HOUSTON INTERWEB DESIGN INC, 10KSB, 2000-11-22

HOUSTON INTERWEB DESIGN INC
10KSB, 2000-11-22
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-KSB
FOR ANNUAL AND TRANSITION REPORTS PURSUANT
TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

(MARK ONE)
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE FISCAL YEAR ENDED JULY 31, 2000

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

COMMISSION FILE NUMBER 000-67871

HOUSTON INTERWEB DESIGN,INC.
(Exact Name of Registrant as Specified in Its Charter)

TEXAS 76-0532709
(State or other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)

1770 ST. JAMES PLACE, SUITE 420, HOUSTON, 77056
TEXAS (Zip Code)
(Address of Principal Executive Offices)

(713) 627-9494
Registrant's Telephone Number, Including Area Code

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

COMMON STOCK, NO PAR VALUE PER SHARE
(Title of Class)

Indicate by check mark whether the Company (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
Company was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the Company's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendments to this Form 10-KSB. [_]

Issuer had revenues of $1,077,236 for the 12 months ended July 31, 2000.

As of July 31, 2000 registrant had 18,265,050 shares of Common Stock
outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

None.

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HOUSTON INTERWEB DESIGN,INC.

ANNUAL REPORT ON FORM 10-KSB
FOR THE FISCAL YEAR ENDED JULY 31, 2000

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<S> <C>
PART I..................................................................... 3
ITEM 1. BUSINESS......................................................... 3
ITEM 2. PROPERTIES....................................................... 22
ITEM 3. LEGAL PROCEEDINGS................................................ 22
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............. 23

PART II.................................................................... 23
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.......................................................... 23
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS............................................ 24
ITEM 7. FINANCIAL STATEMENTS............................................. 26
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE............................................. 26

PART III................................................................... 26
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS..... 26
ITEM 10. EXECUTIVE COMPENSATION.......................................... 27
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.. 28
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................. 28
ITEM 13. EXHIBITS AND REPORT ON FORM 8-K................................. 29

SIGNATURES................................................................. 30
</TABLE>

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

Certain statements contained in this Annual Report on Form 10-KSB constitute
"forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933, as amended (the "Securities Act") and Section 21E of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"). All
statements, other than statements of historical facts included in this Annual
Report, regarding our strategy, future operations, financial position,
estimated revenues, projected costs, prospects, plans and objectives of
management are forward-looking statements. When used in this Annual Report, the
words "will", "believe", "anticipate", "intend", "estimate", "expect",
"project" and similar expressions are intended to identify forward-looking
statements, although not all forward-looking statements contain these
identifying words. We cannot guarantee future results, levels of activity,
performance or achievements and you should not place undue reliance on our
forward-looking statements. Our forward-looking statements do not reflect the
potential impact of any future acquisitions, mergers, dispositions, joint
ventures or strategic investments. Our actual results could differ materially
from those anticipated in these forward-looking statements as a result of
various factors, including the risks described in Part I "Business--Risk
Factors", in Part II "Management's Discussion and Analysis" and elsewhere in
this Annual Report. We do not assume any obligation to update any of the
forward-looking statements we make.

PART I

ITEM 1. Business

RECENT DEVELOPMENTS

In August 2000, Interweb launched tonicandteas.com the first phase of a co-
operation agreement with the State Administration of Health and Traditional
Chinese Medicine (TCM) an Agency of the PRC. The company plans on completing
phases 2 and 3 during the upcoming year.

In August 2000, Interweb launched listentochina.com an English version of
the PRC government approved MP3 site, Beijing Artists On Line, for the
promotion and distribution of Chinese music worldwide.

In October 2000, Interweb settled two of its three lawsuits filed against
AMP3.com, LLC an interactive music Internet company. See ITEM 3 for more
explanation.

In October 2000, Interweb purchased the remaining 50% of its Affiliate
company Cyber-pitch.com, Inc. for stock and royalties.

GENERAL

Houston Interweb Design, Inc. ("Interweb") is a software developer and e-
services consultancy providing Internet strategy consulting and sophisticated
Internet-based solutions to International companies and startup businesses. We
help our clients define Internet strategies to improve their competitive
position and we design, architect, develop and implement solutions to execute
those strategies. These solutions focus on large-scale and complex business-to-
consumer and business-to-business electronic commerce, digital customer
relationship management, supply chain optimization, electronic markets and
Internet portals.

We believe that our main strength is our ability to leverage pre-existing
technology to deliver high quality solutions, primarily on a fixed-price,
fixed-time frame basis, through a rapid, effective and integrated process. Our
services include digital business strategy development; experience modeling;
creative design and technology development and systems integration.

We provide end-to-end solutions to our clients using multidisciplinary teams
composed of business/legal strategists, creative specialists (graphic designers
and hardcode programmers), technology professionals and program managers. We
deliver our solutions primarily through five industry business units:

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legal/medical/financial services; media, entertainment and travel;
manufacturing, retail and distribution; political and government; and
international services. Using this industry alignment helps us accurately
define and deliver tailored solutions that effectively address the market
dynamics and business opportunities that our clients face. We have been
providing Internet solutions for over four years and have our main office in
Houston, Texas and licensee/joint ventures in Mexico, China, Brazil, Panama,
Colombia and Belgium/EU.

Our executive offices are located at 1770 St. James Place, Suite 420,
Houston, Texas, 77056 and our telephone number is (713) 627-9494. Our stock is
traded on the OTC Bulletin Board under the symbol "HITD". Our Internet address
is http://www.houston-interweb.com. Unless the context otherwise requires,
references in this Annual Report on Form 10-KSB to "Interweb", "we", "us" or
"our" refer to Houston Interweb Design, Inc. and its subsidiaries.

INTERWEB'S SOLUTION

Our experience in managing start-up initiatives, our multidisciplinary
approach to delivering solutions and our in-depth industry knowledge and
partnership approach with clients enable us to rapidly deliver Internet
strategies and solutions that help our clients transform or launch their
businesses cost efficiently in a very short time period.

Large-Scale Program Management. Our methodology and program management
approach builds upon over four years of experience implementing Internet
solutions. During this time, the size and complexity of our Internet solutions
have increased and we expect this trend to continue. During 2000, several of
our Internet projects involved 8 or more team members. In addition, we often
manage the entire client initiative, which requires the coordination of
numerous third parties such as content providers, technology vendors,
infrastructure experts and telecommunications firms. We believe our significant
experience in managing large-scale, complex initiatives is essential to
achieving high levels of client satisfaction and repeat business.

Multidisciplinary Approach. We deliver end-to-end Internet solutions by
combining our four core services: digital business/legal strategy; creative
design; technology development and systems integration. Multidisciplinary teams
are able to quickly communicate new information, identify potential issues and
implement solutions. Our integrated approach enables our clients to utilize a
single Internet professional services firm to manage the delivery of an end-to-
end solution.

In-Depth Industry Knowledge. We have extensive knowledge and experience in
five industry sectors: legal/medical/financial services; media, entertainment
and travel; manufacturing, retail and distribution; political and government;
and international services. We believe this focus helps us accurately define
and deliver tailored solutions that effectively address the market dynamics and
business opportunities that our clients face. As the market for Internet
professional services becomes more sophisticated, we believe that clients will
increasingly demand in-depth industry expertise.

Partnering with Clients. Our culture and approach has always been based on
working with our clients to understand and achieve their business objectives.
Client representatives play an active and important role throughout the
engagement and are integrated into our project teams. This client involvement
helps ensure that the solutions accurately reflect our clients' objectives and
have the support of critical client constituencies. In most cases, we further
align our interests with our clients' interests by entering into fixed-price,
fixed-time frame contracts. Occasionally we enter into bonus arrangements with
our clients. These types of contracts and arrangements create incentives for us
to complete the project within budgeted timeframes and in a cost-effective
manner.

Rapid Delivery of Relevant Solutions. Rapid time-to-market is crucial to the
effectiveness of an Internet solution. Each element of our solution helps
reduce the time required to complete our client engagements and ensures the
creation and delivery of strategies and solutions that are responsive to our
clients' needs. Our four years of software development have created a large
group of tools and subprograms proprietary to the company

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that allow us to specifically tailor larger Internet solutions to each
individual client. By delivering our services in an integrated fashion, we
reduce time-consuming and costly handoffs of project tasks. Our experience in
delivering large-scale projects gives us the program management expertise to
quickly coordinate numerous aspects of complex engagements. Our industry
knowledge reduces our learning curve on new engagements, helps us to develop
industry best practices and allows us to implement solutions more efficiently.
Substantial client involvement reduces delays caused by difficulties in
obtaining critical information and resources from our client and helps ensure
that the solution addresses our client's needs.

SERVICES

We provide the wide range of services required to identify, design, develop
and deploy Internet strategies and solutions for International companies and
startup businesses. Our services enable rapid delivery of complex solutions for
business-to-consumer and business-to-business electronic commerce, digital
customer relationship databases, supply chain optimization, electronic markets
and Internet portals. The following descriptions highlight our core services.

. Digital Business/Legal Strategy. Our digital business/legal strategy
development services enable our clients to launch, or transform their
existing business into, Internet-based businesses. We help our clients
define their Internet strategy, including immediate and long-term
objectives for their customers, brands, business models and
organizations. We also work with clients to develop or change management
practices that help align their organizational structure and processes
with their Internet strategies.

. Creative Design. We have extensive experience in developing visual and
interactive content and creating electronic multimedia experiences that
enhance and extend our clients' relationships with their customers. Our
creative design services assess and analyze our clients' existing brands,
identify opportunities and provide user-focused solutions that are
appropriate and relevant to the customer-controlled Internet environment.
We believe that this helps our clients build sustainable, long-term
relationships with their customers.

. Technology Development and Systems Integration. Using our extensive in-
depth knowledge of the Internet and emerging technologies, we translate
strategic, creative and business requirements into sophisticated and
functional technology platforms in short timeframes. Recognizing that
technical infrastructure is the foundation for clients' Internet
solutions, we develop infrastructures that are reliable, robust, secure
and scalable. Our core technology services include the design,
architecture and development of electronic commerce web sites, digital
customer relations databases, supply chain inter-relational systems,
electronic markets, auctions and exchanges and Internet portals.

. Integrated Engagement Leadership. The execution of large-scale,
multidisciplinary Internet solutions in a fixed timeframe requires
significant expertise in project and program management. Our integrated
engagement leadership approach enables us to effectively manage the
relationships, complexities and risks associated with large-scale,
multidisciplinary engagements. This allows us to plan, scope, manage and
deliver projects in a coordinated manner. We believe that our integrated
engagement leadership results in more successful engagements and enhances
client satisfaction with the entire process.

Our proprietary software provides a framework of functions, tools and
multimedia products that we use to deliver our services. We believe that our
proprietary code benefits our clients by providing an ability for us and our
clients to work together efficiently and expeditiously as a team to understand
and anticipate specific client needs; work effectively in short timeframes to
meet deadlines; set clearly-defined prices for each phase of a project; and
successfully manage the project and flow of information through each phase of
the project.

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DIVISIONS

Custom Web Site Development

The company develops high-end custom web sites, encompassing original
graphics and innovative layouts. The company's business strategy is to develop
and design web sites that achieve growth and organizational optimization for
the company's customers by creating more efficient navigation, utilizing
interactive databases, and by using proprietary technology to increase the
likelihood of being found at or near the top of search engines. Management
believes that its web site pricing is very competitive. The interactive
databases enable customers to self-manage their web sites internally. Many of
the company's proprietary scripting programs are adapted and included in
individual web sites, allowing customers to manage, modify, and maintain their
web sites with little or no programming knowledge. The company currently hosts
over two hundred and fifty custom web sites which it has developed.

Siteblazer.com

The focus of SiteBlazer.com is to allow companies to build customized,
updateable web sites, within minutes, at a reduced cost. SiteBlazer(TM) web
sites are built with proprietary codes and automatically submitted to major
search engines which allows the sites to be found near the top of major search
engines under relevant keywords.

Currently the company hosts over 40,000 sites built utilizing SITEBLAZER(TM)
technology. In addition to marketing web site services to individual companies,
the company focuses on targeting affinity groups and offers an affinity group
an efficient and cost effective means of representing its members on the
Internet.

