NETGATEWAY INC, 424B4, 1999-11-19

NETGATEWAY INC
424B4, 1999-11-19
COMPUTER INTEGRATED SYSTEMS DESIGN

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<PAGE>
PROSPECTUS
Registration No.333-79751
Filed Pursuant to Rule 424(b)4

3,300,000 SHARES

[LOGO]
NETGATEWAY, INC.

COMMON STOCK

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

We are a provider of turn-key electronic commerce services designed to
enable clients to extend their business to the Internet. Our Internet Commerce
Center provides our clients with a variety of features ranging from simple
Internet storefronts to complex systems designed to enable them to conduct
business-to-business electronic commerce by means of the Internet.

Through November 17, 1999, our common stock traded on the OTC Bulletin Board
under the symbol "NGWY." The common stock has been approved to be quoted on the
Nasdaq National Market under the symbol "NGWY." On November 17, 1999, the last
reported sale price of our common stock on the OTC Bulletin Board was $9.00.

INVESTING IN OUR COMMON STOCK INVOLVES RISKS WHICH ARE DESCRIBED IN THE
"RISK FACTORS" SECTION BEGINNING ON PAGE 10 OF THIS PROSPECTUS.

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

NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

<TABLE>
<CAPTION>
PER SHARE TOTAL
<S> <C> <C>
Public Offering Price................................. $7.00 $23,100,000
Underwriting Discounts and Commissions................ $0.49 $1,617,000
Proceeds, before expenses, to Netgateway.............. $6.51 $21,483,000
</TABLE>

The underwriters may, under certain circumstances, for 45 days after the
date of this prospectus, purchase up to an additional 495,000 shares of common
stock from us at the public offering price, less underwriting discounts and
commissions.

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

CRUTTENDEN ROTH INCORPORATED

PENNSYLVANIA MERCHANT GROUP, LTD.

THE DATE OF THIS PROSPECTUS IS NOVEMBER 18, 1999
<PAGE>
INSIDE FRONT COVER PAGE 1

PICTURE OF LIGHTSWITCH FOLLOWED BY "SWITCH ON," PICTURE OF ELECTRICAL PLUG
FOLLOWED BY "PLUG INTO," PICTURE OF KEY FOLLOWED BY "UNLOCK," AND PICTURE OF
FAUCET FOLLOWED BY "TURN ON," ALL FOLLOWED BY ECOMMERCE . . ."

INSIDE COVER PAGE 2

PICTURES OF WEB PAGES OF CUSTOMERS OF NETGATEWAY AND CUSTOMER LOGOS.

INSIDE COVER PAGE 3

MATRIX OF TRANSACTION VOLUME AND BUSINESS RULE COMPLEXITY DESCRIBING
NETGATEWAY'S INTERNET COMMERCE CENTER WITH STATEMENT ". . . THE INTERNET
CONVENTION CENTER-TM- (ICC) COVERS THE ENTIRE SPECTRUM OF ECOMMERCE." FOLLOWED
BY LOGOS OF CUSTOMERS OF NETGATEWAY.
<PAGE>
TABLE OF CONTENTS

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PAGE
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Prospectus Summary......................................................................................... 3
Risk Factors............................................................................................... 10
Use of Proceeds............................................................................................ 25
Price Range of Common Stock................................................................................ 27
Dividend Policy............................................................................................ 27
Capitalization............................................................................................. 28
Dilution................................................................................................... 29
Selected Financial Data.................................................................................... 31
Management's Discussion and Analysis of Financial Condition and Results of Operations...................... 33
Business................................................................................................... 39
Management................................................................................................. 53
Principal Stockholders..................................................................................... 67
Related Party Transactions................................................................................. 69
Description of Securities.................................................................................. 71
Shares Eligible for Future Sale............................................................................ 73
Underwriting............................................................................................... 74
Legal Matters.............................................................................................. 77
Experts.................................................................................................... 78
Additional Information..................................................................................... 78
Index to Financial Statements.............................................................................. F-1
</TABLE>
<PAGE>
PROSPECTUS SUMMARY

THE FOLLOWING SUMMARY HIGHLIGHTS SELECTED INFORMATION FROM THIS PROSPECTUS
AND MAY NOT CONTAIN ALL THE INFORMATION THAT IS IMPORTANT TO YOU. TO UNDERSTAND
OUR BUSINESS AND THIS OFFERING FULLY, YOU SHOULD READ THIS ENTIRE PROSPECTUS
CAREFULLY, INCLUDING THE FINANCIAL STATEMENTS AND THE RELATED NOTES BEGINNING ON
PAGE F-1. WHEN WE REFER IN THIS PROSPECTUS TO "NETGATEWAY," "THE COMPANY," "WE,"
"OUR," AND "US," WE MEAN NETGATEWAY, INC., A DELAWARE CORPORATION, TOGETHER WITH
OUR SUBSIDIARIES AND THEIR RESPECTIVE PREDECESSORS. THIS PROSPECTUS CONTAINS
FORWARD-LOOKING STATEMENTS AND INFORMATION RELATING TO NETGATEWAY. SEE
"CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS" ON PAGE 24.

NETGATEWAY

OUR BUSINESS

We provide turn-key electronic commerce services designed to enable clients
to extend their business to the Internet to conduct commercial transactions
between business enterprises. The hub of our electronic commerce solution is our
proprietary Internet Commerce Center, which consists of the hardware,
proprietary and licensed software, and the related technical services necessary
for our clients to transact electronic commerce, known in our industry as
eCommerce. We also design and build custom interfaces, or SPOKES, to connect
business clients to the ICC. Our ICC provides a continuum of increasingly
sophisticated and technologically complex solutions, ranging from a simple
Internet storefront advertising their products and taking orders through e-mail
to a highly complex system of private Websites, known as EXTRANETS. These
extranets are accessible only by clients and selected outsiders, such as their
customers, suppliers, and vendors, to interact and transact business-to-business
electronic commerce.

In July 1999, we formed CableCommerce, a new operating division which
focuses upon providing electronic commerce services and solutions to cable
television operators. Typically, CableCommerce will design, develop, host, and
manage branded Internet-based shopping malls in the markets served by the cable
television system operator featuring businesses local to each of these markets.
In addition, CableCommerce offers local and regional classified advertisements,
community calendars, and coupons, provides mall content, trains cable television
system sales people, and offers storefront creation and maintenance services to
the cable television system's subscribers. To date, we have entered into
contracts to provide these services with MediaOne, CableOne, Wireless One, and
Frontiervision Media Services. See "Prospectus Summary--Significant Strategic
Relationships."

OUR SERVICES

Our services currently include

- Web site development and design, including the development of electronic
storefronts for the conduct of electronic commerce on the Internet,

- Internet-based "shopping mall" and secure client extranet development and
design,

- transaction processing and clearing through standardized order formats and
commercial terms,

- data warehousing and transaction reporting,

- customer support services, and

- connectivity solutions.

We believe that our electronic commerce services have a number of advantages
over other currently available alternatives, in that:

- our customers do not invest in hardware, software, and staffing, but
rather connect to our existing hardware and software infrastructure, which
we believe is a highly economical method to obtain and maintain an
electronic commerce presence;

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- clients with existing Web sites can maintain their investment in the
creation of that presence while seamlessly adding electronic commerce
capabilities;

- because our infrastructure enables our customers to access a continuum of
sophisticated and technologically complex electronic commerce solutions,
we can offer incremental services to our clients through the activation of
additional portions of our proprietary software in response to client
growth or commercial requirements quickly and cost-effectively; and

- because our proprietary and other software resides only on our servers, we
can offer clients easy access to additional functionality on a test or
temporary basis in order to permit our clients to try new or additional
services with their respective customers on their Web sites, and can
provide real time updates, patches, and fixes to software with no
additional effort by the client.

OUR MARKET

International Data Corp., an industry research firm, forecasts that the
market for Internet and electronic commerce services worldwide will grow from
$4.6 billion in 1997 to $43.7 billion by 2002. Forrester Research, another
technology industry research firm, estimates that the market for Internet and
electronic commerce services will grow from $5.4 billion in 1998 to
$32.7 billion by 2002. These projections represent a compound annual growth rate
of more than 55% over these periods.

As a result of the recent growth of electronic commerce and its acceptance
as a mainstream medium for commercial transactions, businesses are investing in
the strategic use of Internet solutions to transform their core business and
technology strategies. This, in turn, has created a significant and growing
demand for third-party Internet professional services and has resulted in a
proliferation of companies offering specialized solutions, such as connectivity,
transaction reporting, security, and Web site design to business customers. This
specialization has resulted in a fragmented market that often requires the
business customer to seek solutions from a number of different providers using
differing, or even contradictory, strategies, models, and designs.

SIGNIFICANT STRATEGIC RELATIONSHIPS

MEDIAONE. In July 1999, we entered into a strategic relationship with
MediaOne, a leading cable television operator, under which we will design,
develop, host, and manage Internet-based shopping malls in each of MediaOne's
markets. These markets currently consist of more than five million households.
These shopping malls will be branded with the MediaOne name, brand, and image,
will feature businesses local to each market, and will offer additional online
services, such as classified advertisements, local community events calendars,
and coupons. MediaOne has agreed to contribute commercial advertising time on
their cable systems in order to promote these malls. In connection with this
relationship, MediaOne acquired 50,000 shares of our common stock and warrants,
to purchase up to an aggregate of 200,000 shares of our common stock, at an
exercise price per share equal to the current market price on the date of the
vesting of these warrants. These warrants vest in four installments upon the
satisfaction of milestones relating to the scope of the launch of these
Internet-based shopping malls. See "Business--Clients and Strategic
Relationships."

CABLEONE. In August 1999, we entered into a cable reseller and mall
agreement with CableOne, a large cable television operator, under which we will
design and develop an Internet-based shopping mall, to be branded with the
CableOne name, brand, and image, and will offer our storefront creation and
maintenance services to CableOne's subscribers. We will also be responsible for
marketing support, including development of mall content, training of CableOne
sales people, and production of advertising to promote their services. CableOne
will promote this mall with a minimum of 400 cablecasts per broadcast month in
each broadcast market where the mall services are offered.

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to Wireless One's subscribers. We will also be responsible for marketing
support, including development of mall content, training of Wireless One sales
people, development of Wireless One branded collateral material and periodic
distribution and updating of advertising spots to promote their services.
Wireless One will promote this mall with a total of 1,000 30-second spots every
month jointly developed by us and Wireless One in all systems in which it is
able to provide advertising.

FRONTIERVISION MEDIA SERVICES. In July 1999, we entered into a reseller and
mall agreement with Frontiervision Media Services, a provider of cable
television programming services, pursuant to which we will design and develop an
Internet-based shopping mall, to be branded with the Frontiervision name, brand,
and image, and will offer our storefront creation and maintenance services to
Frontiervision's subscribers. We will also be responsible for marketing support,
including development of mall content, training of Frontiervision sales people,
and production of advertising spots to promote their services. Frontiervision
will promote this mall with a minimum of 1,000 cablecasts per broadcast month in
each broadcast market where the mall services are offered.

XOOM.COM. In March 1999, we entered into an agreement with XOOM.com (NMS:
XMCM), an electronic commerce Web portal with over 7.8 million members. Under
the terms of the agreement, we are the sole provider of a private labeled
version of XOOM.com's products and services which permit its members to create
and maintain storefronts on the Web through XOOM.com and are the sole provider
of electronic commerce processing services to XOOM.com's electronic commerce
customers. In addition, XOOM.com is reselling our electronic commerce services
and we are developing XOOM.com's Internet-based shopping mall located at
WWW.XOOMMEMBERSTORES.COM.

CB RICHARD ELLIS. In March 1999, we entered into an electronic commerce
services agreement with CB Richard Ellis (NYSE: CBG), one of the world's largest
building management and real estate services companies with over
12,000 properties under management and over $1 billion of revenue during 1998.
Under this agreement, we have been engaged to develop, manage, and service CB
Richard Ellis' Internet-based shopping mall and client extranet. This Web site
is designed to permit CB Richard Ellis personnel to conduct all of their
corporate materials purchasing, including computers and building and maintenance
supplies, and all global facilities management by means of the Internet. In
addition, CB Richard Ellis will be able to offer to the tenants in the buildings
they manage volume purchasing services on the Internet for a variety of office
products and supplies.

BUYSELLBID.COM In August 1999, we entered into a distributor mall and
reseller agreement with BuySellBid.com under which we will design and develop
Internet-based shopping malls for BuySellBid.com, which will in turn resell
and/or sublicense these Internet-based shopping mall packages, custom-branded,
to other resellers, or alternatively brand any such Internet-based mall with the
BuySellBid.com name, brand, and image, and offer our storefront creation and
maintenance services to its own subscribers. Under this agreement, we will be
responsible for marketing support, including development of mall content, and
training of BuySellBid.com sales people.

B2BSTORES.COM INC. In July 1999, we entered into an electronic commerce
services agreement with B2BStores.com Inc., a catalogue aggregator and
procurement company, under which we will develop, manage, and service an
internet commerce site for B2BStores.com which will use the internet commerce
site to offer and sell goods and services to businesses.

RELIANT INNOVATIONS. In June 1999, we entered into an electronic commerce
services agreement with Reliant Innovations, under which we will develop an
electronic commerce site that will enable Reliant Innovations to sell computer
products to clients who are members of specific associations with which Reliant
Innovations has formed a partnership. We expect to complete implementation of
this agreement by November 30, 1999.

BERGEN BRUNSWIG DRUG COMPANY. In October 1999, we entered into an internet
services agreement, with Bergen Brunswig Drug Company, a leading supplier of
pharmaceuticals, medical-surgical supplies

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and specialty healthcare products, under which we will design, develop, manage,
and service an Internet-based shopping mall to be branded with the Bergen
Brunswig name, brand, and image and which will contain on-line storefronts for
affiliated local pharmacies. We will also be responsible for training of Bergen
Brunswig personnel.

