1ST NET TECHNOLOGIES INC, 10KSB/A, 2000-11-15

1ST NET TECHNOLOGIES INC
10KSB/A, 2000-11-15
ASPHALT PAVING & ROOFING MATERIALS

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U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20594

FORM 10-KSB/A

AMENDMENT NO. 1

(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 OR THE TRANSITION PERIOD FROM __________ TO __________

Commission file number 0-27145

1st Net Technologies, Inc.
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(Exact name of registrant as specified in its charter)

Colorado 33-0756798
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)

11423 West Bernardo Court, San Diego, California 92127
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(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: (858) 675-4449

Securities registered under Section 12(b) and/or 12(g) of the Exchange Act:

Common Stock, $.001 par value
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(Title of Class)

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No___

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

State Issuer's revenues for its most recent fiscal year: $3,328,387

The aggregate market value as of November 7, 2000 of voting stock held by non-
affiliates of the Registrant was $2,080,000 based upon the average of the
closing bid and asked prices on the Over-the-Counter market as of that date.

As of December 31, 1999, 5,753,700 shares of Registrant's Common Stock, $.001
par value, were issued and outstanding.

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TABLE OF CONTENTS

PAGE
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COVER PAGE

TABLE OF CONTENTS 2

PART I

ITEM 1. DESCRIPTION OF BUSINESS 3

ITEM 2. DESCRIPTION OF PROPERTY 13

ITEM 3. LEGAL PROCEEDINGS 14

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 14

PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS 14

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 15

ITEM 7. FINANCIAL STATEMENTS 23

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS 23

PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT 24

ITEM 10. EXECUTIVE COMPENSATION 25

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT 26

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 27

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K 29

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PART I

Item 1. Description of Business

THIS ANNUAL REPORT ON FORM 10-KSB CONTAINS FORWARD-LOOKING STATEMENTS THAT
INVOLVE RISKS AND UNCERTAINTIES. THESE STATEMENTS RELATE TO THE COMPANY'S
FUTURE PLANS, OBJECTIVES, EXPECTATIONS AND INTENTIONS AND MAY BE IDENTIFIED BY
WORDS LIKE "BELIEVE," "EXPECT," "MAY," "WILL," "SHOULD," "SEEK," OR
"ANTICIPATE," AND SIMILAR EXPRESSIONS. OUR ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A
RESULT OF CERTAIN FACTORS, INCLUDING THOSE SET FORTH IN THIS BUSINESS SECTION
AND UNDER "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS" BELOW.

1st Net Technologies, Inc., a Colorado corporation (with our
subsidiaries, "1st Net," "the Company" or "we"), is an Internet products and
services company. We were incorporated in Colorado on May 14, 1990 as Snow
Eagle Investments, Inc. On April 2, 1997, we acquired the assets of 1st Net
Technologies, LLC, a California limited liability company. On April 22, 1997,
we amended and restated our Articles of Incorporation to change our name to
1st Net Technologies, Inc. In 1997, we commenced business operations.

We have three subsidiaries:

In May 1999, we acquired a controlling interest in The Children's
Technology Group, Inc. ("CTG") (formerly Tummybusters, Inc.), a Nevada
corporation. The business model of CTG is to build a safe and enjoyable
Internet community for children on-line. Prior to its acquisition by 1st Net,
CTG had members of its Board of Directors who were also Board members of 1st
Net.

In August 1998, we acquired a controlling interest in Mariah
Communications, Inc. ("Mariah"), a Colorado corporation. This company was
responsible for pursuing research and development into the business of
Internet Protocol (IP) Telephony. During the first quarter of 2000, the
Company completed a transaction initiated in 1999 whereby it invested $220,000
cash and tendered substantially all of the non-technology assets of Mariah in
exchange for a 10% note receivable. The note was subsequently converted into
400,000 shares of common stock of Last Mile Communications, Inc. Mariah
retains the rights to its IP Telephony technology. The remaining assets of
Mariah consist mainly of the Last Mile's common stock acquired in this
transaction. Prior to its acquisition by 1st Net, Mariah had members of its
Board of Directors who were also Board members of 1st Net.

In January 1999, we acquired a 100% interest in SSP Management Corp., a
Colorado corporation ("SSP"), from a private company that is considered a
related party. SSP was wholly owned by Entrepreneur Investments, LLC. ("EI")
whose sole shareholder was a member of 1st Net's Board of Directors. Through
our acquisition of that company, we built several investment-oriented Internet
Web sites and on-line newsletter publications. In December 1999, we made a
strategic decision to divest ourselves of those types of clients and services
and, where applicable, sell our information-based assets to companies whose
long-term business objective is to participate in that business. Accordingly,
we completed the sale of some of our online newsletters to other unrelated
companies in February and July 2000.

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OUR COMPANY

We provide E-business products and services that enable businesses to
develop and maintain an effective Web presence and to communicate effectively
on the Internet. We have also developed an E-mail administration and database
management software product called "Envoy Mail." Through our subsidiary CTG,
we are continuing to develop and deploy a range of Internet products,
including private label community Web browsers (Web browsers that appear to
users as though they are owned and operated by our customers).

INFORMATIONAL/E-COMMERCE WEB SITES

We have been and continue to be engaged in various types of Internet Web
site development projects that have required a rapid Web site building cycle,
a combination of content and transaction processing capability, interactivity,
and personalization.

INTERNET MARKETING SERVICES

We provide online marketing programs and services for vendors of various
products and services.

E-MAIL SERVICES AND SOFTWARE

While a large number of companies and organizations have Web sites, they
often lack the underlying sophisticated database systems to capture the names
of visitors and then sort them by select criteria for ongoing marketing and
sales efforts. In 1999, we began development of a new software product called
Envoy Mail Version 1.0, which is a full-featured, Web-based E-mailing and
database management system. The term "full-featured" refers to the
functionality and flexibility of the Envoy Mail product. We believe that
Envoy Mail is different from traditional list serve mail systems. With
traditional systems, the client has little flexibility to adjust the areas of
demographic content it can capture from its user (e.g., age, city, zip code,
etc.) without substantial time and expense. With Envoy Mail, we designed it
to be more flexible and thus more full-featured for customers so that they can
adjust and more custom fit the product to their specific need and situation.

Envoy Mail offers our customers valuable Web-based E-mail information
management tools. Envoy Mail allows subscribers to not only capture and manage
a database of E-mail visitors to their Web site, but also to communicate
effectively with that database. We charge our customers on a three-tiered
level based upon the number of members in their database and upon the number
of E-mails sent through our system.

The Company began commercially deploying the Envoy Mail service at the
end of the first quarter of 2000. Currently we have approximately 10 paying
customers who have signed up to use the service. Future, ongoing development
revisions will be financed through revenues derived from the sale of the
service and through normal operating capital available to the Company.

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COMMUNITY-BASED WEB BROWSERS

In association with our majority-owned subsidiary CTG, Crayon Crawler
helps to protect children in today's computing environment, and provides a
conduit for education, entertainment, and exploration of the Internet without
the worries associated with unsupervised browsing. Crayon Crawler generates
revenues for us through the sale of sponsorships, receipt of subscription fees
and through revenue sharing of income from e-commerce transactions generated
through the electronic community. Specific features include the following:

- Browser and Database. Crayon Crawler provides access only to Web
sites that have been pre-approved to be on our "Include List" of
sites. Crayon Crawler will not allow a child to access a Web
address that has not been pre-approved by the community or his/her
parent/guardian.

- Sound And Speech Capabilities. Microsoft's Agent(TM) technologies
provide the user with animated characters that are text-to-speech
enabled. This allows Crayon Crawler's Agent characters to talk with
dynamic responses. For example, characters can speak to a child or
read a child his or her E-mail. Additionally, Crayon Crawler is
RealAudio and MediaPlayer enabled for streaming video and audio.

- Instant Messaging and Who's Online. Crayon Crawler automatically
logs children who are members of the community into the
closed-community servers. This allows children to find out if any
of their friends are online and to communicate with them by sending
messages. This system also allows the community system
administrators the ability to track the activities of members and
keep out potential intruders.

- Chat Client. Crayon Crawler provides closed chat rooms for its
community members. It allows children to find out who else is
presently online with them in an environment that is closed to the
Internet at large. Our intention is to enable monitoring of the
closed community in order to create a safe environment for
children. In this way, children can communicate with other
community members without parents having to worry about who or what
their child will encounter.

- E-mail. Crayon Crawler will provide a closed E-mail system for
children so that "spam," pornographic banners, links, and unwanted
E-mail cannot be sent to, or by, a child.

In May 1999, we granted CTG exclusive world-wide marketing rights to the
Crayon Crawler Kid Safe Web Browser and the kids browser marketplace in
exchange for 4,000,000 shares of Common Stock of CTG. We determined through
negotiations between CTG's and 1st Net's management and Boards of Directors
that this was fair consideration to be paid for the licenses. Based on an
earlier private placement of CTG shares at $2.00 per share, this would give
the licenses a total valuation of $8,000,000. However, due to the
relationship between the two companies (i.e., the existence of common
management and directors) and the fact that the technology was still in
process at the time of its license and subsequent acquisition by CTG, there
was no accounting value assigned to either the license of the technology or to
its subsequent purchase by CTG.

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INTERNET TELEPHONY

Through our majority-owned subsidiary Mariah, we have been in the process
of developing a deployable Internet protocol ("IP") telecommunications
gateway. This type of service, which allows for the transmission of packets
of data over voice line, is known generally as Internet Protocol Telephony, or
"IP Telephony." IP Telephony combines the low cost, global reach of the
Internet and the high quality and security of private IP-based networks with
the public telephone system's ease of access.

The Company presently does not have plans to invest any more capital in
this portion of its business and may attempt to sell its Mariah business to a
third party if a viable purchaser can be found. Mariah does not have any
commitments concerning additional financing and none are currently being
sought. Without financing, or some alternative source of funding, Mariah will
not be able to finance the future development of the Mariah IP gateway.

In September 1999, Mariah received a convertible promissory note from
Last Mile Communications, Inc. in the principal amount of $220,000. In
December, 1999, this note was converted into 400,000 shares of common stock of
Last Mile Communications, Inc. at a conversion rate of $.55 per share.

INTERNET PORTALS

In association with our wholly owned subsidiary SSP, we own and maintain
several Internet Web sites, which have financially related themes and content.
These sites present to individual opt-in investors information about publicly-
traded companies that generally have not yet attracted significant attention
on Wall Street or among institutional money managers. Membership to our online
web sites and publications is free for all subscribers.

We have been informed by the Securities and Exchange Commission that it
has commenced an enforcement investigation into the past activities of SSP. At
the present time, the outcome of this investigation is uncertain.

In December 1999, we made a strategic decision to divest ourselves of the
types of clients serviced by SSP and, where applicable, sell our information-
based assets to companies whose long-term business objective is to participate
in the investor information business. Accordingly, we completed the sale of
some of our online newsletters to other unrelated companies in February and
July 2000.

OUR WEB STRATEGY

Our primary objective for the Internet is to create leading branded Web
sites that allow our clients the ability to create an effective Web presence.
Our strategy is designed to maximize the quantity and quality of traffic to
our client's Web sites and to assist them in developing a strong and loyal
community. This creates an audience that is highly attractive to companies
that are advertising and engaging in commerce over the Internet. Our strategy
to achieve this objective includes the following key elements:

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Build Traffic and Customer Loyalty. We believe that our plans for
significantly increased marketing activities will provide us with increased
visibility among Web users and companies advertising and engaging in commerce
over the Internet. Additionally, we intend to pursue distribution
relationships with high-traffic Web sites to strategically place programming
and links to our Web sites as a key element in building traffic.

Build and Capitalize on Attractive Audience Demographics. It is always
important to understand the demographics of your prospective client.
Therefore, we maintain a working knowledge of the potential customer
throughout the entire Web process. Our Web sites, therefore, represent an
attractive medium for companies that advertise and engage in commerce over the
Internet. In order to attract new users and grow a loyal audience that appeals
to a broad range of advertisers and business partners, we are investing in
content, improved and expanded features, advertising, and promotional
programs.

Pursue Additional Revenue Streams. We believe that we have significant
opportunities to capitalize on our audience and content offerings to create
multiple revenue streams for future growth. We are continually exploring the
use of revenue sharing programs with our clients, as well as advertising
opportunities within each project we undertake.

SALES, MARKETING AND DISTRIBUTION

We sell our products and services to our clients using a combination of
distribution channels, including a direct in-house sales force, online
distribution channels, and strategic relationships.

DIRECT SALES FORCE

Our direct sales force focuses primarily on sales to corporate customers.
Our sales representatives develop and pursue leads generated from inquiries on
our Web sites, downloads of our trial products, and other direct marketing and
networking efforts.

ONLINE DISTRIBUTION CHANNELS

Our Web site, available at http://www.1st Nettech.com, allows users to
get information about the products and services that we offer as well as the
ability to download and purchase certain products through links that reach to
our subsidiary companies' Web sites.

These online distribution channels provide us with a low-cost, globally
accessible, 24-hour sales channel.

STRATEGIC RELATIONSHIPS

Where appropriate and advantageous to the Company, we will identify and
develop strategic relationships with other companies that significantly
enhance our ability to develop, market or distribute our products and
services.

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MARKETING AGREEMENTS

NO FEAR, Inc. (http://nofear.com). In April, 1999, we signed a Web Site
Development, Service and Revenue Sharing Agreement with NO FEAR, whereby we
developed a fully functional E-commerce Web site aimed at marketing NO FEAR's
line of over 500 sports apparel products. Per the terms of the original
agreement, we will be paid a commission of 10% on all Net Sales Revenues
generated by the site through November 2003. Thereafter, the Agreement will
automatically renew for successive twelve (12) month terms unless terminated
by either party with three (3) months notice. In August 1999, the Agreement
was amended to add an additional 2.5% commission payable to us for cost
overruns associated with the project. The additional commissions were payable
through August 2000.

MARKETING ACTIVITIES

Since our inception, we have invested in a broad range of marketing
activities to generate demand, gain corporate brand identity, establish
corporate and subsidiary Web sites and educate the market about our products
and services. These activities have included advertising (print, radio and
online), direct marketing via E-mail, sponsoring seminars for potential
clients, participating in trade shows and conferences, and providing product
and service information through our Web sites. Our marketing programs are
aimed at informing our clients and customers of the capabilities and benefits
of our products and services, increasing brand awareness, stimulating demand
across market segments and encouraging other companies to enter into
co-marketing and distribution arrangements with us.

PROFESSIONAL ONLINE CORPORATE AWARENESS PROGRAMS

Prior to December 14, 1999, we provided certain online corporate
awareness programs for publicly traded companies to leverage their worldwide
exposure and improve their online shareholder relations. As of December 14,
1999, however, we discontinued our involvement in our online corporate
awareness programs through the assignment of this portion of our business to a
former officer who at that time was actively involved in the operation of that
portion of our business. This person is no longer employed by us. The Company
received no compensation in connection with this assignment.

DEVELOPMENT

We have been in development of our MindWalker series Web browsers since
August 1998, when we began a relationship with Spirit 32 Development Corp. of
Denver, Colorado ("Spirt 32"). Most of that time has been spent on developing
Crayon Crawler, our Internet safe Web browser aimed at children ages 5 - 11.

Effective January 14, 2000 the Company entered into a new Agreement
("Technology Purchase and Rescission Agreement") with Spirit 32 that
superceded and rescinded the prior Acquisition Agreement, dated January 21,
1999, between the Company and Spirit 32.

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As part of the January 14, 2000 Agreement, the Company agreed to acquire
all of Spirit 32's rights, title and interest in the Mariah Internet Protocol
Telecomputing Project, the Mindwalker Series Browsers, the Crayon Crawler
Browser, the Spirit 32 Voice Mailer and all the trade names associated with
the names "CrayonCrawler," "Mindwalker" and "Mariah." The sale was closed on
February 14, 2000. At closing, the Company delivered 250,000 shares of the
its restricted common stock together with cash in the amount of $100,000 and
Spirit 32 transferred all its rights to and interest in the assets listed
above.

Our subsidiary, Mariah Communications, Inc., through a pre-existing
arrangement with Spirit 32 Development, has been in the development of a PC
gateway for telecommunications through an IP telephony switch, which
eliminates the need for hardware-based routers. The purpose of this product
line is to reduce the costs to major telecommunications companies in
implementing voice-over IP services (the ability to transmit voice responses
over data lines).

We have incurred significant development costs in the production of Envoy
Mail. Further enhancement of Envoy Mail continues currently.

COMPETITION

The market for Internet services, software and products is relatively
new, intensely competitive and rapidly changing. The number of Web sites on
the Internet competing for consumers' attention and spending has proliferated
and we expect that competition will continue to intensify. We all compete,
directly and indirectly, for advertisers, viewers, members and content
providers.

We anticipate that the number of direct and indirect competitors will
increase in the future. Many of our existing competitors, as well as a number
of potential new competitors, have longer operating histories in the Web
market, greater name recognition, larger customer bases and higher amounts of
user traffic and significantly greater financial, technical and marketing
resources. Such competitors may be able to undertake more extensive marketing
campaigns, adopt more aggressive pricing policies, make more attractive offers
to potential employees, distribution partners, advertisers and content
providers and may be able to respond more quickly to new or emerging
technologies and changes in Web user requirements. Further, there can be no
assurance that they will not develop services that are equal or superior to
ours or that they will not achieve greater market acceptance than our product
and service offerings. Increased competition could also result in price
reductions, reduced margins or loss of market share, any of which could
materially adversely affect our business, results of operations and financial
condition.