Siteblazer Network--Siteblazer.net

The SITEBLAZER(TM) network is a business-to-business and business-to-
consumer web guide/search engine designed to increase sales for its customers.
The SiteBlazer.com program allows a business to have a stand-alone customized
web site and still be part of the SITEBLAZER(TM) network. The company believes
that the SITEBLAZER(TM) network contains up-to-date information, as each web
site must pay a monthly hosting fee in order to continue to be on the
SITEBLAZER(TM) network. The company is populating the SITEBLAZER(TM) network
with SiteBlazer.com web sites and expects to launch the SITEBLAZER(TM) network
as a search engine. At the time of launch, the SITEBLAZER(TM) network will
allow non-SiteBlazer.com web sites to be included in the SITEBLAZER(TM) network
search engine for a nominal fee. Multiple SiteBlazer(TM) sites can be developed
and submitted to search engines under different keywords to drive traffic to a
company's main site. Several of our customers have multiple SiteBlazer(TM)
sites.

Interactive Databases

The company has developed proprietary technology involving interactive
databases. The interactive databases enable customers to self-manage their web
sites internally. Many of the company's proprietary scripting programs are
adapted and included in individual web sites, allowing customers to manage and
modify their web sites. The company's interactive databases offer a cost-
effective alternative to products and services offered by its competitors, and
have been successfully implemented in a wide range of applications and by
Fortune 500 companies, like Union Carbide and CSX. In many cases our customized
interactive databases are less expensive, more user-friendly and easier to
alter than off the shelf products.

PoliticalNet.Com and PoliticalTeam.com

PoliticalNet.Com and PoliticalTeam.com (Targeted Effective Advertising
Medium) are one-stop political campaign sites that provide politicians,
organizations and political groups a full range of Internet as well as brick
and mortar products. Some products sold include automated dialers, automated
phone calls, Cyber-Pitch(TM) cards, print graphic design, web site design, fax
blasting and voter data. Currently the company hosts over 236

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web sites for candidates and organizations. PoliticalNet.com utilizes
SiteBlazer(TM) technology to deliver mass produced cost effective web sites.
PoliticalNet recently licensed its site building tool to Politics On-line, and
a Spanish version with specialized templates has been licensed to
Electorales.com. The company is currently developing versions for the EU.

TonicsandTeas.com

In August 2000, the company launched phase one of its traditional Chinese
Medicine Portal www.TonicsandTeas.com. The site contains herbal remedies
prescribed for over 5000 years in China for the 40 most common ailments.
Interweb has outsourced all fulfillment and billing through a strategic
partnership. Phase two of the portal will include launching a large searchable
database of information on Traditional Chinese Medicine (TCM) and an area for
experts to exchange research and findings. Phase three will incorporate the
production, manufacture and distribution of large quantities of herbs, remedies
and natural pharmaceuticals in conjunction with Chinese companies and the PRC
Agency TCM.

The government of China agreed to co-operate with the company on promoting
its TCM industry. The PRC government will provide access to its vast databases
of information, existing relationships with manufacturers as well as thousands
of years old know-how in applying these remedies to every day medical
conditions. China has over 2,600 TCM hospitals, with over 1,000 of those
focusing on TCM-related research. There are also 28 TCM medical unions and over
2,000 factories producing TCM pharmaceuticals--many of which have recently been
introduced in the West as herbal formulas and remedies, but used in China for
treating various ailments over 5,000 years.

ListenToChina.com

Using its proprietary technology, the company launched ListenToChina.com in
August 2000. ListenToChina.com is the first MP3 music site approved by the
Chinese government to promote its thousands of artists worldwide. As a part of
the cooperation agreement of Beijing Artists Online Co. Ltd., ListenToChina.com
is the first phase of the project. This site is owned and operated solely by
Interweb.

The joint venture, Beijing Artists Online Co. Ltd., is designed to provide
Chinese artists with self-designed and updateable web pages that promote
Chinese music, and allow listeners to download music of independent and
professional Chinese artists. After the successful launch of
www.ListenToChina.com, the joint venture will design a sister site in Chinese
hosted in Beijing. Once the web presence in English and Chinese Languages is
established, the joint venture will engage in the web site related music
production, distribution, sales and advertising.

Cyber-Pitch.com(TM)

In October 2000 the company acquired 100 percent of Cyber-Pitch.com(TM).
Cyber-Pitch.com focuses on design, marketing and production of interactive CD-
ROM and writeable CD cards that when combined with InterWeb's pending business
process technology takes marketing and advertising of products to a new level.
Currently the company has built the prototype to be used by sports
organizations. Cyber-Pitch.com(TM) is currently negotiating with several sports
organizations to obtain access to sporting events and to use sports
organizations' trademarks and logos on the CD cards. The CD cards are business
card size and come in a variety of shapes (baseball, basketball, football,
soccer, hockey etc.). Each card is a collectible item highlighting the
accomplishments of a specific player. These cards are distributed for free at
stadiums and other events and provide advertisers with perpetual advertising.
The cards also allow holders to join a player specific or team specific fan
club by signing up. These cards, in conjunction with the "e-fan" club
membership, allow owners of sports teams to fill stadiums and increase
concession sales with special offers. Fans also obtain access to special events
and receive special discounts on future events and memoribilia.

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Online Auction System

The company has developed an online auction system, which allows traditional
sealed bids or bids that can be viewed online. The online auction system allows
dealers to view and bid on items online with products being sold to the highest
bidder. The system is available for immediate delivery upon customer's
requests.

The company has developed the following applications: Online Accounting
Financial Package, Campus Network, Hunting and Fishing.Com and Legal Net.
During the 1999 fiscal year no activities took place in regards to the above
applications. These applications are currently seeking strategic partners with
specialized knowledge or expertise and existing relationships in each specific
field prior to launch.

AFFILIATES

OTCNN.com--Over the Counter News Network

The company holds an equity interest of twenty percent (20%) in OTCnn.com.
OTCnn.com is a daily online news source focusing exclusively on providing
unbiased daily news coverage of the Over-The-Counter Bulletin Board (OTCBB)
stock market. OTCnn's business model is not based on paid editorial content,
making the unbiased news source similar to other leading sites such as
CNBC.com, CNN.com and CBS MarketWatch.com.

Brazil InterWeb Design

The company holds an equity interest of thirty percent (30%) in Brazil
InterWeb Design (BID). BID is licensed to use several software products
developed by Interweb. BID leverages Houston Interweb's existing SiteBlazer(TM)
technology with regional marketing expertise to provide web site design,
hosting and maintenance to the Internet users in the growing Brazilian and
Latin American markets. The company has a portfolio of complex Internet
applications that it has designed for its U.S. customers. These applications
and platforms can be used as such or with only minor modifications in Brazil,
thus increasing BID's profit margins and its overall profitability.

Beijing Artists Online Co. Ltd

Beijing Artists Online Co. Ltd is a joint venture between Houston Interweb
Design, Inc., Hainan Dingshen Investment Co. Ltd. and China Culture Information
Net (PRC government entity). Interweb owns thirty three percent (33%) of the
venture. Under the agreement, Chinese partners are responsible for management
of the operation including music production, marketing and distribution within
the PRC.

NetTrade Online, L.L.C.

The company continues to host and maintain NetTrade and is in negotiations
to purchase the remaining interest. The Shanghai Chemical exchange has
expressed interest in using a similar product for the 50,000+ chemical
distributors in China.

ARFRA

The company owns a 30% interest in ARFRA, an Internet provider of pet
medical records. ARFRA provides documented medical records detailing a pet's
medical history in the event that an unexpected medical emergency should arise,
or simply to provide a more organized record of a pet's medical history.

Commerce Partners

The company has several commerce partners that are licensed to market its
products or refer customers to the company in exchange for a portion of
collected revenues. Present commerce partners are Ehome.com, Erealty.com,
Houston Chronicle, Politicsonline.com and electorales.com.

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SALES AND MARKETING

The role of Interweb's marketing program is to create and sustain preference
and loyalty for Interweb as a leading e-services/internet integrator. Interweb
markets its products and services through marketing staff using both
telemarketing, direct sales and licensee relationships. The corporate marketing
Department has overall responsibility for communications, advertising, public
relations and our web site.

Our marketing personnel undertake a variety of marketing activities,
including sponsoring industry specific events, sponsoring and participating in
targeted conferences and holding private meetings with individual companies.
Our sales professionals are trained in all available products and services the
company offers. Various media advertising and product and services listings in
appropriate directories supplement direct sales efforts. We believe that the
industry focus of our sales professionals and our business unit marketing
personnel enhances their knowledge and expertise in these industries and will
generate additional client engagements. The company has built and designed
numerous web sites and internet solutions for several companies/firms in each
of our industry groups. Familiarity with specialized solutions tailored to each
of these groups allows us to leverage solutions already developed and easily
complete projects.

We generally soft bid a project and work with our clients to develop and
understand their needs. We then enter into written commitment letters or a hard
bid with our clients after their goals and objectives have been clearly
defined. These commitment letters typically contemplate that Interweb and the
client will subsequently enter into a more detailed agreement, although the
client's obligations under the commitment letter are not conditioned upon the
execution of the later agreement. These written commitments and subsequent
agreements contain varying terms and conditions specific to each client.

EMPLOYEES

Our key values are creating long term value for our clients; client-focused
delivery; long-term relationships; creativity; openness; and professional
growth.

To encourage the achievement of these values, we reward teamwork and promote
individuals who demonstrate these values. We believe that our growth and
success are attributable in large part to the high caliber of our employees and
our commitment to maintain the values on which our success has been based.

There is significant competition for employees with the skills required to
perform the services we offer. We believe that we have been successful in our
efforts to attract and retain employees, in part because of our emphasis on
cross-training, professional growth and our employee stock option plan. We
intend to continue to recruit, hire and promote employees who share our values.

As of November 1, 2000, we had 21 full-time employees, comprised of 10
project personnel, 5 employees in general and administration and 6 employees in
sales and marketing. None of our employees are subject to a collective
bargaining agreement. We have entered into non-disclosure and non-competition
agreements with our key personnel which provide that upon termination of
employment with the company for any reason, the individual will not compete
with the company for 2 years. We believe the non-compete covenants comply with
state law, however the company can provide no assurances that a state court may
determine not to enforce or only partially enforce such covenants. We believe
that we have good relationships with our employees.

COMPETITION

The markets for the services we provide are highly competitive. We believe
that we currently compete principally with strategy consulting firms, Internet
professional services firms, systems integration firms, technology vendors and
internal information systems groups. Many of the companies that provide
services in our markets have significantly greater financial, technical and
marketing resources than we do and generate greater revenues and have greater
name recognition than we do. In addition, there are relatively low barriers to
entry into our markets and we have faced, and expect to continue to face,
competition from new entrants into our markets.

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We believe that the principal competitive factors in our markets include:
ability to integrate strategy, experience modeling, creative design and
technology services; quality of service, speed of delivery and price; industry
knowledge; sophisticated project and program management capability; and
Internet technology expertise and talent.

We believe that we compete favorably when considering these factors and that
our extensive experience in managing large-scale initiatives, multidisciplinary
approach to delivering solutions, in-depth industry knowledge and partnership
approach with clients distinguish us from our competitors.

RESEARCH AND DEVELOPMENT

The company develops and markets a variety of Internet related products and
services, as well as a number of database software technologies. These
industries are characterized by rapid technological development. The company
believes that its future success will largely depend upon its ability to
continue the enhancement of its existing products and services and the
development of cutting edge products and services which complement existing
ones. To date, all research and development activities have been charged to
customers and recorded as "Cost of Revenues" on our income statement. In order
to respond to rapidly changing competitive and technological conditions, the
company expects to incur significant research and development expenses during
the initial development phase of new products and services as well as on an on-
going basis with established products.

INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS

We rely upon a combination of trade secrets, nondisclosure and other
contractual arrangements, and copyright and trademark laws, to protect our
proprietary rights. We enter into confidentiality agreements with our
employees, generally require that our consultants and clients enter into such
agreements, and limit access to and distribution of our proprietary
information. There can be no assurance that the steps we take in this regard
will be adequate to deter misappropriation of our proprietary information or
that we will be able to detect unauthorized use and take appropriate steps to
enforce our intellectual property rights.

Our business involves the development of technology solutions for specific
client engagements. Ownership of these solutions is the subject of negotiation
and is frequently assigned to the client, although we may retain a license for
certain uses. Some clients have prohibited us from marketing the solutions
developed for them for specified periods of time or to specified third parties
and there can be no assurance that clients will not demand similar or other
restrictions in the future. Issues relating to the ownership of and rights to
use solutions can be complicated and there can be no assurance that disputes
will not arise that affect our ability to resell or reuse such solutions.