OTHER RESELLERS. We have also recently entered into reseller agreements,
under which the reseller offers our services to their customers, with FedPage (

www.fedpage.com), a division of Federal Business Council, Inc., the industry
leader in the production of on site federal technology shows, Ayrix
Technologies, OKC Webshopper, Country Wide Net, Hill Country Network, Encom
Industries, Epicycle Business Solutions, Integrated Systems Solutions, Found.com
Inc., Card Service International, and O.T.I. Cable Advertising.

OUR HISTORY AND STRUCTURE

We were incorporated under the laws of the State of Nevada on April 13, 1995
under the name Video Calling Card, Inc. and on June 2, 1998 acquired all of the
outstanding capital stock of Netgateway, a Nevada corporation (formerly,
eClassroom.com) in exchange for 5,900,000 shares of our common stock.
Simultaneously with this acquisition, we acquired the assets of Infobahn, LLC
d/b/a Digital Genesis, an electronic commerce applications developer, in
exchange for 400,000 shares of our common stock. As of January 15, 1999, through
our subsidiary StoresOnline.com, Ltd., an Alberta, Canada corporation, we
acquired Spartan Multimedia, Inc., an Internet storefront developer and
storefront service provider, in exchange for 371,429 shares of Class B common
stock of StoresOnline.com, which shares are exchangeable for an aggregate of
371,429 shares of our common stock. We were reincorporated under the laws of the
State of Delaware prior to the date of this prospectus. Our executive offices
are located at 300 Oceangate, 5th Floor, Long Beach, California 90802 and our
telephone number is (562) 308-0010. Our website is located at
www.netgateway.net. Information contained on our website is not part of this
prospectus.
------------------------

UNLESS OTHERWISE STATED, THE INFORMATION IN THIS PROSPECTUS DOES NOT GIVE
EFFECT TO

- THE REPRESENTATIVE'S WARRANTS OR THEIR EXERCISE,

- THE UNDERWRITERS' OVER-ALLOTMENT OPTION OR ITS EXERCISE,

- UP TO 8,000,000 SHARES OF COMMON STOCK RESERVED FOR ISSUANCE UPON THE
EXERCISE OF OPTIONS WHICH MAY BE GRANTED PURSUANT TO OUR EXISTING STOCK
OPTION PLANS, OF WHICH, OPTIONS EXERCISABLE FOR AN AGGREGATE OF 1,872,284
SHARES OF COMMON STOCK ARE OUTSTANDING ON THE DATE OF THIS PROSPECTUS, AND

- UP TO AN AGGREGATE OF 1,672,154 SHARES OF COMMON STOCK ISSUABLE UPON THE
EXERCISE OF OUTSTANDING WARRANTS OR UPON THE CONVERSION OF CONVERTIBLE
SECURITIES OR UPON THE EXCHANGE OF EXCHANGEABLE SECURITIES.

UNLESS OTHERWISE STATED, THE INFORMATION IN THIS PROSPECTUS REFLECTS

- ANY STOCK SPLITS TO DATE,

- OUR RECEIPT OF $522,500 OF NET PROCEEDS IN OCTOBER 1999 FROM OUR MAY
THROUGH SEPTEMBER 1999 PRIVATE PLACEMENT OF SECURITIES,

- THE ISSUANCE OF 270 SHARES OF COMMON STOCK IN NOVEMBER 1999 UPON THE
EXERCISE OF OUTSTANDING WARRANTS FOR $270,

- THE ISSUANCE OF 8,000 SHARES OF COMMON STOCK IN OCTOBER 1999 UPON THE
CONVERSION OF $20,000 OF CONVERTIBLE DEBENTURES,

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- THE ISSUANCE OF 962,444 SHARES OF COMMON STOCK UPON THE EXERCISE OF
OUTSTANDING WARRANTS ON A CASHLESS BASIS DURING OCTOBER 1999; AND

- THE ISSUANCE TO THREE OF OUR EXECUTIVE OFFICERS OF AN AGGREGATE OF
1,200,000 SHARES IN OCTOBER 1999 OF COMMON STOCK WHICH MAY BE FORFEITED BY
THESE INDIVIDUALS IF THEY SHOULD END THEIR EMPLOYMENT WITH US PRIOR TO
VESTING IN EXCHANGE FOR OUTSTANDING STOCK OPTIONS UNDER OUR EXISTING STOCK
OPTION PLANS.

PLEASE SEE "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--LIQUIDITY AND CAPITAL RESOURCES" AND
"MANAGEMENT--EXECUTIVE COMPENSATION."

THE OFFERING

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Common stock offered............ 3,300,000 shares

Common stock outstanding
immediately prior to this
offering...................... 12,495,768 shares(1)

Common stock outstanding
immediately following this
offering...................... 15,795,768 shares(1)

Use of proceeds................. We intend to use the net proceeds of this offering to
repay indebtedness, including $6,483,500 principal amount
of indebtedness which we incurred in our May through
September 1999 private placement, to increase marketing
and research and development, to acquire additional
capital equipment, and for general corporate and working
capital purposes, including possible acquisitions of, and
investment in, businesses and technologies. See "Use of
Proceeds."

Proposed Nasdaq National Market
trading symbol................ NGWY

OTC Bulletin Board trading
symbol........................ NGWY

Risk factors.................... An investment in our common stock is highly speculative
and involves a high degree of risk. You should read the
"Risk Factors" section beginning on page 10.
</TABLE>

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(1) Does not reflect the representative's warrants or their exercise, the
underwriters' over-allotment option or its exercise, up to 8,000,000 shares
of common stock reserved for issuance upon the exercise of options which may
be granted pursuant to our existing stock option plans, of which options
exercisable for an aggregate of 1,872,284 shares of common stock are
outstanding on the date of this prospectus, up to an aggregate of 1,183,725
shares of common stock issuable upon the exercise of outstanding warrants,
and up to 443,429 shares of common stock issuable upon the conversion of
convertible securities or upon the exchange of exchangeable securities.

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SUMMARY CONSOLIDATED FINANCIAL INFORMATION

The following selected statements of operations data for the period from our
inception on March 4, 1998 through June 30, 1998 and the year ended June 30,
1999 and the selected balance sheet data as of June 30, 1999 are derived from
our consolidated financial statements and related notes included elsewhere in
this prospectus audited by KPMG LLP, our independent auditors. The selected
financial data as of and for the three months ended September 30, 1999 is
unaudited. The selected statement of operations data for the period from our
inception on March 4, 1998 through June 30, 1998 includes the results of
operations of Infobahn Technologies, LLC (dba Digital Genesis) from June 2,
1998, its date of acquisition, and the pro forma selected statement of
operations data for such period includes the operations of Digital Genesis and
Spartan Multimedia as if they were acquired by us on March 4, 1998. The selected
statement of operations data for the year ended June 30, 1999 includes the
results of operations of Spartan Multimedia from January 15, 1999, its date of
acquisition, and the pro forma selected statement of operations data for such
period includes the operations of Spartan Multimedia as if it was acquired by us
on July 1, 1998. The pre-offering pro forma balance sheet data as of
September 30, 1999 is adjusted to reflect:

- our receipt of $522,500 of the net proceeds from our May through September
1999 private placement of securities received by us after September 30,
1999;

- the issuance of 270 shares of common stock in November 1999 upon the
exercise of outstanding warrants for $270;

- the issuance of 8,000 shares of common stock in October 1999 upon the
conversion of $20,000 of convertible debentures;

- the issuance of 962,444 shares of common stock upon the exercise of
outstanding warrants on a cashless basis during October 1999; and

- the issuance to three of our executives of an aggregate of 1,200,000
shares of common stock in October 1999 which may be forfeited by those
individuals if they should end their employment with us prior to vesting
in exchange for outstanding stock options under our stock option plans.

The post-offering pro forma, as adjusted balance sheet data as of September 30,
1999 is adjusted to reflect:

- our receipt of $522,500 of the net proceeds from our May through September
1999 private placement of securities received by us after September 30,
1999;

- the issuance of 270 shares of common stock in November 1999 upon the
exercise of outstanding warrants for $270;

- the issuance of 8,000 shares of common stock in October 1999 upon the
conversion of $20,000 of convertible debentures;

- the issuance of 962,444 shares of common stock upon the exercise of
outstanding warrants on a cashless basis during October 1999;

- the receipt of estimated net proceeds of approximately $19.6 million from
the sale of our common stock in this offering and the initial application
of these proceeds as described under "Use of Proceeds."

The following data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
our consolidated financial statements and the related notes appearing elsewhere
in this prospectus.

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<CAPTION>
PERIOD FROM
MARCH 4, 1998
(INCEPTION) THROUGH THREE MONTHS ENDED
SEPTEMBER 30, 1998 YEAR ENDED JUNE 30, 1999 SEPTEMBER 30,
------------------------- ------------------------------ -------------------------------
ACTUAL PRO FORMA ACTUAL PRO FORMA 1998 1999
----------- ----------- ------------ ------------ ------------ -------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
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STATEMENT OF OPERATIONS DATA:
Revenues...................... $ 2,800 $ 124,325 $ 143,426 $ 146,867 $ 22,470 $ 212,733
Total operating expenses...... 4,555,459 4,736,557 11,303,848 11,518,898 1,778,173 3,014,976
Interest expense, net......... 19,277 19,277 925,097 925,097 2,408 1,029,812
Loss before extraordinary
item........................ (4,571,936) (4,631,509) (12,140,248)(1) (12,351,857)(1) (1,812,840) (3,832,055)
Loss before extraordinary item
per weighted average common
share outstanding (basic and
diluted).................... (0.84) (0.81) (1.36)(1) (1.39)(1) (0.22) (0.38)
Weighted average common shares
outstanding (basic and
diluted).................... 5,416,242 5,721,327 8,912,041 8,912,041 8,280,801 10,017,740

CUMULATIVE PERIOD
FROM MARCH 4, 1998
(INCEPTION) THROUGH
SEPTEMBER 30,
1999(2)
-------------------

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STATEMENT OF OPERATIONS DATA:
Revenues...................... $ 358,959
Total operating expenses...... 18,874,283
Interest expense, net......... 1,974,186
Loss before extraordinary
item........................ (20,544,239)(1)
Loss before extraordinary item
per weighted average common
share outstanding (basic and
diluted).................... (2.26)(1)
Weighted average common shares
outstanding (basic and
diluted).................... 8,372,298
</TABLE>

<TABLE>
<CAPTION>
SEPTEMBER 30, 1999
---------------------------------------
JUNE 30, PRO FORMA,
------------------------- AS
1998 1999 ACTUAL PRO FORMA ADJUSTED
----------- ----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
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BALANCE SHEET DATA:
Current assets................................... $ 371,467 $ 1,379,326 $2,441,451 $2,962,899 $15,088,445
Total assets..................................... 871,552 3,458,350 4,617,114 5,138,562 17,264,108
Working capital (deficit)........................ (1,959,776) (1,545,420) (3,042,769) (2,658,821) 13,045,761
Shareholders' equity (deficit)................... (1,827,583) 545,291 (867,106) (483,158) 15,221,424
</TABLE>

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(1) Before extraordinary gain of $1,653,232 relating to extinguishment of
indebtedness of $0.19, $0.19, and $0.20 per weighted-average common shares
outstanding during the year ended June 30, 1999 actual, pro forma, and the
cumulative period from March 4, 1998 (inception) through September 30,
1999, respectively.

(2) The cumulative period statement of operations data is included in
accordance with applicable generally accepted accounting principles since
we are a development stage company.

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RISK FACTORS

AN INVESTMENT IN OUR COMMON STOCK IS HIGHLY SPECULATIVE, INVOLVES A HIGH
DEGREE OF RISK, AND SHOULD BE MADE ONLY BY INVESTORS WHO CAN AFFORD A COMPLETE
LOSS. YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS, TOGETHER WITH
THE OTHER INFORMATION IN THIS PROSPECTUS, INCLUDING OUR FINANCIAL STATEMENTS AND
THE RELATED NOTES, BEFORE YOU DECIDE TO BUY OUR COMMON STOCK.

RISKS SPECIFIC TO NETGATEWAY

WE HAVE HAD A DEFICIT IN STOCKHOLDERS' EQUITY; WE ANTICIPATE FUTURE LOSSES

We have incurred substantial losses since our inception and we anticipate
continuing to incur substantial losses for the foreseeable future. As of
June 30, 1999 and September 30, 1999, we had a working capital (deficit) of
$(1,545,420) and $(3,042,769), respectively, and shareholders' equity (deficit)
of $545,291 and $(867,106) at June 30, 1999 and September 30, 1999,
respectively. See our financial statements and the related notes. We generated
revenues of $143,426 for the year ended June 30, 1999 and $212,733 during the
three months ended September 30, 1999. For the year ended June 30, 1999 and the
three months ended September 30, 1999, we incurred net losses of $(10,487,016)
and $(3,832,055), respectively. We may never achieve profitability. In addition,
during the year ended June 30, 1999 and the three months ended September 30,
1999, we recorded negative cash flows from operations of $(4,552,912) and
$(2,156,738), respectively. To succeed, we must leverage our existing
relationships and develop new relationships to substantially increase our
revenue derived from more comprehensive electronic commerce services. We have
expended and will continue to expend significant resources to build our internal
systems, to grow our infrastructure, to add additional participating companies
and employees, and to establish access to the ICC platform for participating
companies, directly and as resellers. These development expenses must be
incurred well in advance of the recognition of revenue. Under generally accepted
accounting principles during our fiscal year ended June 30, 1999 and the three
months ended September 30, 1999, we recognized revenue only upon completion of a
customer transaction through the ICC. This required the realization of expenses
in advance of associated related revenue. Our performance will depend in large
part upon our ability to estimate accurately these resource requirements and the
revenues generated by customers engaging in the transactions through the ICC. To
date, the volume of our transactions has been limited, and, accordingly, the
revenue recognized has been minimal. We intend to continue to invest heavily in
acquisitions, infrastructure, development, and marketing. As result, we may not
be able to achieve or sustain profitability.