The Web, and 1st Net specifically, also must compete with traditional
advertising media, such as print, radio and television, for a share of
advertisers' total advertising budgets. Web companies and 1st Net would lose
revenue if the Web were not perceived as an effective advertising medium. In
addition, well-established traditional media companies may acquire, invest or

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otherwise establish commercial relationships with our competitors. Greater
competition resulting from such relationships could have a material adverse
effect on our business and, ultimately, our stock price. As a result, there
can be no assurance that we will be able to compete successfully against our
current or future competitors or that competition will not have a material
adverse effect on our business, results of operations and financial condition.

We believe that Mariah's ability to compete in the Internet telephony
industry successfully will depend upon a number of factors, including our
ability to develop a commercially viable product; the pricing policies of
competitors and suppliers; the capacity, reliability, availability and
security of the Internet telephony infrastructure; marketing; the timing of
introductions of new products and services into the industry; Mariah's ability
to support existing and emerging industry standards; Mariah's ability to
balance network demand with the fixed expenses associated with network
capacity; and industry and general economic trends.

The market for telecommunications services, in particular, is extremely
competitive and there are a growing number of competitors in the Internet
telephony industry. There are many companies that offer business
communications services and which will compete with Mariah at some level.
These include large telecommunications companies and carriers such as AT&T,
MCI, and Sprint; smaller, regional resellers of telephone line access; and
other existing Internet telephony companies. These companies, as well as
others, including manufacturers of hardware and software used in the business
communications industry, could in the future develop products and services
that could compete with those of Mariah on a direct basis. Many of these
entities have far greater financial and organizational resources than Mariah
and control significant market share in their respective industry segments.
Therefore, there is no assurance that Mariah will be able to successfully
compete in the Internet telephony industry.

INTELLECTUAL PROPERTY

Our success and ability to compete are dependent to a significant degree
on our proprietary technology. We rely primarily on state and federal
copyright, trade secret and trademark common law to protect our proprietary
technology. We have several unregistered trademarks, various unregistered
copyrights and certain licenses of technology with third parties. We have no
patents or other registered intellectual property, other than certain
trademarks. The source code for our proprietary software is protected as a
trade secret but not as a formally copyrighted work. At present, some of our
trademarks or copyrights are not registered with the United States government;
therefore, we do not enjoy the same degree of protection that we might
otherwise have if they were already registered (as registration puts others on
notice that particular copyrights and trademarks are in use and protected).
The Company intends to eventually register all of its proprietary names and
marks. The loss of any of our unregistered trademarks or copyrights
(particularly source codes) could have a material adverse effect on our
business.

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without authorization or otherwise infringe on our proprietary rights. It is
also possible that third parties may independently develop technologies
similar to those of our own. Policing unauthorized use of our intellectual
property rights may be difficult, particularly because it is difficult to
control the ultimate destination or security of information transmitted over
the Internet. In addition, the laws of foreign countries may afford
inadequate protection of intellectual property rights.

We may need to engage in litigation in order to enforce our intellectual
property rights in the future or to determine the validity and scope of the
proprietary rights of others. Such litigation could result in substantial
costs and diversion of management and other resources, either of which could
have a material adverse effect on our business, operating results and
financial condition. We also use certain third-party technology, such as
Agent (TM) software from Microsoft, and data and content from third parties.
In these license agreements, the licensors have generally agreed to defend,
indemnify and hold us harmless with respect to any claim by a third party that
the licensed software or content infringes any person's proprietary rights.
There can be no assurance that the outcome of any litigation between such
licensors and a third party or between us and a third party will not lead to
royalty obligations for which we are not indemnified or for which such
indemnification is insufficient, or that we will be able to obtain any
additional license on commercially reasonable terms, if at all.

In the future, we may seek to license additional technology or content in
order to enhance our current features or to introduce new services, such as
certain of the community features we may introduce. There can be no assurance
that any such licenses will be available on commercially reasonable terms, if
at all. The loss of or inability to obtain or maintain any of these
technology licenses could result in delays in introduction of new services
until equivalent technology, if available, is identified, licensed and
integrated, which could have a material adverse effect on our business,
results of operations and financial condition.

Because we license some data and content from third parties, our exposure
to copyright infringement actions may increase because we must rely upon such
third parties for information as to the origin and ownership of such licensed
content. We generally obtain representations as to the origins and ownership
of such licensed content and generally obtain indemnification to cover any
breach of any such representations. However, there can be no assurance that
such representations will be accurate or that such indemnification will be
sufficient to provide adequate compensation for any breach of such
representations. There can be no assurance that infringement or other claims
will not be asserted or prosecuted against us in the future, whether resulting
from our internally developed intellectual property or licenses or content
from third parties. Any future assertions or prosecutions could materially
adversely affect our business, results of operations and financial condition.
Any such claims, with or without merit, could be time-consuming, result in
costly litigation and diversion of technical and management personnel or
require us to introduce new content or trademarks, develop non-infringing
technology or enter into royalty or licensing agreements. Such royalty or
licensing agreements, if required, may not be available on acceptable terms,
if at all. In the event of a successful claim of infringement and our failure

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or inability to introduce new content or trademarks, develop non-infringing
technology or license the infringed or similar technology on a timely basis,
our business, results of operations and financial condition could be
materially adversely affected.

GOVERNMENT REGULATION

The laws and regulations applicable to the Internet and our services are
evolving and unclear and could damage our business. There are currently few
laws or regulations directly applicable to access to, or commerce on, the
Internet. Due to the increasing popularity and use of the Internet, it is
possible that laws and regulations may be adopted covering issues such as user
privacy, defamation, pricing, taxation, content regulation, quality of
products and services, and intellectual property ownership and infringement.
Such legislation could expose us to substantial liability, as well as dampen
the growth in use of the Internet, decrease the acceptance of the Internet as
a communications and commercial medium, or require us to incur significant
expenses in complying with any new regulations.

The European Union has recently adopted privacy and copyright directives
that may impose additional burdens and costs on international operations. In
addition, several telecommunications carriers, including America's Carriers'
Telecommunications Association, are seeking to have telecommunications over
the Internet regulated by the Federal Communications Commission ("FCC"), in
the same manner as other telecommunications services. Because the growing
popularity and use of the Internet has burdened the existing
telecommunications infrastructure and many areas with high Internet usage have
begun to experience interruptions in phone services, local telephone carriers
have petitioned the FCC to regulate the Internet and to impose access fees.
Increased regulation or the imposition of access fees could substantially
increase the costs of communicating on the Internet, potentially decreasing
the demand for our service.

A number of proposals have been made at the federal, state and local
level that would impose additional taxes on the sale of goods and services
through the Internet. Such proposals, if adopted, could substantially impair
the growth of electronic commerce and could adversely affect us. Also, the
United States Congress ("Congress") recently enacted the Digital Millennium
Copyright Act, which is intended to reduce the liability of online service
providers for listing or linking to third-party Web sites that include
materials that infringe copyrights.

We are aware of this legislation, but cannot currently predict the
effect, if any, that this legislation will have on our business. There can be
no assurance that such legislation will not add significant additional costs
to our business or subject us to additional liabilities. Moreover, the
applicability to the Internet of existing laws governing issues such as
property ownership, copyright, defamation, obscenity and personal privacy is
uncertain. We may be subject to claims that our services violate such laws.
Any new legislation or regulation in the United States or abroad or the
application of existing laws and regulations to the Internet could damage our
business and cause the price of our Common Stock to decline. Due to the
global nature of the Internet, it is possible that the governments of other
states and foreign countries might attempt to regulate its transmissions or
prosecute us for violations of their laws. We might unintentionally violate

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such laws. Such laws may be modified or new laws may be enacted in the
future. Any such development could damage our business.

The securities industry in the United States is subject to extensive
regulation under both federal and state laws. In addition, the Securities and
Exchange Commission (the "Commission"), the NASD, various stock exchanges, and
other regulatory bodies, such as state securities commissions, require strict
compliance with their rules and regulations. As a matter of public policy,
regulatory bodies are charged with safeguarding the integrity of the
securities and other financial markets and with protecting the interests of
customers participating in those markets. Our failure to comply with any of
these laws, rules or regulations could result in censure, fine, and/or the
issuance of cease-and-desist orders, any of which could have a material
adverse effect on our business, financial condition and operating results.
The Securities and Exchange Commission has informed us that it has commenced
an investigation with respect to SSP's past business activities. The outcome
of this investigation is uncertain at the present time.

EMPLOYEES

As of October 20, 2000, the Company and its subsidiaries employed 39
full-time employees. We also utilize independent contractors for legal
services and sales development, among other functions. None of our employees
is represented by a labor union. We have not experienced any work stoppages
and consider our employee relations to be satisfactory.

ITEM 2. Description of Property.

We presently maintain our executive and administrative offices at 11423
West Bernardo Court, San Diego, California 92127. We lease this space, which
is approximately 8,000 square feet, from Entrepreneur Investments, LLC, a
Colorado limited liability company that is controlled by James H. Watson, Jr.,
our Chief Executive Officer, Chairman and a Director ("EI") at a rate of
$8,000 per month on a five-year term that began on September 1, 1998.

Our property and equipment as of December 31, 1999 consists of the
following:

1999
----

Office Furniture and Fixtures and Equipment............... $ 217,933
Office Equipment - Capitalized Leases..................... 291,407
Leasehold Improvements.................................... 22,954
Vehicle - Capitalized Leases.............................. 27,219
Radio Equipment........................................... 4,243
Computer Equipment - Capitalized Leases................... 38,898
Computer Equipment and Peripherals........................ 50,546
--------
Total............................................. 653,200

Less Accumulated Depreciation............................. (117,917)
--------
Net Property and Equipment........................ $535,283
========

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The future minimum annual aggregate rental payments required under both
capital and operating leases that have initial or remaining non-cancelable
lease terms in excess of one year are as follows:

YEARS ENDING DECEMBER 31,
-------------------------
2000................................................... $216,928
2001................................................... 186,494
2002................................................... 185,254
2003................................................... 135,878
2004................................................... 42,404
Thereafter............................................. -0-
--------
Total............................................. $766,958

ITEM 3. Legal Proceedings.

The Securities and Exchange Commission (the "Commission") had been
investigating the business affairs of our wholly-owned subsidiary, SSP
Management, Inc. ("SSP"). By letter dated October 31, 2000, the Commission
advised SSP that the investigation had terminated and that, at this time, no
further enforcement recommendation is anticipated.

ITEM 4. Submission of Matters to a Vote of Security Holders

There has been no submission of matters to a vote of security holders
during the fiscal year ended December 31, 1999.

PART II

ITEM 5. Market for Common Equity and Related Shareholder Matters.

Although a trading market for our Common Stock has at times existed in
the past during periods while our shares were quoted on the OTC Bulletin
Board, it is currently only sporadically traded through the "pink sheets."
Consequently, no meaningful market information is currently available.

During the fiscal year ended December 31, 1999, we sold 472,400 shares of
our Preferred Stock and 236,200 warrants in units of $5 each for gross
proceeds of $1,181,000. The offering closed on March 11, 1999 and was
conducted in reliance upon the safe harbor provision afforded by Rule 505 of
Regulation D. The offering was sold to accredited investors and fewer than 35
non-accredited investors, each of whom received disclosure documents regarding
the investment.

To date, we have issued no dividends and do not anticipate issuing
dividends until we receive revenues in an amount which management determines
to be sufficient.

The number of record holders of the Company's $.001 par value Common
Stock at September 30, 2000, was approximately 1,500.

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ITEM 6. Management's Discussion and Analysis of Financial Condition and
Results of Operations.

This discussion may contain forward-looking statements that involve risks
and uncertainties. Our actual results may differ materially from the results
discussed in such forward-looking statements. Factors that might cause such a
difference include, but are not limited to, those discussed in "Risks and
Uncertainties" below. We undertake no obligation to release publicly the
results of any revisions to these forward-looking statements to reflect events
or circumstances arising after the date hereof.

OVERVIEW

1st Net derives its revenue from services provided to the Internet and
multi-media industries. Also, 1st Net and our majority owned subsidiary CTG
have developed certain proprietary technologies that management feels will in
the future increase our overall capability to generate revenue and add value
for our shareholders.

The Company maintains three subsidiary corporations:

1. In January 1999, we acquired a 100% interest in SSP from a private
company that is considered a related party. Through our acquisition of that
company, we built several investment-oriented Internet Web sites and on-line
newsletter publications. In December 1999, we made a strategic decision to
divest ourselves of those types of clients and services and, where applicable,
sell our information-based assets to companies whose long-term business
objective is to participate in that business. Accordingly, we completed the
sale of some of our online newsletters to other unrelated companies in
February and July 2000.

2. In May 1999, we acquired a controlling interest in CTG. CTG is the
company responsible for deploying our Crayon Crawler Kid's Safe Web Browser
and community. The business model of CTG is to build a safe and enjoyable
Internet community for children on-line.

3. In August 1998, we acquired a controlling interest in Mariah. This
company was responsible for pursuing research and development into the
business of Internet Protocol (IP) Telephony. During the first quarter of
2000, the Company completed a transaction initiated in 1999 whereby it
invested $220,000 cash and tendered substantially all of the non-technology
assets of Mariah in exchange for a 10% note receivable. The note was
subsequently converted into 400,000 shares of common stock of Last Mile
Communications, Inc. Mariah retains the rights to its IP Telephony
technology. The remaining assets of Mariah consist mainly of the Last Mile's
common stock acquired in this transaction.

Our historical financial information contained in this report is that of
1st Net Technologies, Inc. and its subsidiary corporations on a consolidated
basis.

RESULTS OF OPERATIONS YEAR ENDED DECEMBER 31, 1999

Revenue

Revenue is recognized when earned. The Company's revenue recognition
policies are in compliance with all applicable accounting regulations,

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including American Institute of Certified Public Accountants (AICPA) Statement
of Position (SOP) 97-2, Software Revenue Recognition, and SOP 98-9,
Modification of SOP 97-2, With Respect to Certain Transactions. Revenues from
technology consulting, user fees and marketing services are recognized ratably
over the contract period in accordance with the period in which the services
are performed. Revenues attributable to undelivered elements, including
technical support, are recognized ratably on a straight-line basis over the
contract period.

The Company's revenues from technology consulting, user fees and
marketing services during the 1999 increased $713,390 or 71.4% from the prior
year. The increase was primarily attributable to increases in revenue for SSP
of $651,871 or 125% over the 1998 level. CTG contributed revenue of $65,209
in 1999 versus no revenue in 1998. Because the Company made a strategic
decision late in 1999 to redirect its efforts away from the business of SSP,
revenue levels in 2000 will be significantly lower. Included in revenues in
1999 were stocks received for services totaling $348,798 compared to $328,140
in 1998. The Company recognized related party revenues totaling $501,121 and
$173,294 during the years ended December 31, 1999 and 1998, respectively.

Operating Expenses

Operating expenses consist of product development, marketing and
administrative expenses. Non-stock related operating expenses increased
$4,334,877 or 261.3% to $5,993,623 from the prior year's level of $1,658,746.
Significant items in the total of operating expenses in 1999 included: 1)
personnel related costs totaling $2,011,493; 2) outside services and
consulting totaling $921,543; 3) professional fees totaling $615,604; 4)
losses from disposals of property and equipment totaling $102,480; and 5)
expenditures for technology development totaling $730,546.

Included in the total of operating expenses for 1999 of $7,848,798 were
charges related to the issuance or future issuance of stock for employees and
outsiders totaling $1,855,175. This compared to similar charges totaling
$264,735 in 1998. These charges were the result of issuing 768,300 shares of
Common Stock to employees and outsiders for compensation and services provided
to the Company.

Other Income and Expense

The bulk of the $919,518 realized gain from the sale of investments came
from the sale of two of the Company's investments. This was offset in part by
the write-down of the Company's investment in LaForza totaling $162,600
($137,400 in 1998). Interest expense increased 19.1% in 1999 to $21,719 while
other income was up $6,894 to $8,924 for 1999.

LIQUIDITY AND CAPITAL RESOURCES

Our greatest need for cash is payment of salaries and benefits to our
employees and fees to our outside consultants. Through June 30, 2000, we
expended significant effort and committed substantial resources toward the
continued development of CTG's Crayon Crawler and 1st Net's Envoy Mail product
lines. Management believes that these investments will begin showing a return
to the Company in the future in the form of increased revenues. However, we
are unable to predict with any degree of certainty the future results of our
operations, and accordingly, make no assurance as to future cash flows from
these products.

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During the first quarter of 2000, SSP concluded a sale of its newsletter
OTCjournal.com for a $200,000 note receivable and 10% of the gross noncash
compensation the buyer realizes from the operation of OTCjournal.com through
June 2002. In the event that the Company does not realize a minimum of
$750,000 from the sale of OTCjournal.com through June 2002, the buyer is
required to pay the Company $750,000 less all proceeds previously received in
connection with OTCjournal.com. The first two payments in connection with the
note receivable of $50,000 are due in January and June 2001.

In July 2000 SSP sold its newsletter InvestmentOpportunity.com to an
unrelated third party. Consideration for the newsletter is: 1) cash totaling
$100,000 paid in August 2000; 2) a $650,000 note receivable payable in monthly
installments ranging from $15,000 to $20,000 through December 2001 with a
$375,000 balloon payment due January 2002; and 3) $750,000 payable in stocks
received in connection with the operation of the newsletter.

