operations for the Years ended December 31, 1999 and 1998

Statements of Stockholders' Equity for the Years ended December 31, 1999 and 1998

Consolidated Statements of Cash Flows for the Years ended December 31, 1999 and 1998

Notes to Audited Financial Statements
</TABLE>
<PAGE>

INDEPENDENT AUDITORS' REPORT

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

We have audited the accompanying consolidated balance sheet of Interactive
Objects, Inc. and Subsidiary as of December 31, 1999, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the years ended December 31, 1999 and 1998. 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Interactive Objects,
Inc. as of December 31, 1999, and the results of its operations and its cash
flows for the years ended December 31, 1999 and 1998, in conformity with
generally accepted accounting principles.

/s/ Peterson & Sullivan

February 8, 2000
<PAGE>

INTERACTIVE OBJECTS, INC.

CONSOLIDATED BALANCE SHEETS
December 31, 1999 and 1998
<TABLE>
<S> <C> <C>
ASSETS

Current Assets
Cash $ 1,922,392 $ 3,298,278
Certificate of deposit 110,743 106,145
Accounts receivable 174,935 14,000
Prepaid expenses 67,994 147,431

Total current assets 2,276,064 3,565,854

Furniture and Equipment, at cost,
less accumulated depreciation of $202,344 and $84,610 371,042 226,598

Other Assets
Deposits 17,161 6,934

$ 2,664,267 $ 3,799,386

LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities
Accounts payable $ 330,873 $ 85,395
Accrued expenses 148,134 225,095
Unearned revenue 59,113
Notes payable 61,000

Total current liabilities 599,120 340,490

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, 14,616,952 shares issued and outstanding 146,169 147,089
Additional paid-in capital 8,126,950 9,000,485
Retained deficit (6,207,972) (5,688,678)

2,065,147 3,458,896

$ 2,664,267 $ 3,799,386
</TABLE>

See Notes to Consolidated Financial Statements

<PAGE>

INTERACTIVE OBJECTS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 1999 and 1998

<TABLE>
<CAPTION>
1999 1998
------------------- ------------------
<S> <C> <C>
Revenue
Service and sales $ 3,202,367 $ 3,586,191

Expenses
Labor and benefits 2,818,664 4,451,430
Selling, general and administrative 1,232,216 3,202,245
------------------- ------------------

4,050,880 7,653,675
------------------- ------------------

Loss from operations (848,513) (4,067,484)

Other income 24,800
Interest income 87,422 107,877
Interest expense (17,970)
------------------- ------------------

Net loss $ (761,091) $ (3,952,777)
=================== ==================

Basic loss per share of common stock $ (0.05) $ (0.27)
=================== ==================
</TABLE>

See Notes to Consolidated Financial Statements

<PAGE>

INTERACTIVE OBJECTS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1999 and 1998

<TABLE>
<CAPTION>
1999 1998
------------------- ------------------
<S> <C> <C>
Cash Flows From Operating Activities
Net loss $ (761,091) $ (3,952,777)
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
Depreciation and amortization 104,905 66,342
Disposal of capitalized software costs 165,000
Changes in operating assets and liabilities
Accounts receivable (160,935) (3,302)
Prepaid expenses and deposits 76,087 (113,805)
Accounts payable and accrued expenses (437) 230,612
Unearned revenue 59,113
------------------- ------------------

Cash used in operating activities (682,358) (2,523,090)

Cash Flows From Investing Activities
Purchase of equipment (135,613) (216,225)
Investment in certificate of deposit (4,598) (4,836)
Capitalization of software costs (35,000)
------------------- ------------------

Cash used in investing activities (140,211) (256,061)

Cash Flows From Financing Activities
Issuance of common stock 6,158,047
Redemption of common stock (475,000)
Proceeds of notes payable 675,566
Payments on notes payable (53,774) (673,292)
Distributions - Avatar Interactive, Inc. (72,800) (249,602)
------------------- ------------------

Cash provided by (used in) financing activities (601,574) 5,910,719
------------------- ------------------

Net increase (decrease) in cash (1,424,143) 3,131,568

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

Cash, end of year $ 1,922,392 $ 3,346,535
=================== ==================
</TABLE>

See Notes to Consolidated Financial Statements
<PAGE>

INTERACTIVE OBJECTS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 1999 and 1998