OUR AUDITORS HAVE QUALIFIED THEIR REPORT ON OUR FINANCIAL STATEMENTS WITH
RESPECT TO OUR ABILITY TO CONTINUE AS A GOING CONCERN

The report of KPMG LLP, our independent auditors, with respect to our
financial statements and the related notes, indicate that, at the date of their
report, we were in the development stage, had generated minimal revenues since
inception, and were continuing to incur losses. Accordingly, KPMG LLP qualified
their report to indicate that these matters raise substantial doubt, at such
date, about our ability to continue as a going concern. Our financial statements
do not include any adjustments that might result from this uncertainty. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our financial statements and the related notes.

BECAUSE WE HAVE BEEN IN BUSINESS FOR A SHORT PERIOD OF TIME, THERE IS
LIMITED INFORMATION UPON WHICH INVESTORS CAN EVALUATE OUR BUSINESS

We began our operations in March 1998 and are currently a development stage
company. Consequently, we have a very limited operating history upon which you
may base an evaluation of our business and determine our prospects for achieving
our intended business objectives. Although we have

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recently entered into agreements with electronic commerce resellers providing us
with access to more than eight million potential clients, we are currently
providing electronic commerce transaction processing services to only
approximately 1,600 clients. We are prone to all of the risks inherent to the
establishment of any new business venture, including unforeseen changes in our
business plan. For example, in June 1998, we changed our business plan to the
development of technology to enable businesses and other organizations to engage
in electronic commerce, whereas our prior efforts focused on the licensing and
distribution of software support materials for the governmental and educational
markets. You should consider the likelihood of our future success to be highly
speculative in light of our limited operating history, as well as the limited
resources, problems, expenses, risks, and complications frequently encountered
by similarly situated companies in the early stages of development, particularly
companies in new and rapidly evolving markets, such as electronic commerce. To
address these risks, we must, among other things,

- maintain and increase our client base,

- implement and successfully execute our business and marketing strategy,

- continue to develop and upgrade our technology and transaction processing
systems,

- continually update and improve our service offerings and features,

- provide superior customer service,

- respond to industry and competitive developments, and

- attract, retain, and motivate qualified personnel.

We may not be successful in addressing these risks. If we are unable to do
so, our business prospects, financial condition, and results of operations would
be materially and adversely affected.

FLUCTUATIONS IN OUR OPERATING RESULTS MAY AFFECT OUR STOCK PRICE

As a result of our limited operating history and the emerging nature of the
markets in which we compete, we believe that our operating results may fluctuate
materially, as a result of which quarter-to-quarter comparisons of our results
of operations may not be meaningful. If in some future quarter, whether as a
result of such a fluctuation or otherwise, our results of operations fall below
the expectations of securities analysts and investors, the trading price of our
common stock would likely be materially and adversely affected. You should not
rely on our results of any interim period as an indication of our future
performance. Additionally, our quarterly results of operations may fluctuate
significantly in the future as a result of a variety of factors, many of which
are outside our control. Factors that may cause our quarterly results to
fluctuate include, among others:

- our ability to retain existing clients and electronic commerce resellers,
to attract new clients and electronic commerce resellers at a steady rate,
and to maintain client satisfaction;

- our ability to motivate our existing clients, and the ability of certain
of our clients to motivate their customers, to begin to conduct certain
portions of their business on the Internet;

- the ability of our resellers to resell our StoresOnline services;

- the announcement or introduction of new services and products by us and
our competitors;

- price competition or higher prices in the industry;

- pricing of hardware and software required for the transaction of
electronic commerce;

- the level of use of the Internet and online services and the rate of
market acceptance of the Internet and other online services for
transacting commerce;

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- our ability to upgrade and develop our systems and infrastructure in a
timely and effective manner;

- our ability to attract, train, and retain skilled management, strategic,
technical, and creative professionals;

- technical difficulties, system downtime, or Internet brownouts;

- the amount and timing of operating costs and capital expenditures relating
to the expansion of our business, operations, and infrastructure;

- unanticipated technical, legal, and regulatory difficulties with respect
to use of the Internet; and

- general economic conditions and economic conditions specific to Internet
technology usage and electronic commerce.

OUR MARKETING STRATEGY HAS NOT BEEN TESTED AND MAY NOT RESULT IN SUCCESS

To date, we have conducted limited marketing efforts directly and have
relied substantially upon the marketing efforts of the electronic commerce
resellers with which we have contracts or strategic relationships. All of our
marketing efforts, including our marketing through these resellers, have been
largely untested in the marketplace, and may not result in sales of our products
and services. To penetrate our market, we will have to exert significant efforts
to create awareness of, and demand for, our products and services. With respect
to our marketing efforts conducted directly, we intend to begin to do the
following after this offering:

- advertise on the Internet;

- advertise on television in selected markets;

- direct mail;

- conduct targeted e-mail campaigns;

- advertise in technology, financial, and business publications having wide
readership; and

- expand our sales staff.

With respect to our marketing efforts conducted through resellers, we intend to
do the following after this offering:

- create a group within our sales staff trained to assist resellers in
marketing our products and services to their customers, members,
employees, and relationships;

- create branded promotional brochures and other marketing materials to
inform resellers and their constituencies as to our products and services,
and

- advertise in trade publications in strategic industries.

Our failure to further develop our marketing capabilities and successfully
market our products and services could have a material adverse effect on our
business, prospects, financial condition, and results of operations. See "Use of
Proceeds," "Business--Business Strategy," "Business--Clients and Strategic
Relationships," and "Business--Sales and Marketing."

IF WE ARE UNABLE TO UPGRADE OUR INFRASTRUCTURE, WE MAY BE UNABLE TO PROCESS
AN INCREASED VOLUME OF TRANSACTIONS

A key element of our strategy is to provide on a cost-effective basis the
means by which our clients can generate a high volume of electronic commerce
transactions through the use of our hardware and software infrastructure. If the
volume of transactions through our infrastructure substantially increases,

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we will have to expand and further upgrade our technology, transaction
processing systems, and hardware and software infrastructure to accommodate
these increases or our systems may suffer from

- unanticipated system disruptions,

- slower response times,

- degradation in levels of customer service,

- impaired quality and speed of transaction processing, and

- delays in reporting accurate financial information.

We may be unable to effectively upgrade and expand our hardware and software
infrastructure or to integrate smoothly any newly developed or purchased
software with our existing systems, which could have a material adverse effect
on our business, prospects, financial condition, and results of operations. See
"Business--Business Strategy."

WE RELY ON INTERNALLY DEVELOPED SYSTEMS WHICH ARE INEFFICIENT, WHICH MAY PUT
US AT A COMPETITIVE DISADVANTAGE

We use an internally developed system for a portion of our transaction
processing software, as well as the software required to interconnect our
clients' systems with our own. As we developed these systems primarily to
support the rapid growth of transaction submission volume and customer service
and less on traditional accounting, control, and reporting, these systems are
inefficient and require a significant amount of manual effort to prepare
information for financial and accounting reporting. Such manual effort is
time-consuming and costly and may place us at a competitive disadvantage when
compared to competitors with more efficient systems. We intend to upgrade and
expand our transaction processing systems and to integrate newly-developed and
purchased software with our existing systems in order to improve the efficiency
of our reporting methods and support increased transaction volume, although we
are unable to predict whether these upgrades will improve our competitive
position when compared to our competitors.

IF WE CHANGE OUR REVENUE RECOGNITION PRINCIPLES, OUR RESULTS OF OPERATIONS
FOR PRIOR PERIODS MAY CHANGE

We currently recognize revenues using the completed contract method. We
intend to consider using the percentage of completion method to recognize
revenues when we meet the criteria necessary to use that method. Under the
completed contract method, revenue is recognized upon completion or substantial
completion of the contract. Under the percentage of completion method, revenue
is recognized on a pro rata basis as work progresses on the contract, and
percentage of completion is determined on the basis of cost incurred to total
estimated costs. Under the percentage of completion method, in the period in
which one determines that a loss will result from a performance of a contract,
the entire amount of the estimated loss is recognized. In the event that we
should make this change, we will be required to restate comparative prior
periods. We cannot guarantee that any amendments to our financial statements as
a result of this change will not be material.

BECAUSE OUR MANAGEMENT WILL CONTINUE TO OWN A SUBSTANTIAL PORTION OF OUR
COMMON STOCK FOLLOWING THIS OFFERING, INVESTORS MAY HAVE DIFFICULTY
OBTAINING THE NECESSARY STOCKHOLDER VOTE FOR CORPORATE ACTIONS CONTRARY TO
THE WISHES OF MANAGEMENT

Upon the completion of this offering, our current directors and executive
officers will together beneficially own approximately 4,769,101 shares, or 30.2%
of the outstanding shares of common stock,

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<PAGE>
or approximately 29.3% of the outstanding shares of our common stock if the
underwriters' over-allotment option is exercised in full. As a result of their
stock ownership:

- our current officers and directors will have the ability to substantially
influence the outcome of all matters on which stockholders are entitled to
vote, including the elections of our directors and the approval of
significant corporate transactions; and

- investors in this offering may have difficulty obtaining the necessary
stockholder vote required for corporate actions contrary to the wishes of
management.

See "Principal Stockholders."

INVESTORS WILL NOT HAVE THE OPPORTUNITY TO REVIEW THE SPECIFIC ALLOCATION OF
THE NET PROCEEDS OF THIS OFFERING IN DECIDING WHETHER TO PURCHASE OUR
COMMON STOCK

Management has allocated approximately $10.2 million, or 52.0%, of the
estimated net proceeds of this offering for marketing, research and development,
and general corporate and working capital purposes. Accordingly, our management
will have broad discretion in how to use the net proceeds of this offering, and
investors will not have the opportunity to review the specific allocation of our
net proceeds in deciding whether to purchase our common stock. The failure of
management to apply these proceeds effectively could have a material adverse
affect on our business, prospects, financial condition, and results of
operation. See "Use of Proceeds."

OUR MANAGEMENT TEAM IS RELATIVELY NEW; MANY OF OUR EMPLOYEES HAVE RECENTLY
JOINED US AND MUST BE INTEGRATED INTO OUR OPERATIONS

From our inception on March 4, 1998 to June 30, 1998, during the year ended
June 30, 1999, and during the three months ended September 30, 1999, we expanded
from seven to 16 employees, from 16 to 68 employees, and from 68 to 101
employees, respectively. Some of our officers have no prior senior management
experience in public companies and have only recently joined us. Our new
employees include a number of key managerial, technical, financial, marketing,
and operations personnel who have not yet been fully integrated into our
operations, and we expect to add additional key personnel in the near future.
Our failure to fully integrate our new employees into our operations could have
a material adverse effect on our business, prospects, financial condition, and
results of operations. See "Business--Employees" and "Management."

WE HAVE LIMITED HUMAN RESOURCES; WE NEED TO ATTRACT AND RETAIN HIGHLY
SKILLED PERSONNEL; AND WE MAY BE UNABLE TO EFFECTIVELY MANAGE OUR GROWTH
WITH OUR LIMITED RESOURCES

We expect that the expansion of our business will place a significant strain
on our limited managerial, operational, and financial resources. We will be
required to expand our operational and financial systems significantly and to
expand, train, and manage our work force in order to manage the expansion of our
operations. Our future success will depend in large part on our ability to
attract, train, and retain additional highly skilled executive level management,
creative, technical, and sales personnel. Competition is intense for these types
of personnel from other technology companies and more established organizations,
many of which have significantly larger operations and greater financial,
marketing, human, and other resources than we have. We may not be successful in
attracting and retaining qualified personnel on a timely basis, on competitive
terms, or at all. If we are not successful in attracting and retaining these
personnel, our business, prospects, financial condition, and results of
operations will be materially adversely affected. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations,"
"Business--Business Strategy," and "Business--Employees."

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WE DEPEND UPON OUR SENIOR MANAGEMENT AND THEIR LOSS OR UNAVAILABILITY COULD
PUT US AT A COMPETITIVE DISADVANTAGE

Our success depends largely on the skills of certain key management and
technical personnel. The loss or unavailability of any of these individuals for
any significant period of time could have a material adverse effect on our
business, prospects, financial condition, and results of operations. We have
obtained, own, and are the sole beneficiary of, key-person life insurance in the
amount of $1,000,000 on the life of Keith D. Freadhoff, our Chairman of the
Board of Directors. We cannot guarantee that we will be able to replace this key
individual in the event his services become unavailable. See
"Management--Employment Agreements."

AS OUR CHAIRMAN OF THE BOARD OF DIRECTORS HAS PLEDGED HIS STOCK, WE MAY
EXPERIENCE A CHANGE OF CONTROL

Keith D. Freadhoff, our Chairman of the Board of Directors, has pledged
825,000 shares of our common stock held by him as security for his personal
financial obligations, which, at the date of this prospectus, are approximately
$1,100,000. These financial obligations are due on demand. If Mr. Freadhoff
defaults on these obligations, Mr. Freadhoff may lose ownership of these shares,
including the right to vote these shares, which could result in a change of
control of Netgateway and would have a material adverse effect on our business,
prospects, financial condition, and results of operations. See "Principal
Stockholders."