In May 2000, CTG sold 2,000,000 shares of preferred stock and warrants to
purchase common stock to an unrelated investor for net proceeds totaling
$3,593,525. Additionally, 1st Net realized proceeds totaling $114,570 from
the sale of 42,356 shares of CTG during January 2000.

At June 30, 2000, the Company had cash and net working capital of
$2,992,837 and $2,041,393, respectively. CTG's portion of this cash totaled
$2,785,550 at June 30, 2000 and 1st Net owns 59.8% of the outstanding common
and preferred stock of CTG as of June 30, 2000.

On a going forward basis, 1st Net and its 100% owned subsidiary SSP
continue to maintain several holdings of restricted and marketable securities.
It is impossible however to ascertain the actual value that will be eventually
realized by the Company when these securities are sold.

Management believes that proceeds from the sale of investments held in
addition to cash payments to be received from the transactions described
above, will be sufficient to make up projected shortfalls from the results of
its operations through the next twelve months.

RISKS AND UNCERTAINTIES

The risks and uncertainties described below are those that we currently
deem to be material and that we believe are specific to our company and our
industry. If any of these or other risks actually occurs, the trading price
of our common stock could decline, and you may lose all or part of your
investment. We have a history of losses and absent the realized gains on
securities held and sold and the sale of assets during the first quarter of
2000, we would have suffered a significantly greater loss than the $123,236
incurred year to date. Also, because we expect our operating expenses to
increase in the future, we may never be profitable. We have an accumulated
deficit of $6,111,691 at June 30, 2000. We incurred net losses of $5,238,406
and $652,884 for the years ended December 31, 1999 and 1998, respectively and
will have a significant net loss for the year ended December 31, 2000. We
expect to continue to incur significant net losses until we are able to
generate sufficient revenues from 1st Net's Envoy Mail product and/or CTG's
community based web browser-related products and services. While we are
unable to predict accurately our future operating expenses, we currently
expect these expenses to increase substantially, as we, among other things:

- expand our selling and marketing activities;

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- increase our development efforts to upgrade existing and develop new
products and technologies;

- upgrade our operational and financial systems, procedures and
controls; and

- hire additional necessary personnel.

We will need to significantly increase our revenues to achieve and
maintain profitability. If we fail to generate significant revenues from
software licensing of 1st Net's Envoy Mail or from subscription fees to CTG's
community based browsers and related sales of merchandise and advertising
revenues, we will continue to experience losses indefinitely. We may not be
able to achieve or maintain profitability. We also may fail to accurately
estimate and assess our increased operating expenses as we grow. If our
operating expenses exceed our expectations, our financial performance will be
adversely affected, which could cause the price of our common stock to
decline. We are an early-stage company with an unproven business model, which
makes it difficult to evaluate our current business and future prospects. We
have only a limited operating history upon which to base an evaluation of our
current business and future prospects.

We only recently began focusing on the Envoy Mail product. Also, CTG is
still in the early stages of procuring distribution agreements for its
community web browsers. As a result, the revenue and income potential of our
business and our market are unproven. Because of our limited operating history
and because the markets for the Company's products are relatively new and
rapidly evolving, we have limited insight into trends that may emerge and
affect our business. We may make errors in predicting and reacting to
relevant business trends, which could harm our business.

You should consider an investment in our stock in light of the risks,
uncertainties and difficulties frequently encountered by early-stage companies
in new and rapidly evolving markets such as ours. We may not be able to
successfully address any or all of these risks. Failure to adequately do so
could cause our business, results of operations and financial condition to
suffer. Our future financial performance also will depend, in part, on our
ability to diversify our offerings by successfully developing, introducing and
gaining customer acceptance of new products and enhanced versions of existing
products. We cannot assure you, however, that we will be successful in
achieving market acceptance of any new products that we develop or of enhanced
versions of existing products. Any failure or delay in diversifying our
existing offerings could harm our business, results of operations and
financial condition.

The market for CTG's community based browsers is emerging and if we are
not successful in promoting the benefits to children of our products, our
growth may be limited. In addition, there may be a time-limited opportunity
to achieve and maintain a significant share of the market for children safe
Internet communities due to the emerging nature of this market and the
substantial resources available to our existing and potential competitors.

We currently sell our products both indirectly and directly. We intend
to primarily market 1st Net's Envoy Mail product directly with a sales force
built internally. Due to the new nature of the product, its market potential

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is uncertain. Also, if 1st Net is not able to attract and retain effective
members of its sales force, its prospects for realizing profits from the
licensing of Envoy Mail will be diminished.

For CTG's community based Web browsers, we intend to rely on distribution
agreements with large consumer product companies that will include our web
browser with their product. We will custom brand the software according to
the specifications of our distribution partners. We will depend heavily on
our distribution partners to get our software in the hands of the targeted
consumer market. We will need to enter into new relationships to increase our
current and future market share and revenue. We cannot assure you that we
will be able to enter into new relationships, or that any new relationships
will be available on commercially reasonable terms. If we are unable to enter
into new relationships, we would not have a viable and cost effective channel
to reach our target market and our operating results could suffer. Our
reliance on our distribution partners could result in reduced revenue growth
because we have little control over them. None of these parties is obligated
to continue distributing our products.

We face increasing competition from better-established companies that may
have significantly greater resources, which could prevent us from increasing
revenue or achieving profitability. The market for our products is intensely
competitive and is likely to become even more so in the future. Increased
competition could result in pricing pressures, reduced sales, reduced margins
or the failure of either Envoy Mail or our community based browsers to achieve
or maintain more widespread market acceptance, any of which would have a
material adverse effect on our business, results of operations and financial
condition.

Many of our current and potential competitors could enjoy substantial
competitive advantages, such as:

- greater corporate name recognition and larger marketing budgets and
resources;
- established marketing relationships and access to larger customer
bases; and
- substantially greater financial, technical and other resources.

As a result, they may be able to respond more quickly and effectively
than we can to new or changing opportunities, technologies, standards or
customer requirements. Also, such competitors may be able to undertake more
extensive marketing campaigns, adopt more aggressive pricing policies, make
more attractive offers to potential employees, distribution partners,
advertisers and content providers and may be able to respond more quickly to
new or emerging technologies and changes in Web user requirements. Further,
there can be no assurance that they will not develop services that are equal
or superior to ours or that they achieve greater market acceptance than our
product and service offerings. For all of the foregoing reasons, we may not
be able to compete successfully against our current and future competitors.

Our future success will depend in part upon the ability of our senior
management to manage growth effectively. This will require us to hire and
train additional personnel to manage our expanding operations. In addition, we
will be required to continue to improve our operational, financial and
management controls and our reporting systems and procedures. If we fail to
successfully manage our growth, we will be unable to execute our business
plan. If we acquire any companies or technologies in the future, they could

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prove difficult to integrate, disrupt our business, dilute shareholder value
and adversely affect our operating results. We may acquire or make
investments in complementary companies, services and technologies in the
future. As a result, if we fail to properly evaluate and execute acquisitions
or investments, our business and prospects may be seriously harmed.

We are dependent on our employees and management, and the loss of any key
member of this team may prevent us from implementing our business plan in a
timely manner. Our success depends largely upon the continued services of our
executive officers and other key management and development personnel. We are
also substantially dependent on the continued services of our existing
engineering personnel and our outside development partners because of the
complexity of our products and technologies. We do not have employment
agreements with a majority of our executive officers, key management or
development personnel and, therefore, they could terminate their employment
with us at any time without penalty. We do not maintain key person life
insurance policies on any of our employees. The loss of one or more of our
key employees could seriously harm our business, results of operations and
financial condition. We cannot assure you that in such an event we would be
able to recruit personnel to replace these individuals in a timely manner, or
at all, on acceptable terms.

It is our policy to enter into confidentiality and non-competition
agreements with our associates and generally to control access to and
distribution of our proprietary technology. Notwithstanding the precautions
taken by us to protect our intellectual property rights, it is possible that
third parties may copy or otherwise obtain and use our proprietary technology
without authorization or otherwise infringe on our proprietary rights. It is
also possible that third parties may independently develop technologies
similar to those of our own. Policing unauthorized use of our intellectual
property rights may be difficult, particularly because it is difficult to
control the ultimate destination or security of information transmitted over
the Internet. In addition, the laws of foreign countries may afford
inadequate protection of intellectual property rights.

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financial condition. We also use certain third-party technology, such as MS
Agent (TM) software from Microsoft, and data and content from third parties.
In these license agreements, the licensors have generally agreed to defend,
indemnify and hold us harmless with respect to any claim by a third party that
the licensed software or content infringes any person's proprietary rights.
There can be no assurance that the outcome of any litigation between such
licensors and a third party or between us and a third party will not lead to
royalty obligations for which we are not indemnified or for which such
indemnification is insufficient, or that we will be able to obtain any
additional license on commercially reasonable terms, if at all.

The laws and regulations applicable to the Internet and our services are
evolving and unclear and could damage our business. There are currently few
laws or regulations directly applicable to access to, or commerce on, the
Internet. Due to the increasing popularity and use of the Internet, it is
possible that laws and regulations may be adopted, covering issues such as
user privacy, defamation, pricing, taxation, content regulation, quality of
products and services, and intellectual property ownership and infringement.
Such legislation could expose us to substantial liability, as well as dampen
the growth in use of the Internet, decrease the acceptance of the Internet as
a communications and commercial medium, or require us to incur significant
expenses in complying with any new regulations.

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The European Union has recently adopted privacy and copyright directives
that may impose additional burdens and costs on international operations. In
addition, several telecommunications carriers, including America's Carriers'
Telecommunications Association, are seeking to have telecommunications over
the Internet regulated by the Federal Communications Commission ("FCC"), in
the same manner as other telecommunications services. Because the growing
popularity and use of the Internet has burdened the existing
telecommunications infrastructure and many areas with high Internet usage have
begun to experience interruptions in phone services, local telephone carriers,
have petitioned the FCC to regulate the Internet and to impose access fees.
Increased regulation or the imposition of access fees could substantially
increase the costs of communicating on the Internet, potentially decreasing
the demand for our service.

We are aware of this legislation, but cannot currently predict the
effect, if any, that this legislation will have on our business. There can be
no assurance that this legislation will have significant additional costs on
our business or subject us to additional liabilities. Moreover, the
applicability to the Internet of existing laws governing issues such as
property ownership, copyright, defamation, obscenity and personal privacy is
uncertain. We may be subject to claims that our services violate such laws.
Any new legislation or regulation in the United States or abroad or the
application of existing laws and regulations to the Internet could damage our
business and cause the price of our common stock to decline. Due to the
global nature of the Internet, it is possible that the governments of other
states and foreign countries might attempt to regulate its transmissions or
prosecute us for violations of their laws. We might unintentionally violate
such laws. Such laws may be modified, or new laws may be enacted, in the
future. Any such development could damage our business.

The securities industry in the United States is subject to extensive
regulation under both federal and state laws. In addition, the Securities and
Exchange Commission (the "Commission"), the NASD, various stock exchanges, and
other regulatory bodies, such as state securities commissions, require strict
compliance with their rules and regulations. As a matter of public policy,
regulatory bodies are charged with safeguarding the integrity of the
securities and other financial markets and with protecting the interests of
customers participating in those markets. Our failure to comply with any of
these laws, rules or regulations could result in censure, fine, the issuance
of cease-and-desist orders, any of which could have a material adverse effect
on our business, financial condition and operating results.

Because the equity securities that we currently hold amount to more than
40% of our total assets, we may be deemed to be an "Investment Company" and be
required to register under the Investment Company Act of 1940 (the "Act"). We
view this situation to be an anomaly, however, and we do not intend to be
engaged in the business of investing, reinvesting owning, holding or trading

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in securities. We intend to rectify this situation within the next twelve
months so that the amount of our equity securities will not exceed 40% of our
assets. On August 17, 2000, our Board of Directors adopted a resolution to
take this action. In the event that we are unsuccessful (or in the event that
this situation occurs more than once in any three year period), it is likely
that we would be forced to register under the Act which would significantly
increase out regulatory burdens and professional fees.

ITEM 7. Financial Statements

Financial Statements are included on Pages F-1 through F-47.

ITEM 8. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.

Our independent accounting firm, Bewley, Argy & Company, San Diego,
California, resigned in July, 1999. Bewly, Argy & Company's report on our
1997 financial statements and audit report on our 1998 financial statements
did not contain an adverse opinion or disclaimer of opinion, or modification
of the type required to be disclosed in this Item 3. The decision to change
accountants was approved by the board of directors. There have been no
disagreements with Bewly, Argy & Company and management of the type required
to be reported under this Item 3 since the date of Bewly, Argy & Company's
engagement.

By letter dated April 14, 2000, our former independent certified
accountants, Corbin & Wertz, informed us that they were resigning as our
independent certified accountants effective April 14, 2000. The letter states
that the reason for the resignation is that we could not come to an agreement
with Corbin & Wertz on the scope of the audit work to be performed by them on
the December 31, 1999 audit. In addition, Corbin & Wertz stated that they
were also withdrawing their previously issued opinion on the separate April
30, 1999 financial statements of Children's Technology Group, Inc., our
majority-owned subsidiary.

After Corbin & Wertz had commenced their audit of our consolidated
financial statements, they informed us that the audit would be more work than
originally anticipated because of the state of our financial records and the
need to expand audit scope to comply with Statement of Auditing Standards No.
82 relating to the state of our financial records and an enforcement
investigation commenced by the Securities and Exchange Commission with respect
to certain aspects of our business, and informed us that they would need to
increase their fees accordingly. We could not come to an agreement with
Corbin & Wertz with respect to the amount of the increase in fees, and a
decision was mutually made to terminate the relationship. Our Board of
Directors discussed the problem with Corbin & Wertz, and we have authorized
Corbin & Wertz to respond fully to inquiries from the new certified public
accounting firm regarding any matters deemed appropriate by the new auditors,
including, but not limited to, the scope of the audit.

Corbin & Wertz's report on the Children's Technology Group, Inc.'s
financial statements for the period of inception (July 30, 1998) through April
30, 1999 contained a going concern paragraph but otherwise did not contain a
disclaimer of opinion and was not qualified or modified as to uncertainty,

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audit scope or accounting principles. Other than the Children's Technology
Group, Inc. report, Corbin & Wertz has never issued any report on any
financial statements for us or any of our parents or subsidiaries. During our
two most recent fiscal years and the interim period up to the date of
resignation, there were no disagreements between us and Corbin & Wertz that
are required to be disclosed under Item 3-04(a)(1)(iv) of Regulation S-K, and
there were no reportable events involving Corbin & Wertz as described under
paragraphs (A) through (D) of Item 3-04(a)(1)(iv) of Regulation S-K.

Subsequent to the resignation of Corbin & Wertz, we engaged Argy &
Company as our independent accountants.

PART III

ITEM 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act.

The Directors and Officers of the Company are as follows:

Name Age Positions and Offices Held
---- --- --------------------------

James H. Watson, Jr. 37 Chairman, Chief Executive Officer
and Director
Clifford J. Smith 40 President and Director
Mary E. Writer 41 Secretary

Although there is no family relationship between any Director or
Executive Officer of the Company, Mary E. Writer is the wife of Gregory D.
Writer, our former Chief Executive Officer and the current Chief Executive
Officer of Children's Technology Group, Inc., our majority-owned subsidiary.

The Company presently has no committees.

Set forth below are the names of all Directors and Executive Officers of
the Company, all positions and offices with the Company held by each such
person, the period during which he has served as such, and the business
experience of such persons during at least the last five years:

James H. Watson, Jr., 37, has served as our Chief Executive Officer and
Chairman of our Board of Directors since June 30, 1999. He has been a member
of our Board since 1997. Mr. Watson is Founder and the General Managing
Member of Entrepreneur Investments, LLC (EI), a private financial consulting
and investment firm that specializes in the unique needs of development stage
companies. Started in 1996, EI has worked hand in hand with both public and
private companies, assisting them with such critical issues as corporate
capitalization, mergers/acquisitions, management placement, and business
strategy. From 1995 - 1996, he was a Founder and Chief Operating Member of N8
Concepts, LLC, a private company that specialized in sports-related Trademark
Licensing and Event Management. Currently, Mr. Watson is the Chairman of the
Board and CEO of 1st Net Technologies, Inc., as well as a member of the Board
of Directors of its subsidiary, Children's Technology Group, Inc. In addition,
Mr. Watson currently serves in the capacity of CEO of 1st Net's subsidiary,
Mariah Communications, Inc. Mr. Watson serves as Chairman of the Board and
Interim CEO of PROBOOK, Inc. a San Diego, California based sports marketing

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company. He holds a seat on the Board of Directors of Nicklebys.com, Inc., an
Internet art auction company. Mr. Watson graduated from the University of
Tennessee at Chattanooga in 1985 with a B.S. in Political Science.

Clifford J. Smith, 40, has served as our President and a Director since
September 1997. From 1991 until 1997, Mr. Smith was a food and beverage
executive for Marriot Corporation in San Diego.

Mary E. Writer, 41, has served as our corporate Secretary since December,
1999. Ms. Writer also currently serves the corporate secretary and treasurer
of Probook, Inc., a sports marketing firm of which EI (our largest percentage
shareholder) owns a majority interest. Her duties with both of these entities
are essentially involved with payroll, accounting and record keeping
functions. From December of 1996 through May of 1997, she served as the
corporate secretary and treasurer of Celebrity Network, Inc, (now known as
LaForza Automobiles, Inc.). From 1996 to 1998 she was also employed as an
administrative assistant for EI, an affiliated entity that is controlled by
James H. Watson. Prior to that time (until January 1996) she served as the
corporate secretary and treasurer of Shareholder Communications Online, Inc.