Interweb currently has two patents pending, three additional patents being
prepared and sixteen trademarks pending. The two pending patents are System and
Method for Downloading Files filed on January 14, 2000 and Method of
Disseminating Information and Data Collection filed on May 2, 2000. The sixteen
pending trademarks are Jingle Banner(TM), Jingle(TM), Jingle Banner and
Design(TM), SiteBlazer Network and Design(TM), Siteblazer Network(TM),
SiteBlazer(TM) (International), Single Jingle(TM), PoliticalNet.com(TM),
OTCNews.net(TM), OTCnn.com(TM), OTCnn.net(TM), OTCnewsnetwork.net(TM), OTC News
Network, Inc.(TM), LegalNet(TM), LegalNet.com(TM), PoliticalTeam.com &
Design(TM). The company believes that these patents and trademarks will become
a valuable part of its intellectual property in the future.

The company pursues the registration of its trademarks in the United States
and internationally. The company's application for the trademark of
SITEBLAZER(TM) was approved for publication on November 5, 1999. The company
has applied for the registration of the service mark and trademark
SITEBLAZER(TM). The company is applying for a European Community Trademark for
international protection of SITEBLAZER(TM) in every country in the European
Community. Effective trademark, service mark, copyright and trade secret
protection may not be available an every country in which the company's
services are distributed or made

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available through the Internet, and policing unauthorized use of the company's
proprietary information is difficult.

During the fiscal period, the company researched and prepared an additional
three patents. Two patents broaden applications of the two patents pending. The
third is in a new area. The company believes it will be able to file for three
additional patents. We are currently charging off to operations all expenses
incurred in connection with our patents, trademarks and copyrights.

The company currently licenses certain technologies to other companies and
utilizes an independent reseller to market and distribute the company's
products and services. The company has entered into the following material
agreements:

. In February 2000, the company granted a license as a part of the
Cooperation Agreement of Beijing Artists Online Co. Ltd to utilize
Interweb's software products and technology; to promote and develop
Chinese culture; to promote and develop the China music industry; to
provide artists and their audiences with an unprecedented, financially
sustainable music distribution and entertainment platform.

. In March 2000, the company entered into a non-exclusive agreement with
Hearst Newspaper Partnership, L.P. for design and development of Web
Sites, banner ads and other Internet advertising solutions for
advertising customers of the Houston Chronicle.

. In April 2000, the company entered into a non-exclusive software reseller
agreement with Brazil Interweb (BID) to market and distribute software
products manufactured by the company in Brazil.

. In July 2000, the company entered into a non-exclusive agreement with
eRealty.com for the design and development of web sites for Service
Providers of eRealty.

. In October 2000, the company entered into a non-exclusive agreement with
eHome.com for the design and development of web sites for Service
Providers of eHome.

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RISK FACTORS

The following important factors, among others, could cause our actual
results to differ materially from those contained in forward-looking statements
made in this Annual Report on Form 10-KSB or presented elsewhere by management
from time to time.

IF BUSINESSES DO NOT INCREASE THEIR USE OF THE INTERNET AS A MEANS FOR
CONDUCTING COMMERCE, OUR REVENUES WILL BE ADVERSELY AFFECTED

Our future success depends heavily on the increased acceptance and use of
the Internet as a means for conducting commerce. We focus our services on the
development and implementation of Internet strategies and solutions. If
commerce on the Internet does not continue to grow, or grows more slowly than
expected, our revenue growth would slow or decline and our business, financial
condition and results of operations would be materially adversely affected.
Consumers and businesses may delay adoption of the Internet as a viable medium
for commerce for a number of reasons, including:

. inadequate network infrastructure;

. delays in the development of Internet enabling technologies and
performance improvements;

. delays in the development or adoption of new standards and protocols
required to handle increased levels of Internet activity;

. delays in the development of security and authentication technology
necessary to effect secure transmission of confidential information;

. changes in, or insufficient availability of, telecommunications services
to support the Internet; and

. failure of companies to meet their customers' expectations in delivering
goods and services over the Internet.

IF WE DO NOT ATTRACT AND RETAIN QUALIFIED PROFESSIONAL STAFF, WE MAY NOT BE
ABLE TO ADEQUATELY PERFORM OUR CLIENT ENGAGEMENTS AND COULD BE LIMITED IN
ACCEPTING NEW CLIENT ENGAGEMENTS

Our business is labor intensive and our success will depend in large part
upon our ability to attract, retain, train and motivate highly skilled
employees. Because of the rapid growth of the Internet, there is intense
competition for employees who have strategic, experience modeling, creative
design, technical and program management experience. In addition, the Internet
has created many opportunities for people with the skills we seek to form their
own companies or join startup companies and these opportunities frequently
offer the potential for significant future financial profit through equity
incentives which we cannot match. We may not be successful in attracting a
sufficient number of highly skilled employees in the future, or in retaining,
training and motivating the employees we are able to attract. Any inability to
attract, retain, train and motivate employees could impair our ability to
adequately manage and complete existing projects and to bid for or accept new
client engagements.

IF WE DO NOT MANAGE OUR GROWTH EFFECTIVELY, OUR OPERATING RESULTS WILL BE
ADVERSELY AFFECTED

Our growth has placed significant demands on our management and other
resources. Our revenues increased approximately 8% from $.997 million in 1999
to $1.1 million in 2000. Our staff decreased from a high of 38 full-time
employees at July 31, 1999 to 21 October 31, 2000. Increasing revenues and
decreasing staff has placed an ever-increasing burden on the current staff. Our
future success will depend on our ability to manage our growth effectively,
including by:

. developing and improving our operational, financial and other internal
systems;

. integrating and managing acquired businesses, joint ventures and
strategic investments;

. training, motivating and managing our employees;

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. estimating fixed-price fees and project timeframes accurately;

. maintaining high rates of employee utilization; and

. maintaining project quality and client satisfaction.

Our management has limited experience managing a business in today's highly
competitive markets. If we are unable to manage our growth and projects
effectively, the quality of our services and products, our ability to retain
key personnel and our business, financial condition and results of operations
may be materially adversely affected.

WE HAVE SIGNIFICANT FIXED OPERATING COSTS, WHICH MAY BE DIFFICULT TO ADJUST IN
RESPONSE TO UNANTICIPATED FLUCTUATIONS IN REVENUES

A high percentage of our operating expenses, particularly personnel and
rent, are fixed in advance of any particular quarter. As a result,
unanticipated variations in the number, or progress toward completion, of our
projects may cause significant variations in operating results in any
particular quarter and could have a material adverse effect on operations for
that quarter.

An unanticipated termination of a major project, a client's decision not to
proceed with a project we anticipated, or the completion during a quarter of
several major client projects could require us to maintain underutilized
employees and could therefore have a material adverse effect on our business,
financial condition and results of operations. Our revenues and earnings may
also fluctuate from quarter to quarter based on such factors as:

. the contractual terms and timing of completion of projects;

. any delays incurred in connection with projects;

. the adequacy of provisions for losses and bad debts;

. the accuracy of our estimates of resources required to complete ongoing
projects; and

. general economic conditions.

INTERNATIONAL EXPANSION OF OUR BUSINESS COULD RESULT IN FINANCIAL LOSSES DUE TO
CHANGES IN FOREIGN ECONOMIC CONDITIONS OR FLUCTUATIONS IN CURRENCY AND EXCHANGE
RATES

We expect to continue to expand our international operations. We currently
have offices in Beijing, Rio, Sao Paulo Mexico City, Monterrey and Panama
through joint ventures and have recently commenced a joint venture in Belgium.
We have limited experience in marketing, selling and providing our services
internationally. The company has limited its risk during start-up through these
joint ventures with knowledge and expertise in these countries. International
operations are subject to other inherent risks, including:

. recessions in foreign countries;

. fluctuations in currency exchange rates;

. the scheduled conversion to the euro by most European Union members;

. difficulties and costs of staffing and managing foreign operations;

. reduced protection for intellectual property in some countries;

. political instability or changes in regulatory requirements; and

. U.S. imposed restrictions on the import and export of technologies.

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GOVERNMENT REGULATION

The Internet largely operates outside the scope of U.S. government
regulation. Standards are set by an inter-related group of independent, non-
profit bodies, but no U.S. agency or organization exerts formal regulatory
control over the market.

We are subject to governmental regulation in the countries in which we
conduct business. The countries currently include: China, Mexico, and Brazil.
The types of governmental regulation to which our business is subject include
regulation of currency conversion, regulation of telecommunications services,
regulation of information and content, and regulation of electronic commerce.

REGULATION OF THE PRC INTERNET INDUSTRY

OVERVIEW

After the U.S., we expect PRC to become our largest and most important
market. At present, there is no legislation in the PRC directly addressing the
Internet businesses we are engaged in. However, certain areas related to the
Internet, such as telecommunications, international connections for computer
information networks, information security and censorship, as well as foreign
investment in those areas, are covered in detail by a number of existing laws
and regulations. Some of these existing laws and regulations, which may impact
foreign investment in various Internet businesses in China, are promulgated by
various governmental authorities, such as the Ministry of Information Industry
("MII") (formerly the Ministry of Posts and Telecommunications, or MPT), the
State Administration for Industry and Commerce ("SAIC"), or the Ministry of
Public Security.

The PRC legislature and regulatory authorities are currently in the process
of preparing new legislation that will govern or affect the PRC Internet
sector. For example, the SAIC is currently considering adopting new regulations
governing online advertising. We cannot predict the timing and effects of such
new regulations and may be adversely affected by one or more of the following:

. New laws or regulations, or different interpretation of existing laws and
regulations;

. Pre-emption of provincial or local laws by national laws;

. Our ability to timely obtain the necessary administrative approvals and
licenses;

. Our ability to comply with applicable administrative requirements;

. Content restrictions on our Internet properties;

. Confiscatory taxation;

. Restrictions on imports;

. Restrictions on foreign investments;

. Currency devaluations;

. Expropriation or nationalization of our operations, which could result in
the total loss of ownership and control of any assets or operations that
we develop in China; and

. Adoption of measures intended to reduce inflation, such as price
controls.

There are substantial uncertainties regarding the proper interpretation of
existing PRC laws and regulations relating to the Internet Industry and there
are likely to be new PRC laws and regulations relating to the Internet sector
adopted in the future. In particular, the PRC does not have a well-developed
body of laws governing foreign enterprises, such as those relating to the
permissible percentage of foreign investments. Official Chinese statements
regarding these evolving policies have been conflicting and are subject to
broad interpretation and modification.

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The legal issues, risks and uncertainties relating to the PRC government
laws and regulations generally relate to the legality of Beijing Artists
Online's ownership structure, whether the PRC government will restrict or
prohibit the distribution of content over the Internet, whether the imposition
of additional regulatory requirements may result in our non-compliance with
applicable law, whether we will be able to acquire future licenses or permits
necessary to conduct our operations in the PRC. Some of these issues, risks and
uncertainties include the following:

. Various officials of the MII have, during 1999, stated publicly that
foreign investment is prohibited in the PRC Internet sector, including in
Internet service providers and Internet content providers.

. Foreign investment is prohibited in businesses providing "value-added
telecommunication services", including "computer information services" or
"electronic mail box services". However, the relevant regulation is
silent as to whether the Internet business is included in these
businesses in which foreign investment is prohibited.

. The MII has stated recently that it intends to adopt new laws or
regulations governing foreign investment in the PRC Internet sector in
the near future. At this time, we do not know the timing or terms of
these new laws or regulations or whether or how they will apply to us.

. According to press reports, under the agreement reached in November 1999
between China and the United States concerning the United States' support
of China's entry into the World Trade Organization ("WTO"), foreign
investment in PRC Internet services will be liberalized at the same rate
as other key telecommunications services. In addition, according to press
reports, key telecommunication services in the PRC will be subject to a
foreign ownership limit of 49% for the first two years after China's
entry into the WTO and 50% thereafter. We do not know if this agreement
will in fact be implemented, the timing thereof, the terms of any new
laws or regulations resulting from such implementation, or whether our
Internet business in China will be subject to these foreign ownership
limits.

. The MII has stated recently that the activities of Internet content
providers are also subject to regulation by various PRC government
authorities, depending on the specific activities conducted by the
Internet content provider. According to press reports, various government
authorities are in the process of preparing new laws and regulations that
will govern these activities. The areas of regulation may include online
advertising and online news reporting.

. A PRC wholly foreign-owned enterprise is prohibited from engaging in the
business of providing or distributing advertisements as defined under the
1994 PRC Advertising Law. The relevant law is silent as to whether online
advertising is covered by the law.

OWNERSHIP STRUCTURE AND RESTRICTIONS ON FOREIGN INVESTMENT

The MII has promulgated regulations restricting foreign investment in the
telecommunications sector in China, including:

. Provisional Administrative Measures Regarding the Examination and
Approval of Deregulated Telecommunication Operations (1993);

. Provisional Regulations for the Administration of the Deregulated
Telecommunications Operations (1995); and

. Definitions of Various Deregulated Telecommunications Operations (1995).