<TABLE>
<CAPTION>
Additional
Common Common Paid-in Retained
Shares Stock Capital Deficit Total
---------- --------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Balances, December 31, 1997,
as previously reported 12,944,917 $ 19,417 $ 1,907,277 $ (1,543,164) $ 383,530

Avatar Interactive, Inc. pooling of interests 868,025 8,680 13,327 22,007
---------- --------- ----------- ------------ -----------
Balances, December 31, 1997, as restated 13,812,942 28,097 1,920,604 (1,543,164) 405,537

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

Distributions - Avatar Interactive, Inc. (249,602) (249,602)

Stock redemption - Avatar Interactive, Inc. (10,000) (100) (10,903) (38,997) (50,000)

Net loss (3,952,777) (3,952,777)
---------- --------- ----------- ------------ -----------
Balances, December 31, 1998 15,566,952 155,669 9,002,909 (5,784,540) 3,374,038

Redemption of stock (950,000) (9,500) (465,500) (475,000)

Distributions - Avatar Interactive, Inc. (72,800) (72,800)

Reclassification of undistributed losses
on effective date of change of Avatar
Interactive, Inc. from S corporation status
to C corporation status (410,459) 410,459

Net loss (761,091) (761,091)
---------- --------- ----------- ------------ -----------
Balances, December 31, 1999 14,616,952 $ 146,169 $ 8,126,950 $ (6,207,972) $ 2,065,147
========== ========= =========== ============ ===========
</TABLE>

See Notes to Consolidated Financial Statements
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Organization and Significant Accounting Policies

Organization

Interactive Objects, Inc. ("Interactive Objects") was founded in 1995 by former
Microsoft employees to develop object software for commercial internet and
intranet applications. Today, Interactive Objects continues to evolve and
expand its offerings by leveraging revenue generating intellectual property and
technical talent.

On March 31, 1999, Interactive Objects acquired Avatar Interactive, Inc.
("Avatar") in a business combination accounted for as a pooling of interests.
Avatar, which engages in software consulting, became a wholly-owned subsidiary
of Interactive Objects through the exchange of 858,025 shares of Interactive
Objects common stock for all of the outstanding stock of Avatar. The
accompanying financial statements for 1999 are based on the assumption that the
companies were combined for the full year, and financial statements of prior
years have been restated to give effect to the combination. Avatar was
originally incorporated on March 31, 1998.

Prior to March 31, 1999, Interactive Objects and Avatar, in the normal course of
business, entered into certain transactions for the purchase and sale of
services. These intercompany transactions have been eliminated in the
accompanying financial statements.

Summarized results of operations of the separate companies for the period from
January 1, 1999 through March 31, 1999, the date of acquisition, are as follows:

<TABLE>
<CAPTION>
Interactive Consolidating Consolidated
Avatar Objects Eliminations Amounts
---------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C>
Service revenue $ 547,371 $ 35,459 $ - $ 582,830

Net loss $(241,797) $(454,953) $ - $(696,750)
</TABLE>

Summarized results of operations of the separate companies for the period from
January 1, 1998 through December 31, 1998, are as follows:

Net income (loss) $ 192,737 $(4,145,514) $ - $(3,952,777)
</TABLE>

There are no effects of conforming Avatar's accounting policies to those of
Interactive Objects.

Concentration of Market and Credit Risk

In 1999 and 1998, Interactive Objects sold computer consulting services and
electronic computer-related devices it developed. Revenue from three
international companies (Microsoft, SAFECO, and Labor Ready) accounted for
almost all of total revenue during each of the last two years. Microsoft
revenue comes from three separate divisions within Microsoft. Accounts
receivable from Microsoft amounts to 88% of total accounts receivable at
December 31, 1999.

Use of Estimates
<PAGE>

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.

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of
Interactive Objects and its wholly-owned subsidiary, Avatar. All significant
intercompany accounts and transactions have been eliminated.

Revenue Recognition

Software consulting services: 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. Occasionally,
customers prepay consulting services fees resulting in unearned revenue.
Unearned revenue is recognized as earned revenue when the services are
performed.

Sale of electronic devices: Revenue is recognized when an unconditional sales
contract is signed and the product is shipped.

Advertising Costs

Advertising costs are expensed as incurred and totaled $3,530 for 1999 and
$148,691 for 1998.

Research and Development

Research and development costs are charged to operations when incurred and are
included in operating expenses. The amounts charged in 1999 were $404,312. No
research and development costs were paid in 1998.