SECTION 16(A) BENEFICIAL REPORTING COMPLIANCE

Based solely on a review of Forms 3 and 4 and amendments thereto
furnished to the Company during its most recent fiscal year, and Forms 5 and
amendments thereto furnished to the Company with respect to its most recent
fiscal year, and certain written representations, no persons who were either a
director, officer, or beneficial owner of more than 10% of the Company's
Common Stock failed to file on a timely basis reports required by Section
16(a) of the Exchange Act during the most recent fiscal year.

ITEM 10. Executive Compensation.

The following table sets forth the annualized base salary that we paid to
Gregory D. Writer, Jr., our former Chief Executive Officer from 1997 through
June, 1999. James H. Watson, Jr. became our Chief Executive Officer on June
29, 1999 and has not received any cash compensation for serving in such
capacity. All other compensation for our executives or directors has not
exceeded $100,000 on an annualized basis. Prior to 1997, we had not paid
compensation to executives. We reimburse our officers and directors for any
reasonable out-of-pocket expenses incurred on our behalf.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
------------------- RESTRICTED SECURITIES
NAME AND PRINCIPAL STOCK UNDERLYING ALL OTHER
POSITION YEAR SALARY($) BONUS($) AWARDS OPTIONS COMPENSATION
------------------ ---- --------- -------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>

Gregory D. Writer, Jr. 1997 $20,000 0 0 0 0
Chief Executive Officer 1998 0 0 0 0 0
from 1996 until 1999 $45,000 0 0 0 0
June 29, 1999

James H. Watson, Jr. 1997 0 0 0 0 0
Chairman and Chief 1998 0 0 0 0 0
Executive Officer 1999 0 0 0 0 0
since June 29, 1999

</TABLE>

25
<PAGE>

COMPENSATION OF DIRECTORS

When traveling from out-of-town, members of the Board of Directors are
eligible for reimbursement for their travel expenses incurred in connection
with attendance at Board meetings and meetings of committees of the Board of
Directors. Non-employee directors will be paid $1,000 for their participation
in Board or Board committee meetings. Non-employee directors will also be
eligible for initial options granted upon becoming a member of the Board and
annual option grants so long as they remain on the Board. See "1999 Incentive
Plan."

In 1999, we entered into a two (2) year Outside Director's Agreement with
Steven J. Santamaria which entitled him to be paid an annual base compensation
of 25,000 shares of our Common Stock, but since Mr. Santamaria resigned as a
Director on January 1, 2000, he was only entitled to receive one year's
compensation under this agreement. No other directors have received
compensation for serving on our Board of Directors.

FUTURE OPTION GRANTS

During 1999, the Company announced its intention to issue options to
employees to purchase common stock at an exercise price of $5.00 per share,
subject to the future approval of the Company's Board of Directors. There are
272,000 shares of common stock that would be subject to this future option
grant. The vesting period for the options to be granted will vary based on
the terms of employment of the recipients at the time the options are
announced, but in no event will such period exceed three years from the time
of the announcement of the options in 1999. None of the options to be granted
will be issued to officers or directors.

EMPLOYMENT AGREEMENTS

On April 19, 1999, Mr. Lawrence K. Kimball entered into an employment
agreement with us that was scheduled to end on April 19, 2002. Mr. Kimball's
employment agreement provided for an annual base salary of $70,000 and granted
him an option to purchase 150,000 shares of our Common Stock, having a
ten-year term, at $5.00 per share, with vesting contingent upon his continued
employment, in equal quarterly installments of 12,500 options. In addition to
his cash compensation, Mr. Kimball received an automobile allowance of $300
per month. Mr. Kimball terminated his employment with the Company on November
30, 1999. Per the terms of Mr. Kimball's contract, options to purchase 25,000
shares at $5.00 per share are exercisable through their expiration date of
November 30, 2000.

ITEM 11. Security Ownership of Certain Beneficial Owners and Management.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS. The following table sets
forth information regarding the beneficial ownership of the shares of the
Common Stock (the only class of shares outstanding) of 1st Net on October 20,
2000 (at which date the were 6,062,292 shares issued and outstanding), by each
person known by us to be the beneficial owner of more than five percent of the

26
<PAGE>

<PAGE>
outstanding shares of our Common Stock and by each person known by us to be a
director or nominee or executive officer owning a beneficial interest in our
equity securities.

AMOUNT AND
NAME AND ADDRESS OF NATURE OF PERCENT OF
BENEFICIAL OWNER(a) BENEFICIAL OWNERSHIP CLASS TITLE OF CLASS
------------------- -------------------- ---------- --------------

Clifford J. Smith,
President and Director 300,000 5.0% Common Stock

Entrepreneur Investments,
LLC/James H. Watson, Jr. 691,000 11.4% Common Stock
Chief Executive Officer
and Chairman (b)

Mary E. Writer none -0- N/A

All Officers and Directors
as a Group 991,000 16.4% Common Stock

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

(a) All beneficial owners referenced are at the same address: 11423 West
Bernardo Court, San Diego, California 92127. Unless otherwise indicated, all
persons listed have sole voting and investment power with respect to their
shares of Common Stock, except to the extent authority is shared by spouses
under applicable law.

(b) Includes 33,500 shares owned of record owned by James H. Watson and
657,500 shares owned of record by Entrepreneur Investments, LLC. James H.
Watson is the sole owner of Entrepreneur Investments, LLC.

CHANGES IN CONTROL. We are not aware of any arrangement which might
result in a change in control of 1st Net in the future.

ITEM 12. Certain Relationships and Related Transactions.

On November 5, 1997, we entered into an agreement to purchase eight
automobiles from LaForza Automobiles, Inc. ("LaForza") (formerly Celebrity
Networks, Inc.) for which we paid $400,000. As we had historically been
successful in generating sales leads for LaForza in the past, our intent was
to re-sell the vehicles over the Internet as a distributor and to use LaForza
to handle the legal aspects of the sales. The vehicles were to be delivered
to us beginning no later than March 30, 1998, with final delivery no later
than August 30, 1998. Due to LaForza's inability to deliver the vehicles to
us in a timely manner, we renegotiated the terms of the purchase in 1998 and
received 200,000 shares of LaForza's common stock instead of the automobiles.
The net market value of these shares as of December 31, 1998 had declined to
$262,600 from their value of $400,000 as of December 31, 1997, and resulted in
the recording of unrealized losses of $137,400 during 1998. Likewise, the net
market value of these shares declined in 1999 to $100,000, resulting in
unrealized losses of $162,600.

27
<PAGE>

<PAGE>
Additionally, in 1999, through Mariah, we invested $220,000 in restricted
shares of the Last Mile Communications Corporation, whose CEO and chairman of
the board formerly held the same positions in Mariah.

In 1999, we had aggregate related party sales of $1,276,121 of which
$775,000 was eliminated in consolidation. There were no related party
receivables as of December 31, 1999.

In 1998, we had sales to related parties amounting to $622,156. In
addition, the accounts receivable balance of $134,467 was all due from related
parties, with approximately $119,000 attributable to SSP, which was acquired
subsequent to December 31, 1998. (See Note 2 to our Financial Statements).

We issued 265,000 shares of our Common Stock to employees during 1998 as
bonuses for the 1997 year. Since the stock is restricted for a one-year
period and there was no established market for the shares, the issuance of
shares was recorded at par for a total of $265. We issued 595,300 additional
shares of our Common Stock to management and key employees during 1999, as
incentives and bonuses for the 1998 year, and 173,000 shares as payment for
services. These shares issued are likewise restricted for a one year period,
with no established market for trading and, accordingly, the issuance of such
shares was recorded at par.

EI currently owns approximately 11.4% of our outstanding shares and is
our largest percentage owner. The sole shareholder of EI also serves on the
Board of each of our subsidiaries. The Company and/or EI also have officers
or directors in common with various other entities..

In 1999, sales to one unrelated customer totaled $970,500 which
represented 28% of our sales. In 1998, sales to one customer, SSP, which was
subsequently acquired, accounted for approximately 42% of our total revenues.
Further, in 1999 and 1998, approximately 69.6% and 31%, respectively, of our
revenue was in the form of Common Stock received, including the realized and
unrealized gains on such stocks, as payment for services.

In March 1998, we entered into an Investment Banking Agreement with EI,
whereby EI provided $30,000 in consulting services to us, of which $15,000 is
included in the accompanying financial statements as offering costs. As of
December 31, 1997 and 1998, $12,500 and $6,162, respectively, are included in
accounts payable as a result of our activities with EI. EI advanced us
approximately $60,000 on an interest-free basis during 1997, of which we
repaid $25,000 during 1997. The remaining balance of $34,500 is included in
the accompanying financial statements as due to related parties as of December
31, 1997. This balance of the loan was repaid in full in June 1998.

During the years ended December 31, 1999 and 1998, we subleased office
space from EI for total rent payments of $96,000 and $41,347, respectively.

On December 15, 1998, EI loaned us $5,400 on an interest-free basis,
which is part of the related party balance due of $44,000 as of December 31,
1998. The remaining balance of $39,000 consists of a loan payable to CTGI of
$24,000, and loans payable to two other affiliates totaling $15,000.

On November 9, 1998, we entered into an Internet Web Site Development
Agreement with La Jolla Fresh Squeezed Coffee Company, a Washington
corporation ("La Jolla Coffee"), by which we provided corporate due diligence
and Web site services to La Jolla Coffee. In exchange therefor, we received

28
<PAGE>

<PAGE>
$30,000 and approximately five percent of the issued and outstanding stock of
La Jolla Coffee, in addition to a stock option to purchase an additional three
and three tenths percent (3.3%) of La Jolla Coffee's outstanding shares.

In 1998, we had sales to related parties amounting to $622,156. In
addition, the accounts receivable balance of $134,467 is all due from related
parties, with approximately $119,000 attributable to SSP, which was acquired
by us in January 1999.

In January 1999, we borrowed $138,000 from Grey Mare, LLC, a Colorado
limited liability company ("Grey Mare") on an interest-free basis. Mr. Wilford
Purcell, the stepfather of Mr. Gregory D. Writer, Jr., our former Chief
Executive Officer and Chairman, is the sole owner of Grey Mare. We repaid this
loan in full on February 19, 1999.

We believe that all of the related party transactions discussed above
were on terms no less favorable to us than we would have received if the
transactions were negotiated with disinterested third parties.

Item 13. Exhibits and Reports on Form 8-K.

Reports on Form 8-K

No current reports on Form 8-K were filed during the fiscal year ended
December 31, 1999.

Exhibits

The Exhibits listed below in the Index to Exhibits are filed as part of
this report.

Index to Exhibits:

Exhibit Number Description

3.1 Articles Of Amendment And Restatement Of 1st Net
Technologies, Inc. Filed On December 11, 1998 (1)

3.2 Amended And Restated Bylaws Of 1st Net Technologies, Inc.
Dated June 24, 1999 (1)

4.3 Specimen Of 1st Net Technologies, Inc.'s Common Stock
Certificate (1)

4.4 Warrant Agreement Dated April 1, 1999 By And Between 1st
Net Technologies, Inc. And No Fear, Inc. (1)

4.5 Warrant Agreement Dated April 1, 1999 By And Between 1st Net
Technologies, Inc. And Eric Baker (1)

4.6 1st Net Technologies, Inc.'s Series "A" Preferred Warrant
Agreement (1)

4.7 Warrant Agreement By And Between 1st Net Technologies, Inc.
And Children's Technology Group Dated April 19, 1999 (1)

29
<PAGE>

<PAGE>
4.8 1st Net Technologies, Inc.'s 1999 Incentive Stock Option
Plan (1)

4.9 1st Net Technologies, Inc.'s 1999 Non-Qualified Stock Option
Plan Dated January 4, 1999 (1)

10.1 Investment Banking Agreement Dated As Of March 1, 1998 By
And Between 1st Net Technologies, Inc. And Entrepreneur
Investments, LLC (1)

10.2 Internet Marketing And Joint Venture Agreement By And Between
1st Net Technologies, Inc. And Nicklebys.com, Inc. Dated
January 14, 1999 (1)

10.3 Web Site Development, Service And Revenue Sharing Agreement
By And Between 1st Net Technologies, Inc. And No Fear,
Inc. Dated April 1, 1999 (1)

10.4 Profit Sharing Agreement By And Between 1st Net Technologies,
Inc. And Netsol USA, Inc. Dated July 6, 1999 (1)

10.5 Stock Acquisition Agreement By And Between 1st Net
Technologies, Inc. And MC32, Inc. Dated As Of August 15,
1998 (1)

10.6 Stock Acquisition Agreement By And Between 1st Net
Technologies, Inc. And Spirit 32 Development Corporation
Dated As Of January 22, 1999 (1)

10.7 Stock Acquisition Agreement By And Between 1st Net
Technologies, Inc. And SSP Management Corporation
Dated As Of January 26, 1999 (1)

10.8 Technology License Agreement By And Between 1st Net
Technologies, Inc. And Children's Technology Group, Inc.
Dated As Of April 19, 1999 (1)

10.9 Technology License Agreement By And Between 1st Net
Technologies, Inc. And Children's Technology Group, Inc.
Dated As Of May 1, 1999 (1)

10.10 Employment Agreement By And Between 1st Net Technologies,
Inc. And Lawrence K. Kimball Dated April 19, 1999 (1)

10.11 Outside Director's Agreement By And Between 1st Net
Technologies, Inc. And Steven J. Santamaria Dated May 1,
1999 (1)

10.12 Standard Industrial/Commercial Multi-Tenant Lease By And
Between 1st Net Technologies, Inc. And Entreprenuer
Investments, LLC Dated June 1, 1998 (1)

10.13 Stock Option Agreement Dated January 10, 1999 By And Between
1st Net Technologies, Inc. And Gregory D. Writer, Jr.,
Entrepreneur Investments, LLC, Clifford J. Smith And
Jeffrey Chatfield (1)

30
<PAGE>

<PAGE>
10.14 Consulting Agreement By and Between 1st Net Technologies,
Inc. and Mariah Communications, Inc. Dated As Of August 15,
1998 (1)

10.15 Internet Web Site Development Agreement Dated November 9,
1998 By And Between 1st Net Technologies, Inc., And La Jolla
Fresh Squeezed Coffee, Inc. (1)

10.16 Mariah Communications, Inc. Asset Purchase and Sale Agreement
dated September 21, 1999 (1)

10.17 SSP Management Corp. Asset Purchase Agreement dated
February 23, 2000 (1)

10.18 Spirit 32 Development Corporation Technology Purchase and
Rescission Agreement dated January 14, 2000 (1)

10.19 Children's Technology Group, Inc. Technology Purchase
Agreement dated March 22, 2000 (1)

10.20 Standard Internet Web Site Development Agreement (1)

11 Statement Re: Computation of Per Share Earnings (1)

16.1 Cordovano and Harvey, P.C. letter (1)

16.2 Bewley, Argy & Company letter (1)

21 Subsidiaries Of 1st Net Technologies, Inc. (1)

27 Financial Data Schedule (2)

(1) Incorporated by reference to the Registrant's Form 10SB, as amended.

(2) Filed herewith electronically.

31
<PAGE>

INDEX TO FINANCIAL STATEMENTS

Page
1ST NET TECHNOLOGIES, INC.

Twelve months ended December 31, 1999 and 1998:

Auditors' report ............................................. F-2
Consolidated balance sheets - assets ......................... F-3
Consolidated balance sheets - liabilities and stockholders'
equity ...................................................... F-4
Consolidated statements of operations ........................ F-5
Consolidated statements of changes in stockholders' equity ... F-6
Consolidated statements of cash flows ........................ F-8
Notes to consolidated financial statements ................... F-10

Six months ended June 30, 2000 and 1999:

Consolidated balance sheets (unaudited) ...................... F-21
Consolidated statements of operations (unaudited) ............ F-23
Consolidated Statements of cash flows (unaudited) ............ F-24
Notes to Consolidated Financial Statements (unaudited) ....... F-25

THE CHILDREN'S TECHNOLOGY GROUP, INC. F.K.A. TUMMY BUSTERS, INC.

Independent Auditors' Report.................................. F-29
Balance Sheet as of April 30, 1999............................ F-30
Statement of Operations for the period from July 30,
1998 (Date of Inception)through April 30, 1999............... F-31
Statement of Stockholders' Equity for the period from
July 30, 1998 (Date of Inception) through April 30, 1999..... F-32
Statement of Cash Flows for the period from July 30,
1998 (Date of Inception) through April 30, 1999 ............. F-33
Notes to the Financial Statements ............................ F-34

SSP MANAGEMENT CORP.