These regulations prohibit a foreign person or entity, including any foreign
investment enterprise established in the PRC, such as Beijing Artists Online,
from investing in, or operating or participating in the operation of, any
business that provides "value-added telecommunications services", which is
defined to include, among other services, "computer information services" and
"electronic mail box services". However, these regulations were promulgated and
the definitions were adopted, prior to the general emergence of the

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Internet in China, and the relevant regulation is silent as to whether our
Internet business is included in these businesses in which foreign investment
is prohibited.

Foreign investment in advertising companies is also restricted, and proposed
investment projects in these areas must be approved on a project-by-project
basis. Under the relevant restrictions, non-PRC investors are restricted from
holding a majority of voting shares in an advertising company. No regulations
have yet been adopted specifically governing online advertising in the PRC and
the PRC laws and regulations are silent as to whether they cover online
advertising. The SAIC, the PRC government agency regulating advertising
activities, has not expressly issued regulations or rules stating that the
Internet is considered and advertising media. However, if the SAIC were to do
so, Beijing Artists Online, as a partially foreign owned enterprise in the PRC,
could be required to apply to the SAIC for authorization to conduct advertising
business in accordance with its rules. We cannot guarantee that such
application, if required, would be approved by the relevant authorities. If we
were unable to obtain required approvals, our ability to generate advertising
revenues could be seriously restricted. If the relevant regulatory authorities
were to take the position that our operations are in violation of existing
regulations, we could be subjected to penalties, including being prohibited
from engaging in online advertising and having our earnings from such
activities confiscated. In addition, if we are deemed to be an "advertisement
publisher", we will be held responsible for ensuring the content of an
advertisement complies with the regulations of PRC laws.

The interpretation and application of existing PRC laws and regulations, the
stated positions of the MII relating to the prohibition of foreign investments
in PRC Internet companies, and the likely possibility of the introduction of
new laws or regulations, have created substantial uncertainties regarding the
legality of existing and future foreign investments in, and the businesses and
activities of, PRC Internet businesses, including our business.

We cannot be sure that our current ownership structure and activities
relating to Beijing Artists Online will be viewed by PRC regulatory authorities
as in compliance with applicable PRC laws or regulations. Our Businesses in the
PRC will be adversely affected if our business license is revoked as a result
of non-compliance with the relevant regulations. It is possible that the
relevant PRC authorities could, at any time, assert that any portion or all of
our existing or future ownership structure and business in China violate
existing or future PRC laws and regulations. In addition, new laws and
regulations may be retroactively applied to us. For example, China's potential
entry into the WTO will likely affect the terms of any new laws and
regulations, and may result in the PRC government adopting a 49% or 50% limit
on foreign investment in Internet businesses, including limits on foreign
investments in PRC Internet content providers, as well as affect the
interpretation of existing regulations relating to the PRC Internet sector.

INFORMATION SECURITY AND CENSORSHIP

The principal PRC regulations concerning information security and censorship
are:

. The Law of the People's Republic of China on the Preservation of State
Secrets (1988) and its implementing rules (1990);

. The Law of the People's Republic of China on State Security (1993) and
its implementing rules (1994);

. Rules of the People's Republic of China for Protecting the Security of
Computer Information Systems (1994);

. Notice Concerning Work Relating to the Filing of Computer Information
Systems with International Connections (1996);

. Administrative Measures for Protecting the Security of Computer
Information Network with International Connections (1997); and

. Regulations for the Protection of State Secrets for Computer Information
Systems on the Internet (2000).

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These regulations specifically prohibit the use of Internet infrastructure
that results in a breach of public security or the provision of socially
destabilizing content or transmission of state secrets.

. ""A breach of public security" includes breach of national security or
disclosure of state secrets, infringement on state, social or collective
interests or the legal rights and interests of citizens, and illegal or
criminal activities.

. ""Socially destabilizing content" includes any action that incites
defiance or violation of Chinese laws and regulations, incites subversion
of state power and the overturning of the socialist system, fabricates or
distorts the truth, spreads rumors or distorts social order, spreads
feudal superstition, involves obscenities, pornography, gambling,
violence, murder or horrific acts, or instigates criminal acts.

. ""State secrets" are defined as "matters that affect the security and
interest of the state". The term covers such broad areas as national
defense, diplomatic affairs, policy decisions on state affairs, national
economic and social development, political parties and "other state
secrets that the State Secrets Bureau has determined should be
safeguarded".

China has enacted regulations governing Internet access and the distribution
of news and other information. In the past, the PRC government has stopped the
distribution of information over the Internet that it believes violated PRC
laws ore regulations, including content that is obscene, incites violence,
endangers national security, is contrary to the national interest or is
defamatory. The Ministry of Public Security also has the authority to cause any
local Internet service provider to block any web site maintained outside China
at its sole discretion. In addition, the Propaganda Department of the Chinese
Communist Party has been given the responsibility to censor news published in
China to ensure, supervise and control proper political ideology.

The State Secrecy Bureau, which is directly responsible for the protection
of state secrets of all PRC government and Chinese Communist Party
organizations, is also authorized to block any web site it deems to be leaking
state secrets or failing to meet the relevant regulations relating to the
protection of state secrets in the distribution of online information.
Specifically, Internet companies in China with bulletin board systems, chat
rooms or new services must apply for the approval of the State Secrets Bureau.
As the implementation rules for the regulations have not been issued, however,
details concerning how Internet companies should comply with these regulations
remain to be clarified.

The MII has also published implementing regulations that subject online
information providers to potential liability for content included on their
portals and the actions of subscribers and others using their systems,
including liability for violation of Chinese laws prohibiting the distribution
of content that clearly violates the laws, regulations or policies of the PRC
and report content that we suspect may violate such laws, regulations or
policies.

Because many Chinese laws, regulations and legal requirements with regard to
the Internet are relatively new and untested, their interpretation and
enforcement may involve significant uncertainty. In addition, the Chinese legal
system is a civil law system in which decided legal cases have limited binding
force as legal precedents. As a result, in many cases it is difficult for us to
determine the type of content that may result in liability for a web site
operator.

According to applicable regulations, Internet companies in China are
required to complete security filing procedures with the local public security
bureau and to regularly update the local public security bureau regarding
information security and censorship systems for their web sites.

INTERNATIONAL CONNECTIONS FOR COMPUTER INFORMATION NETWORKS

The State Council and the MII have promulgated regulations governing
international connections for PRC computer networks, including:

. Provisional Regulations of the People's Republic of China for the
Administration of International Connections to Computer Information
Networks (1997) and their Implementing Measures (1998);

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. Measures for the Administration of International Connections to China's
Public Computer Interconnected Networks (1996); and

. Reply Concerning the Verification and Issuance of Operating Permits for
Business Relating to International Connections for Computer Information
Networks and for Public Multimedia Telecommunications Business (1998).

Under these regulations, any entity seeking access to international
connections for computer information networks in China, such as Beijing Artists
Online, must comply with the following requirements:

. Be a PRC legal entity;

. Have the appropriate equipment, facilities and technical and
administrative personnel;

. Have implemented and registered a system of information security and
censorship; and

. Effect all international connections with an authorized Internet service
provider in China.

ENCRYPTION SOFTWARE

In October 1999, the State Encryption Administration Commission promulgated
the Regulations for the Administration of Commercial Encryption, which was
followed in November 1999 by the Notice of the General Office of the State
Encryption Administration Commission. Both of these regulations address the use
in China of software with encryption functions. According to these regulations,
encryption products purchased for use without the permission of the state
encryption administration departments and foreign encryption products purchased
for use must be reported. Violation of the encryption regulations may result in
the issuance of a warning, levying of a penalty, confiscation of the encryption
products and even criminal liabilities. Because these regulations do not
specify what constitutes encryption products, and there are currently no
official interpretations of, or detailed implementing rules for, these
regulations, we are unsure as to whether or how they may apply to us.

BUSINESS LICENSE AND APPROVAL FOR FOREIGN INVESTMENT

Under current PRC law, the legal establishment of a technology company such
as Beijing Artists Online must be approved by the relevant local Commission for
Foreign Economic Relations and Trade.

If we were found to be in violation of any existing or future PRC laws,
regulations or policies, the relevant PRC authorities would have broad
discretion in dealing with such a violation, including, without limitation, the
following:

. Levying fines;

. Revoking our business license;

. Requiring us to restructure our ownership structure or operations; and/or

. Requiring us to discontinue any portion or all of our Internet business
or our investment in Beijing Artists Online;

. Require us to obtain licenses in order to commence or continue our
business;

. Revoke or suspend any licenses we may have;

. Regulate the rates that we will be permitted to charge of
telecommunications services; or

. Impose or change the tariffs or fees on our operations.

Any of these actions could have a material adverse effect on our business,
results of operations and financial condition.

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THE INCREASED SIZE AND COMPLEXITY OF THE SOLUTIONS WE ARE IMPLEMENTING MAKES IT
MORE LIKELY THAT WE WILL FAIL TO SATISFY CLIENT EXPECTATIONS, WHICH WOULD
DAMAGE OUR REPUTATION AND BUSINESS

The average dollar size of our solutions has grown significantly, while the
timeframe for delivering solutions has generally decreased. As our client
engagements become larger and more complex and must be completed in shorter
timeframes, it becomes more difficult to manage the development process and the
likelihood and consequences of any mistakes increase. Any inability by us to
complete client solutions in a timely manner, any defects contained in the
solutions we deliver and any other failure by us to achieve client
expectations, would have a material adverse effect on our reputation with the
affected client and generally within our industry and could have a material
adverse effect on our business, results of operations or financial condition.

WE ENTER INTO FIXED-PRICE CONTRACTS AND COULD LOSE MONEY ON THESE CONTRACTS

Most of our projects are based on fixed-price, fixed-timeframe contracts,
rather than contracts in which payment to us is determined on a time and
materials basis. Our failure to accurately estimate the resources required for
a project or our failure to complete our contractual obligations in a manner
consistent with the project plan upon which our fixed-price, fixed-timeframe
contract was based could adversely affect our overall profitability and could
have a material adverse effect on our business, financial condition and results
of operations. We have been required to commit unanticipated additional
resources to complete projects in the past, which has resulted in losses on
those contracts. We recognize that we will experience similar situations in the
future and that the consequences could be more severe than in the past due to
the increased size and complexity of our solutions. In addition, for some
projects we may fix the price at an early stage of the process, which could
result in a fixed price that turns out to be too low and therefore would
adversely affect our profitability.

WE DEPEND HEAVILY ON A LIMITED NUMBER OF CLIENT PROJECTS, THE LOSS OF ANY WOULD
ADVERSELY AFFECT OUR OPERATING RESULTS

We have derived, and believe that we will continue to derive, a significant
portion of our revenues from a limited number of clients for whom we perform
large projects. In 1999, our three largest clients accounted for approximately
39% of our revenues, with one client accounting for more than 19% of our
revenues. In addition, revenues from a large client may constitute a
significant portion of our total revenues in a particular quarter. The loss of
any principal client for any reason, including as a result of the acquisition
of that client by another entity, could have a material adverse effect on our
business, financial condition and results of operations.

IF WE ARE UNABLE TO ACHIEVE ANTICIPATED BENEFITS FROM ACQUISITIONS, JOINT
VENTURES AND STRATEGIC INVESTMENTS, OUR BUSINESS COULD BE ADVERSELY AFFECTED

During the past two years, we have completed two acquisitions and entered
into several joint ventures. The anticipated benefits from these and future
acquisitions, joint ventures and strategic investments may not be achieved. For
example, when we acquire a company, we cannot be certain that customers of the
acquired business will continue to do business with us or that employees of the
acquired business will continue their employment or become well integrated into
our operations and culture. The identification, consummation and integration of
acquisitions, joint ventures and strategic investments requires substantial
attention from management. The diversion of the attention of management
relating to these activities, as well as any difficulties encountered in the
integration process, could have an adverse impact on our business, financial
condition and results of operations.

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IF CLIENTS UNEXPECTEDLY TERMINATE THEIR CONTRACTS FOR OUR SERVICES, OUR
BUSINESS COULD BE ADVERSELY AFFECTED

Some of our contracts can be canceled by the client with limited advance
notice and without significant penalty. Termination by any client of a contract
for our services could result in a loss of expected revenues and additional
expenses for staff which were allocated to that client's project. The
cancellation or a significant reduction in the scope of a large project could
have a material adverse effect on our business, financial condition and results
of operations.