WE MAY BE REQUIRED TO USE FUNDS WHICH WE WOULD OTHERWISE USE FOR GROWTH TO
RESCIND OUR MAY THROUGH SEPTEMBER 1999 PRIVATE PLACEMENT

During May through September 1999, we completed a private placement of
$6,483,500 principal amount of notes and 648,350 shares of common stock for
aggregate gross proceeds of approximately $6,483,500, of which $525,000 was
received in October 1999. Although we intend to use a portion of the net
proceeds of this offering to repay those notes, pursuant to the Securities Act,
the rules and regulations under the Securities Act, and the interpretations of
the Commission, the investors in this private placement may have the right to
require us to repurchase the securities which they purchased in this private
placement for a price equal to the amount they paid for these securities when
they were purchased from us. Investors would be required to bring any action for
rescission within one year from the date of discovery of the omission or
misstatement or the date that it should have been discovered, but no more than
three years from the sale. If we are required to rescind the private placement
in its entirety, we would be required to refund all of the gross proceeds of
this private offering to the investors. These proceeds would be paid in part
with the net proceeds of this offering. Even following the repayment of these
notes, based on this Act, rules and regulations, and interpretations, the
investors in this private offering may have the right to require us to
repurchase the shares of common stock which they received in this private
placement if they can successfully argue that these shares were issued in lieu
of a higher interest rate on these notes. We believe that the likelihood of an
investor commencing an action for rescission on this basis will increase if the
trading price of the common stock drops below the offering price in this
offering.

In addition, although we have no current plans to conduct an additional
private offering of securities prior to the closing of this offering, in the
event that this offering is materially delayed, we may be required to conduct an
additional private offering in order to satisfy our working capital
requirements. In this event, the investors in this private placement may also
have the right to require us to repurchase the securities which they purchased
in this private placement as described above. See "Use of Proceeds" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."

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<PAGE>
WE MAY BE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS AND WE MAY BE
LIABLE FOR INFRINGING THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS

Our ability to compete effectively will depend on our ability to maintain
the proprietary nature of our services and technologies, including our
proprietary software and the proprietary software of others with which we have
entered into software licensing agreements. Although we have one patent
application pending we hold no patents and rely on a combination of trade
secrets and copyright laws, nondisclosure, and other contractual agreements and
technical measures to protect our rights in our technological know-how and
proprietary services. We depend upon confidentiality agreements with our
officers, directors, employees, consultants, and subcontractors to maintain the
proprietary nature of our technology. These measures may not afford us
sufficient or complete protection, and others may independently develop know-how
and services similar to ours, otherwise avoid our confidentiality agreements, or
produce patents and copyrights that would materially and adversely affect our
business, prospects, financial condition, and results of operations. We believe
that our services are not subject to any infringement actions based upon the
patents or copyrights of any third parties; however, our know-how and technology
may in the future be found to infringe upon the rights of others. Others may
assert infringement claims against us, and if we should be found to infringe
upon their patents or copyrights, or otherwise impermissibly utilize their
intellectual property, our ability to continue to use our technology could be
materially restricted or prohibited. If this event occurs, we may be required to
obtain licenses from the holders of this intellectual property, enter into
royalty agreements, or redesign our products and services so as not to utilize
this intellectual property, each of which may prove to be uneconomical or
otherwise impossible. Licenses or royalty agreements required in order for us to
use this technology may not be available on terms acceptable to us, or at all.
These claims could result in litigation, which could materially adversely affect
our business, prospects, financial condition, and results of operations. See
"Business--Intellectual Property."

WE MAY BE HELD LIABLE FOR ONLINE CONTENT PROVIDED BY THIRD PARTIES

We may face potential liability for defamation, negligence, copyright,
patent, or trademark infringement and other claims based on the nature and
content of the materials that appear on storefronts and Web pages that utilize
our services. Claims of this type have been brought, and sometimes successfully
pursued, against online services. Although we carry general liability insurance,
our insurance may not cover all claims or may not be adequate to indemnify us
for any liability that may be imposed. Any imposition of liability, particularly
liability that is not covered by insurance or is in excess of our insurance
coverage, could have a material adverse effect on our reputation, business,
prospects, financial condition, and results of operations.

WE INTEND TO USE FUNDS WHICH WE WOULD OTHERWISE USE FOR GROWTH TO REPAY
INDEBTEDNESS TO INVESTORS IN OUR MAY THROUGH SEPTEMBER 1999 PRIVATE
PLACEMENT, WHICH COULD LIMIT OUR ABILITY TO EXPAND

We intend to use approximately $7.0 million, or 35.7%, of the net proceeds
of this offering to repay the promissory notes issued in our private placement
which closed from May through September 1999 and $150,000 principal amount of
notes issued to settle a financial obligation in May 1999. As a result, we will
be unable to utilize these funds for growth, which could limit our ability to
implement our current plans for expansion. See "Use of Proceeds" "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."

WE CANNOT PREDICT OUR FUTURE CAPITAL NEEDS AND WE MAY NOT BE ABLE TO SECURE
ADDITIONAL FINANCING

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<PAGE>
sufficient to satisfy our capital requirements for this period. In addition, we
may need to raise significant additional funds sooner in order to support our
growth, develop new or enhanced services and products, respond to competitive
pressures, acquire or invest in complementary or competitive businesses or
technologies, or take advantage of unanticipated opportunities. If our financial
resources are insufficient and, in any case, after this 18-month period, we will
require additional financing in order to meet our plans for expansion. We cannot
be sure that this additional financing, if needed, will be available on
acceptable terms or at all. Furthermore, any additional debt financing, if
available, may involve restrictive covenants, which may limit our operating
flexibility with respect to business matters. If additional funds are raised
through the issuance of equity securities, the percentage ownership of our
existing stockholders will be reduced, our stockholders may experience
additional dilution in net book value per share, and such equity securities may
have rights, preferences, or privileges senior to those of our existing
stockholders. If adequate funds are not available on acceptable terms, we may be
unable to develop or enhance our services and products, take advantage of future
opportunities, repay debt obligations as they become due, or respond to
competitive pressures, any of which would have a material adverse effect on our
business, prospects, financial condition, and results of operations. See "Use of
Proceeds," "Dilution," and "Business--Business Strategy."

WE COULD LOSE REVENUES AND INCUR SIGNIFICANT COSTS IF OUR SYSTEMS OR
MATERIAL THIRD PARTY SYSTEMS ARE NOT YEAR 2000 COMPLIANT

Many currently installed computer systems and software products are coded to
accept only two-digit entries to identify a year in the date code field.
Consequently, on January 1, 2000, many of these systems could fail or
malfunction because they may not be able to distinguish between 20th century
dates and 21st century dates. Accordingly, in the coming year, many companies,
including our customers, potential customers, vendors, and strategic partners,
may need to upgrade their systems to comply with applicable "Year 2000"
requirements.

Because we and our clients are dependent, to a very substantial degree, upon
the proper functioning of our and their computer systems, a failure of our or
their systems to correctly recognize dates beyond December 31, 1999 could
materially disrupt our operations, which could materially adversely affect our
business, prospects, financial condition, and results of operations.
Additionally, our failure to provide Year 2000 compliant products and services
to our clients could result in financial loss, harm to our reputation, and legal
liability. Likewise, the failure of the computer systems and products of the
third parties with which we transact business to be Year 2000 compliant could
materially disrupt their and our operations, which could materially adversely
affect our business, prospects, financial condition, and results of operations.
We have already completed an internal review, and we are conducting a formal
assessment to determine the Year 2000 readiness of our proprietary software. We
are also in the process of contacting third party vendors, licensors of
hardware, software, and services and clients regarding their Year 2000
readiness. Following our assessment and after contacting these third parties, we
will be able to make an evaluation of our state of readiness, risks, and costs,
and determine whether a contingency plan is necessary. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--Year
2000 Compliance."

BECAUSE WE WILL NOT PAY CASH DIVIDENDS, INVESTORS MAY HAVE TO SELL THEIR
SHARES IN ORDER TO REALIZE THEIR INVESTMENT

We have not paid any cash dividends on our common stock and do not intend to
pay cash dividends in the foreseeable future. We intend to retain future
earnings, if any, for reinvestment in the development and expansion of our
business. Any credit agreements into which we may enter with institutional
lenders may restrict our ability to pay dividends. Whether we pay cash dividends
in the future will be at the discretion of our board of directors and will be
dependent upon our financial condition, results of operations, capital
requirements, and any other factors that the board of directors

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<PAGE>
decides is relevant. As a result, investors may have to sell their shares of
common stock to realize their investment. See "Dividend Policy" and "Description
of Securities--Common Stock."

BECAUSE WE DEPEND UPON A SINGLE SITE FOR OUR COMPUTER AND COMMUNICATIONS
SYSTEMS, WE ARE MORE VULNERABLE TO THE EFFECTS OF NATURAL DISASTERS,
COMPUTER VIRUSES, AND SIMILAR DISRUPTIONS

Our ability to successfully process transactions and provide high-quality
customer service largely depends on the efficient and uninterrupted operation of
our computer and communications hardware and software systems. Our proprietary
and licensed software resides solely on our servers, all of which, as well as
all of our communications hardware, are located in a monitored server facility
in Irvine, California. Our systems and operations are in a secured facility with
hospital-grade electrical power, redundant telecommunications connections to the
Internet backbone, uninterruptible power supplies, and generator back-up power
facilities. In addition, we maintain redundant systems for backup and disaster
recovery. Despite these safeguards, we remain vulnerable to damage or
interruption from fire, flood, power loss, telecommunications failure,
break-ins, earthquake, and similar events. In addition, we do not, and may not
in the future, carry sufficient business interruption insurance to compensate us
for losses that may occur. Despite our implementation of Internet security
measures, our servers are vulnerable to computer viruses, physical or electronic
break-ins, and similar disruptions, which could lead to interruptions, delays,
loss of data, or the inability to process client transactions. The occurrence of
any of these events could have a material adverse effect on our business,
prospects, financial condition, and results of operations. See
"Business--Facilities."

USERS MAY CONFUSE OTHER COMPANIES' DOMAIN NAMES WITH OUR OWN

We have registered with the InterNIC registration service the Internet
domain names: netgateway.net, netgateway.org, federalbuyersmall.com,
storesonlinemall.com, solint.net, Clevelandstores.com, Clevelande-mall.com,
Clevelandemall.com, Cleveland-emall.com, E-Cart.com, cablecommerce.net,
cablenetmall.com, citdmall.com, frontiervisionmall.com, mikesofamerica.com,
northshorestores.com, otimall.com, showcasestores.com, cconnections.com,
entchat.com, golfmate.com, openemail.net, opentrade.net, eknowledge.net ,
dgenesis.com, communicationsgroup.com, quickgrill.com, flashgrill.com,
afisteaks.com , and storesonline.com. We have registered with Internic.com the
Internet domain names: millenniumemall.com and millenniumemall.net. However,
there are other substantially similar domain names which are registered by
companies which may compete with us, which may cause potential users and
advertisers to confuse our domain name with other similar domain names. In
addition, new domains may be added in the future, allowing combinations and
similar domain names that may be confusingly similar to our own. If that
confusion occurs,

- we may inadvertently lose business to a competitor,

- we may have to adjust our advertising rates and service fees accordingly,
or

- some users of our services may have negative experiences with other
companies on their Web sites that those users erroneously associate with
us. See "Business--Intellectual Property."

SOME PROVISIONS OF OUR CERTIFICATE OF INCORPORATION AND BY-LAWS MAY DETER
TAKEOVER ATTEMPTS, WHICH MAY LIMIT THE OPPORTUNITY OF OUR STOCKHOLDERS TO
SELL THEIR SHARES AT A PREMIUM TO THE THEN MARKET PRICE

Some of the provisions of our certificate of incorporation and our by-laws
could make it more difficult for a third party to acquire us, even if doing so
might be beneficial to our stockholders by providing them with the opportunity
to sell their shares at a premium to the then market price. Our by-laws contain
provisions which regulate the introduction of business at annual meetings of our
stockholders by other than the board of directors. These provisions may have the
effect of rendering more difficult, delaying, discouraging, preventing, or
rendering more costly an acquisition of the

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Company or a change in control of the Company. In addition, our certificate of
incorporation authorizes the board of directors to issue up to 4,000,000 shares
of preferred stock, which may be issued in one or more series, the terms of
which may be determined at the time of issuance by the board of directors,
without further action by stockholders, and may include voting rights, including
the right to vote as a series on particular matters, preferences as to dividends
and liquidation, conversion, and redemption rights, and sinking fund provisions.
No shares of preferred stock are currently outstanding, and we have no present
plans for the issuance of any preferred stock. However, the issuance of any
preferred stock could materially adversely affect the rights of holders of our
common stock, and, therefore, could reduce its value. In addition, specific
rights granted to future holders of preferred stock could be used to restrict
the Company's ability to merge with, or sell its assets to, a third party. The
ability of the board of directors to issue preferred stock could have the effect
of rendering more difficult, delaying, discouraging, preventing, or rendering
more costly an acquisition of us or a change in our control thereby preserving
our control by the current stockholders. See "Description of Securities."

RISKS SPECIFIC TO OUR INDUSTRY

INTERNET SECURITY POSES RISKS TO OUR ENTIRE BUSINESS

The processing of electronic commerce transactions by means of our hardware
and software infrastructure involves the transmission and analysis of
confidential and proprietary information of the consumer, the merchant, or both,
as well as our own confidential and proprietary information. The compromise of
our security or misappropriation of proprietary information could have a
material adverse effect on our business, prospects, financial condition, and
results of operations. We rely on encryption and authentication technology
licensed from other companies to provide the security and authentication
necessary to effect secure Internet transmission of confidential information,
such as credit information and proprietary consumer information. Advances in
computer capabilities, new discoveries in the field of cryptography, or other
events or developments may result in a compromise or breach of the technology
used by us to protect client transaction data. Anyone who is able to circumvent
our security measures could misappropriate proprietary information or cause
interruptions in our operations, as well as the operations of the merchant. We
may be required to expend significant capital and other resources to protect
against security breaches or to minimize problems caused by security breaches.
Concerns over the security of the Internet and other electronic transactions and
the privacy of consumers and merchants may also inhibit the growth of the
Internet and other online services generally, especially as a means of
conducting commercial transactions. To the extent that our activities or the
activities of others involve the storage and transmission of proprietary
information, security breaches could damage our reputation and expose us to a
risk of loss or litigation and possible liability. Our security measures may not
prevent security breaches. Our failure to prevent these security breaches may
have a material adverse effect on our business, prospects, financial condition,
and results of operations.