Independent Auditors' Report ................................. F-39
Balance Sheet as of December 31, 1998 ........................ F-40
Statement of Operations for the year ended December 31, 1998.. F-41
Statement of Stockholder's Equity for the year ended
December 31, 1998 ........................................... F-42
Statement of Cash Flows for the year ended December 31, 1998.. F-43
Notes to the Financial Statements ............................ F-44

F-1
<PAGE>

<PAGE>
Independent Auditors' Report

The Board of Directors
1st Net Technologies, Inc.
11423 West Bernardo Court
San Diego, California 92127

We have audited the accompanying consolidated balance sheets of 1st Net
Technologies, Inc. (a Colorado corporation) and Subsidiaries, as of December
31, 1999, and the related consolidated statements of operations, shareholders'
equity and cash flows for the years ended December 31, 1999 and 1998. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
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 consolidated financial
statements are free of material misstatement. An audit includes examining, on
a test-basis, evidence supporting the amounts and disclosures in the
consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of 1st Net Technologies, Inc., and Subsidiaries as of December 31, 1999, and
the consolidated results of their operations and their cash flows for the
years ended December 31, 1999 and 1998, in conformity with generally accepted
accounting principles.

The Company is affiliated with other companies in the same line of business,
all of which are controlled by a common control group with the ability to
influence the volume of business done by each company. As discussed in the
notes to the financial statements, the Company and its affiliates have engaged
in significant transactions with each other.

The Company has a relatively short history of operations and has experienced
losses during the three years ended December 31, 1999. As of December 31,
1999, the Company has an accumulated deficit of 6,040,227. In view of this
matter, realization of a portion of some of the recorded amounts in the
accompanying financial statement is dependent upon continued operations of the
Company and upon the Company's ability to raise funds through debt or equity
offerings. These factors raise substantial doubt about the Company's ability
to continue as a going concern (see notes to the financial statements).
Accordingly, these consolidated financial statements do not include any
adjustments relating to the recoverability and classification of recorded
assets, or the amounts and classification of liabilities that might be
necessary in the event the Company cannot continue in existence.

/s/ Argy & Company
Argy & Company

Fountain Valley, California
April 30, 2000
F-2

<PAGE>

<PAGE>
1st NET TECHNOLOGIES, INC.
and Subsidiaries
CONSOLIDATED BALANCE SHEETS
December 31, 1999
-----------------
ASSETS

Current assets:
Cash $ 12,873
Accounts receivable, net of allowance for
doubtful accounts of $22,999 67,498
Marketable securities 1,158,366
-----------
Total current assets 1,238,737

Investment in LaForza Automobiles, Inc. 100,000
Investment in Last Mile Communication Corporation 220,000

Property and equipment, at cost net of accumulated
depreciation and amortization of $71,249 442,531

Other assets 15,926
-----------
$ 2,017,194
===========

See accompanying notes.
F-3
<PAGE>

<PAGE>
1st NET TECHNOLOGIES, INC.
and Subsidiaries
CONSOLIDATED BALANCE SHEETS
December 31, 1999
-----------------
LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Accounts payable and accrued liabilities $ 706,019
Notes payable 68,000
Notes payable and amounts due to related parties 335,972
Current portion of capital lease obligations 66,095
Accrued personnel costs 285,652
Income taxes payable 2,400
-----------
Total current liabilities 1,464,138

Long term portion of capital lease obligations 246,476
-----------
Total liabilities 1,710,614

Commitments and contingencies

Minority interests in subsidiaries 39,778

Stockholders' equity:
Preferred stock, $.001 par value, 10,000,000 shares
authorized, no shares issued and outstanding -
Common stock, $.001 par value, 40,000,000 shares
authorized, 5,753,700 shares issued and outstanding 5,754
Common stock warrants 204,041
Additional paid in capital 5,428,170
Accumulated deficit (6,040,227)
Accumulated other comprehensive income 669,064
-----------
Total stockholders' equity 266,802
-----------
$ 2,017,194
===========

See accompanying notes.
F-4
<PAGE>

<PAGE>
1st NET TECHNOLOGIES, INC.
and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS

For the years ended
December 31, December 31,
1999 1998
------------ ------------
Revenues:
Technology consulting, user fees and
marketing services including related
party revenues totaling $501,121 and
$173,294 in 1999 and 1998, respectively $ 1,712,735 $ 999,345

Operating expenses:
Stock based employee compensation 1,339,425 264,735
Stock and warrant based compensation for
consulting services 515,750 -
Other operating expenses 5,993,623 1,658,746
------------ ------------
7,848,798 1,923,481
------------ ------------
Loss from operations (6,136,063) (924,136)

Other income and expense:
Realized gain on investments sold 919,518 331,760
Unrealized loss on decline of restricted
stock investement (162,600) (137,400)
Interest expense (21,719) (18,238)
Other income 8,924 2,030
------------ ------------
Loss before provision for income taxes
and minority interest in loss of subsidiaries (5,391,940) (745,984)

Provision for income taxes 4,000 1,600
------------ ------------
Loss before provision for minority interest
in undistributed loss of subsidiaries (5,395,940) (747,584)

Minority interest in undistributed loss
of subsidiaries 157,534 94,700
------------ ------------
Net loss $ (5,238,406) $ (652,884)
============ ============

Loss per share:
Net loss $ (5,238,406) $ (652,884)
Preferred dividends - (6,000)
------------ ------------
Net loss applicable to common
shareholders (5,238,406) (658,884)

Basic and diluted loss per share $ (0.92) $ (0.16)
============ ============

Weighted average common shares outstanding:
Basic and diluted 5,682,147 4,018,697
============ ============
See accompanying notes.
F-5
<PAGE>

<PAGE>
1st NET TECHNOLOGIES, INC.
and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years ended December 31, 1999 and 1998
<TABLE>
<CAPTION>
Accumu-
mulated
Addi- Other
Number Common tional Compre- Total
Number of of Stock Paid-In Accumulated hensive stockholders'
Shares Amount Shares Amount Warrants Capital Deficit (loss) equity
--------- ---------- --------- ------ -------- ---------- ----------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31,
1997 - $ - 2,798,000 $2,798 $ - $ 506,252 $ (142,937) $ - $ 366,113

Shares issued
to employees - - 265,000 265 - 264,735 - - 265,000

Common stock of
1st Net issued
to investors - - 450,000 450 - 368,163 - - 368,613

Series A pre-
ferred shares
and warrants
issued to
investors 20,000 45,000 - - 5,000 - - - 50,000

Common stock
of Mariah issued
in exchange for
technology - - - - - 4,000 - - 4,000

Common stock
of Mariah issued
to investors - - - - - 94,700 - - 94,700

Dividends on
preferred
stock - - - - - - (6,000) - (6,000)

Comprehensive
loss
Net loss - - - - - - (652,884) - (652,884)
Unrealized
loss on
investements
held for
sale - - - - - - - (27,070) (27,070)
--------- ---------- --------- ------ -------- ---------- ----------- -------- ------------
Balance at
December 31,
1998 20,000 45,000 3,513,000 3,513 5,000 1,237,850 (801,821) (27,070) 462,472

Shares issued
to employees - - 595,300 596 - 1,338,829 - - 1,339,425

Common stock
issued in exchange
for services - - 173,000 173 - 389,077 - - 389,250

Common stock of
Mariah issued
to investors - - - - - 760,000 - - 760,000

Common stock of
CTG issued
to investors - - - - - 750,764 - - 750,764

F-6
<PAGE>

<PAGE>
Common stock of
1st Net issued
in exchange for
SSP - - 1,000,000 1,000 - - - - 1,000

Series A pre-
ferred shares
and warrants
issued to
investors 452,400 907,122 - - 100,791 - - - 1,007,913

Common stock
warrants
issued in
exchange for
services - - - - 98,250 - - - 98,250

Conversion
of preferred
stock to
common stock (472,400) (952,122) 472,400 472 - 951,650 - - -

Comprehensive
loss
Net loss - - - - - - (5,238,406) - (5,238,406)
Unrealized
gain on
investements
held for sale - - - - - - - 696,134 696,134
--------- ---------- --------- ------ -------- ---------- ----------- -------- ------------
Balance at
December 31,
1999 - $ - 5,753,700 $5,754 $204,041 $5,428,170 $(6,040,227) $669,064 $ 266,802
========= ========== ========= ====== ======== ========== =========== ======== ============

</TABLE>

See accompanying notes.

F-7
<PAGE>

<PAGE>
1st NET TECHNOLOGIES, INC.
and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended
December 31, December 31,
1999 1998
Operating activities ------------ -------------
Net loss $(5,238,406) $ (652,884)
Adjustments to reconcile net income
to net cash from operating activities:
Depreciation and amortization 115,447 20,877
Changes in minority interests in
subsidiaries 39,778 -
Loss on disposal of property and equipment 102,480 -
Stock based employee compensation 1,339,425 265,000
Stock and warrant based compensation for
consulting services 515,750 -
Realized gain on investments sold (919,518) (331,760)
Unrealized loss on decline of restricted
stock investment 162,600 137,400
Revenues received in the form of stock (348,798) (328,140)
Changes in operating assets and liabilities:
Accounts receivable (52,348) (15,010)
Other assets 5,530 (474)
Accounts payable and accrued liabilities 506,995 160,511
Accrued personnel costs 232,507 46,710
Deferred revenues (11,122) (88,980)
Income taxes payable - 2,400
Other liabilities (10,000) 10,000
------------ -------------
Net cash from operating activities (3,559,680) (774,350)

Investing activities
Additions to property and equipment (162,636) (136,458)
Investment in Last Mile Communication
Corporation (220,000) -
Sales of marketable securities 941,939 664,377
Changes in loans receivable 330,882 (330,882)
------------ -------------
Net cash from investing activities 890,185 197,037

Financing activities
Repayments of capital lease obligations (39,808) (11,170)
Additions to notes payable 429,245 366,467
Repayments of notes payable (244,542) (275,498)
Net proceeds from issuance of common stock
by CTG 750,764 -
Net proceeds from issuance of common stock - 368,613
Net proceeds from issuance of common stock
by Mariah 760,000 94,700
Net proceeds from issuance of preferred
stock and warrants 1,007,913 50,000
------------ -------------
Net cash from financing activities 2,663,572 593,112
------------ -------------
Increase in cash (5,923) 15,799
Cash at beginning of period 18,796 2,997
------------ -------------
Cash at end of period $ 12,873 $ 18,796
============ =============
F-8
<PAGE>

<PAGE>
Supplemental disclosures of cash flow
information:
Cash paid (refunded) during the year for:
Interest $ 21,719 $ 18,238
============ =============
Income taxes $ 4,000 $ -
============ =============

See accompanying notes.

SUPPLEMENTAL DISCLOSURES OF NONCASH ACTIVITIES:

The Company granted exclusive proprietary technology rights to IP Telephony
Technology that had no recorded accounting value in connection with the
acquisition of Mariah during 1998.

The Company acquired net assets of $7,687 in connection with the acquisition
of SSP Management Corp in exchange for 1,000,000 shares of common stock in
January 1999.

The Company acquired the net assets of Children's Technology Group, Inc.
totaling $705,657 in exchange for a license to in-process proprietary
technology that had no recorded accounting value in May 1999.

The Company incurred capital lease obligations totaling $309,881 and $53,668
in connection with lease agreements to acquire equipment during the years
ended December 31, 1999 and 1998, respectively.

The Company recorded revenues totaling $348,798 and $328,140 for services
performed in exchange for clients' stocks during the year ended December 31,
1999 and 1998, respectively.

F-9
<PAGE>

<PAGE>
1st NET TECHNOLOGIES, INC.
and Subsidiaries
Notes to consolidated financial statements

1. Organization

1st Net Technologies, Inc. ("the Company" or "1st Net") is primarily in the
Internet commerce and services business. These financial statements include
the following subsidiaries:

- Mariah Communications, Inc. ("Mariah") is in the business of
developing Internet protocol telephony technologies. It was
acquired in August 1998 in exchange for technology owned by 1st Net.
At December 31, 1999, the Company owned approximately 87.8% of
Mariah's common stock.

- SSP Management Corp. ("SSP") provides Internet public relations and
Internet newsletters. It was acquired in January 1999 in exchange for
1,000,000 common shares of 1st Net. At December 31, 1999, SSP remains
wholly owned by 1st Net.

- Children's Technology Group, Inc. ("CTG") is in the business of
creating Internet communities for children. CTG was acquired in May
1999 in exchange for the licensing rights to certain technologies.
At December 31, 1999, the Company owned approximately 86.4% of CTG's
outstanding stock.

All three of the Company's subsidiaries had shareholders and management in
common with the Company of the Company's management prior to their
acquisition.

2. Significant accounting policies

The Company's financial statements have been prepared in conformity with
generally accepted accounting principles.

Going concern

The Company's financial statements have been prepared under the assumption it
will continue as a going concern. However, the Company has incurred net
losses throughout its entire history resulting in an accumulated deficit of
$6,040,227 at December 31, 1999. Realization of a portion of the Company's
assets in the accompanying financial statements is dependent upon the
continued operation of the Company. In order to continue operations, the
Company must raise additional funds either through incurring new debt, raising
new equity or liquidating investment securities held. These factors raise
substantial doubt about the Company's ability to continue as a going concern.
Management believes that actions presently being taken and current revenues
being generated will provide the opportunity for the Company to continue as a
going concern.

Cash and cash equivalents

The Company considers all liquid interest-earning investments with original
maturities of three months or less to be cash equivalents. There were no
cash equivalents at December 31, 1999 or 1998.

F-10
<PAGE>

<PAGE>
Principles of consolidation

The financial statements include the accounts of 1st Net and its three
subsidiaries. Because all three of the Company's subsidiaries had
shareholders and management in common with 1st Net prior to their acquisition,
the Company has accounted for them in a manner similar to pooling-of-interests
accounting. The accompanying financial statements have been prepared on a
consolidated basis as if common control was established as of the inception of
the three subsidiaries during the year ended December 31, 1998. Significant
intercompany transactions and balances have been eliminated in consolidation.

Estimates and assumptions

Preparing financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenue,
and expenses. Examples include provisions for bad debts and the value of
securities received in exchange for services. Actual results may differ from
these estimates.

Revenue recognition

Revenue is recognized when earned. The Company's revenue recognition policies
are in compliance with all applicable accounting regulations, including
American Institute of Certified Public Accountants (AICPA) Statement of
Position (SOP) 97-2, Software Revenue Recognition, and SOP 98-9, Modification
of SOP 97-2, With Respect to Certain Transactions. Revenues from technology
consulting, user fees and marketing services are recognized ratably over the
contract period in accordance with period in which the services are performed.
Revenues attributable to undelivered elements, including technical support are
recognized ratably on a straight-line basis over the contract period.

Computer software costs

Computer software costs are expensed as incurred. Statement of Financial
Accounting Standards (SFAS) 86, Accounting for the Costs of Computer Software
to Be Sold, Leased, or Otherwise Marketed, does not materially affect the
Company. In March 1998, the American Institute of Certified Public
Accountants issued Statement of Position 98-1 Accounting for Costs of Computer
Software Developed or Obtained for Internal Use (SOP 98-1). This standard
requires companies to capitalize qualifying computer software costs, which are
incurred during the application development stage and amortize them over the
software's estimated useful life. The Company adopted SOP 98-1 effective
January 1, 1999 with no material effect on the financial statements.

Marketable and restricted securities

Marketable and restricted securities consist primarily of stock received for
services performed on behalf of clients. Publicly traded equity securities
are classified as available for sale and are recorded at market using the
specific identification method. Unrealized gains and losses are reflected in
other comprehensive income. Restricted securities are recorded at cost.
Restricted shares of LaForza Automobiles, Inc. declined in value from their
original book basis of $400,000 to $262,600 and $100,000 at December 31, 1998
and 1999, respectively. Because management believed these declines to be of
an other than temporary nature, the investment was written down to its new
values as of these dates and the losses of $137,400 and $162,600 were recorded
in operations in 1998 and 1999, respectively.

F-11
<PAGE>

<PAGE>
The Company realized gross proceeds of $941,939 and $664,377 from the sales of
available-for-sale securities during 1999 and 1998, respectively. Gross
realized gains and losses included in operations for 1999 were $972,918 and
$53,400, respectively ($380,231 and $48,471 for 1998).

Property and equipment

Property and equipment consists primarily of office equipment and furniture,
is stated at cost and is depreciated using the straight-line method over the
estimated useful lives of the assets of three to five years. Expenditures for
maintenance and repairs are expensed; expenditures for renewals and
improvements are generally capitalized. Upon sale or retirement of an asset,
the related costs and accumulated depreciation are removed from the accounts
and any gain or loss is recognized. When events or changes in circumstances
indicate that assets may be impaired, an evaluation is performed comparing the
estimated future undiscounted cash flows associated with the asset to the
asset's carrying amount to determine if a write-down to market value or
discounted cash flow value is required.

Property and equipment consists of the following at December 31, 1999:

Office furniture and equipment $ 243,319
Computer equipment 152,299
Leasehold improvements 22,954
Automobiles 27,219
Tradeshow accessories 52,000
Other 15,989
---------
513,780
Less accumulated depreciation (71,249)
---------
$ 442,531
=========

Capital lease property

Capital lease property and equipment at December 31, 1999 totaled $264,529 net
of accumulated amortization of $23,205.

Fair value of financial instruments

The Company estimates the fair value of its monetary assets and liabilities
based upon existing interest rates related to such assets and liabilities
compared to current rates of interest for instruments with a similar nature
and degree of risk. The Company estimates that the carrying value of its
monetary assets and liabilities approximates their fair value as of December
31, 1999.

Advertising costs

Advertising costs are expensed as incurred. Advertising expenses totaled
$300,927 and $199,164 in 1999 and 1998, respectively.

Concentration of credit risk

The Company sells its services to customers in the United States. The Company
maintains a reserve for potential credit losses and historically such losses
have been within management's estimates. In 1999, revenues from one unrelated
major customer totaled $970,500, which represented 56.7% of total revenues.