OUR STOCK PRICE IS VOLATILE AND MAY RESULT IN SUBSTANTIAL LOSSES FOR INVESTORS

The trading price of our common stock could be subject to wide fluctuations
in response to:

. quarterly variations in operating results and our achievement of key
business metrics;

. changes in earnings estimates by securities analysts;

. any differences between reported results and securities analysts
published or unpublished expectations;

. announcements of new contracts or service offerings by us or our
competitors;

. market reaction to any acquisitions, joint ventures or strategic
investments announced by us or our competitors; and

. general economic or stock market conditions unrelated to our operating
performance.

In the past, securities class action litigation has often been instituted
against companies following periods of volatility in the market price of their
securities. This type of litigation could result in substantial costs and a
diversion of management attention and resources.

IF WE DO NOT KEEP PACE WITH TECHNOLOGICAL CHANGES, OUR COMPETITIVE POSITION
WILL SUFFER

Our markets and the technologies used in our solutions are characterized by
rapid technological change. Failure to respond in a timely and cost-effective
way to these technological developments would have a material adverse effect on
our business, financial condition and results of operations. We expect to
derive a substantial portion of our revenues from providing Internet solutions
that are based upon leading technologies and that are capable of adapting to
future technologies. As a result, our success will depend on our ability to
offer services that keep pace with continuing changes in technology, evolving
industry standards and changing client preferences. We may not be successful in
addressing future developments on a timely basis. Our failure to keep pace with
the latest technological developments would have a material adverse effect on
our business, financial condition and results of operations.

WE FACE SIGNIFICANT COMPETITION IN MARKETS THAT ARE NEW AND RAPIDLY CHANGING

We believe that the principal competitive factors in our markets include:

. ability to integrate strategy, creative design and technology services;

. quality of service, speed of delivery and price;

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. industry knowledge;

. sophisticated project and program management capability; and

. Internet technology expertise and talent.

We believe that our ability to compete also depends in part on a number of
competitive factors outside our control, including:

. the ability of our competitors to hire, retain and motivate professional
staff;

. the development by others of Internet services or software that is
competitive with our solutions; and

. the extent of our competitors' responsiveness to client needs.

There can be no assurance that we will be able to compete successfully in
our markets.

GOVERNMENT REGULATION COULD INTERFERE WITH THE ACCEPTANCE OF THE INTERNET AND
ELECTRONIC COMMERCE, WHICH WOULD ADVERSELY AFFECT THE DEMAND FOR OUR SERVICES

Any new laws and regulations applicable to the Internet and electronic
commerce that are adopted by federal, state or foreign governments could dampen
the growth of the Internet and decrease its acceptance as a commercial medium.
If this occurs, companies may decide in the future not to pursue Internet
initiatives, which would decrease demand for our services. A decrease in the
demand for our services would have a material adverse effect on our business,
financial condition and results of operations.

IF WE ARE UNABLE TO PROTECT OUR PROPRIETARY METHODOLOGY, OUR BUSINESS COULD BE
ADVERSELY AFFECTED

Our success depends, in part, upon our proprietary methodology and other
intellectual property rights. We rely upon a combination of trade secrets,
nondisclosure and other contractual arrangements, and copyright and trademark
laws to protect our proprietary rights. We enter into confidentiality
agreements with our employees, generally require that our consultants and
clients enter into these agreements, and limit access to and distribution of
our proprietary information. There can be no assurance that the steps we take
in this regard will be adequate to deter misappropriation of our proprietary
information or that we will be able to detect unauthorized use and take
appropriate steps to enforce our intellectual property rights. In addition,
although we believe that our services and products do not infringe on the
intellectual property rights of others, there can be no assurance that
infringement claims will not be asserted against us in the future, or that if
asserted that any infringement claim will be successfully defended. A
successful claim against us could materially adversely affect our business,
financial condition and results of operations.

WE MAY NOT HAVE THE RIGHT TO RESELL OR REUSE SOLUTIONS DEVELOPED FOR SPECIFIC
CLIENTS

A portion of our business involves the development of technology solutions
for specific client engagements. Ownership of these solutions is the subject of
negotiation and is sometimes assigned to the client, although we usually retain
a license for certain uses. Some clients have prohibited us from marketing the
applications developed for them for specified periods of time or to specified
third parties and there can be no assurance that clients will not demand
similar or other restrictions in the future. Issues relating to the ownership
of and rights to use solutions can be complicated and there can be no assurance
that disputes will not arise that affect our ability to resell or reuse these
solutions. Any limitation on our ability to resell or reuse a solution could
require us to incur additional expenses to develop new solutions for future
projects.

OUR BOARD DIRECTORS AND OFFICERS HAVE SIGNIFICANT VOTING POWER AND MAY
EFFECTIVELY CONTROL THE OUTCOME OF ANY STOCKHOLDER VOTE

Harry L. White, Lee A. Magness and Richard J. Finn, all board members and
Executive Officers, together own approximately 72% of our common stock. As a
result, they have the ability to substantially influence, and may effectively
control the outcome of corporate actions requiring stockholder approval,
including the election

21
<PAGE>

of directors. This concentration of ownership may also have the effect of
delaying or preventing a change in control of Interweb even if such a change of
control would benefit other investors.

WE ARE DEPENDENT ON OUR KEY PERSONNEL

Our success will depend in large part upon the continued services of a
number of key employees, including Messrs. White, Magness and Finn. Our
employment contracts with Messrs. White, Magness and Finn expire in one year
and our other key personnel are terminable at will by either party. The loss of
the services of either of Messrs. White, Magness or Finn or of one or more of
our other key personnel could have a material adverse effect on our business,
financial condition and results of operations. In addition, if one or more of
our key employees resigns from Interweb to join a competitor or to form a
competing company, the loss of such personnel and any resulting loss of
existing or potential clients to any such competitor could have a material
adverse effect on our business, financial condition and results of operations.
In the event of the loss of any personnel, there can be no assurance that we
would be able to prevent the unauthorized disclosure or use of our technical
knowledge, practices or procedures by such personnel.

OUR CORPORATE GOVERNANCE PROVISIONS MAY DETER A FINANCIALLY ATTRACTIVE TAKEOVER
ATTEMPT

Provisions of our charter and by-laws may discourage, delay or prevent a
merger or acquisition that stockholders may consider favorable, including
transactions in which stockholders would receive a premium for their shares.
These provisions include the following:

. any action that may be taken by stockholders must be taken at an annual
or special meeting and may not be taken by written consent;

. stockholders must comply with advance notice requirements before raising
a matter at a meeting of stockholders or nominating a director for
election;

. a chairman of the board or a chief executive officer are the only ones
who may call a special meeting of stockholders; and

. our board of directors has the authority, without further action by the
stockholders, to fix the rights and preferences of and issue shares of
preferred stock.

Provisions of Texas law may also discourage, delay or prevent someone from
acquiring us or merging with us.

ITEM 2. Properties

The company currently leases approximately 9,867 square feet of office space
in Houston, Texas. The lease expires in October 2001 and the monthly rental is
currently $11,761. Management believes that its existing facilities are
adequate to meet its current needs and to accommodate anticipated growth.

ITEM 3. Legal Proceedings

The Company filed suit on November 23, 1999 against AMP3.com, L.L.C. Cause
No. 1999-58234; Houston Interweb Design, Inc. v. AMP3.com, L.L.C.; 190th
Judicial District Court of Harris County, Texas. The cause of action is for
breach of contract and requests payment for services and hosting plus interest
and costs. The company settled this suit on October 12, 2000. The terms of the
settlement agreement are confidential.

The Company filed suit in December 1999 against AMP3.com, L.L.C.; Cause No.
1999-60298; Houston Interweb Design, Inc. v. AMP3.com, L.L.C.; 234th Judicial
District Court of Harris County, Texas. The causes of action include: trade
secret misappropriation, breach of fiduciary duty, violation of various
intellectual property rights, violations under the Texas Theft Liability Act
and unfair competition. In addition to various damages, the suit requests a
temporary restraining order, temporary injunction and permanent injunction
prohibiting Defendants from misappropriating Plaintiff's "Jingle Banner(TM)"
technology and using its SiteBlazer(TM)software. The company settled this suit
on October 12, 2000. The terms of the settlement agreement are confidential.

22
<PAGE>

The Company filed suit on November 23, 1999 against AMP3.com, L.L.C. and its
officers/directors; Cause No. 1999-58235; Houston Interweb Design, Inc. v.
AMP3.com, L.L.C. Nigel Brassington and Michael Sharp; 295th Judicial District
Court of Harris County, Texas. The causes of action are for breach of fiduciary
duty, negligence, gross negligence, and constructive fraud, fraud in a stock
transaction, an accounting, and minority shareholder oppression. In addition to
damages the suit also requests an injunction prohibiting Defendants from
issuing or selling additional shares, selling, pledging or transferring shares
of stock and selling or transferring assets. This case is set for trial on
November 20, 2000.

The Company is also subject to various legal proceedings and claims that
arise in the ordinary course of business. Management currently believes that
resolving these matters will not have a material adverse impact on the
Company's financial position or its results of operations.

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

None.

PART II

ITEM 5. Market For the Company's Common Equity and Related Stockholder Matters

MARKET PRICE OF COMMON STOCK

The stock commenced trading on January 31, 2000. Our common stock is quoted
on the Over the Counter Bulletin Board or OTCBB National Market System under
the symbol "HITD". The table below sets forth for the periods indicated the
high and low intraday sale prices for our common stock.

<TABLE>
<CAPTION>
High Low
------ -----
<S> <C> <C>
2000
First Quarter................................................ $ -- $ --
Second Quarter (January 31, 2000 only)....................... $ 6.00 $5.00
Third Quarter................................................ $10.75 $2.00
Fourth Quarter............................................... $ 2.50 $0.63
</TABLE>

On November 1, 2000, the last reported sale price of our common stock was
$0.625 per share. As of November 1, 2000, there were approximately 350 holders
of record of our common stock.

RECENT SALES OF UNREGISTERED SECURITIES

In September 1999, the company issued 30,000 shares of company common stock
to an individual in connection with the purchase of TEAM Productions, Inc. The
Company believes these transactions were exempt from registration pursuant to
Section 4(2) of the Securities Act as isolated transactions by an issuer not
involving a public offering. This investor had extensive experience in the
Internet industry and had such knowledge and experience in financial and
business matters that it was able to evaluate the merits and risks of an
investment in the company.

In October 1999, the Company issued 187,500 shares of company common stock
to an accredited entity for $375,000. In addition, during the year the company
issued 246,000 shares of Company common stock to various individuals and
entities in exchange for services rendered. The Company believes these
transactions were exempt from registration pursuant to Section 4(2) of the
Securities Act as isolated transactions by an issuer not involving a public
offering. As accredited investors these individuals were able to fend for
themselves due to their exceptional business experience.

In January 2000, the Company issued 128,000 shares of company common stock
to six accredited individuals for $350,000. The Company believes these
transactions were exempt from registration pursuant to

23
<PAGE>

Section 4(2) of the Securities Act as isolated transactions by an issuer not
involving a public offering. As accredited investors these individuals were
able to fend for themselves due to their exceptional business experience.

In May 2000, the company issued 200,000 shares of common stock in exchange
for 33% ownership in Beijing Artists Online Co. Ltd. The Company believes this
transaction is exempt from registration pursuant to Section 4(2) of the
Securities Act as isolated transactions by an issuer not involving a public
offering. Through the due diligence process this investor had access to the
inner workings of the company which would provide it with the same kind of
information as would be included in a registration statement. This investor had
extensive experience in the Internet industry and had such knowledge and
experience in financial and business matters that it was able to evaluate the
merits and risks of an investment in the company.

During the year 3,750 warrants have been exercised at $1.50 per share
purchase price as a part of employee stock option plan.

In April 2000, the company issued 50,000 shares of common stock in exchange
for 30% ownership in Brazil Interweb Design. The Company believes this
transaction is exempt from registration pursuant to Section 4(2) of the
Securities Act as isolated transactions by an issuer not involving a public
offering. Through the due diligence process this investor had access to the
inner workings of the company which would provide it with the same kind of
information as would be included in a registration statement. This investor had
extensive experience in the Internet industry and had such knowledge and
experience in financial and business matters that it was able to evaluate the
merits and risks of an investment in the company.

On April 17, 2000 the Company settled one potential claim with
PinkMonkey.com Inc. Under the settlement, 150,000 shares were to be returned to
the company: 75,000 were to be cancelled immediately, and the remainder was to
be placed in an escrow account to be cancelled in 90 days. The company believes
that PinkMonkey.com will comply with these terms. In the event of non-
compliance with this agreement and other agreements the company intends to
litigate.