WE WILL ONLY BE ABLE TO EXECUTE OUR BUSINESS PLAN IF ELECTRONIC COMMERCE
CONTINUES TO GROW

Our future revenues and any future profits are substantially dependent upon
the widespread acceptance and use of the Internet and other online services as
an effective medium of commerce by merchants and consumers. If use of the
Internet and other online services does not continue to grow or grows more
slowly than we expect, if the infrastructure for the Internet and other online
services does not effectively support the growth that may occur, or if the
Internet and other online services do not become a viable commercial
marketplace, our business, prospects, financial condition, and results of
operations could be materially adversely affected. Rapid growth in the use of,
and interest in, the Internet, the Web, and online services is a recent
phenomenon, and may not continue on a lasting basis. In addition, customers may
not adopt, and continue to use, the Internet and other online services

19
<PAGE>
as a medium of commerce. Demand and market acceptance for recently introduced
services and products over the Internet are subject to a high level of
uncertainty, and few services and products have generated profits. For us to be
successful, consumers of both retail and business to business services must be
willing to accept and use novel and cost efficient ways of conducting business
and exchanging information.

In addition, the public in general may not accept the Internet and other
online services as a viable commercial marketplace for a number of reasons,
including potentially inadequate development of the necessary network
infrastructure or delayed development of enabling technologies and performance
improvements. To the extent that the Internet and other online retail and
business to business services continue to experience significant growth in the
number of users, their frequency of use, or in their bandwidth requirements, the
infrastructure for the Internet and online services may be unable to support the
demands placed upon them. In addition, the Internet or other online services
could lose their viability due to delays in the development or adoption of new
standards and protocols required to handle increased levels of Internet
activity, or due to increased governmental regulation. Significant issues
concerning the commercial use of the Internet and online services technologies,
including security, reliability, cost, ease of use, and quality of service,
remain unresolved and may inhibit the growth of Internet business solutions that
utilize these technologies. Changes in, or insufficient availability of,
telecommunications services to support the Internet or other online services
also could result in slower response times and adversely affect usage of the
Internet and other online services generally and our product and services in
particular.

WE MAY NOT BE ABLE TO ADAPT AS THE INTERNET, ELECTRONIC COMMERCE, THE
ELECTRONIC COMMERCE SERVICES INDUSTRY, AND CUSTOMER DEMANDS CONTINUE TO
EVOLVE

We may not be able to adapt as the Internet, electronic commerce, the
electronic commerce services market, and consumer demands continue to evolve.
Our failure to respond in a timely manner to changing market conditions or
client requirements would have a material adverse effect on our business,
prospects, financial condition, and results of operations. The Internet, the
electronic commerce, and the electronic commerce services industry are
characterized by:

- rapid technological change;

- changes in user and customer requirements and preferences;

- frequent new product and service introductions embodying new technologies;
and

- the emergence of new industry standards and practices that could render
proprietary technology and hardware and software infrastructure obsolete.

Our success will depend, in part, on our ability to:

- enhance and improve the responsiveness and functionality of our online
transaction processing services;

- license or develop technologies useful in our business on a timely basis,
enhance our existing services, and develop new services and technology
that address the increasingly sophisticated and varied needs of our
prospective or current customers; and

- respond to technological advances and emerging industry standards and
practices on a cost-effective and timely basis.

See "Business--Business Strategy."

20
<PAGE>
WE MAY NOT BE ABLE TO COMPETE EFFECTIVELY IN OUR INDUSTRY

While the market for electronic commerce services is relatively new, it is
already highly competitive and characterized by an increasing number of entrants
that have introduced or developed products and services similar to those offered
by us. We believe that competition will intensify and increase in the future.
Our target market is rapidly evolving and is subject to continuous technological
change. As a result, our competitors may be better positioned to address these
developments or may react more favorably to these changes, which could have a
material adverse effect on our business, prospects, financial condition, and
results of operations. We compete on the basis of a number of factors, including
the attractiveness of the electronic commerce services offered, the breadth and
quality of these services, creative design and systems engineering expertise,
pricing, technological innovation, and understanding clients' strategies and
needs. A number of these factors are beyond our control. Existing or future
competitors may develop or offer electronic commerce services that provide
significant technological, creative, performance, price, or other advantages
over the services offered by us.

Our competitors can be divided into several groups:

- large systems integrators;

- Internet service providers and portals;

- large information technology consulting services providers;

- computer hardware and service vendors; and

- strategic consulting firms.

We also may compete with telecommunications companies. Although most of
these types of competitors to date have not offered a full range of Internet
professional services, many are currently offering these services or have
announced their intention to do so. These competitors at any time could elect to
focus additional resources in our target markets, which could materially
adversely affect our business, prospects, financial condition, and results of
operations. Many of our current and potential competitors have longer operating
histories, larger customer bases, longer relationships with clients, and
significantly greater financial, technical, marketing, and public relations
resources than we do. Competitors that have established relationships with large
companies, but have limited expertise in providing Internet solutions, may
nonetheless be able to successfully use their client relationships to enter our
target market or prevent our penetration into their client accounts. We believe
that our primary competitors currently include, without limitation, Broadvision,
Open Market, Commerce One, Ariba, VerticalNet, Intel, Microsoft, AT&T,
Intershop, MCI Worldcom, Yahoo! Stores, ICAT, GE Information Services, IBM, and
smaller Internet services providers.

Additionally, in pursuing acquisition opportunities we may compete with
other companies with similar growth strategies, certain of which may be larger
and have greater financial and other resources than we have. Competition for
these acquisition targets likely could also result in increased prices of
acquisition targets and a diminished pool of companies available for
acquisition.

There are relatively low barriers to entry in our business. Although we have
one patent application pending at this time, we have no patented, and only a
limited amount of other proprietary, technology that would preclude or inhibit
competitors from entering the electronic commerce services market. Therefore, we
must rely on the skill of our personnel and the quality of our client service.
The costs to develop and provide electronic commerce services are relatively
low. Therefore, we expect that we will continually face additional competition
from new entrants into the market in the future, and we are subject to the risk
that our employees may leave us and may start competing businesses. The
emergence of these enterprises could have a material adverse effect on our
business, prospects, financial condition, and results of operations. See
"Business--Industry Background--Electronic Commerce Services Industry" and
"Business--Competition."

21
<PAGE>
REGULATORY AND LEGAL UNCERTAINTIES COULD HARM OUR BUSINESS

We are not currently subject to direct regulation by any government agency
other than laws or regulations applicable generally to electronic commerce. Any
new legislation or regulation, the application of laws and regulations from
jurisdictions whose laws do not currently apply to our business, or the
application of existing laws and regulations to the Internet and other online
services, could have a material adverse effect on our business, prospects,
financial condition, and results of operations. Due to the increasing popularity
and use of the Internet and other online services, federal, state, and local
governments may adopt laws and regulations, or amend existing laws and
regulations, with respect to the Internet or other online services covering
issues such as taxation, user privacy, pricing, content, copyrights,
distribution, and characteristics and quality of products and services. In 1998,
the United States Congress established the Advisory Committee on Electronic
Commerce which is charged with investigating, and making recommendations to
Congress regarding, the taxation of sales by means of the Internet. Furthermore,
the growth and development of the market for electronic commerce may prompt
calls for more stringent consumer protection laws to impose additional burdens
on companies conducting business online. The adoption of any additional laws or
regulations upon the recommendation of this Advisory Committee or otherwise may
decrease the growth of the Internet or other online services, which could, in
turn, decrease the demand for our services and increase our cost of doing
business, or otherwise have a material adverse effect on our business,
prospects, financial condition, and results of operations. Moreover, the
relevant governmental authorities have not resolved the applicability to the
Internet and other online services of existing laws in various jurisdictions
governing issues such as property ownership and personal privacy and it may take
time to resolve these issues definitively.

RISKS SPECIFIC TO THIS OFFERING

OUR COMMON STOCK TRADES SPORADICALLY, THE OFFERING PRICE OF OUR COMMON STOCK
IS ARBITRARY, THE MARKET PRICE OF OUR SECURITIES MAY BE VOLATILE, AND WE
MUST SATISFY THE APPLICABLE REQUIREMENTS FOR OUR COMMON STOCK TO TRADE ON
THE NASDAQ NATIONAL MARKET.

Our common stock currently trades sporadically on the OTC Bulletin Board. We
have applied to have our common stock quoted on the Nasdaq National Market
commencing on the date of this prospectus. Even if our common stock were quoted
on the Nasdaq National Market, the market for our common stock may not be an
active market. Accordingly, unless and until an active public market develops,
you may have difficulty selling your shares of common stock at a price that is
attractive to you.

The initial public offering price of the shares was arbitrarily determined
by negotiations between the underwriters and us principally on the basis of the
market price for our common stock prior to the date of this prospectus. See
"Underwriting." From time to time after this offering, the market price of our
common stock may experience significant volatility. Our quarterly results,
failure to meet analysts expectations, announcements by us or our competitors
regarding acquisitions or dispositions, loss of existing clients, new procedures
or technology, changes in general conditions in the economy, and general market
conditions could cause the market price of the common stock to fluctuate
substantially. In addition, the stock market has experienced significant price
and volume fluctuations that have particularly affected the trading prices of
equity securities of many technology companies. These price and volume
fluctuations often have been unrelated to the operating performance of the
affected companies. In the past, following periods of volatility in the market
price of a company's securities, securities class action litigation has often
been instituted against such a company. This type of litigation, regardless of
the outcome, could result in substantial costs and a diversion of management's
attention and resources, which could materially adversely affect our business,
prospects, financial condition, and results of operations.

22
<PAGE>
Under the currently effective criteria for initial listing of securities on
the Nasdaq National Market, a company must have at least $75 million in market
capitalization, a minimum bid price of $5.00 per share, and securities in the
hands of the public with a market value of at least $20 million. For continued
listing, a company must maintain $50 million in market value, a minimum bid
price of $5.00, and a public float of at least $15 million. If we cannot
maintain the standards for continued listing, our common stock could be subject
to delisting from the Nasdaq National Market. Trading, if any, in our common
stock would then be conducted in either the Nasdaq SmallCap Market or in the
over-the-counter market on the OTC Bulletin Board established for securities
that do not meet the Nasdaq SmallCap Market listing requirements or in what are
commonly referred to as the "pink sheets." As a result, an investor may find it
more difficult to dispose of, or to obtain accurate quotations as to the price
of, our shares.

YOU MAY HAVE DIFFICULTY SELLING YOUR SHARES OF COMMON STOCK AND THE MARKET
PRICE OF OUR COMMON STOCK MAY DECLINE IF CRUTTENDEN ROTH OR PENNSYLVANIA
MERCHANT GROUP DISCONTINUES MAKING A MARKET FOR ANY REASON

A significant number of the shares sold in this offering may be sold to
customers of the underwriters. These customers may engage in transactions for
the sale or purchase of the shares through or with the underwriters. Although
they have no obligation to do so, Cruttenden Roth and Pennsylvania Merchant
Group intend to make a market in our shares and may otherwise effect
transactions in our common stock. If Cruttenden Roth and Pennsylvania Merchant
Group participate in the market, it may influence the market, if one develops,
for our common stock. Either of these firms may discontinue making a market in
the common stock at any time. Moreover, if either of these firms sells the
shares of common stock issuable upon exercise of the representatives' warrants,
that firm may be required under the Exchange Act to temporarily suspend its
market-making activities. The price and liquidity of the common stock may be
significantly affected by the degree, if any, of the direct or indirect
participation of that firm in the market.

INVESTORS WILL INCUR IMMEDIATE AND SUBSTANTIAL DILUTION

The public offering price per share in this offering exceeds the net
tangible book value per share of our outstanding common stock immediately after
the offering. Accordingly, if you purchase shares in this offering, you will

- pay a price per share which substantially exceeds the value of our assets
after subtracting our intangible assets and liabilities and

- contribute 46.2% of the total amount invested to date to fund us, but will
only own 20.9% of the shares of common stock outstanding.

SIGNIFICANT ADDITIONAL DILUTION IF OUTSTANDING OPTIONS AND WARRANTS ARE
EXERCISED

We also have outstanding stock options to purchase approximately
2.1 million shares of common stock and warrants and convertible or exchangeable
securities to purchase approximately 1.6 million shares of common stock, some of
which have exercise prices significantly below the public offering price of our
common stock in this offering. To the extent such options or warrants are
exercised, there will be further dilution. In addition, in the event that any
future financing should be in the form of, be convertible into, or exchangeable
for, equity securities, and upon the exercise of options and warrants, investors
may experience additional dilution. See "Dilution."

FUTURE SALES OF COMMON STOCK BY OUR EXISTING STOCKHOLDERS COULD ADVERSELY
AFFECT OUR STOCK PRICE

The market price of our common stock could decline as a result of sales of a
large number of shares of our common stock in the market after this offering, or
the perception that these sales could occur. These sales also might make it more
difficult for us to sell equity securities in the future at a time and at a
price that we deem appropriate. After this offering, we will have outstanding
15,795,768

23
<PAGE>
shares of common stock. Of these shares, an aggregate of 5,609,913 shares,
including the 3,300,000 shares being offered in this offering, will be freely
tradeable. Our directors and officers and a number of our stockholders who hold
together an aggregate of 7,698,988 shares have entered into lock-up agreements
by which they have agreed that they will not sell, directly or indirectly, any
shares of common stock without the prior written consent of the underwriters for
a period of six months from the date of this prospectus. Giving effect to these
lock-up agreements and applicable legal restrictions, the number of shares of
common stock and the dates when these shares will become freely tradeable in the
market is as follows:

<TABLE>
<CAPTION>
NUMBER OF SHARES DATE
- ----------------- -----------------------------------------------------------------------------------------------
<S> <C>
5,609,913 At the date of this prospectus (including the 3,300,000 shares of common stock in this
offering)
1,304,737 Within six months from the date of this prospectus
8,881,118 Between six and twelve months from the date of this prospectus
</TABLE>

As of the date of this prospectus, we have reserved an aggregate of
1,634,174 shares of common stock issuable upon the exercise of outstanding
warrants and convertible or exchangeable securities. Following this offering, we
intend to file a registration statement to register for issuance and resale the
8,000,000 shares of common stock reserved for issuance under our existing stock
option plans described in "Management--Stock Option Plans." We expect that
registration statement to become effective immediately upon filing. Shares
issued upon the exercise of stock options granted under our stock option plans
will be eligible for resale in the public market from time to time subject to
vesting and, in the case of some options, the expiration of the lock-up
agreements referred to in the preceding paragraph. We also intend to file a
registration statement to register the resale of approximately 480,000 of the
shares of common stock which we issued in October 1999 upon the exercise of
outstanding warrants on a cashless basis, as well as 400,000 shares of common
stock which we issued or are issuable upon the conversion of our convertible
debentures.