F-12
<PAGE>

<PAGE>
Comprehensive income

The Company has adopted SFAS No. 130, Reporting Comprehensive Income, which
requires that all components of comprehensive income, including net income, be
reported in the financial statements in the period in which they are
recognized. Comprehensive income is defined as the change in equity during a
period from transactions and other events and circumstances from non-owner
sources. Net income (loss) and other comprehensive income, including
unrealized gains and losses on investments held for sale, shall be reported
net of their related tax effect, to arrive at comprehensive income (loss).
Comprehensive loss totaled $4,542,272 and $679,954 in 1999 and 1998,
respectively.

Earnings per share

Earnings per share is computed in accordance with SFAS No. 128, Earnings Per
Share and SEC Staff Accounting Bulletin (or SAB) No. 98. Under the provisions
of SFAS No. 128, basic earnings per share is computed by dividing the net loss
for the period by the weighted average number of common shares outstanding
during the period. Diluted earnings per share is computed by dividing the net
loss for the period by the weighted average number of common and common
equivalent shares outstanding during the period. Under the provisions of SAB
No. 98, common shares issued for nominal consideration are included in the per
share calculations as if they were outstanding for all periods presented.

Weighted average shares outstanding of 5,661,711 and 4,018,697 for the years
ended December 31, 1999 and 1998, respectively includes common stock
outstanding as well as common shares issued for nominal consideration as if
the shares were outstanding for all periods presented. Potentially dilutive
securities include options, warrants and preferred stock that were excluded
from basic and diluted earnings per share because of their anti-dilutive
effect. Anti-dilutive securities outstanding totaled 336,200 and 10,000 at
December 31, 1999 and 1998, respectively.

Stock-based compensation

The Company has elected to follow Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees ("APB 25"), and related
interpretations in accounting for its employee stock options because the
alternative fair value accounting provided for under SFAS No. 123, Accounting
for Stock-Based Compensation, requires the use of option valuation models that
were not developed for use in valuing employee stock options. Under APB 25,
when the exercise price of the Company's employee stock options is not less
than the deemed fair value for the underlying stock on the date of grant, no
compensation expense is recognized. At the time stock options were granted,
the Company believed that the exercise price was at a price not less than the
fair value of the underlying common stock.

Recently issued accounting standards

In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, which establishes accounting and reporting
standards for derivative instruments and hedging activities. The Statement
will require the recognition of all derivatives on the Company's balance sheet
at fair value. The Financing Accounting Standards Board has subsequently
delayed implementation of the standard for the financial years beginning after
June 15, 2000. The Company expects to adopt the new Statement effective
January 1, 2001. The impact on the Company's financial statements is not
expected to be material.
F-13
<PAGE>

<PAGE>
Restatements and reclassifications

The Company has restated prior year financial information to reflect the
accounting for the acquisitions of its subsidiaries as if the acquisitions
took place at the inception of the subsidiaries in 1998. Certain
reclassifications have been made to conform prior years' data to the current
period presentation.

3. Acquisitions and proposed acquisition of subsidiaries

Mariah

At its inception in August 1998, Mariah issued all of its outstanding common
stock totaling 4,000,000 shares to 1st Net in exchange for certain in-process
technology research and development owned by 1st Net. Additionally, the
Company issued options to purchase 1,500,000 shares of common stock to
Entrepreneur Investments, LLC for services rendered in Mariah's formation.
The options are exercisable at $.10 per share and expire on August 15, 2001.

Mariah had shareholders and management in common with 1st Net at the time of
its formation and acquisition by 1st Net. The acquisition was accounted for
in a manner similar to a pooling-of-interests and the results of Mariah's
operations from its inception are included in the accompanying financial
statements of the Company. Mariah had no revenues in either 1999 or 1998 and
a net loss of $446,018 and $86,901 in 1999 and 1998, respectively.

Mariah subsequently sold stock to outside investors for proceeds totaling
$854,700 (net of offering costs) and the Company owns approximately 87.8% of
Mariah's outstanding shares at December 31, 1999. Minority interest in
subsidiaries totaling $39,778 in the accompanying balance sheet at December
31, 1999 represents the outside ownership of Mariah's equity as of that date.

In 1999, Mariah received a note receivable from Last Mile Communications
Corporation ("Last Mile") in exchange for $220,000 cash. The note was
subsequently converted into the restricted shares of Last Mile. Last Mile's
chief executive officer and chairman of the board of directors formerly held
the same position with Mariah. In March 2000, Mariah subsequently sold
substantially all of its operating assets to Last Mile in exchange for Last
Mile's assumption of future expense commitments. Mariah retained the rights
to its IP telephony technology.

SSP

In January 1999, the Company acquired 100% of the outstanding shares of SSP in
exchange for 1,000,000 shares of the 1st Net stock. SSP had shareholders and
management in common with 1st Net prior to the acquisition. The transaction
was accounted for in a manner similar to a pooling-of-interests and the
results of SSP's operations from its inception in 1998 are included in the
accompanying financial statements of the Company. SSP continues to be wholly
owned by 1st Net as of December 31, 1999. SSP had revenues and net income of
$1,175,386 and $566,921 in 1999 ($523,515 and $22,947 in 1998).

F-14
<PAGE>

<PAGE>
CTG

In May 1999, the Company obtained 4,000,000 shares or approximately 86.4% of
CTG's common stock in exchange for technology marketing and licensing rights
on in-process technology research and development. CTG had shareholders and
management in common with 1st Net prior to the acquisition. The transaction
was accounted for in a manner similar to a pooling-of-interests and CTG's
results from its commencement of operations in 1999 are included in the
accompanying financial statements of the Company. Revenues and net loss in
1999 totaled $65,209 and $822,295, respectively. 1st Net continues to own
approximately 86.4% of CTG as of December 31, 1999. In March 2000, 1st Net
received an additional 35,000 shares of CTG in lieu of unpaid royalties owed
by CTG to 1st Net. There is no minority interest in CTG shown on the
accompanying balance sheet at December 31, 1999 because CTG has a net equity
deficit as of that date totaling $226,569.

Spirit 32 Development Corporation

In January 1999, the Company entered into an agreement to purchase in the
future all of the issued and outstanding stock of Spirit 32 Development
Corporation ("SP32") in exchange for 450,000 shares of 1st Net's common stock.
The acquisition was not consummated and was formally rescinded in February
2000. The rescission agreement released the Company and SP32 from any
liability that may have arisen under the terms of the original agreement for
1st Net to acquire SP32, including funds previously advanced by 1st Net for
the licensing and development of in-process technology.

4. Related party transactions, major customers and noncash revenues

The Company recognized related party revenues totaling $501,121 and $173,294
during the years ended December 31, 1999 and 1998, respectively. There were
no related party accounts receivable at December 31, 1999.

Entrepreneur Investments, LLP ("EI") is a large percentage stockholder of 1st
Net. The sole shareholder of EI is also 1st Net's Chief Executive Officer and
serves on the Board of Directors of both 1st Net and Mariah. EI owns the
building in which both 1st Net and CTG are housed. Rent expense totaled
$89,823 and $18,501 for the years ended December 31, 1999 and 1998,
respectively. Additionally, the Company had borrowings outstanding from EI
totaling $284,800 and $5,000 at December 31, 1999 and 1998, respectively.
Borrowings from EI are generally non-interest bearing unless so stated at the
time funds are advanced. There was no interest expense from EI borrowings in
either 1999 or 1998.

At December 31, 1999, SSP had certain holdings of corporate securities that
were obtained in connection with past services provided by the Company. SSP
has agreed to pay a former independent contractor of the Company a commission
of 8% of the proceeds realized by SSP from the future sale of these
securities. Included in accounts payable at December 31, 1999 is $90,151 for
the estimated amount due to this individual based on the value of SSP
marketable securities at that date.

F-15
<PAGE>

<PAGE>
5. Sales and issuances of preferred and common stock

The Company issued 595,300 and 265,000 restricted shares of common stock to
employees during the years ended December 31, 1999 and 1998, respectively and
173,000 restricted shares to outsiders for services rendered to the Company.
Additionally, the Company committed to issue 46,907 common shares to employees
in 2000 for services performed in 1999. The Company recognized compensation
expense for the shares issued and to be issued of $1,614,111 and $265,000 for
the years ended December 31, 1999 and 1998, respectively and $417,000 for
shares issued and to be issued to outsiders for services rendered to the
Company. The compensation expense recognized was calculated based on the most
recent trading price of the common stock for stock issuances in 2000 and 1999,
or on the basis of the most recent sale of shares to outsiders for stock
issued in 1998.

1st Net sold 450,000 shares of restricted common stock to outside investors
during the year ended December 31, 1998 for net proceeds totaling $368,613.
In connection with the acquisition of SSP, 1st Net issued 1,000,000 shares of
its common stock to the shareholders of SSP. The shares were issued in
January 1999 when the shares closed on the OTC market at $3.00, giving a total
value for the transaction of $3,000,000.

1st Net sold 452,400 and 20,000 shares of its Series A preferred stock to
outside investors during 1999 and 1998, respectively. The Company's Series A
preferred stock is convertible into an equivalent number of shares of common
stock and has voting rights equal to the number of shares of common stock into
which it is convertible. The shares are entitled to participate in any
dividends issued to common stockholders and have cumulative rights to
dividends at the rate of $.30 per share payable in either cash or shares of
common or preferred stock. The Series A preferred shares have a preference in
liquidation of any unpaid dividends plus $2.50 per share over other 1st Net
stockholders.

The preferred shares automatically converted to common stock when the
Company's share price reached $3 per share and dividends accrued in the prior
year were never paid. The Series A preferred shares were sold with warrants
to purchase additional shares of common stock at $5 per share, exercisable
immediately. The warrants expire on the early of the one-year anniversary of
an underwritten public offering of the Company's shares or October 31, 2002.
There were 236,200 and 10,000 warrants outstanding at December 31, 1999 and
December 31, 1998, respectively.

Mariah sold 437,000 and 118,600 shares of common stock to outsiders during
1999 and 1998, respectively for net proceeds totaling $760,000 and $94,700,
respectively. In 1999, CTG sold 630,000 shares of its common stock to
outsiders for net proceeds totaling $750,764.

The Company agreed to issue warrants to purchase 525,000 shares of common
stock at $3.00 per share to four employees, subject to the approval of the
Company's Board of Directors. When the issuance of the warrants are approved
by the Board of Directors, they will be immediately vested and will expire
five years from the date of Board approval.

F-16
<PAGE>

<PAGE>
During 1999, the Company agreed to issue options to purchase common shares to
employees at the rate of $5.00 per share, subject to the approval of the
Company's Board of Directors. The options have a ten-year term and vest over
three years. At December 31, 1999, the Company had 352,000 stock options
issued and outstanding. The vesting period for some of the options was
accelerated over a period less than three years based on the terms of
employment of the recipients. At December 31, 1999, there were 86,667 options
exercisable.

As provided for under SFAS 123, the Company has provided the required
additional pro forma disclosures. In accordance with the intrinsic value
method followed by APB 25, no compensation expense has been recognized in the
consolidated statement of operations in connection with the granting of stock
options. Had compensation cost been recognized in accordance with the fair
value method called for by SFAS 123, the Company's net loss in 1999 would have
increased $179,520 to $5,417,926.

The fair value of the options issued in 1999 was estimated using the
Black-Scholes option pricing model with the following weighted average
assumptions used for grants: dividend yield 0%; expected volatility 80%;
risk-free investment rate 6%; and an expected life of seven years. The
compensation cost as generated by the Black-Scholes model may not be
indicative of the future benefit, if any, that may be realized by the option
holders. The fair value of the option grant was $.51 per share.

The Company issued 75,000 warrants to a client during 1999 in connection with
a service agreement. The warrants have an exercise price of $3.50 per share
and expire March 31, 2001. The Company recorded a charge of $98,750 to
operations in 1999 in connection with the issuance of the warrants.

6. Notes payable

The Company's notes payable, notes payable due to related parties and amounts
due to related parties outstanding at December 31, 1999 consist of the
following:

Demand notes payable to and amounts
payable from EI, unsecured and non-interest
bearing, varying or no stated maturity dates $ 284,800

Amounts advanced from Grey Mare, LLC,
unsecured, non-interest bearing, no stated
maturity date, repaid in full during the
quarter ended March 31, 2000 40,000

Amounts advanced by employee, unsecured,
non-interest bearing, no stated maturity
date, repaid in full August 2000 11,172
------------
Notes payable and amounts due to related
parties 335,972

Note payable to an individual, unsecured
and bearing interest at 10%, interest only
payments due annually in August, no stated
maturity date 50,000

F-17

<PAGE>

<PAGE>
Note payable to a customer, unsecured and
bearing interest at 10%, repayment to be
made in the form of services, repaid in
full August 2000 18,000
------------
Notes payable 68,000
------------
$ 403,972
============

7. Commitments

Both 1st Net and CTG rent their facilities from EI under operating leases
through February 2003. The lease contracts call for increases in monthly
rent in March 2001 and March 2002. The future minimum annual aggregate
rental payments required under both capital and operating leases as of
December 31 are as follows.

Operating Capital
--------- -------
2000 $154,200 $101,559
2001 259,756 83,286
2002 282,996 81,249
2003 112,608 77,366
2004 - 47,180
-------- --------
809,560 390,640

Less interest portion of
capital lease obligations (78,069)
--------
$312,571
========

8. Income taxes

At December 31, 1999, the Company has federal and California net operating
loss carryforwards of approximately $5,800,000. The federal and California
net operating loss carryforwards will begin to expire in 2012, unless
previously utilized. Pursuant to Sections 382 and 383 of the Internal
Revenue Code, annual use of the Company's net operating loss and credit
carryforwards may be limited in the event of a cumulative change in
ownership of more than 50% occurs within a three year testing period.

The Company's provision for income taxes for the years ended December 31,
1999 and 1998 consist of minimum franchise taxes levied by the state of
California.

The components of the Company's deferred tax assets as of December 31, 1999
and 1998 are shown below. A valuation allowance has been recognized to
offset the deferred tax assets as realization of such assets is uncertain.

F-18
<PAGE>

<PAGE>
December 31, 1999 December 31, 1998
----------------- -----------------
Deferred tax assets:
Net operating loss
carryforwards $ 2,320,000 $ 320,000
Valuation allowance for
deferred tax assets (2,320,000) (320,000)
----------- ---------
Net deferred tax assets $ - $ -
=========== =========

A reconciliation of the statutory tax rates to the Company's provision for
income tax expense is as follows:

Years ended
December 31, 1999 December 31, 1998
----------------- -----------------
Federal income tax rate (35.0)% (35.0)%
State income tax rate,
net of federal benefit (5.9) (5.9)
Valuation allowance 40.9 40.7
------- -------
- % (0.2)%
======= =======

9. Contingencies

The Company is currently under investigation of the United States
Securities and Exchange Commission for potential violations of securities
laws. The outcome of this investigation is indeterminable; however, no
reserve has been established for loss contingencies due to this
investigation in the accompanying financial statements.

The Company is currently involved in disputes with several former employees
concerning compensation and termination decisions. Although the outcome of
these disputes is indeterminable, management is confident that these
matters will be settled favorably. No reserves have been established in
connection with these disputes in the accompanying financial statements.

10. Subsequent event

F-19
<PAGE>

<PAGE>
On May 19, 2000, CTG sold 2,000,000 shares of Series A convertible
preferred stock at a cost of $2.00 per share to an unrelated investor. The
preferred shares are convertible into an equal number of shares of common
stock and automatically convert upon the earlier of a firmly underwritten
public offering of the Company's common stock with total proceeds of at
least $5,000,000 or the date at which the public price per common share is
equal to or greater than $4.00 (as adjusted). The Series A preferred stock
contains no provisions for mandatory dividends except as declared at the
discretion of the Board of Directors. The Series A preferred shares have
voting rights in proportion to the number of common shares into which they
are convertible and carry a liquidation preference of $2.00 per share plus
any declared but unpaid dividends.

The preferred shares included unregistered warrants to purchase an
additional 1,000,000 shares of common stock at $4.00 per share. The
warrants expire on the earlier of May 19, 2003 or one year after the
closing of a firmly underwritten public offering of not less than
$5,000,000. The proceeds of the preferred stock and warrant sale totaled
$3,593,525, net of offering costs and commissions.

F-20
<PAGE>

<PAGE>
1st NET TECHNOLOGIES, INC.
and Subsidiaries
CONSOLIDATED BALANCE SHEETS
UNAUDITED

June 30,
2000
-----------
ASSETS

Current assets:
Cash $ 2,992,837
Accounts receivable, net of allowance for
doubtful accounts of $33,723 25,210
Marketable securities 169,966
Current portion of note receivable from
Marketbyte, L.L.C. 100,000
Other current assets 37,463
-----------
Total current assets 3,325,476

Investment in LaForza Automobiles, Inc. 60,000
Investment in Last Mile Communication Corporation 220,000
Note receivable from Marketbyte, L.L.C. 650,000

Property and equipment, at cost net of accumulated
depreciation of $107,110 348,991

Other assets 11,742
-----------
$ 4,616,209
===========

See accompanying notes.