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

The following analysis compares the financial condition of the company for
the year ended July 31, 1999 as compared to the year ended July 31, 2000.

RESULTS OF OPERATIONS

Results of operations for the year ended July 31, 1999 compared with the
results of operations for the year ended July 31, 2000.

Revenues increased from $994,876 for the year ended July 31, 1999 to
$1,077,236 for the year ended July 31, 2000. The increase of $82,360 or 8% was
primarily due to growth in web sites developed by the company.

Revenues from Non-affiliates increased from $422,947 for the year ended in
July 31, 1999 to $772,207 for the year ended July 31, 2000. The increase of
$349,260 or 83% was primarily due to growth in web sites developed for new
customers.

Revenues from Affiliates decreased from $571,929 for the year ended in July
31, 1999 to $305,029 for the year ended July 31, 2000. The decrease of $266,900
or 47% was primarily due to reclassification of $219,800 affiliates revenue as
a result of the acquisition of one hundred percent of Cyber-Pitch.com in
October 2000.

Cost of revenues increased from $630,132 for the year ended in July 31, 1999
to $1,046,121 for the year ended July 31, 2000. The increase of $415,989 or 66%
was due to higher number of employees and related salaries.

24
<PAGE>

Selling expenses increased from $93,284 for the year ended in July 31, 1999
to $214,314 for the year ended July 31, 2000. The increase of $121,057 or 130%
was due to increase in commission and advertising expense.

General and administrative expenses increased from $1,048,227 for the year
ended in July 31, 1999 to $1,687,931 for the year ended July 31, 2000. The
increase of $639,704 or 61% was primarily due to increases in legal expenses
associated with patent and trademark filings, salary and benefits, rent and
travel expenses.

Depreciation and amortization expenses increased from $9,916 for the year
ended in July 31, 1999 to $126,893 for the year ended July 31, 2000. The
increase of $116,977 or 1180% was primarily due to an increase in amortization
of goodwill associated with the Axis Technologies and Team Productions
acquisitions.

Bad debt expense decreased from $318,762 for the year ended July 31, 1998,
to $302,088 for the year ended July 31, 1999. The bad debt of $302,088 is
primarily due to the establishment of reserves for outstanding accounts
receivable from AMP3.com, Inc., an affiliate in which the company owns a 20%
interest.

Writedown of Investments for the year ended July 31, 2000 was $1,553,843. In
accordance with FASB 121 "Investment Writedown", the following investments have
been written off: Investment in Beijing Artists Online Co. Ltd for $1,200,000;
Investment in Brazil Interweb for $116,000; Investment in Mexico Siteblazer
Office for $7,500 and investment in Cyber-Pitch.com(TM) Inc. for $101,494.

The company had a net loss of $1,109,898 for the year ended July 31, 1999
compared to a net loss of $3,855,651 for the year ended July 31, 2000. The
increased net loss of $2,825,615 or 134% is due primarily to non-cash expenses
such as bad-debt expense of $302,088 and the one-time investment write off of
$1,553,843.

Net loss per share of Common Stock increased from $(.07) for the year ended
July 31, 1999 to $(.22) for the year ended July 31, 2000.

The company may in the future experience significant fluctuations in its
results of operations. Such fluctuations may result in volatility in the price
and/or value of the company's Common Stock. Results of operations may fluctuate
as a result of a variety of factors, including demand for the company's design
and creation of Internet web sites, the introduction of new products and
services, the timing of significant marketing programs, the success of reseller
and license agreements, the number and timing of the hiring of additional
personnel, competitive conditions in the industry and general economic
conditions. Shortfalls in revenues may adversely and disproportionately affect
the company's results of operations because a high percentage of the company's
operating expenses are relatively fixed. Accordingly, the company believes that
period-to-period comparisons of results of operations should not be relied upon
as an indication of future results of operations. There can be no assurance
that the company will be profitable. Due to the foregoing factors, it is likely
that in one or more future periods the company's operating results will be
below the expectations of the investor.

The financial statements included herein have been prepared assuming the
company will be able to continue as a going concern. As shown in the financial
statements, the company incurred a net loss of $3,855,171 for the year ended
July 31, 2000 and has incurred substantial losses since inception. Negative
cash flows from operating activities were $670,274 for the year ended July 31,
2000. These factors, among others, raise doubts about the company's ability to
generate sufficient cash flow to meet its obligations on a timely basis, to
obtain additional financing or capital and to refinance its debt and ultimately
attain profitable operations.

LIQUIDITY AND CAPITAL RESOURCES

As of July 31, 2000, the company's primary source of liquidity was $18,655
of cash and $54,569 of accounts receivable. The company's working capital
deficit and shareholders' deficit was $168,594 and shareholders' equity of
$339,825 at July 31, 1999 as compared to a working capital deficit of
$1,307,244 and $988,009 at July 31, 2000.

25
<PAGE>

Net cash used by operating activities during the year ended July 31, 1999
was $967,752 compared with net cash used in operating activities of $670,274
for the year ended July 31, 2000. The decrease in net cash used by operating
activities was primarily due to accrued salaries and Common Stock issued as
compensation.

Net cash used in investing activities for the year ended July 31, 1999, was
$6,054 compared with net cash used in investing activities of $136,709 for the
year ended July 31, 2000. The increase in the net cash used in investing
activities is attributed to an increase in the purchase of property and
equipment and investment in software R&D.

Net cash provided by financing activities was $1,117,932 for the year ended
July 31, 1999 compared with net cash provided by financing activities of
$662,524 for the year ended July 31, 2000.

ITEM 7. Financial Statements

The financial statements prepared in accordance with Item 310 of Regulation
S-B are included in this report commencing on Page F-1.

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

There have been no disagreements concerning matters of accounting principles
or financial statement disclosure between the company and Mann, Frankfort,
Stein and Lipp, P.C. or Malone and Bailey, PLLC of the type requiring
disclosure hereunder.

PART III

ITEM 9. Directors, Executive Officers, Promoters and Control Persons

DIRECTORS AND EXECUTIVE OFFICERS

The company's directors and executive officers are:

<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Harry L. White................ 42 Chairman, Chief Executive Officer, President,
Treasurer and Secretary
Richard J. Finn............... 24 Chief Technical Officer and Director
Lee A. Magness................ 37 Chief Financial Officer and Director
Daniel B. Nelson.............. 42 General Counsel
Michael J. Minihan............ 52 Director
</TABLE>

Harry L. White has served as chairman, chief executive officer, president,
secretary and treasurer of the company since inception. From December 1986
through February 1997, Mr. White worked at Air Products and Chemicals, a
hydrogen production company, as the senior plant technician from December 1996
to February 1997. Mr. White also served as an ISO 9000 Manager from January
1994 to February 1997.

Richard J. Finn has served as chief technical officer and director of the
company since inception. From December 1995 through February 1997, Mr. Finn
served as the assistant webmaster for Neosoft, Inc., an Internet service
provider. From August 1995 through December 1995, Mr. Finn served as the
assistant network administrator of Cybersim, an Internet service provider. From
October 1994 through August 1995, Mr. Finn served as an assistant network
administrator for Triconex Systems, Inc.

Lee A. Magness has served as chief financial officer and director of the
company since inception. Since August 1993, Mr. Magness has served as a
financial consultant to various individuals and corporations. Prior to
receiving his law degree from Thurgood Marshall School of Law, Mr. Magness
served as a senior economic analyst at Transco Energy Corporation. Mr. Magness
received a MBA in International Finance from Texas

26
<PAGE>

A&M University in College Station, Texas in May 1986 and received a BBA in
Accounting from Hardin-Simmons University in Abilene, Texas in May 1984.

Daniel B. Nelson was named General Counsel effective April 7, 2000. Mr.
Nelson, formerly a partner and owner in Daniel B. Nelson & Associates and a
partner in Wauson & Nelson, L.L.P has already been working with Houston
InterWeb in a wide variety of legal projects. Mr. Nelson has over 14 years of
experience practicing law. He has represented a wide variety of publicly traded
corporate clients such as Travelers Insurance, Allstate Insurance and Horace
Mann Insurance Co. Mr. Nelson is a member of Houston Bar Association, Bar
Association of the Fifth Circuit, Texas Association of Defense Counsel and
Defense Research Institute, and he has taught law as an adjunct professor of
law at the University of Houston Law Center. Before his career in law, he has
worked for AMF Tuboscope and Union Carbine in various positions

Michael J. Minihan has served as a director of the company since July 1999.
From November 1997 until the present, Mr. Minihan has served as an asset
manager and economist for The Markpoint Company, a Texas-based investment
company. From April 1991 until October 1997, Mr. Minihan operated the Texas
Insurance Agency, a state-wide independent property and casualty insurance
agency. Mr. Minihan received a Bachelor of Science in Economics from St. Mary's
University in 1972.

All executive officers of the company are chosen by the board of directors
and serve at the board's discretion. There are no family relationships among
the company's officers and directors. The company plans to reimburse directors
for any expenses incurred in attending board of directors and Year 2000 board
committee meetings.

ITEM 10. Executive Compensation

The following table sets forth information with respect to the chief
executive officer of the company for the fiscal years ended July 31, 2000, July
31, 1999 and July 31, 1998. No other executive officers of the company received
total annual salary and bonus for the fiscal years ended July 31, 1998 or July
31, 1997 in excess of $100,000.

Summary Compensation Table

<TABLE>
<CAPTION>
Long-Term
Name and Principal Fiscal Other Annual Compensation All Other
Position Year Salary(2) Bonus Compensation(1) Options Compensation(3)
------------------ ------ --------- ----- --------------- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
Harry L. White.......... 2000 $120,000 $800
Chief Executive 1999 $120,000 $800
Officer and President 1998 $ 70,000 $800

Richard Finn............ 2000 $120,000 $800
Chief Technology
Officer 1999 $120,000 $800
1998 $ 70,000 $800

Lee Magness............. 2000 $120,000 $800
Chief Financial Officer 1999 $120,000 $800
and General Counsel 1998 $ 70,000 $800
</TABLE>
--------
(1) The named executive officers did not receive perquisites or other benefits
valued in excess of 10% of the total reported annual salary and bonus.
(2) For the 2000 compensation, the above captioned officers received $44,334
each and the remaining total for the group of $227,000 was accrued. For
1999 compensation the above captioned officers received $59,000 each and
the remaining total for the group of $183,000 was accrued. Since inception
of the company in 1996, the company has accrued and not paid salaries of
$500,000 plus vacation pay of $156,923.
(3) Although entitled to this compensation, Messrs. White, Finn and Magness
have not drawn this compensation and it has not accrued.

27
<PAGE>

Employment Agreements

In August 1996, Messrs. White, Finn and Magness entered into five year
written employment contracts that provide for a base salary of $30,000 for the
first year, $70,000 for the second year, and $120,000 annually for years three
through five. In addition, these employment agreements entitle each of these
individuals to an annual bonus of 1% of the company's earnings before income
taxes and depreciation in excess of $5,000,000. In addition to salary,
beginning in August 1998, Messrs. White, Finn and Magness were to each receive
$600 per month as a car allowance and $200 per month for miscellaneous
expenses. If the company terminates an employment contract with cause, such
executive will not engage in certain activities in competition with the company
for a period of six months following such termination. The company believes the
non-compete covenants comply with state law, however, the company can provide
you no assurances that a state court may determine not to enforce or only
partially enforce such covenants.

Stock Options

In August 1998, the Board of Directors and stockholders adopted a stock
option plan under which 500,000 shares of Common Stock have been reserved for
issuance. In May 2000, the Board of Directors amended the stock option plan to
increase the total reserved shares of Common Stock from 500,000 to 2,000,000.
As of the date of hereof, options to purchase 735,000 shares of company Common
Stock have been granted pursuant to the plan. The company does not have a
defined benefit plan or any retirement or long-term incentive plans.

ITEM 11. Security Ownership of Certain Beneficial Owners and Management

The following table presents certain information regarding the beneficial
ownership of all shares of the company Common Stock by (i) each person who owns
beneficially more than five percent of the outstanding shares of Common Stock,
(ii) each director of the company, (iii) each named executive officer, and (iv)
all directors and officers as a group.

<TABLE>
<CAPTION>
Shares Percentage
Beneficially of Voting
Name of Beneficial Owner(1) Owned Power
--------------------------- ------------ ----------
<S> <C> <C>
Harry L. White...................................... 4,488,000 24.6%
Richard J. Finn..................................... 4,488,000 24.6%
Lee A. Magness...................................... 4,207,500 23.0%
Michael J. Minihan.................................. -- --
All directors and officer as a group (4 persons).... 13,183,500 72.2%
</TABLE>
--------
(1) The business address of each individual is the same as the address of the
company's principal executive offices.