Some of our stockholders, holding approximately 1,511,429 shares of common
stock or holding securities convertible into or exercisable or exchangeable for
shares of common stock, have the right, subject to a number of conditions and
limitations, to include their shares in registration statements relating to our
securities. Stockholders holding these shares have waived this right with
respect to this offering. By exercising their registration rights and causing a
large number of shares to be registered and sold in the public market, these
holders may cause the market price of the common stock to fall. In addition, any
demand to include these shares in our registration statements could have an
adverse effect on our ability to raise needed capital.

CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS

This prospectus contains forward-looking statements and information relating
to Netgateway. We intend to identify forward-looking statements in this
prospectus by using words such as "believes," "intends," "expects," "may,"
"will," "should," "plan," "projected," "contemplates," "anticipates,"
"estimates," "predicts," "potential," "continue," or similar terminology. These
statements are based on our beliefs as well as assumptions we made using
information currently available to us. We undertake no obligation to publicly
update or revise any forward-looking statements, whether as a result of new
information, future events, or otherwise. Because these statements reflect our
current views concerning future events, these statements involve risks,
uncertainties, and assumptions. Actual future results may differ significantly
from the results discussed in the forward-looking statements. Some, but not all,
of the factors that may cause such a difference include those which we discuss
in the Risk Factors section of this prospectus beginning on page 10.

24
<PAGE>
USE OF PROCEEDS

We estimate that we will receive net proceeds of approximately
$19.6 million from the sale of the common stock offered by us in this offering.
If the underwriters exercise their over-allotment option in full, we will
receive net proceeds of approximately $21.6 million. These estimates are after
deducting estimated underwriting discounts and commissions and other fees and
expenses payable by us.

We intend to use approximately $7.0 million, or 35.7%, of the net proceeds
of this offering to repay indebtedness incurred in connection with our May
through September 1999 private placement of $6,483,500 principal amount of
Series A 12% Senior Notes due 2000 and 648,350 shares of common stock and
$150,000 principal amount of notes and 15,000 shares of common stock issued to
settle a financial obligation in May 1999. The notes are due on the earlier of
April 30, 2000 or completion of this offering and accrue interest at the rate of
12% per annum. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources."

We intend to use approximately $3.7 million, or 18.9%, of the estimated net
proceeds of this offering to expand our marketing efforts. With respect to our
marketing efforts conducted directly, we intend to begin to do the following:

- advertise on the Internet;

- advertise on television in selected markets;

- direct mail;

- conduct targeted e-mail campaigns;

- advertise in technology, financial, and business publications having wide
readership; and

- expand our sales staff.

With respect to our marketing efforts conducted through resellers, we intend to
do the following:

- create a group within our sales staff trained to assist resellers in
marketing our products and services to their customers, members,
employees, and relationships;

- create branded promotional brochures and other marketing materials to
inform resellers and their constituencies as to our products and services,
and

- advertise in trade publications in strategic industries.

See "Risk Factors--Our Marketing Strategy Has Not Been Tested and May Not Result
in Success."

We intend to use approximately $1.3 million, or 6.6%, of the estimated net
proceeds of this offering for research and development and for the continued
enhancement of our ICC eCommerce transaction processing system. See
"Business--Research and Development."

We intend to use approximately $3.6 million, or 18.4%, of the estimated net
proceeds of this offering for the acquisition of capital equipment to purchase
or otherwise acquire computers, servers, communication hardware and software,
and networking equipment.

The balance of the net proceeds, estimated to be approximately
$4.0 million, or 20.4%, of the estimated net proceeds of this offering will be
used for general corporate and working capital purposes to fund the ongoing cash
flow and capital requirements associated with our growth, including the
retention and training of additional personnel. We may also use a portion of the
net proceeds allocated for general corporate and working capital purposes to
acquire, or invest in, businesses and technologies. From time to time we
evaluate such potential acquisitions and we anticipate continuing to make such
evaluations. In this regard, we are currently evaluating certain acquisition and
investment opportunities;

25
<PAGE>
however, we cannot assure you that we will identify suitable acquisition or
investment candidates or that we will, in fact, complete any acquisition or
investment.

Under the Securities Act, the rules and regulations under the Securities
Act, and the interpretations of the Commission, we may be required to offer
rescission to investors in our May through September 1999 private placement.
These investors hold $6,483,500 principal amount of our 12% Senior Notes due
2000, which notes we are required to repay with a portion of the net proceeds of
this offering. See "Risk Factors--We May Be Required To Use Funds Which We Would
Otherwise Use For Growth To Rescind Our May through September 1999 Private
Placement."

We believe that the net proceeds from this offering, together with
anticipated revenues from operations, will be sufficient to meet our presently
anticipated working capital and capital expenditure requirements for at least
the next 18 months. Our belief is based on our operating plan which in turn is
based on assumptions, which may prove to be incorrect. As a result, our
financial resources may not be sufficient to satisfy our capital requirements
for this period. In addition, we may need to raise significant additional funds
sooner in order to support our growth, develop new or enhanced services and
products, respond to competitive pressures, acquire or invest in complementary
or competitive businesses or technologies, or take advantage of unanticipated
opportunities. If our financial resources are insufficient and, in any case,
after this 18-month period, we will require additional financing in order to
meet our plans for expansion. We cannot be sure that this additional financing,
if needed, will be available on acceptable terms or at all. Furthermore, any
additional debt financing, if available, may involve restrictive covenants,
which may limit our operating flexibility with respect to business matters. If
additional funds are raised through the issuance of equity securities, the
percentage ownership of our existing stockholders will be reduced, our
stockholders may experience additional dilution in net book value per share, and
such equity securities may have rights, preferences, or privileges senior to
those of our existing stockholders. If adequate funds are not available on
acceptable terms, we may be unable to develop or enhance our services and
products, take advantage of future opportunities, repay debt obligations as they
become due, or respond to competitive pressures, any of which would have a
material adverse effect on our business, prospects, financial condition, and
results of operations. See "Risk Factors--We Cannot Predict Our Future Capital
Needs And May Not Be Able to Secure Additional Financing," "Use of Proceeds,"
"Dilution," and "Business--Business Strategy."

Although, based upon our contemplated operations, business plan, and current
economic and industry conditions, the above is our best estimate of the amount,
timing, and allocation of the expenditures of the net proceeds of this offering,
such estimated amounts are subject to reallocation within the listed categories
or to new categories in response to a number of unanticipated events. These may
include changes in our business plans, new government regulations, changing
industry conditions, and future revenues and expenditures.

26
<PAGE>
PRICE RANGE OF COMMON STOCK

Our common stock has been traded on the OTC Bulletin Board since July 6,
1998. The following table sets forth, for the fiscal periods indicated, the
quarterly high and low sales prices for our common stock, as reported by Nasdaq.

<TABLE>
<CAPTION>
HIGH LOW
--------- ---------
<S> <C> <C>
FISCAL YEAR ENDED JUNE 30, 1999
First Quarter (from July 6, 1998)............................................................... $ 11 1/8 $ 6 3/8
Second Quarter.................................................................................. 9 3/4 2 1/4
Third Quarter................................................................................... 13 1/4 4 3/4
Fourth Quarter.................................................................................. 15 5/8 9 1/4

FISCAL YEAR ENDING JUNE 30, 2000
First Quarter (through November 17, 1999)....................................................... 11 15/16 6 7/8
</TABLE>

The last reported sale price of our common stock on the OTC Bulletin Board
on November 17, 1999 was $9.00 per share. As of November 9, 1999, there were 457
holders of record of our common stock.

DIVIDEND POLICY

We have never paid or declared any cash dividends. We currently expect to
retain future earnings, if any, to finance the growth and development of our
business. Therefore, we do not anticipate paying any cash dividends on our
shares in the foreseeable future.

27
<PAGE>
CAPITALIZATION

The following table sets forth, as of September 30, 1999:

- our actual short-term debt and capitalization,

- our pre-offering as adjusted short-term debt and capitalization, which
gives effect to (1) $522,500 of the net proceeds from our May through
September 1999 private placement of securities received by us after
September 30, 1999, (2) the issuance of 270 shares of common stock in
November 1999 upon the exercise of outstanding warrants for $270, (3) the
issuance of 8,000 shares of common stock in October 1999 upon the
conversion of $20,000 of convertible debentures; (4) the issuance of
962,444 shares of common stock upon the exercise of outstanding warrants
on a cashless basis during October 1999, and (5) the issuance to three of
our executive officers of an aggregate of 1,200,000 shares of common stock
in October 1999 which may be forfeited by these individuals if they should
end their employment with us prior to vesting in exchange for outstanding
options under our existing stock option plans, and

- our post-offering as adjusted short-term debt and capitalization, which
give effect to (1) $522,500 of the net proceeds from our May through
September 1999 private placement of securities received by us after
September 30, 1999, (2) the issuance of 270 shares of common stock in
November 1999 upon the exercise of outstanding warrants for $270, (3) the
issuance of 8,000 shares of common stock in October 1999 upon the
conversion of $20,000 of convertible debentures; (4) the issuance of
962,444 shares of common stock upon the exercise of outstanding warrants
on a cashless basis during October 1999, (5) the issuance to three of our
executive officers of an aggregate of 1,200,000 shares of common stock in
October 1999 which may be forfeited by these individuals if they should
end their employment with us prior to vesting in exchange for outstanding
options under our existing stock option plans, and (6) our receipt of
estimated net proceeds of approximately $19.6 million from the sale of the
shares of common stock in this offering and the initial application of the
net proceeds of this offering as described under the heading "Use of
Proceeds."

The data below should be read in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and our financial
statements and related notes and other financial information included elsewhere
in this prospectus.

<TABLE>
<CAPTION>
SEPTEMBER 30, 1999
----------------------------------------------
PRE-OFFERING POST-OFFERING
ACTUAL AS ADJUSTED AS ADJUSTED
-------------- -------------- --------------
<S> <C> <C> <C>
Short-term debt.................................................. $ 3,424,330 $ 3,561,830 $ 181,799
Stockholders' equity
Preferred stock--$.001 par value authorized--5,000,000 shares;
issued and outstanding 0 shares.............................. -- -- --
Common stock--$0.001 par value, authorized--40,000,000 shares;
issued and outstanding--10,322,554 shares, actual;
12,495,768 shares as adjusted; and 15,795,768 shares, as
further adjusted............................................. 10,323 12,496 15,796
Additional paid-in capital....................................... 18,402,614 26,837,565 46,401,265
Deferred compensation............................................ (34,380) (8,434,380 (8,434,380)
Stock subscription receivable.................................... (350,000) -- --
Accumulated other comprehensive loss............................. (4,656) (4,656) (4,656)
Accumulated deficit.............................................. (18,891,007) (18,894,814) (22,756,601)
-------------- -------------- --------------
Total stockholders' equity (deficit)............................. (867,106) (483,158) 15,221,424
-------------- -------------- --------------
Total short-term debt and capitalization......................... $ 2,557,224 $ 3,078,672 $ 15,403,223
============== ============== ==============
</TABLE>

28
<PAGE>
DILUTION

As of September 30, 1999, our net tangible net book value (deficit) was
$(2,790,004) or approximately $(0.27) per share of common stock based on
10,322,554 shares of common stock outstanding. The net tangible book value per
share represents the amount of our total assets less the amount of our
intangible assets and our liabilities, divided by the number of shares of common
stock outstanding at September 30, 1999.

After giving effect to

- our receipt after September 30, 1999 of estimated net proceeds of $522,500
from our May through September 1999 private placement,

- the issuance of 270 shares of common stock in November 1999 upon the
exercise of outstanding warrants for $270,

- the issuance of 8,000 shares of common stock in October 1999 upon the
conversion of $20,000 of convertible debentures,

- the issuance of 962,444 shares of common stock upon the exercise of
outstanding warrants on a cashless basis during October 1999, and

- the issuance to three of our executive officers of an aggregate of
1,200,000 shares of common stock in October 1999 which may be forfeited by
these individuals if they should end their employment with us prior to
vesting in exchange for outstanding stock options under our existing stock
option plans,

our pre-offering pro-forma net tangible book value (deficit) at September 30,
1999 would have been $(2,404,634) or approximately $(0.19) per share of common
stock.