F-21
<PAGE>

<PAGE>
1st NET TECHNOLOGIES, INC.
and Subsidiaries
CONSOLIDATED BALANCE SHEETS
UNAUDITED

June 30,
2000
-----------
LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Accounts payable and accrued liabilities $ 519,773
Notes payable 55,090
Notes payable and amounts due to related parties 67,456
Current portion of capital lease obligations 72,496
Accrued personnel costs 565,270
Income taxes payable 4,000
-----------
Total current liabilities 1,284,085

Long term portion of capital lease obligations 219,103
-----------
Total liabilities 1,503,188

Commitments and contingencies

Minority interests in subsidiaries 960,920

Stockholders' equity:
Preferred stock -
Common stock 6,004
Common stock warrants 204,041
Additional paid in capital 7,885,426
Accumulated deficit (6,111,691)
Accumulated other comprehensive income 168,321
-----------
Total stockholders' equity 2,152,101
-----------
$ 4,616,209
===========

See accompanying notes.

F-22
<PAGE>

<PAGE>
1st NET TECHNOLOGIES, INC.
and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED
For the six months ended
June 30, June 30,
2000 1999
----------- -----------
Revenues:
Technology consulting, user fees and
marketing services $ 153,343 $ 663,751
Operating expenses 2,562,111 4,305,183
----------- -----------
Loss from operations (2,408,768) (3,641,432)

Other income and expense:
Realized gain on investments sold 1,154,822 390,726
Writedown of restricted security (40,000) -
Interest expense (53,319) (8,695)
Gain on sale of assets 735,359 -
Other income 23,967 11,368
----------- -----------
Loss before provision for income taxes
and minority interest in loss of
subsidiaries (587,939) (3,248,033)

Provision for income taxes 5,902 800
----------- -----------
Loss before provision for minority
interest in undistributed loss of
subsidiaries (593,841) (3,248,833)

Minority interest in undistributed
loss of subsidiaries 522,377 100,114
----------- -----------
Net Loss $ (71,464) $(3,148,719)
=========== ===========
Loss per share:
Basic and diluted $ (0.01) $ (0.56)
=========== ===========

Weighted average common shares outstanding:
Basic and diluted 5,943,260 5,590,969
=========== ===========

See accompanying notes.

F-23
<PAGE>

<PAGE>
1st NET TECHNOLOGIES, INC.
and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
For the six months ended
June 30, June 30,
2000 1999
Operating activities ----------- -----------

Net loss $ (71,464) $(3,148,719)
Adjustments to reconcile net loss
to net cash flows from operating
activities:
Depreciation and amortization 57,545 56,935
Changes in minority interests in
subsidiaries (522,377) 50,836
Gain on sale of assets (735,359) -
Realized gain on investments sold (1,154,822) (390,726)
Writedown of restricted security - -
Reduction of note payable in exchange
for services (12,910) -
Stock based employee compensation - 1,339,425
Stock based payments for services and
technology 282,500 98,250
Revenues received in the form of stock - (22,500)
Changes in operating assets and liabilities:
Accounts receivable 42,288 (115,065)
Other assets (36,963) (61,881)
Accounts payable and accrued liabilities (136,018) 324,049
Accrued personnel costs 279,618 50,770
Deferred revenues - -
Income taxes payable 1,600 3,200
----------- -----------
Net cash flows from operating activities (2,006,362) (1,815,426)

Investing activities

Additions to property and equipment (10,151) (155,641)
Changes in marketable securities 1,682,479 42,587
Repayments of notes and loans receivable - 330,882
----------- -----------
Net cash flows from investing activities 1,672,328 217,828

Financing activities

Repayments of capital lease obligations (36,011) (4,879)
Repayments of notes payable (268,516) (219,269)
Net proceeds from issuance of common stock
of Mariah - 760,000
Net proceeds from issuance of common
stock by CTG 25,000 750,764
Net proceeds from issuance of CTG preferred
stock and warrants 3,593,525 -
Net proceeds from issuance of preferred
stock and warrants - 1,007,913
----------- -----------
Net cash flows from financing activities 3,313,998 2,294,529
----------- -----------
Increase in cash 2,979,964 696,931
----------- -----------
Cash at beginning of period 12,873 18,796
----------- -----------
Cash at end of period $ 2,992,837 $ 715,727
=========== ===========
See accompanying notes.
F-24
<PAGE>

<PAGE>
1st NET TECHNOLOGIES, INC.
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. Organization

1st Net Technologies, Inc. ("the Company") is primarily in the Internet
commerce and services business.

The accompanying financial statements of the Company have been prepared in
conformity with generally accepted accounting principles, which
contemplates continuation of the Company as a going concern. Realization
of a portion of the assets in the accompanying financial statement is
dependent upon future profitable operations of the Company, or the
realization of sufficient funds from the sales of investment securities
held or upon the Company's ability to raise funds through future debt or
equity offerings. Management believes that actions presently being taken
and current revenues being generated will provide the opportunity for the
Company to continue as a going concern and has therefore prepared the
financial statements accordingly.

2. Basis of presentation

The accompanying consolidated financial statements include the accounts of
the Company and its majority owned subsidiaries, Mariah Communications,
Inc. ("Mariah"), SSP Management Corp. ("SSP") and Children's Technology
Group, Inc. ("CTG"). These acquisitions have been accounted for in a
manner similar to a pooling-of-interests because the Company and the
acquired companies had shareholders and management in common prior to the
acquisition. Intercompany transactions and balances have been eliminated
in consolidation.

The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles for interim financial statements
and with the instructions to Form 10-QSB and Item 310(b) of Regulation SB.
Accordingly, certain information or footnote disclosures normally included
in complete financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to
the rules and regulations of the Securities and Exchange Commission. In
the opinion of management, the statements include all adjustments
necessary, which are of a normal and recurring nature, for the fair
presentation of the results of the interim periods presented.

These financial statements should be read in conjunction with the audited
financial statements and notes thereto for the year ended December 31,
1999, included in 1st Net Technologies, Inc.'s Form 10-KSB reported to the
Securities and Exchange Commission. Operating results for the three and
six months ended June 30, 2000 are not necessarily indicative of the
results which may be expected for any other interim period or for the year
ended December 31, 2000. Certain reclassifications have been made to
conform prior years' data to the current period presentation.

3. Earnings per share

Earnings per share is computed in accordance with SFAS No. 128, Earnings
Per Share. Under the provisions of SFAS No. 128, basic earnings per share
is computed by dividing the net income for the period by the weighted
average number of common shares outstanding during the period. Diluted net
income per share is computed by dividing the net income for the period by
the weighted average number of common and common equivalent shares
outstanding during the period. All of the Company's common stock
equivalents totaling 236,200 and 311,200 were antidilutive for the three
and six months ended June 30, 2000 and June 30, 1999, respectively.

F-25
<PAGE>

<PAGE>
4. Warrants, stock options and employee stock grant

There are 236,200 warrants outstanding to purchase shares of common stock
at $5 per share. The warrants expire at the earlier of one year subsequent
to the closing of an underwritten public offering of the Company's common
stock or October 21, 2002.

There are 75,000 warrants outstanding to purchase common stock outstanding
with an exercise price of $3.50 per share. The warrants expire March 31,
2001.

The Company agreed to issue warrants to purchase 525,000 shares of common
stock at $3.00 per share to four employees, subject to the approval of the
Company's Board of Directors. When the issuance of the warrants is
approved by the Board of Directors, they will be immediately vested and
will expire five years from the date of Board approval.

During 1999, the Company announced its intention to issue options to
employees to purchase common stock at an exercise price of $5.00 per share,
subject to the future approval of the Company's Board of Directors. There
are 272,000 shares of common stock that would be subject to this future
option grant. The vesting period for the options to be granted will vary
based on the terms of employment of the recipients at the time the options
were announced, but in no event will exceed three years from the time of
the announcement of the options in 1999. None of the options to be granted
will be issued to officers or directors.

In April 1999 pursuant to an employment agreement, the Company issued
150,000 options to purchase common stock at $5.00 per share to a former
employee. At the time the former employee voluntarily terminated his
employment with the Company in November 1999, there were 25,000 options
vested. The options will expire on November 30, 2000 if not exercised on
or prior to that date.

In December 1999, the Company announced the issuance of shares of common
stock to employees. In August 2000, the Company's Board of Directors
approved the issuance of 58,592 shares. The shares were distributed in
September 2000. The Company recorded compensation expense of $53,005
during the year ended December 31, 1999, related to the future issuance of
the shares.

5. Technology Purchase Agreement

In January 1999, the Company entered into an agreement to purchase in the
future all of the issued and outstanding stock of Spirit 32 Development
Corporation ("SP32") in exchange for 450,000 shares of 1st Net's common
stock. The acquisition was not consummated and was formally rescinded in
February 2000. The rescission agreement released the Company and SP32 from
any liability that may have arisen under the terms of the original
agreement for 1st Net to acquire SP32, including funds previously advanced
by 1st Net for the licensing and development of in-process technology.

Included in the rescission agreement, SP32 sold all of its rights, title
and interest in technology being developed by both Mariah and CTG. The
release also included trade names in connection with the technology. At
the close of the rescission agreement, 1st Net delivered 250,000 shares of
its restricted common stock to SSP together with cash totaling $100,000.
The Company recorded a charge to operations totaling $382,500 in connection
with this transaction as the technology being obtained was in-process
research and development at the time of the rescission agreement. In March
2000, 1st Net sold the CTG technology obtained from SP32 to CTG in exchange
for 250,000 shares of CTG common stock.

F-26
<PAGE>

<PAGE>
6. Asset sales

In 1999, Mariah received a note receivable from Last Mile Communications
Corporation ("Last Mile") in exchange for $220,000 cash. The note was
subsequently converted into the restricted shares of Last Mile. Last
Mile's chief executive officer and chairman of the board of directors
formerly held the same position with Mariah. In March 2000, Mariah
subsequently sold substantially all of its operating assets to Last Mile in
exchange for Last Mile's assumption of future expense commitments. Mariah
retained the rights to its IP telephony technology.

On February 23, 2000, SSP sold a newsletter published by the Company along
with certain related assets to Marketbyte, L.L.C. ("Marketbyte") in
exchange for a note receivable totaling $200,000 and 10% of any future
consideration received by Marketbyte in connection with the newsletter
through June 2, 2002. Under the sale agreement, in the event that the
consideration received from Marketbyte by the Company through June 2, 2002
does not equal or exceed $750,000, Marketbyte will be required to pay the
Company the difference between $750,000 and the consideration previously
paid to the Company in connection with the newsletter. Accordingly, the
transaction has been recorded as a current and long-term note receivable
due from Marketbyte totaling $750,000 in the accompanying balance sheet at
June 30, 2000. Also the Company recorded a gain from the sale of the
newsletter less the related assets sold totaling $735,359 in the
accompanying statement of operations for the three months ended March 31,
2000.

7. Related party transactions and significant sales

Entrepreneur Investments, L.L.C. ("EI") is one of the largest percentage
shareholders in the Company. The sole shareholder of EI serves as the
Company's Chief Executive Officer. The Company has officers and directors
in common with various other entities in related and unrelated businesses.
During the three and six months ended June 30, 2000 and 1999, the Company
subleased office space from EI for total rent expenses of $36,900, $69,961,
$24,081 and $44,458, respectively. The Company also had borrowings
outstanding from EI totaling $59,800 at June 30, 2000. The Company paid
interest on the borrowings to EI totaling $35,000 during the six months
ended June 30, 2000.

At June 30, 2000 and December 31, 1999, SSP had certain holdings of
corporate securities that were obtained in connection with past services
provided by the Company. SSP has agreed to pay a former independent
contractor of the Company a commission of 8% of the proceeds realized by
SSP from the future sale of these securities.

During the three and six months ended June 30, 1999 the Company had
revenues from related parties totaling $40,000 and $120,000, respectively.

8. Contingencies

F-27
<PAGE>

<PAGE>
9. Sale of CTG preferred stock

On May 19, 2000, CTG sold 2,000,000 shares of Series A convertible
preferred stock at a cost of $2.00 per share to an unrelated investor. The
preferred shares are convertible into an equal number of shares of common
stock and automatically convert upon the earlier of a firmly underwritten
public offering of the Company's common stock with total proceeds of at
least $5,000,000 or the date at which the public price per common share is
equal to or greater than $4.00 (as adjusted). The Series A preferred stock
contains no provisions for mandatory dividends except as declared at the
discretion of the Board of Directors. The Series A preferred shares have
voting rights in proportion to the number of common shares into which they
are convertible and carry a liquidation preference of $2.00 per share plus
any declared but unpaid dividends.

10. Subsequent event

In July 2000, SSP agreed to sell its opt-in databases SmallCapDigest.com
and InvestmentOpportunity.com to Millennium Financial Publishing, LLC
("Millennium"), an unrelated business. The Company will receive
consideration totaling $1,500,000 as follows: 1) $100,000 paid to SSP at
signing; 2) monthly installments ranging from $15,000 to $20,000 through
December 1, 2001; 3) $375,000 due on or before January 1, 2002; 4) 25% of
all stock consideration paid to the buyer by its client companies until the
total stock consideration totals $750,000; and 5) cash totaling up to
$750,000 to the extent the stock consideration does not have a total value
(as defined) equal to $750,000.

F-28
<PAGE>

<PAGE>
INDEPENDENT AUDITORS' REPORT

The Board of Directors
The Children's Technology Group, Inc.

We have audited the accompanying balance sheet of The Children's Technology
Group, Inc. f.k.a. Tummy Busters, Inc. (a development stage company) (the
"Company") as of April 30, 1999, and the related statements of operations,
stockholders' equity and cash flows for the period from July 30, 1998 (date
of inception) through April 30, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.

We conducted our audit 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 audit
provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Company as of April
30, 1999, and the results of its operations and its cash flows for the
period from July 30, 1998 (date of inception) through April 30, 1999 in
conformity with generally accepted accounting principles.

As discussed in Note 1, the Company has been in the development stage since
its inception on July 30, 1998. Realization of a major portion of the
assets is dependent upon the Company's ability to raise funds through debt
or equity offerings, and the success of future operations. These factors
raise substantial doubt about the Company's ability to continue as a going
concern.

/s/ Argy & Company

Argy & Company

Fountain Valley, California
May 31, 2000

F-29
<PAGE>

<PAGE>
THE CHILDREN'S TECHNOLOGY GROUP, INC.
f.k.a. Tummy Busters, Inc.
(A Development Stage Company)

BALANCE SHEET

April 30, 1999

ASSETS

Cash $ 465,650

Computer equipment 1,007

Licenses 400,000

Other assets 15,000
---------

Total assets $ 881,657
=========

LIABILITIES AND STOCKHOLDERS' EQUITY

Liabilities:
Accrued liabilities $ 176,000
---------

Stockholders' equity:
Common stock, $0.001 par value; 50,000,000
shares authorized; 630,000 shares issued
and outstanding 630
Additional paid-in capital 753,484
Deficit accumulated during the development stage (48,457)
---------

Total stockholders' equity 705,657
---------
Total liabilities and stockholders' equity $ 881,657
=========

See independent auditors' report and accompanying notes to financial
statements.

F-30
<PAGE>

<PAGE>
THE CHILDREN'S TECHNOLOGY GROUP, INC.
f.k.a. Tummy Busters, Inc.
(A Development Stage Company)

STATEMENT OF OPERATIONS

For the Period From July 30, 1998 (Date of Inception)
Through April 30, 1999

Selling, general and administrative expenses $ 47,657

Provision for taxes 800
--------

Net loss $(48,457)
========

See independent auditors' report and accompanying notes to financial
statements.

F-31
<PAGE>

<PAGE>
THE CHILDREN'S TECHNOLOGY GROUP, INC.
f.k.a. Tummy Busters, Inc.
(A Development Stage Company)

STATEMENT OF STOCKHOLDERS' EQUITY

For the Period From July 30, 1998 (Date of Inception)
Through April 30, 1999

<TABLE>
<CAPTION>
Deficit
Accumulated
Additional During the Total
Common Stock Paid-in Development Stockholders'
Shares Amount Capital Stage Equity
-------- ------ ---------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Balances, July 30, 1998 - $ - $ - $ - $ -

Issuance of common stock to
founders on August 30, 1998 870,000 870 2,480 - 3,350

Common stock issued in connec-
tion with a private placement
for $0.40 per share dated
August 10, 1998:
December 1998 77,750 78 31,022 - 31,100
January 1999 5,500 5 2,195 - 2,200
February 1999 79,250 79 31,621 - 31,700

Common stock issued in connec-
tion with a private placement
for $2.00 per share dated March 3,
1999, net of offering costs 467,500 468 685,296 - 685,764

Surrender of common stock from
founders on April 22, 1999 (870,000) (870) 870 - -

Net loss - - - (48,457) (48,457)
-------- ----- --------- -------- ---------

Balances, April 30, 1999 630,000 $ 630 $ 753,484 $(48,457) $ 705,657
======== ===== ========= ======== =========

</TABLE>

See independent auditors' report and accompanying notes to financial
statements.

F-32

<PAGE>

<PAGE>
THE CHILDREN'S TECHNOLOGY GROUP, INC.
f.k.a. Tummy Busters, Inc.
(A Development Stage Company)

STATEMENT OF STOCKHOLDERS' EQUITY

For the Period From July 30, 1998 (Date of Inception)
Through April 30, 1999

Cash flows from operating activities:
Net loss $ (48,457)
Increase in accrued liability 20,000
----------

Net cash used in operating activities (28,457)

Cash flows from investing activities:
Purchases of computer equipment (1,007)
Purchases of licenses (400,000)
Other assets (15,000)
----------

Net cash used in investing activities (416,007)
----------

Cash flows provided by financing activities:
Net proceeds from issuance of stock, net
of offering costs of $93,236 910,114
----------

Net increase in cash 465,650

Cash at beginning of period -
----------

Cash at end of period $ 465,650
==========

Supplemental disclosure of cash flow information -
Cash paid during period for:
Interest $ -
==========
Income and franchise taxes $ -
==========

Supplemental disclosure of non-cash investing and financing activities:

During the current period ended April 30, 1999, the Company issued
warrants to purchase 4,000,000 shares of common stock to a third
party, in connection with a license agreement (see Notes 2 and 3).