ITEM 12. Certain Relationships and Related Transactions.

In May 1999, Mr. White resigned as a director of PinkMonkey.com.

In June 1999, Mr. Magness loaned the company $250,000 pursuant to a one-year
promissory note which bears interest at 10% per annum. The company repaid the
note in August 1999.

In July 1999, the company acquired certain assets and the client base of
Axis Technologies, Inc., a web site provider, for consideration of 500,000
shares of company Common Stock and up to 125,000 shares of additional Common
Stock provided certain net revenue goals or net cash flows are obtained. In
connection with the acquisition, Michael J. Minihan joined the board of
directors. This transaction was not deemed an acquisition of a "Business",
accordingly; separate historical and pro forma financial statements were not
filed with the SEC.

In September 1999, the company acquired all of the assets of Team
Productions, Inc. from an employee in exchange for 30,000 shares of company
Common Stock.

28
<PAGE>

During the fiscal year 1999, Messrs. White, Finn and Magness loaned the
company $13,784, $11,393, and $126,723 respectively. These loans bore interest
at the rate of 10% per annum and remain outstanding as of July 31, 2000.

ITEM 13. Exhibits and Report on Form 8-K

<TABLE>
<CAPTION>
Exhibit
No. Identification of Exhibit
------- -------------------------
<C> <S>
3.1(2) Amended and Restated Articles of Incorporation

3.2(2) Articles of Amendment to the Articles of Incorporation

3.3(2) By-Laws of the company

3.4(2) Articles of Correction to the Amended and Restated Articles of
Incorporation

3.5(2) Articles of Correction to the Articles of Amendment to the Articles
of Incorporation

4.1(2) Form of Specimen of Common Stock

10.1(2) Letter Agreement between the company and PinkMonkey.com, Inc.

10.2(2) Software License and Marketing Agreement between the company and
Websource Media, L.L.C.

10.3(2) Software Reseller Agreement between the company and Harry Bauge

10.4(2) Letter Agreement between the company and Harry Bauge

10.5(2) Agreement between the company and NetTrade Online, L.L.C.

10.6(2) Employment Agreement between the company and Harry White

10.7(2) Employment Agreement between the company and Richard Finn

10.8(2) Employment Agreement between the company and Lee Magness

10.9(2) Lease Agreement

10.10(1) Beijing Artists Online Co. Ltd. Co-operation Agreement

10.11(1) Software Reseller Agreement between the company and Brazil Interweb
Design

10.12(1) Website/Banner Ad Development agreement between the company and
Hearst Newspapers Partnership, L.P.

10.13(1) Website Development Agreement between the company and eRealty.com

10.14(1) Website Development Agreement between the company and eHome.com

21.1(1) List of Subsidiaries

27.1(1) Financial Data Schedule
</TABLE>
--------
(1) Filed herewith.
(2) Filed as an Exhibit to the company's registration statement on Form SB-2
(File No. 67871) on June 15, 1999, and herein incorporated by reference.

On November 11, 2000, the company filed 8-K report concerning change of
Auditors.

29
<PAGE>

SIGNATURES

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

THE COMPANY INTERWEB DESIGN, INC.

/s/ Harry L. White
By:__________________________________
Harry L. White
President and Chief Executive
Officer

DATE: November 14, 2000

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

<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----

<S> <C> <C>
/s/ Harry L. White President and Chief November 14, 2000
______________________________________ Executive Officer
Harry L. White

/s/ Richard J. Finn Chief Technical Officer, November 14, 2000
______________________________________ and Director
Richard J. Finn

/s/ Lee A. Magness Chief Financial Officer, November 14, 2000
______________________________________ and Director
Lee A. Magness
</TABLE>

30
<PAGE>

INDEPENDENT AUDITORS REPORT

To the Board of Directors and Stockholders
Houston Interweb Design, Inc.
Houston, Texas

We have audited the accompanying balance sheet of Houston InterWeb Design,
Inc. as of July 31, 2000 and the related statements of income, changes in
stockholders' equity (deficit), 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.

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 overall accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Houston Interweb Design,
Inc. as of July 31, 2000, and the results of its operations and its cash flows
for the year then ended in conformity with generally accepted accounting
principles.

Malone & Bailey, PLLC
Houston, Texas

October 31, 2000

F-1
<PAGE>

INDEPENDENT AUDITORS REPORT

To the Board of Directors and Stockholders
Houston Interweb Design, Inc.
Houston, Texas

We have audited the accompanying statements of income, changes in
stockholders' equity (deficit) and cash flows of Houston InterWeb Design, Inc.
for the year ended July 31, 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.

In our opinion, the financial statements of Houston Interweb Design, Inc.
referred to above present fairly, in all material respects, the results of its
operations and its cash flows for the year ended July 31, 1999 in conformity
with generally accepted accounting principles.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As shown in the financial statements,
the Company incurred a net loss of $1,109,898 for 1999 and has incurred
substantial net losses since inception. Negative cash flows from operating
activities were $967,752 for the year ended July 31, 1999. These factors, and
the others discussed in Note 2, raise substantial about the Company's ability
to continue as a going concern. The 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.

Mann Frankfort Stein & Lipp, P.C.

Houston, Texas
September 20, 1999

F-2
<PAGE>

HOUSTON INTERWEB DESIGN, INC.

BALANCE SHEET
July 31, 2000

<TABLE>
<S> <C>
Current Assets
Cash $ 18,655
Accounts receivable--trade...................................... 54,569
Other........................................................... 725
-----------
Total Current Assets.......................................... 73,950
-----------
Furniture and computer equipment, net of accumulated depreciation
of $28,760....................................................... 56,552
Goodwill, net of accumulated amortization of $101,840............. 261,250
Other............................................................. 707
-----------
Total Assets.................................................. $ 392,459
===========
Current Liabilities
Accounts payable................................................ $ 266,788
Accrued expenses................................................ 274,858
Due to affiliates............................................... 838,822
-----------
Total Current Liabilities..................................... 1,380,468
-----------
Stockholders' Equity
Preferred stock, $.01 par value, 5,000,000 shares authorized, no
shares issued or outstanding Common stock, no par value,
50,000,000 shares authorized, 18,265,050 shares issued and
outstanding.................................................... 4,830,537
Subscription receivable......................................... (7,050)
Retained (deficit).............................................. (5,811,496)
-----------
Total Stockholders' Equity (Deficit).......................... (988,009)
-----------
Total Liabilities and Stockholders' Equity.................... $ 392,459
===========
</TABLE>

See accompanying Summary of Accounting Policies and Notes to Financial
Statements.

F-3
<PAGE>

HOUSTON INTERWEB DESIGN, INC.

INCOME STATEMENTS
For the Years Ended July 31, 2000 and 1999

<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
Revenues
Non-affiliates..................................... $ 772,207 $ 422,947
Affiliates......................................... 305,029 571,929
----------- -----------
Total Revenues................................... 1,077,236 994,876
----------- -----------
Operating Expenses
Cost of revenues................................... 1,046,121 630,132
Selling............................................ 214,341 93,284
General and administrative......................... 1,687,931 1,048,227
Depreciation and amortization...................... 126,893 9,916
Bad debts.......................................... 302,088 318,762
Interest (income).................................. (1,425) (1,174)
Interest expense................................... 3,095 8,125
----------- -----------
Total Operating Expenses......................... 3,378,564 2,107,272
----------- -----------
Writedown of investments............................. 1,553,843
Total Expenses................................... 4,932,407 2,107,272
Net (Loss) before Income Taxes....................... (3,855,171) (1,112,396)
Income tax (benefit)................................. (2,498)
----------- -----------
Net (Loss)........................................... $(3,855,171) $(1,109,898)
=========== ===========
Income (loss) per common share....................... $ (.22) $ (.07)
Weighted average shares outstanding.................. 17,827,425 16,181,595
</TABLE>

See accompanying Summary of Accounting Policies and Notes to Financial
Statements.

F-4
<PAGE>

HOUSTON INTERWEB DESIGN, INC.

STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
Years Ended July 31, 2000 and 1999

<TABLE>
<CAPTION>
Common Stock
--------------------- Subscrip. Accumulated
Shares Amount Receivable (Deficit) Totals
---------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Balances,
July 31, 1998......... 16,029,000 $ 754,000 $ (846,427) $ (92,427)
Shares issued for
--cash................ 764,133 904,200 $(7,050) 897,150
--services............ 96,667 145,000 145,000
Acquisition of Axis..... 500,000 500,000 500,000
Net loss................ (1,109,898) (1,109,898)
---------- ---------- ------- ----------- ----------
Balances,
July 31, 1999......... 17,389,800 2,303,200 (7,050) (1,956,325) 339,825
---------- ---------- ------- ----------- ----------
Shares issued for
--cash................ 341,250 730,625 730,625
--services............ 254,000 487,375 487,375
Less:
unearned portion...... (56,663) (56,663)
Acquisition of
Beijing Artists....... 200,000 1,200,000 1,200,000
Team Productions...... 30,000 60,000 60,000
Brazil Interweb....... 50,000 106,000 106,000
Net loss................ (3,855,171) (3,855,171)
---------- ---------- ------- ----------- ----------
Balances,
July 31, 2000......... 18,265,050 $4,830,537 $(7,050) $(5,811,496) $( 988,009)
========== ========== ======= =========== ==========
</TABLE>

See accompanying Summary of Accounting Policies and Notes to Financial
Statements.

F-5
<PAGE>

HOUSTON INTERWEB DESIGN, INC.

STATEMENTS OF CASH FLOWS
For the Years Ended July 31, 2000 and 1999

<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
Cash Flows from Operating Activities
Net (loss)......................................... $(3,855,171) $(1,109,898)
Adjustments to reconcile net loss to net cash
provided by operating activities
Bad debts expense................................ 301,608 304,519
Depreciation and amortization.................... 126,893 9,916
Writedown in asset valuation..................... 1,553,843
Loss on disposal of fixed assets................. 1,385
Deferred income tax expense (benefit)............ (2,498)
Common stock issued for services................. 430,712 145,000
Changes in:
Cash held in escrow.............................. 250,000 (250,000)
Accounts receivable--trade....................... (230,123) (369,562)
Accounts receivable--affiliate................... 3,760 51,499
Other current assets............................. 1,896 7,417
Accounts payable................................. 152,616 126,461
Accrued expenses................................. 209,769 (67,144)
Customer deposits................................ -- 2,153
Due to affiliates................................ 383,923 183,000
----------- -----------
Cash Flows (Used by) Operating Activities........ (670,274) (967,752)
----------- -----------
Cash Flows from Investing Activities
Purchase of furniture and computer equipment....... (34,736) (5,954)
Capitalized software development costs............. (101,973) --
Investment in affiliate............................ (100) --
----------- -----------
Cash Flows (Used by) Investing Activities........ (136,709) (6,054)
----------- -----------
Cash Flows from Financing Activities
Sale of common stock............................... 730,625 897,150
Net proceeds from (payments to) affiliates......... (68,101) 250,000
Net change in bank line of credit.................. -- (29,218)
----------- -----------
Cash Flows Provided by Financing Activities...... 662,524 1,117,932
----------- -----------
Net increase in cash................................. (144,459) 144,126
Cash Balance--Beginning of Year...................... 163,114 18,988
----------- -----------
--End of Year............................ $ 18,655 $ 163,114
=========== ===========

SUPPLEMENTAL DISCLOSURES
Interest paid...................................... $ 2,084 $ 0
Income taxes paid.................................. 0 0

NON-CASH DISCLOSURES
Issuance of 500,000 common shares to acquire Axis
Technologies Corporation.......................... 500,000
</TABLE>

See accompanying Summary of Accounting Policies and Notes to Financial
Statements.

F-6
<PAGE>

HOUSTON INTERWEB DESIGN, INC.

NOTES TO FINANCIAL STATEMENTS

NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Business. Houston Interweb Design, Inc. ("Company") was formed in
August 1996 as a Texas corporation to design and create Internet web sites for
customers. The Company uses internally-developed technology for this
development, which it licenses to customers, to ensure that these web sites are
available to the Internet user irrespective of the search engine used.

Estimates. In preparing financial statements, management makes estimates and
assumptions that affect the reported amounts of assets and liabilities in the
balance sheet and revenue and expenses in the income statement. Actual results
could differ from those estimates.

Cash and Cash Equivalents include highly liquid investments, which are
readily convertible into cash and have original maturities of three months or
less.