After giving effect to

- our receipt after September 30, 1999 of net proceeds of $522,500 from our
May through September 1999 private placement of securities,

- the issuance of 270 shares of common stock in November 1999 upon the
exercise of outstanding warrants for $270,

- the issuance of 8,000 shares of common stock in October 1999 upon the
conversion of $20,000 of convertible debentures,

- the issuance of 962,444 shares of common stock upon the exercise of
outstanding warrants on a cashless basis during October 1999,

- our receipt of estimated net proceeds of approximately $19.6 million from
our sale of the shares of common stock in this offering and the initial
application of those proceeds as described under the heading "Use of
Proceeds,"

Our post-offering pro forma as adjusted net tangible book value at September
30, 1999 would have been $13,709,892 or approximately $0.87 per share of common
stock. This represents an increase in the pro forma as adjusted net tangible
book value of $1.06 per share to existing stockholders and an

29
<PAGE>
immediate dilution in the pro forma as adjusted net tangible book value of $6.13
per share, or 87.6%, to investors in this offering. The following table
illustrates the per share dilution:

<TABLE>
<CAPTION>
PER SHARE OF
COMMON
STOCK
--------------------
<S> <C> <C>
Public offering price.......................................................................... $ 7.00
Actual tangible book value (deficit) at September 30, 1999................................... $ (0.27)
Increase in net tangible book value, giving effect to the Summer 1999
private placement and October and November 1999 stock issuances............................ 0.08
---------
Pre-offering pro forma net tangible book value (deficit)..................................... (0.19)
Increase in net tangible book value.......................................................... 1.06
---------
Post-offering pro forma net tangible book value after this offering............................ 0.87
---------
Dilution of net tangible book value to new investors........................................... $ 6.13
=========
</TABLE>

The following table sets forth, as of the date of this prospectus:

- the number of shares of common stock purchased,

- the percentage of total shares of common stock purchased,

- the total consideration paid,

- the percentage of total consideration paid, and

- the average price per share of common stock paid by the investors in this
offering and our current stockholders.

<TABLE>
<CAPTION>
SHARES OF COMMON
STOCK PURCHASED TOTAL CONSIDERATION AVERAGE
-------------------------- -------------------------- PRICE PER
NUMBER PERCENTAGE AMOUNT PERCENTAGE SHARE
------------- ----------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Existing stockholders........................... 12,495,768 79.1 $ 26,850,061 53.8% $ 2.15
New investors................................... 3,300,000 20.9 23,100,000 46.2 7.00
------------- --------- ------------- --------- ---------
Total........................................... 15,795,768 100.0% $ 49,950,061 100.0% $ 3.16
============= ========= ============= ========= =========
</TABLE>

30
<PAGE>
SELECTED FINANCIAL DATA

The following selected statements of operations data for the period from our
inception on March 4, 1998 through June 30, 1998 and the year ended June 30,
1999 and the selected balance sheet data as of June 30, 1999 are derived from
our consolidated financial statements and related notes included elsewhere in
this prospectus audited by KPMG LLP, our independent auditors. The selected
financial data as of and for the three months ended September 30, 1999 is
unaudited. The selected balance sheet data as of September 30, 1999 is
unaudited. The selected statement of operations data for the period from our
inception on March 4, 1998 through June 30, 1998 includes the results of
operations of Infobahn Technologies LLC (dba Digital Genesis) from June 2, 1998,
its date of acquisition, and the pro forma selected statement of operations data
for such period includes the operations of Digital Genesis and Spartan
Multimedia, Inc. as if they were acquired by us on March 4, 1998. The selected
statement of operations data for the year ended June 30, 1999 includes the
results of operations of Spartan Multimedia, Inc. from January 15, 1999, its
date of acquisition, and the pro forma selected statement of operations data for
such period includes the operations of Spartan Multimedia, Inc. as if it was
acquired by us on July 1, 1998. The pre-offering pro forma balance sheet data as
of September 30, 1999 is adjusted to reflect:

- the receipt of $522,500 of net the proceeds from our May through September
1999 private placement of securities received by us after September 30,
1999;

- the issuance of 270 shares of common stock in November 1999 upon the
exercise of outstanding warrants for $270;

- the issuance of 8,000 shares of common stock in October 1999 upon the
conversion of $20,000 of convertible debentures;

- the issuance of 962,444 shares of common stock upon the exercise of
outstanding warrants on a cashless basis during October 1999; and

- the issuance to three of our executives of an aggregate of
1,200,000 shares of common stock in October 1999 which may be forfeited by
these individuals if they should end their employment with us prior to
vesting in exchange for outstanding stock options under our existing stock
option plans.

The post-offering proforma, as adjusted balance sheet as of September 30,
1999 is adjusted to reflect:

- the receipt of $522,500 of the net proceeds from our May through September
1999 private placement of securities received by us after September 30,
1999;

- the issuance of 270 shares of common stock in November 1999 upon the
exercise of outstanding warrants for $270;

- the issuance of 8,000 shares of common stock in October 1999 upon the
conversion of $20,000 of convertible debentures;

- the issuance of 962,444 shares of common stock upon the exercise of
outstanding warrants on a cashless basis during October 1999;

31
<PAGE>
The following data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
our consolidated financial statements and the related notes appearing elsewhere
in this prospectus.

<TABLE>
<CAPTION>
PERIOD FROM
MARCH 4, 1998 CUMULATIVE PERIOD
(INCEPTION) THROUGH THREE MONTHS FROM MARCH 4, 1998
JUNE 30, 1998 ENDED
SEPTEMBER 30, (INCEPTION)
YEAR ENDED JUNE 30, 1999 THROUGH SEPTEMBER
---------------------- ------------------------ 30, 1999(2)
ACTUAL PRO FORMA ACTUAL PRO FORMA 1998 1999
---------- ---------- ----------- ----------- ----------- ------------- ------------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues.................... $ 2,800 $ 124,325 $ 143,426 $ 146,867 $ 22,470 $ 212,733 $ 358,959
Total operating expenses.... 4,555,459 4,736,557 11,303,848 11,518,898 1,778,173 3,014,976 18,874,283
Interest expense............ 19,277 19,277 925,097 925,097 2,408 1,029,812 1,974,186
Net loss before
extraordinary item........ (4,571,936) (4,631,509) (12,140,248)(1) (12,351,857)(1) (1,812,840) (3,832,055) (20,544,239)(1)
Loss before extraordinary
item per weighted average
common share outstanding
(basic and diluted)....... (0.84) (0.81) (1.36)(1) (1.39)(1) (0.22) (0.38) (2.26)(1)
Weighted average common
shares outstanding (basic
and diluted).............. 5,416,242 5,721,327 8,912,041 8,912,041 8,280,801 10,017,740 8,372,298
</TABLE>

<TABLE>
<CAPTION>
SEPTEMBER 30, 1999
JUNE 30, -------------------------------------
---------------------- PRO FORMA,
1998 1999 ACTUAL PRO FORMA AS ADJUSTED
---------- ---------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Current assets................................................. $ 371,467 $1,379,326 $2,441,451 $2,962,899 $15,088,445
Total assets................................................... 871,552 3,458,350 4,617,114 5,138,562 17,264,108
Working capital (deficit)...................................... (1,959,776) (1,545,420) (3,042,769) (2,658,821) 13,045,761
Shareholders' equity (deficit)................................. (1,827,583) 545,291 (867,106) (483,158) 15,221,424
</TABLE>

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

(1) Before extraordinary gain of $1,653,232 relating to extinguishment of
indebtedness of $0.19, $0.19, and $0.20 per weighted-average common shares
outstanding during the year ended June 30, 1999 actual, pro forma and the
cumulative period from March 4, 1998 (inception) through September 30,
1999, respectively.

(2) The cumulative period statement of operations data is included in
accordance with generally accepted accounting principles since we are a
development stage company.

32
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS AND OTHER PORTIONS OF THIS PROSPECTUS CONTAIN FORWARD-LOOKING
INFORMATION THAT INVOLVE RISKS AND UNCERTAINTIES. OUR ACTUAL RESULTS COULD
DIFFER MATERIALLY FROM THOSE ANTICIPATED BY THIS FORWARD-LOOKING INFORMATION.
FACTORS THAT MAY CAUSE SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE
DISCUSSED UNDER THE HEADING "RISK FACTORS" AND ELSEWHERE IN THIS PROSPECTUS.
THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS SHOULD BE READ IN CONJUNCTION WITH OUR FINANCIAL STATEMENTS AND THE
RELATED NOTES INCLUDED ELSEWHERE IN THIS PROSPECTUS.

IN GENERAL

We provide turn-key electronic commerce services designed to enable clients
to extend their business to the Internet to conduct commercial transactions
between business enterprises.

As of June 30, 1999 and September 30, 1999, we had a working capital
deficiency of $1,545,420 and $3,042,769, respectively and stockholders' equity
(deficit) of $545,291 and $(867,106), respectively. We generated revenues of
$2,800 during the period from our inception on March 4, 1998 through June 30,
1998, revenues of $143,426 during the year ended June 30, 1999 and revenues of
$212,733 during the three months ended September 30, 1999. We have incurred net
losses since inception and expect to continue to generate operating losses for
the foreseeable future. We may never achieve profitability. In addition, during
the period from our inception on March 4, 1998 through June 30, 1998, the year
ended June 30, 1999 and the three months ended September 30, 1999, we incurred
negative cash flows from operations of $253,119, $4,552,912 and $2,156,738,
respectively.

We are in the early stage of operations and, as a result, the relationships
between revenue, cost of revenue, and operating expenses reflected in the
financial information included in this prospectus do not represent future
expected financial relationships. Much of the cost of revenue and operating
expenses reflected in our financial statements are relatively fixed costs. We
expect that these expenses will increase with the escalation of sales and
marketing activities and transaction volumes, but at a much slower rate of
growth than the corresponding revenue increase. Accordingly, we believe that, at
our current stage of operations, period to period comparisons of results of
operations are not meaningful.

During the year ended June 30, 1999, we estimate that approximately 89% of
our revenues were attributable to Web site development and design and the
development of electronic storefronts, and 11% were attributable to transaction
processing. We anticipate that, over the next three years, as we implement our
operating and expansion plan, approximately

- 20% of our revenues will be attributable to Web site development and
design and the development of electronic storefronts,

- 50% of our revenues will be attributable to Internet-based shopping mall
development and design,

- 25% of our revenues will be attributable to transaction processing, and

- the remainder will be attributable to data warehousing and transaction
reporting, customer support services, advertising, and provision of
connectivity solutions.

During the year ended June 30, 1999 and three months ended September 30,
1999, we expended our resources principally in development of our technology. We
anticipate that, over the next three years, as we implement our operating and
expansion plan, approximately

- 30% of our expenditures will be attributable to Web site development and
design and the development of electronic storefronts,

33
<PAGE>
- 45% of our expenditures will be attributable to Internet-based shopping
mall development and design,

- 20% of our expenditures will be attributable to transaction processing,
and

- the remainder will be attributable to data warehousing and transaction
reporting, customer support services, advertising, and provision of
connectivity solutions.

Based on our operating and expansion plan, we anticipate that, over the next
three years,

- greater revenue growth as a percentage of revenues will be attributable to
transaction processing than to Web site development and design and
Internet-based shopping mall development and design, and

- as transaction volume through our ICC increases, our gross margins and
operating margins will increase as the relatively fixed costs associated
with these activities is spread over such larger volume of transactions.

From our inception on March 1, 1998 until June 1998, our business plan was
to engage in the licensing and distribution of software support materials for
the governmental and educational markets. The principal licenses into which we
entered during this time period were related to the proprietary courseware of
Pro-Soft I-Net, a software and Internet training solutions provider. As a result
of changes in the software market and the related training and support materials
market, we determined to change our business plan to the development of
technology to enable businesses and other organizations to engage in electronic
commerce. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources" and "Related Party
Transactions."

Our strategic focus is on the business-to-business Internet commerce market,
and we believe that our success will depend in large part on

- our ability to develop products and technologies that enable businesses to
transact business-to-business Internet commerce efficiently and
effectively,

- our ability to identify and position ourselves as a significant
participant in the business-to-business Internet commerce market, and

- the willingness of the market place to adapt and engage in electronic
commerce.

Accordingly, we intend to continue to invest in product, technology, and
operating infrastructure development, as well as in the acquisition of companies
that offer development or technological resources.

Because we have a limited operating history, given planned investment
levels, our achieving profitability depends upon our ability to obtain
sufficient numbers of new customers and sufficient numbers of Internet commerce
transactions using our services. This can be accomplished by signing up
sufficient numbers of customers for services through our ICC and/or attaining a
significant volume of transactions through our ICC. Our revenues will also be
dependent on determining and obtaining sufficient levels of fees for the
services offered. In the event that we are unable to attain one or more of these
goals, we may continue to incur substantial operating losses for the foreseeable
future.

FLUCTUATIONS IN QUARTERLY RESULTS AND SEASONALITY

In view of the rapidly evolving nature of our business and its limited
operating history, we believe that period-to-period comparisons of our operating
results, including our gross profit and operating expenses as a percentage of
net sales, are not necessarily meaningful and should not be relied upon as an
indication of future performance. See "Risk Factors--Fluctuations In Our
Operating Results May Affect Our Stock Price."

34
<PAGE>
We cannot predict the degree to which we will experience seasonality in our
business because of our limited operating history, and the fact that we cannot
identify which companies, if any, we will acquire in the foreseeable future.

RESULTS OF OPERATIONS

We had no meaningful operating results through September 30, 1999, as we
focused on the development of our ICC services and technology.

SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES

Selling, general, and administrative expenses consist of payroll and related
expenses for executive, sales, marketing, accounting, and administrative
personnel, recruiting, professional fees, research and development, and other
general corporate expenses. We expect selling, general, and administrative
expenses to increase in absolute dollars as we expand our staff and incur
additional costs related to the growth of our business.

INTEREST EXPENSE

Interest expense of $925,097 and $1,029,812 was incurred during the year
ended June 30, 1999 and three months ended September 30, 1999 respectively,
primarily related to amortization of debt issuance costs and debt discount.

INCOME TAXES

We have not generated any taxable income to date and therefore have not paid
any federal income taxes since our inception. Utilization of our net operating
loss carry forwards, which begin to expire in 2013, may be subject to certain
limitations under Section 382 of the Internal Revenue Code of 1986, as amended.

LIQUIDITY AND CAPITAL RESOURCES

At September 30, 1999, our cash was $956,636. Net cash used by operating
activities was $2,156,738 for the three months ended September 30, 1999.