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 1999 and 1998. Interactive
Objects paid $17,970 for interest during 1998. No interest was paid in 1999.

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 at December 31, 1999.

Furniture and Equipment

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

Taxes on Income
<PAGE>

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.

Earnings Per Share

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 14,814,760 and 14,843,743 for the years ended December 31, 1999 and
1998.

Preferred Stock

The rights and restrictions of preferred stock are to be determined by
Interactive Objects when the stock is issued.

Stock-Based Compensation

Interactive Objects accounts 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

Interactive Objects had no items that resulted in difference between
comprehensive income and the net loss as shown on the statement of operations.

Segment Reporting

Interactive Objects is managed as a single business segment. Accordingly, any
disclosures required by Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information," are
already incorporated in other financial statement disclosures.

New Accounting Standards

New accounting standards issued through the date of the independent auditors'
report do not have an effect on these financial statements.

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 October 2000. Interactive
Objects paid the consultant $36,000 during the year ended December 31, 1999, and
$60,000 during the year ended December 31, 1998.

Note 3. Notes Payable

Notes payable are non-interest bearing, are repayable in monthly installments of
$7,000, and are due in 2000. Due to the relatively short term of these notes,
the fair value of the notes is not materially different than the value recorded
in the financial statements. One note with a balance of $45,000 at December 31,
1999, is guaranteed by the previous shareholder of Avatar.
<PAGE>

Note 4. Leases

Interactive Objects leases office space under an operating lease expiring in
October 2004. The following are the future minimum rental payments required for
the years ending December 31:

Rent expense was $162,099, net of $23,504 in sublease rentals for 1998. Rent
expense was $101,437, net of $47,374 in sublease rentals for 1999.

Note 5. Warrants Outstanding

At December 31, 1999, Interactive Objects had stock purchase warrants
outstanding (issued in 1998) for the purchase of 953,401 shares of its common
stock at prices ranging from $1.41 to $7.00 per share. These warrants were
issued in exchange for services and were valued at the fair value of the
services received and expire at various dates in 2000.

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>
1999 1998
------------ ------------
<S> <C> <C>
Tax at statutory rate $ 258,771 $ 1,409,475

Change in valuation allowance for deferred tax asset
(200,449) (1,036,320)

Effect of loss being taxed at stockholder level (58,322)

Costs associated with raising capital (nondeductible)
(373,155)
------------ ------------
$ - -
============ ============
</TABLE>

Interactive Objects' deferred tax asset as of December 31, 1999, is as follows:

<TABLE>
<S> <C>
Net operating loss carryforwards $ 1,627,523

Accrued vacation deductible for tax when paid 15,232
---------------------

1,642,755

Less valuation allowance for deferred tax asset (1,642,755)
---------------------

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

Interactive Objects has net operating loss carryforwards of $4,714,000 at
December 31, 1999. These losses expire in years 2012 through 2019.
<PAGE>

Note 7. Stock-Based Compensation

Interactive Objects established a non-qualified fixed stock option plan in 1998.
Under this plan, Interactive Objects may grant options for up to 4,000,000
shares of common stock. The exercise price of each option is established on the
date of grant by the plan administrator. 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>
1999 1998
------------------ ------------------
<S> <C> <C>
Dividend yield 0.0% 0.0%
Risk-free interest rate 4.5% 4.5%
Expected life 3 years 3 years
Expected volatility 77.23% 90.50%
</TABLE>

Compensation

Proforma information with respect to fair value accounting for Interactive
Objects' stock option plan is as follows:

Net Loss 1999 1998
- ---------------------------- --------------------- ---------------------
<S> <C> <C>
As reported $(761,091) $(3,952,777)
===================== =====================
Proforma $(802,091) $(4,395,777)
===================== =====================

Basic Loss Per Share
- ----------------------------

As reported $ (0.05) $ (0.27)
===================== =====================
Proforma $ (0.05) $ (0.30)
===================== =====================
</TABLE>

The following is a summary of the status of the plan during 1999 and 1998:

<TABLE>
<CAPTION>
Weighted Average
Number of 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

Granted 2,032,000 1.25
Exercised - -
Forfeited (295,375) 1.41
--------------------- ---------------------

Outstanding at December 31, 1999 3,219,500 $1.31
===================== =====================
</TABLE>

Weighted average fair value of options granted during 1999 and 1998 was $.18 and
$.32, respectively.