Revenue is recognized when hardware, software are delivered or as services
are performed. Bad debts are recognized when collection is deemed doubtful by
management. Web site and software usage royalty income is recognized as it is
earned according to each royalty agreement.

Furniture and computer equipment are carried at cost.

Depreciation is determined using the straight-line method based over their
estimated useful lives of 3 to 5 years.

Software development costs are capitalized and amortized over the estimated
useful lives of the software, not to exceed five years. Under the provisions of
SOP 98-1, these costs include those incurred after feasibility is determined
and until the project is substantially completed. Software maintenance is
expensed as incurred.

Deferred income taxes are determined on the liability method. Timing
differences between net income and taxable income as reported result mostly
from depreciation timing differences.

Goodwill represents the excess of the purchase price over the fair value of
acquired companies and is being amortized on a straight-line basis over 5 years
in each case. During the fourth quarter of 2000, a portion of the balance of
goodwill associated with the Axis Technologies Corporation acquisition was
written off in accordance with Statement of Financial Accounting Standard 121.
Under this standard, the Company evaluates any possible impairment of long-
lived assets using estimates of discounted future cash flows.

Advertising costs are expensed as incurred.

Certain reclassifications were made to the prior year's financial statements
to conform to the classifications used in the current year.

NOTE 2--GOING CONCERN

The Company's financial statements have been prepared assuming the Company
will continue as a going concern. The Company experienced recurring net
(losses) of $(3.8 million), $(1.1 million) and $(.8 million) and a net cash
flow operating (deficit) surplus of $(670,000), $(968,000) and $3,000 in 2000,
1999 and 1998, respectively. The predecessor auditors concluded that the 1999
and 1998 losses and cash deficits raised doubts about the Company's ability to
generate sufficient cash flows to meet its obligations on a timely basis and
ultimately attain profitable operations.

F-7
<PAGE>

HOUSTON INTERWEB DESIGN, INC.

NOTES TO FINANCIAL STATEMENTS--(Continued)

Management, who collectively own 72% of the outstanding stock of the
Company, have represented they will continue to fund these operating deficits.
Based on this representation, no going concern qualification is included in the
auditor's report for the current year.

NOTE 3--SOFTWARE DEVELOPMENT COSTS

In the current year, the Company entered into an agreement with two
individuals to form a company named Cyber-pitch.com, Inc., with the Company
retaining 50% ownership in exchange for contributing the development of
interactive sports, travel and entertainment cards. These cards were developed
and development costs of $101,973 were capitalized.

On October 27, 2000, the Company amended its agreement with these two
individuals to acquire their 50% interest in exchange for $150,000 to be paid
over a two-year period beginning when production commences, if any, plus
warrants to purchase 1,000,000 shares of Company stock at the market value when
production commences, if any, plus a $.10 per card royalty for up to 10 million
cards. There is currently no immediate plans to begin production.

Because the present value of the amounts payable could exceed the $101,973
carrying value of the Company's capitalized investment in the project, the
value has been written down to $0.

NOTE 4--MUSIC PORTAL WEBSITE

In January 1999, the Company agreed to build a music portal web site for
AMP3.com, Inc. ("AMP3"), a privately-held company offering free music downloads
from the Internet and sharing revenues with the artists. The site was built and
running by February 1999. The Company received a 10% interest in AMP3 and an
agreement to pay the current value of services performed by the Company. As of
July 31, 1999, the Company had billed $301,301 and had been paid $64,141. The
balance remaining of $237,160 was charged off as uncollectible in that year.

In November 1999, the Company sued AMP3 for non-payment of the prior
$237,160 plus $258,401 billed since July 31, 1999. During settlement
negotiations, another 10% of AMP3 was promised in exchange for re-launching the
web site. The Company performed but has not received the shares. AMP3 is
currently not operating and is believed insolvent, some assets are in the
physical possession of the Company, and the Company is attempting to purchase
the remaining assets and plans to re-launch the site as soon as possible.

The $258,401 has been charged to bad debts in the current year, and the web
site is not valued for financial reporting purposes.

NOTE 5--CHINA JOINT VENTURE

In February 2000, the Company agreed to participate in a venture to create
and operate a web site in mainland China (PRC) for music distribution and
entertainment. The agreement called for the Company to receive a 33% interest
in the venture, named Beijing Artists Online, in exchange for the technical web
site creation and operation knowledge and about $360,000 in cash. A Hong Kong
investment group is to receive a 59% interest for agreeing to contribute about
$500,000. The remaining 8% is to be retained by the Chinese government in
exchange for operating licenses and permission.

In May 2000, the Company revised the agreement to contribute 200,000 shares
of Company stock in lieu of the $360,000. The stock was valued at the then
current trading price of $6 per share. The Hong Kong group has contributed a
portion of its promised amount. The Beijing office has opened but operations
have not yet started.

F-8
<PAGE>

HOUSTON INTERWEB DESIGN, INC.

NOTES TO FINANCIAL STATEMENTS--(Continued)

Under the equity method of accounting for investments, the valuation of the
initial carrying value is $264,000. However, because of substantial business
uncertainty, the entire $1,200,000 initial purchase price is written off in the
current year.

NOTE 6--RELATED PARTY TRANSACTIONS

The three principal shareholders are all full-time employees of the Company,
with 5-year employment contracts guaranteeing an annual salary of $120,000 per
year for the past 3 years. None of the three principals has ever drawn his full
salary, so the unpaid difference is accrued as unpaid salary.

In addition, these three employment contracts grant five weeks of vacation
each per year. Only a portion of this vacation has been taken by each during
these past three years. Company vacation policy is to accrue unpaid vacation
pay. As of July 31, 2000 and 1999, the Company has accrued $178,000 and
$150,000, respectively, of which $150,000 and $120,000 is due to the three
senior officers. The monies due the senior officers for both unpaid salaries
and unpaid vacation pay are included in the caption "Due to Affiliates" as of
July 31, 2000.

All sales to any entity in which the Company owns 20% or more are included
under the caption "Revenues--Affiliates" on the income statement. For 2000 and
1999, these include the AMP3 billed revenues.

NOTE 7--INCOME TAXES

The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities are as follows:

<TABLE>
<CAPTION>
2000 1999
---------- --------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforward................... $1,639,395 $559,319
Cash to accrual difference........................ 220,818 91,392
Less: valuation allowance........................... (1,860,213) (649,464)
---------- --------
Total deferred tax asset............................ 0 1,247
---------- --------
Total deferred tax asset $ 0 $ 1,247
---------- --------
Deferred tax liabilities:
Tax over book depreciation........................ 0 (1,247)
---------- --------
Net deferred tax asset.............................. $ 0 $ 0
========== ========
</TABLE>

The Company has net operating loss carryforwards of approximately $4,820,000
as of July 31, 2000, which expire through the year 2020.

The difference between the reported income tax expense (benefit) and the
income tax expense (benefit) computed by multiplying the loss before income
taxes by the federal statutory income tax rate is as follows:

<TABLE>
<CAPTION>
2000 1999
----------- ---------
<S> <C> <C>
Current tax benefit computed at federal
statutory tax rate............................ $(1,308,409) $(378,215)
Change in valuation allowance.................. 1,308,409 359,091
Other.......................................... 16,626
----------- ---------
Total income tax expense (benefit)......... $ 0 $ (2,498)
=========== =========
</TABLE>

F-9
<PAGE>

HOUSTON INTERWEB DESIGN, INC.

NOTES TO FINANCIAL STATEMENTS--(Continued)

NOTE 8--OPERATING LEASE

The Company leases 9,867 square feet of office space in Houston, Texas under
a lease which expires October 31, 2001. The Company's minimum rental
commitments under this lease are $141,129 for 2001 and $35,282 for 2002. Total
rent expense for 2000 and 1999 was $148,462 and $73,626, respectively.

NOTE 9--STOCKHOLDERS' EQUITY

On August 19, 1998, the Company effected a stock split of 165 for 1. All
references to shares issued have been restated for this split beginning July
31, 1998.

On September 2, 1998, the company amended its articles of incorporation to
increase its authorized capital to 50,000,000 common shares of no par value,
and 5,000,000 preferred shares with $.01 par value. No preferred shares have
been issued to date. All references herein have been restated to reflect the
amended amounts.

NOTE 10--CREDIT RISK CONCENTRATIONS

The Company extends credit to its customers on a regular basis. A
significant portion of Company's receivables are from companies in the internet
industry. Declines in this industry may make collection of these receivables
doubtful.

NOTE 11--MAJOR CUSTOMERS AND VENDORS

During 2000 and 1999, revenues were recorded on sales to AMP3 of $301,301
and $258,401, or 30% and 24% of total revenues for those years, respectively.
Additionally, sales to SourcePoint Capital ($168,759 or 17%), PGI International
($175,463 or 17%) and Pinkmonkey.com, Inc. ($112,305 or 11%) occurred in 1999.
No other customers and no vendors accounted for 10% or more of sales or
purchases during 2000 or 1999.

NOTE 12--STOCK OPTIONS AND WARRANTS

Beginning at inception, the Company adopted the disclosure requirements of
FASB Statement 123, Accounting for Stock Based Compensation Plans. The
Company's 1998 Incentive Stock Option Plan provides for the grant of incentive
stock options qualifying under the Internal Revenue Code to officers and other
employees of the Company and the grant of non-qualified options to directors,
employees and consultants of the Company. In addition, the Company issues stock
warrants from time to time to employees, consultants, stockholders and
creditors as additional financial incentives. The plans and warrants issuances
are administered by the Board of Directors of the Company, who have substantial
discretion to determine which persons, amounts, time, price, exercise terms,
and restrictions, if any. Both options and warrants carry certain anti-dilution
provisions concerning stock dividends or splits, mergers and reorganizations.
Options differ from warrants in that the option awards are non-transferable. In
contrast, all warrants issued are assignable.

The Company uses the intrinsic value method of calculating compensation
expense, as described and recommended by APB Opinion 25, and allowed by FASB
Statement 123. During the years ended July 31, 2000 and 1999, no compensation
expense was recognized for the issuance of these options and warrants, because
no option prices were below market prices at the date of grant. In addition,
options and no warrants have been exercised during these periods. As of July
31, 2000, all outstanding warrants are payments for consulting and professional
services. The options are subject to 3-year vesting requirements and expire 5
and 10 years from their dates of grant.

F-10
<PAGE>

HOUSTON INTERWEB DESIGN, INC.

NOTES TO FINANCIAL STATEMENTS--(Continued)

Summary information on each are as follows:

<TABLE>
<CAPTION>
Weighted Average Weighted Average
Options Share Price Warrants Share Price
------- ---------------- --------- ----------------
<S> <C> <C> <C> <C>
Year ended July 31, 1999:
Granted and
outstanding........... 288,000 $1.64 412,500 $1.03
Year ended July 31, 2000:
Granted................ 501,000 .71 1,980,000 2.11
Exercised.............. ( 3,750) 1.50
Forfeited.............. (50,250) 1.50
------- ----- --------- -----
Outstanding at July 31,
2000.................... 735,000 $1.05 2,392,500 $1.93
======= ===== ========= =====
</TABLE>

Additional disclosures as of July 31, 2000 are:

<TABLE>
<CAPTION>
Options Options
at at
$.69-$.76 $1.50-$2
--------- --------
<S> <C> <C>
Total options
Number of shares........................................... 462,000 273,000
Remaining life............................................. 9 years 8 years
Currently exercisable options
Number of shares........................................... 76,900 132,600
</TABLE>

<TABLE>
<CAPTION>
Warrants
at
$.69-$2
---------
<S> <C>
Total warrants
Number of shares.................................................... 2,392,500
Remaining life...................................................... 2 years
Currently exercisable warrants
Number of shares.................................................... 2,392,500
</TABLE>

Had compensation cost for the Company's stock-based compensation plan been
determined based on the fair value at the grant dates for awards under those
plans consistent with the Black-Scholes option-pricing model suggested by FASB
Statement 123, the Company's net losses and loss per share would have been
increased to the pro forma amount indicated below:

<TABLE>
<CAPTION>
2000 1999
------- ----
(in
thousands)
<S> <C> <C>
Net loss
As reported..................................................... $(3,855) n/a
Pro forma....................................................... (3,999)
Net loss per share
As reported..................................................... $ (.22)
Pro forma....................................................... (.22)
</TABLE>

Variables used in the Black-Scholes option-pricing model include (1) 5.5%
risk-free interest rate, (2) expected option life is the actual remaining life
of the options as of each year end, (3) expected volatility is the actual
historical stock price fluctuation volatility and (4) zero expected dividends.

The Company's stock began trading on a stock exchange on January 31, 2000.
No calculation of the pro forma net loss was made for the prior year.

F-11