See independent auditors' report and accompanying notes to financial
statements.

F-33
<PAGE>

<PAGE>
THE CHILDREN'S TECHNOLOGY GROUP, INC.
f.k.a. Tummy Busters, Inc.
(A Development Stage Company)

NOTES TO FINANCIAL STATEMENTS

For the Period From July 30, 1998 (Date of Inception)
Through April 30, 1999

NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES

Organization and Operations

The Children's Technology Group, Inc. f.k.a. Tummy Busters, Inc. (a
development stage company) (the "Company"), a Nevada corporation, was
incorporated on July 30, 1998. The Company has been in the development
stage since its formation and is primarily engaged in raising capital,
obtaining financing, advertising and promoting the Company, and
administrative functions. The Company intends to develop and operate
online communities for children.

Basis of Presentation

The accompanying financial statements have been prepared assuming the
Company will continue as a going concern, which contemplates, among other
things, the realization of assets and satisfaction of liabilities in the
normal course of business. The Company's losses from operations through
April 30, 1999 and lack of operational history, among other matters, raise
substantial doubt about its ability to continue as a going concern. The
Company intends to fund operations through debt and equity financing
arrangements which management believes will be sufficient to fund its
capital expenditures, working capital requirements and other cash
requirements for the fiscal year ending December 31, 1999.

Use of Estimates

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the
financial statements, as well as the reported amounts of revenues and
expenses during the reporting period. Significant estimates made by
management include the realizability of mergers of other long-lived assets.
Actual results could differ from those estimates.

Risks and Uncertainties

The Company is a start up company subject to the substantial business risks
and uncertainties inherent to such an entity, including the potential risk
of business failure.

Computer Equipment

Computer equipment is stated at cost. Depreciation is computed using the
straight-line method over the useful life of 3 years.

F-34
<PAGE>

<PAGE>
THE CHILDREN'S TECHNOLOGY GROUP, INC.
f.k.a. Tummy Busters, Inc.
(A Development Stage Company)

NOTES TO FINANCIAL STATEMENTS

For the Period From July 30, 1998 (Date of Inception)
Through April 30, 1999

NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
(CONTINUED)

Betterments, renewals, and extraordinary repairs that extend the lives of
the assets are capitalized; other repairs and maintenance charges are
expensed as incurred. The cost and related accumulated depreciation
applicable to assets retired are removed from the accounts, and the gain or
loss on disposition is recognized in current operations.

Licenses and Other Assets

Licenses and other assets are stated at cost. Amortization is computed
using the straight-line method over the estimated useful lives of the
related agreements ranging from 3 to 10 years.

Long Lived Assets

During 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121 ("SFAS 121"), "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets To Be Disposed
Of," which requires that long-lived assets and certain identifiable
intangibles to be held and used by an entity be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. In accordance with the
provisions of SFAS No. 121, the Company regularly reviews long-lived assets
for impairment whenever events or changes in circumstances indicate that
the carrying amount of the assets may not be recoverable. Based on its
analysis, the Company believes that no impairment of the carrying value of
its long-lived assets existed at April 30, 1999.

Common Stock - Reverse Stock Splits

In April 1999, the Company's board of directors approved a one-for-four
reverse stock split. Par value remained at $0.001 per share. All
references throughout these financial statements to number of shares, per
share amounts, stock option data and market prices of the Company's common
stock have been restated to reflect the reverse stock split.

F-35
<PAGE>

<PAGE>
THE CHILDREN'S TECHNOLOGY GROUP, INC.
f.k.a. Tummy Busters, Inc.
(A Development Stage Company)

NOTES TO FINANCIAL STATEMENTS

For the Period From July 30, 1998 (Date of Inception)
Through April 30, 1999

NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
(CONTINUED)

Stock-Based Compensation

During 1995, the FASB issued Statement of Financial Accounting Standards
No. 123 ("SFAS 123"), "Accounting for Stock-Based Compensation," which
defines a fair value based method of accounting for stock-based
compensation. However, SFAS 123 allows an entity to continue to measure
compensation cost related to stock and stock options issued to employees
using the intrinsic method of accounting prescribed by Accounting
Principles Board Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to
Employees." Entities electing to remain with the accounting method of APB
25 must make pro forma disclosures of net income (loss), as if the fair
value method of accounting defined in SFAS 123 had been applied. The
Company has elected to account for its stock-based compensation to
employees under APB 25.

Revenue Recognition

The Company will recognize revenue during the month in which services are
provided.

Income Taxes

The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109").
Under SFAS 109, deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled.
A valuation allowance is provided for significant deferred tax assets when
it is more likely than not that such assets will not be recovered.

NOTE 2 - LICENSES

In April 1999, the Company entered into an exclusive license agreement with
1st Net Technologies, Inc. ("1st Net") whereby 1st Net granted to the
Company a worldwide exclusive license to use the Crayon Crawler web browser
and community software programs for $400,000 in cash and a 5% royalty on
related sales (not less than $25,000 per month). The license agreement
expires April 2002.

F-36
<PAGE>

<PAGE>
THE CHILDREN'S TECHNOLOGY GROUP, INC.
f.k.a. Tummy Busters, Inc.
(A Development Stage Company)

NOTES TO FINANCIAL STATEMENTS

For the Period From July 30, 1998 (Date of Inception)
Through April 30, 1999

NOTE 2 - LICENSES

In April 1999, the Company entered into a non-exclusive license agreement
with 1st Net whereby 1st Net granted to the Company a worldwide
non-exclusive license agreement to use the Mindwalker Series web browser
and community software programs in exchange for a warrant to purchase
4,000,000 shares of the Company's common stock, a 5% royalty on related
sales and an exclusive license to the Company's R-Site web site. The
license agreement expires April 2002.

NOTE 3 - WARRANTS

From time to time, the Company issues warrants pursuant to various
agreements. Under the terms of a license agreement (see Note 2), the
Company granted 1st Net, a related party (see Note 7), a warrant to
purchase 4,000,000 shares of the Company's stock at an exercise price of
$.10 per share. The warrants vested on the date of grant and were
exercised subsequent to the period ended April 30, 1999 (see Note 6).

NOTE 4 - STOCKHOLDERS' EQUITY

In August 1998, the Company issued to its founder 870,000 shares of common
stock for $3,350. These shares were subsequently surrendered to the
Company on April 22, 1999.

In August 1998, the Company issued 162,500 shares of its common stock for
$65,000 in cash.

In March 1999, the Company issued 467,500 shares of its common stock for
$685,764 in cash, net of offering costs of $249,236.

NOTE 5 - INCOME TAXES

The provision for income taxes for the period ended April 30, 1999 consists
of minimum state taxes only.

Significant reconciling items between the Company's reported income tax
provision and the benefit computed by applying the U.S. Federal income tax
rate of 34% to loss before provision for income taxes result primarily from
changes in the valuation allowance for deferred tax assets and state income
taxes.

F-37

<PAGE>

THE CHILDREN'S TECHNOLOGY GROUP, INC.
f.k.a. Tummy Busters, Inc.
(A Development Stage Company)

NOTES TO FINANCIAL STATEMENTS

For the Period From July 30, 1998 (Date of Inception)
Through April 30, 1999

NOTE 5 - INCOME TAXES

The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets at April 30, 1999 are presented below:

Deferred tax assets:
Net operating loss carryforwards $ 16,500
Less valuation allowance (16,500)
--------
Net deferred tax assets $ -
========

NOTE 6 - SUBSEQUENT EVENTS

In May 1999, 1st Net exercised its warrant to purchase 4,000,000 shares of
common stock at $0.10 per share in connection with a license agreement (see
Notes 2 and 3) and acquired an 86% interest in the Company.

NOTE 7 - RELATED PARTY TRANSACTIONS

As previously discussed in Note 3, the Company granted 1st Net, a warrant
to purchase 4,000,000 shares of the Company's stock at an exercise price of
$.10 per share. At the date of grant, the officers and directors of the
Company were also officers and directors of 1st Net.

F-38
<PAGE>

<PAGE>
INDEPENDENT AUDITORS' REPORT

The Board of Directors
SSP Management Corp.

We have audited the accompanying balance sheet of SSP Management Corp. (the
"Company") as of December 31, 1998, and the related statements of
operations, stockholder's equity and cash flows for the year then ended.
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 audit.

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

The Company is affiliated with other companies in the same line of
business, all of which are controlled by a common control group with the
ability to influence the volume of business done by each company. As
discussed in Note 2, the Company and its affiliates have engaged in
significant transactions with each other.

/s/ Argy & Company

Argy & Company

Fountain Valley, California
September 21, 2000

F-39
<PAGE>

<PAGE>
SSP MANAGEMENT CORP.

BALANCE SHEET

December 31, 1998

ASSETS

Current assets:
Cash $ 908
Marketable securities 16,736
Loan receivable 20,000
Related party loan receivable 300,242
---------

Total current assets 337,886

Office equipment, net of accumulated depreciation 3,774
---------

Total assets $ 341,660
=========

LIABILITIES AND STOCKHOLDER'S EQUITY

Current liabilities:
Accounts payable $ 20,000
Accounts payable - related party 119,317
Income taxes payable 800
Short term loan payable 162,173
Short term related party loan payable 31,683
---------

Total current liabilities 333,973

Stockholder's equity:
Common stock, $0.001 par value; 10,000,000 shares
authorized; 1,000,000 shares issued and outstanding 1,000

Retained earnings 6,687
---------

Total stockholder's equity 7,687
---------

Total liabilities and stockholder's equity $ 341,660
=========

See independent auditors' report and accompanying notes to financial
statements.

F-40
<PAGE>

<PAGE>
SSP MANAGEMENT CORP.

STATEMENT OF OPERATIONS

For the Year Ended December 31, 1998

Consulting income $ 523,515

Operating expenses:
Advertising 240,290
Depreciation 943
Internet expenses 326,703
Other 17,785
Outside services 95,203
Professional fees 12,919
----------

Total operating expenses 693,843
----------

Net (loss) from operations (170,328)

Other income (expense)
Realized gains on sale of marketable securities 207,406
Unrealized losses on marketable securities (15,457)
Interest income 1,174
Interest expense (15,308)
----------

Net income before tax 7,487

Provision for taxes (800)
----------

Net income $ 6,687
==========

See independent auditors' report and accompanying notes to financial
statements.

F-41
<PAGE>

<PAGE>
SSP MANAGEMENT CORP.

STATEMENT OF STOCKHOLDERS' EQUITY

For the Year Ended December 31, 1998

Balances, January 1, 1998 - $ - $ - $ - $ -

Issuance of common stock
to founder 1,000,000 1,000 - - 1,000

Net income - - - 6,687 6,687
--------- ------ ----- ------ ------

Balances, December 31, 1998 1,000,000 $1,000 $ - $6,687 $7,687
========= ====== ===== ====== ======

</TABLE>

See independent auditors' report and accompanying notes to financial
statements.

F-42
<PAGE>

<PAGE>
SSP MANAGEMENT CORP.

STATEMENT OF CASH FLOWS

Cash flows from operating activities:
Net income $ 6,687
Adjustments to reconcile net income to net cash
provided by operations:
Transactions not requiring cash:
Depreciation 943
Changes in operating assets and liabilities:
Increase in marketable securities (16,736)
Increase in loan receivable (20,000)
Increase in short term related party loan
receivables (300,242)
Increase in accounts payable 139,317
Increase in income taxes payable 800
Increase in short term loans payable 162,173
Increase in short term related party loans 31,683
---------
Total adjustments (2,062)
---------
Net cash provided by operating activities 4,625
---------
Cash flows from investing activities:
Purchase of office equipment (4,717)
---------
Net cash (used) in investing activities (4,717)
---------
Cash flows provided by financing activities:
Net proceeds from sale of common stock 1,000
---------
Net cash provided by investing activities 1,000
---------
Net increase in cash 908
Cash at beginning of period -
---------
Cash at end of period $ 908
=========

Supplemental disclosure of cash flow information -
Cash paid during period for:
Interest $ 15,308
=========
Income and franchise taxes $ -
=========

See independent auditors' report and accompanying notes to financial
statements.

F-43
<PAGE>

<PAGE>
SSP MANAGEMENT CORP.

NOTES TO FINANCIAL STATEMENTS

For the Year Ended December 31, 1998

NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES

Organization and Operations

SSP Management Corp. (the "Company"), a Colorado corporation, was
incorporated on November 18, 1997, although it had no activities until the
1998 calendar year. The Company was formed for the primary business
purpose of providing internet public relations and internet newsletters.

The Company was acquired by 1st Net Technologies, Inc. (1st Net) in January
of 1999 and had only one immaterial transaction in the 1999 year prior to
the date of acquisition.

Use of Estimates

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the
financial statements, as well as the reported amounts of revenues and
expenses during the reporting period. Significant estimates made by
management include the realizability of long-lived assets. Actual results
could differ from those estimates.

Risks and Uncertainties

The Company is a start up company subject to the substantial business risks
and uncertainties inherent to such an entity, including the potential risk
of business failure.

Cash Equivalents

For purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments with original maturities of three months or
less to be cash equivalents. There were no cash equivalents as of December
31, 1998.

Marketable Securities

Marketable securities consists of equity securities, or the rights to
obtain equity securities (options), in common stock traded in major market
listings, and for stock in some companies who are traded over-the-counter.
All equity securities are considered "trading" under the provisions of
Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities". Accordingly,
unrealized gains and losses on the equity securities are reflected in
operations.

Office Equipment

Office equipment is stated at cost. Depreciation is computed using the
straight-line method over the useful life of five years.

F-44
<PAGE>

<PAGE>
SSP MANAGEMENT CORP.

NOTES TO FINANCIAL STATEMENTS

For the Year Ended December 31, 1998

NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
(CONTINUED)

Long Lived Assets

Revenue Recognition

Revenues are recorded on the accrual basis.

Income Taxes

NOTE 2 - RELATED PARTIES AND SIGNIFICANT CUSTOMERS

On February 23, 1999, the Financial Accounting Standards Board (FASB)
issued a news release proposing a new Statement updating FASB Statement 94,
that would require a controlling entity to consolidate all entities that it
controls, unless control is temporary, even when control exists in forms
other than a majority voting interest.

F-45
<PAGE>

<PAGE>
SSP MANAGEMENT CORP.

NOTES TO FINANCIAL STATEMENTS

For the Year Ended December 31, 1998

NOTE 2 - RELATED PARTIES AND SIGNIFICANT CUSTOMERS (CONTINUED)

The proposed Statement would be effective for financial statements for
annual periods beginning after December 15, 1999, although earlier
application is encouraged. The Company has not yet elected to adopt
application of this standard and the affect of such accounting treatment is
indeterminable. The application of this standard could have a material
impact on the user's conclusions as to the Company's financial position and
results of operations and cash flows. As reported in the auditors'
opinion, the Company is affiliated with other companies in the same line of
business, all of which are controlled by a common control group, with the
ability to influence the volume of business done by each company.

The balance of related party loans receivable and payable are from various
affiliated entities, are interest free and have no fixed terms of
repayment.

The sole shareholder of the Company as of December 31, 1998, is also 1st
Net's majority shareholder.

Four unrelated customers of the Company constituted 97.7% of the total
consulting revenues in 1998.

NOTE 3 - COMMITMENTS & CONTINGENCIES

The Company is currently involved in litigation with the United States
Securities and Exchange Commission for potential violations of securities
laws. The outcome of the litigation is indeterminable; however, management
is confident that these matters will be settled favorably and no reserve
has been established for loss contingencies due to legal matters in the
accompanying financial statements.

NOTE 4 - STOCKHOLDER'S EQUITY

The Company issued 1,000,000 shares of common stock to Entrepreneur
Investments, LLC during 1998.

NOTE 5 - INCOME TAXES

The provision for income taxes for the period ended December 31, 1999
consists of minimum state taxes only. As of December 31, 1998, the Company
had income taxes payable to the State of California Franchise Tax Board
totaling $800.

At December 31, 1998, deferred taxes consisted of a net tax assets due to
federal and state net operating loss carryforwards of $3,275 and $1,237,
respectively, which were fully offset by valuation allowances. The net
operating loss carryforwards will expire beginning in 2013.

F-46
<PAGE>

<PAGE>
SSP MANAGEMENT CORP.

NOTES TO FINANCIAL STATEMENTS

For the Year Ended December 31, 1998

NOTE 6 - SUBSEQUENT EVENTS

In January of 1999, the Company was acquired by 1st Net in an acquisition
recorded as a pooling.

F-47
<PAGE>
<PAGE>
SIGNATURES

In accordance with Section 12 of the Securities Exchange Act of 1934,
the registrant caused this Amendment to Form 10KSB to be signed on its
behalf by the undersigned, thereunto duly authorized.

Dated: November 14, 2000 1ST NET TECHNOLOGIES, INC.,
a Colorado corporation

By: /s/ James H. Watson
James H. Watson, Jr.,
Chairman and Chief Executive Officer