Following is a summary of the status of options outstanding at December 31,
1999:
<PAGE>

<TABLE>
<CAPTION>
Outstanding Options Exercisable Options
- -------------------------------------------------------------------------------- -------------------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Exercise Price Contractual Exercise Exercise
Range Number Life Price Number Price
- ----------------- --------------- ------------------ ---------------- --------------- ------------------
<S> <C> <C> <C> <C> <C>
$1.09-1.34 1,789,000 10 years $ 1.20 94,734 $ 1.28
$ 1.41 1,397,500 9 years $ 1.41 1,025,412 $ 1.41
$1.50-2.31 33,000 10 years $ 2.21 25,000 $ 2.31
</TABLE>
<PAGE>

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

None.

PART III

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

The following table sets forth the names and ages of the current
directors, executive officers and key employees 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 and from the resignation of Thad E. Wardall in October, 1999. We are
searching for qualified candidates to fill the Board vacancies that currently
exist; however, no persons have been identified. The term of office for the
Class II director (Steven G. Wollach) expires at the Annual Meeting of
Shareholders to be held in 2000; the terms of office for Class III directors
(two current vacancies) expire at the Annual Meeting of Shareholders to be held
in 2001; and the terms of office for Class I directors (Brent Nelson and Peter
Miller) expire at the Annual Meeting of Shareholders to be held in 2000.

The executive officers of the Company are appointed 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 "Item 12.
Certain Relationships and Related 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 33 Executive Vice President
Mark Phillips 25 Chief Technology Officer
Robyn L. Byrd 37 Corporate Secretary
Brent Nelson 38 Director
Peter Miller 44 Director
</TABLE>

Peter Miller has served as a Director of the Company since December 16,
1999. Mr. Miller served in as an attorney in the legal department of Microsoft
Corporation from 1989 to 1998. Mr. Miller also serves on the boards of directors
of Seattle Biomedical Research Institute, an infectious disease research company
and Innovative Research Labs, a medical equipment and accessories company.

Brent Nelson 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;
Mobile PET Systems, Inc., a medical company; and Polar Cargo Systems, Inc., a
refridgeration trucking company.
<PAGE>

Steven G. Wollach was 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.

Robyn L. Byrd was 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 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 was 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 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 six meetings during 1999. 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 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 3 meetings during 1999.

The Compensation Committee, consisting of Messrs. Nelson and Wollach, makes
recommendations regarding the Company's 1998 Stock Option Plan and decisions
concerning the salaries and incentive
<PAGE>

compensation for employees and consultants of the Company. The Compensation
Committee held 3 meetings during 1999.

Compensation of Directors

During 1999, non-employee directors were compensated for their service on
the Company's Board of Directors and any committees on which they served. Brent
Nelson, a non-employee director, received a one-time grant of stock options to
purchase 100,000 shares of Common Stock and was 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. All of such options vest one year from
the date of grant.

Effective on August 19, 1998, the Board of Directors adopted a new
compensation policy for the non-employee 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 closing trade price on the date of grant,
which options will vest 100% on the one-year anniversary of the date of grant.

Compliance with Section 16(a) of the Exchange Act

Based on the Company's review of copies of forms filed with the Securities
and Exchange Commission or written representations from certain reporting
persons, in compliance with Section 16(a) of the Securities Exchange Act of
1934, the Company believes that during fiscal year 1999, all officers,
directors, and greater than ten-percent beneficial owners complied with the
applicable filing requirements, except for three reports filed late by Steven
Jackson, Thad Wardall and Peter Miller. Form 4s were filed in November 1999 for
sales made by Mr. Jackson and Mr. Wardall in August 1999, and a Form 3 was filed
in January 2000 for Mr. Miller, upon his election as a director of the Company
effective December 17, 1999.

ITEM 10. EXECUTIVE COMPENSATION

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
Executive Officer during 1999.

<TABLE>
<CAPTION>
Long Term Compensation Awards
-------------------------------------
Securities Underlying
Name and Principal Position Year Salary ($) Bonus ($) Options/SARs (#)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Steven G. Wollach (1) 1999 $175,000 $70,192 100,000
President and Chief Executive Officer 1998 117,500 17,500
1997 15,385 --
Steve Jackson 1999 127,665 12,500
Executive Vice President
Mark Phillips 1999 98,384 25,000
Chief Technology Officer
Kayleen Arafiles (2) 1999 100,151
Former Vice President of Consulting
Services and President, Avatar
Interactive
</TABLE>
<PAGE>

(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) Ms. Arafiles resigned from the Company as of January 2000.

Option/SAR Grants in Last Fiscal Year

Percent of total
Number of Securities options/SARs granted
Underlying Options/ to employees in fiscal Exercise or base
Name SARs granted (#) year price ($/Sh) Expiration Date
<S> <C> <C> <C> <C>
Steven G. Wollach 300,000 15% $1.28 4/23/09-12/16/09
Steve Jackson 40,000 2% $1.25 12/31/09
Mark Phillips 805,000 40% $1.28-$1.41 1/7/09-12/16/09
</TABLE>

Employment Contracts

Effective November 1, 1998, the Company entered into a new employment
agreement with Mr. Wollach to serve as President and Chief Executive Officer of
the Company. The employment agreement runs through December 31, 1999 and
provides for an annual base salary to Mr. Wollach of $135,000, 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 $135,000 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 of two years from the date of the employment agreement.
The employment agreement also amended Mr. Wollach's prior stock option grant of
200,000 shares to provide that options for 60,000 shares would be immediately
vested and options for 140,000 shares vest monthly over a period of two years
from the date of the employment agreement. All of Mr. Wollach's options
accelerate and
<PAGE>

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 at an annual salary of $175,000. 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.

On December 16, 1999, Mr. Wollach's employment agreement was amended to
extend the agreement for an additional year, to increase the quarterly bonus for
satisfaction of Company quarterly financial goals as set in advance by the Board
of Directors from $5,000 to $10,000, and to increase the bonus in the event of a
merger or acquisition from $40,000 to $50,000. Additionally, the exercise price
of options to purchase the Company's stock previously granted to Mr. Wollach on
April 23, 1999 were repriced from $1.75 to $1.28.

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

In addition, in October 1997 the Company's Board of Directors adopted an
executive compensation policy for certain 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.

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 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 a pool of options will be available for other Company
employees. The number of options in the pool for other Company employees and
management team is based on the Company's financial target; and the maximum
number of options in the pool is options to purchase 750,000 shares each if all
metrics are achieved. 140,000 options to purchase common shares were granted
under this plan. 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. 15,000 options to purchase common
shares were granted under this plan.

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.
<PAGE>

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 March 24, 1999 was $6.468 and $6.531, 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.

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.
<PAGE>

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.

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

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 the Company's Common Stock as of March
24, 2000. 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>
Steven G. Wollach (3) 852,282 5.5%
Kayleen Arafiles 858,025 5.9%
All Directors and Executive 2,429,675 16.6%
Officers as a Group (5 persons) (4)
</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
<PAGE>

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
March 24, 1999.

(3) Represents stock options to purchase 852,282 shares of common stock, which
stock options are exercisable within 60 days of the date hereof.

(4) Consists of Messrs. Wollach, Nelson, Miller, Phillips and Jackson. Includes
stock options to purchase 1,293,191 shares of common stock held by the
executive officers and directors as a group, which stock options are
exercisable within 60 days of the date hereof

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED 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 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.

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 two directors, Messrs. Wollach and Nelson, 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.
<PAGE>

Except as described above, within the last two years 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.

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

(A) EXHIBITS.

Exhibit
Number Description
- ------- ----------------------------------------------------------------------
2.1 Acquisition Agreement between Asia Pacific Chemical Engineering Corp.
and Neoteric Media, Inc., dated August 27, 1997, as filed in the
Company's Form SB-2 (file no. 333-62345) incorporated herein by
reference.

3.1 Articles of Incorporation filed April 14, 1998, as filed in the
Company's Form SB-2 (file no. 333-62345) incorporated herein by
reference.

3.2 Articles of Merger filed April 16, 1998, for reincorporation of
Interactive Objects, Inc. in the State of Washington, as filed in the
Company's Form SB-2 (file no. 333-62345) incorporated herein by
reference.

3.3 Bylaws, as filed in the Company's Form SB-2 (file no. 333-62345)
incorporated herein by reference.

4.1 Specimen Common Stock Certificate, as filed in the Company's Form SB-2
(file no. 333-62345) incorporated herein by reference.

4.2 Form of Common Stock Purchase Warrant, as filed in the Company's Form
SB-2 (file no. 333-62345) incorporated herein by reference.

4.3 Form of Common Stock Purchase Warrant, as filed in the Company's Form
SB-2 (file no. 333-62345) incorporated herein by reference.

10.1 1998 Stock Option Plan, as filed in the Company's Form SB-2 (file no.
333-62345) incorporated herein by reference.

10.2 Lease between Interactive Objects, Inc. and Sterling Realty
Organization Co. effective November 1, 1999 filed in the Company's
Form 10-QSB for the quarter ended September 30, 1999 incorporated
herein by reference.

10.3 Consulting Agreement between Interactive Objects, Inc. and Northwest
Capital Partners, L.L.C., dated July 11, 1997, as filed in the
Company's Form SB-2 (file no. 333-62345) incorporated herein by
reference.
<PAGE>

10.3A First Amendment to Consulting Agreement, dated August 25, 1998, as
filed in the Company's Form SB-2 (file no. 333-62345) incorporated
herein by reference.

10.3B Second Amendment to Consulting Agreement, dated November 1, 1998, as
filed in the Company's Form SB-2 (file no. 333-62345) incorporated
herein by reference.

10.4 Employment Agreement with Ryan Smith, dated January 1, 1998, as
amended as of July 1, 1998, as filed in the Company's Form SB-2 (file
no. 333-62345) incorporated herein by reference.

10.5 Employment Agreement with John J. Guarino, dated January 1, 1998, as
amended as of July 1, 1998, as filed in the Company's Form SB-2 (file
no. 333-62345) incorporated herein by reference.

10.6 Employment Agreement with Steven G. Wollach, dated November 1, 1998,
as filed in the Company's Form SB-2 (file no. 333-62345) incorporated
herein by reference.

10.7 Employment Agreement with Dale Western, dated October 12, 1998, as
filed in the Company's Form SB-2 (file no. 333-62345) incorporated
herein by reference.

10.8 Employment Agreement with Steve Jackson, dated January 1, 1998, as
filed in the Company's Form SB-2 (file no. 333-62345) incorporated
herein by reference.

10.9 Mutual Release and Settlement Agreement dated March 4, 1999 by and
among Interactive Objects, Inc., Ryan Smith and the other signatories
thereto, as filed in the Company's Form 8-K filed March 24, 1999
incorporated herein by reference.

10.10 Mutual Release and Settlement Agreement dated March 4, 1999 by and
among Interactive Objects, Inc., John Guarino and the other
signatories thereto, as filed in the Company's Form 8-K filed March
24, 1999 incorporated herein by reference.

10.11 Agreement and Plan of Merger (exclusive of schedules and exhibits)
dated as of March 31, 1999 by and between Interactive Objects, Inc.,
IO Acquisition Corp., Avatar Interactive, Inc. and Kayleen Arafiles,
as filed in the Company's Form 8-K filed April 15, 1999 incorporated
herein by reference.

27.1 Financial Data Schedule.

(B) REPORTS ON FORM 8-K.

No reports on Form 8-K were filed during the last quarter of the fiscal
year ended December 31, 1999.
<PAGE>

SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized on March 30, 2000.

INTERACTIVE OBJECTS, INC.

By: /s/ Steven G. Wollach
---------------------
Steven G. Wollach
President and Chief Executive Officer
(Principal Executive, Financial
and Accounting Officer)

In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities
indicated on March 30, 2000.

Signature Title
--------- -----

/s/ Steven G. Wollach President, Chief Executive Officer and Director
--------------------- (Principal Executive, Financial and Accounting
Steven G. Wollach Officer)

/s/ Brent Nelson Director
---------------------
Brent Nelson

/s/ Peter Miller Director
---------------------
Peter Miller

<PAGE>
<ARTICLE> 5

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 1,922,392
<SECURITIES> 110,743
<RECEIVABLES> 174,935
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,276,064
<PP&E> 17,161
<DEPRECIATION> 202,344
<TOTAL-ASSETS> 2,264,267
<CURRENT-LIABILITIES> 599,120
<BONDS> 0
0
0
<COMMON> 146,169
<OTHER-SE> 8,126,950
<TOTAL-LIABILITY-AND-EQUITY> 2,264,267
<SALES> 3,202,367
<TOTAL-REVENUES> 3,202,367
<CGS> 4,050,880
<TOTAL-COSTS> 4,050,880
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
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<NET-INCOME> (761,091)
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</TABLE>