MARCH 4, 1998 (INCEPTION) THROUGH JUNE 30, 1998

Net cash used in operations was $253,119 from March 4, 1998 (inception)
through June 30, 1998, which resulted from net losses of $4,571,936 from
inception adjusted principally for non-cash expenses of $3,822,000 in
amortization and write-off of license fees and $371,680 of stock based
compensation. See "Related Party Transactions."

We were established as eClassroom and, shortly thereafter, acquired two
exclusive sublicenses to sell proprietary ProSoft I-Net Solutions courseware to
governmental and educational markets. To date, we have not been successful at
generating any revenue from these sublicenses. These licenses have since been
terminated and we believe that we have no further obligations to make additional
payments under such licenses. We wrote off $3,822,000 in the period ended
June 30, 1998, representing the carrying cost of such licenses. In May 1999, the
sublicensors paid an additional $200,000 to ProSoft to terminate these license
agreements and to settle all obligations relating to them. See "Related Party
Transactions."

Net cash used in investing activities from March 4, 1998 (inception) through
June 30, 1998, was related principally to the purchase of $102,034 of fixed
assets and $75,000 of loans to customers. Net cash provided by financing
activities from March 4, 1998 (inception) through June 30, 1998 of $681,429
resulted from $649,000 of private placements of common stock, $132,429 from the
issuance of notes payable to related parties, and reduced by the repayment of
notes payable in the amount of $100,000.

35
<PAGE>
YEAR ENDED JUNE 30, 1999

Net cash used in operations was $4,552,912 during the year ended June 30,
1999, which resulted principally from net losses of $10,487,016 for such period
adjusted for non-cash items of gain on extinguishment of indebtedness of
$1,653,232, common stock issued for services in the amount of $1,262,200,
compensation expense for contributed capital of $400,000, interest and
amortization of debt issue costs of $679,535, options and warrants issued for
services in the amount of $2,820,428, the provision for doubtful accounts of
$26,876, and the write-off of an $800,000 note receivable. Accounts payable and
accrued liabilities increased by $1,220,010.

Net cash used in investing activities for the year ended June 30, 1999 was
related to the purchase of equity securities in the amount of $100,733, a loan
to Admor of $800,000, a loan to an officer of $30,000, and the purchase of
$250,579 of fixed assets. Net cash provided by financing activities during the
year ended June 30, 1999 of $5,951,912 resulted from $4,253,360 of private
placements of common stock, $264,200 from the exercise of warrants, $2,506,000
from the issuance of notes payable and convertible debentures, $100,000 from the
issuance of notes payable to related parties, $181,018 of cash paid for debt
issue costs and the repayment of notes payable in the amount of $990,630.

In June 1998, we commenced an offering of 1,022,800 units, each consisting
of one share of common stock at $2.00 per share and one warrant, expiring on
October 9, 1998, to purchase one additional share of common stock at $4.00 per
share. By June 30, 1998, $146,000 had been received. During the three months
ended September 30, 1998, 949,800 units were issued for $1,899,600. In January
and February 1999, we received $1,000,000 from the sale of convertible
debentures at a conversion price of $2.50 per share. During March through May
1999, we sold 326,334 shares in a private placement for $3.00 per share and
received gross proceeds of $979,000.

In May and June 1999, we sold in a private placement a total of $2,880,000
principal amount of our 12% promissory notes due on the earlier of April 30,
2000 or completion of this offering. As part of this transaction, we issued to
the investors a total of 288,000 shares of our common stock and 144,000 warrants
with a fair value of $301,300. In May 1999, the Company issued $150,000 of 12%
notes due on the earlier of April 30, 2000 or completion of this offering as
settlement for a financial obligation. Additionally, 15,000 shares of common
stock were issued as part of the settlement agreement. See "Risk Factors--We May
Be Required To Use Funds Which We Would Otherwise Use For Growth To Rescind Our
May through September 1999 Private Placement."

In connection with the ProSoft licenses, we assumed notes issued by the
previous holders of those licenses in the amount of $3,300,000. In December
1998, the remaining balance of $1.8 million due on the notes was cancelled. See
"Related Party Transactions."

In March 1999, Keith D. Freadhoff, our Chairman of the Board of Directors,
loaned $100,000 to us on an interest-free basis. We repaid the loan in May 1999.

As of June 30, 1999, our principal sources of liquidity consisted of
$569,472 in cash. As of that date, our principal commitments consisted of
operating leases and commitments for advertising and promotional arrangements.
Although we have no material commitments for capital expenditures, we anticipate
a substantial increase in our capital expenditures and lease commitments
consistent with anticipated growth in operations, infrastructure, and personnel.

THREE MONTHS ENDED SEPTEMBER 30, 1999

Net cash used in operations was $2,156,738 during the three months ended
September 30, 1999, which resulted principally from net losses of $3,832,055 for
such period adjusted for non-cash items of common stock issued for services in
the amount of $14,400, amortization of deferred compensation of $24,224,
amortization of debt issue costs and debt discount of $913,712, and options
issued for services in the amount of $5,105. Accounts payable and accrued
liabilities increased by $886,477.

36
<PAGE>
Net cash used in investing activities for the three months ended September
30, 1999 was related to the repayment of notes receivable of $30,000 and the
purchase of $229,331 of fixed assets. Net cash provided by financing activities
during the three months ended September 30, 1999 of $2,744,291 resulted from
$1,890,269 of private placements of common stock, $957,450 from the issuance of
notes payable and $103,428 of cash paid for debt issue costs.

In August and September 1999, we sold in a private placement a total of
$3,578,500 principal amount of our 12% promissory notes due on the earlier of
April 30, 2000 or completion of this offering. As part of this transaction, we
issued to the investors a total of 357,850 shares of our common stock of which
$500,000 was received in October 1999 and 149,375 warrants with a fair value of
$396,500. See "Risk Factors--We May Be Required To Use Funds Which We Would
Otherwise Use For Growth To Rescind Our May through September 1999 Private
Placement."

In July 1999 we issued 50,000 shares of common stock valued at $300,000 for
prepaid advertising. We also issued 2,400 shares of common stock valued at
$14,400 for services in July 1999.

In September 1999, we began offering to holders of certain of our
outstanding warrants the right to exercise warrants on a cashless basis.

As of September 30, 1999, our principal sources of liquidity consisted of
$956,636 in cash. As of that date, our principal commitments consisted of
operating leases and commitments for advertising and promotional arrangements.
Although we have no material commitments for capital expenditures, we anticipate
a substantial increase in our capital expenditures and lease commitments
consistent with anticipated growth in operations, infrastructure, and personnel.

RECENT ACTIVITY

On October 13, 1999, options and warrants exercisable for an aggregate of
1,184,730 shares of common stock were exercised on a cashless basis for an
aggregate of 962,444 shares of our common stock. Our purpose in taking this
action was to decrease the number of warrants outstanding.

In October 1999, we issued to three of our executives an aggregate of
1,200,000 shares of common stock which may be forfeited by these individuals if
they should end their employment with us prior to vesting in exchange for an
aggregate of 1,980,000 stock options outstanding under our existing stock option
plans and terminated additional stock options under these plans exercisable for
an aggregate of 316,667 shares of common stock. Our purpose in taking this
action was to decrease the number of stock options outstanding under our
existing stock option plans. See "Management--Executive Compensation."

In October 1999, we received $525,000 relating to our May through September
1999 private placement. As part of this transaction, we issued to investors
2,500 shares of common stock and 1,250 warrants with a fair value of $3,349.

In October 1999, we issued 8,000 shares of common stock upon the conversion
of $20,000 of convertible debentures. In November 1999, we issued 270 shares of
common stock upon the exercise of warrants for $270.

YEAR 2000 COMPLIANCE

Many currently installed computer systems and software products are unable
to distinguish between 20th century dates and 21st century dates. As a result,
many companies' software and computer systems may need to be upgraded or
replaced to comply with these "Year 2000" requirements. Our business is
dependent on the operation of numerous systems that could potentially be
impacted by Year 2000 related problems. Those systems include, among others:

- hardware and software systems used by us to process transactions and
deliver other services to our clients, including our proprietary software
systems, as well as hardware and software supplied by third parties;

37
<PAGE>
- communications networks, such as the Internet and private intranets, on
which we depend to permit electronic commerce transactions by our clients;

- the internal systems of our clients and suppliers;

- the hardware and software systems used internally by us in the management
of our business; and

- non-information technology systems and services used by us in our
business, such as telephone systems and building systems.

We have internally reviewed the proprietary software systems we use to
process transactions and deliver other services to our clients. Although we
believe that our internally developed applications and systems are designed to
be Year 2000 compliant, we utilize third-party equipment and software that may
not be Year 2000 compliant. Failure of third-party or currently owned equipment
or software to operate properly with regard to the Year 2000 could require us to
incur unanticipated expenses to remedy any problems, which could have a material
adverse effect on our business, prospects, financial condition, and results of
operations. We believe that our expenditures to upgrade our internal systems and
applications and replace non-compliant systems will not exceed $100,000 and will
not be material to our business, prospects, financial condition, and results of
operations. To date, we have incurred $20,000 in connection with our Year 2000
compliance activities. We have utilized, and intend to continue to utilize,
general working capital in order to fund these activities. We have not had to
defer any information technology projects as a result of these activities.

Furthermore, the success of our efforts may depend on the success of our
clients in dealing with their Year 2000 issues. Many of these organizations are
not Year 2000 compliant, and the impact of widespread client failure on our
systems is difficult to determine. Customer difficulties due to Year 2000 issues
could interfere with electronic commerce transactions or information, which
might expose us to significant potential liability. If client failures result in
the failure of our systems, our business, prospects, financial condition, and
results of operations would be materially adversely affected. Furthermore, the
purchasing patterns of these customers or potential customers may be affected by
Year 2000 issues as companies expend significant resources to become Year 2000
compliant. The costs of becoming Year 2000 compliant for current or potential
customers may result in reduced funds being available to purchase and implement
our applications and services.

We have implemented a Year 2000 program to assess and monitor Year 2000
issues with all of our significant clients, suppliers, and other third parties.
We have appointed a single individual to head our Year 2000 program. The
following significant parties, which provide us with essential or critical
systems, have certified through Year 2000 compliance testing or vendor
certification that such systems are Year 2000 compliant: Exodus Communications,
PAJO, Dell Computers, Intel, PAL Employer Services, Inc., Verisign, Inc., and
Thawte, Inc. We have identified and have contacted the following significant
parties by letter or telephone: PaymentNet, Cardservice International,
Authorizenet, eCommerce Exchange, Clear Exchange, XOOM.com, Inc., CB Richard
Ellis, Reliant Innovations, Inc., Wireless One, Inc., Found.com, Inc., On Track
Inc. (O.T.I. Cable Advertising), and Power Enterprises, Inc. We intend to
continue to contact these significant parties until there is either a
satisfactory determination that the significant party has reasonably addressed
any Year 2000 issues or, in the absence of such determination, until one or more
replacement parties are identified and engaged.

We have conducted a formal assessment of our Year 2000 exposure in order to
determine what steps beyond those identified by our internal review may be
advisable. We are presently developing a contingency plan for handling Year 2000
problems that are not detected and corrected prior to this occurrence and
anticipate completing this plan by October 1999. Our most likely worst case Year
2000 scenario is unknown at this time. Our failure to address any unforeseen
Year 2000 issue could materially adversely affect our business, prospects,
financial condition, and results of operations.

38
<PAGE>
BUSINESS

IN GENERAL

We provide turn-key electronic commerce services designed to enable clients
to extend their business to the Internet to conduct commercial transactions
between business enterprises. The HUB of our electronic commerce solution is our
proprietary ICC, which consists of the hardware, proprietary and licensed
software, and the related technical services necessary for our clients to
transact electronic commerce. We also design and build custom interfaces, or
SPOKES, to connect business clients to the ICC. Our ICC permits a continuum of
sophisticated and technologically complex, or scalable, solutions ranging from a
simple Internet storefront advertising their products and taking orders through
e-mail to a highly complex system of secure client extranets allowing vendors to
interact and transact business-to-business electronic commerce with one or more
specific customers.

In July 1999, we formed CableCommerce, a new operating division which
focuses upon providing electronic services and solutions to cable television
operators. Typically, CableCommerce will design, develop, host, and manage
branded Internet-based shopping malls in the markets served by the cable
television system operator featuring businesses local to each of these markets.
In addition, CableCommerce offers local and regional classified advertisements,
community calendars, and coupons, provides mall content, trains cable television
system sales people, and offers storefront creation and maintenance services to
the cable television system's subscribers. To date, we have entered into
contracts to provide these services with MediaOne, CableOne, Wireless One, and
Frontiervision Media Services.

INDUSTRY BACKGROUND

THE INTERNET

The Internet has grown rapidly in recent years, spurred by developments such
as

- inexpensive, readily available, and user-friendly Web browsers,

- a large and growing installed base of advanced personal computers,

- the adoption of faster and more cost efficient networks,

- the emergence of compelling Web-based content and commerce applications,
and

- the growing sophistication of the user base.

According to International Data Corp. ("IDC"), a leading research firm, the
number of Internet users was 98 million worldwide at the end of 1998 and will
continue to grow to 320 million by the end of 2002.

The broad acceptance of the Internet has led to the emergence of secure Web
sites accessible only within a given company, known as INTRANETS, and
specialized intranets also available to select outsiders, such as clients,
suppliers, or vendors, known as EXTRANETS, as new global communications and
commerce environments, representing a significant opportunity for enterprises to
interact in new, different, and highly efficient ways with customers, employees,
suppliers, and partners.

ELECTRONIC COMMERCE

The Internet presents opportunities to transform businesses and entire
industries as organizations exploit their potential to extend and enhance their
business activities and gain competitive advantage. Companies are using the
Internet to communicate and transact business on a one-to-one basis with
existing customers and to target and acquire new customers. At the same time,
companies are using the Internet to collaborate with their supply-chain partners
and manage distribution and other strategic

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relationships. The Internet has also allowed businesses to identify new product
and service offerings which extend and complement their core markets.

A number of organizations have projected that the volume of business
transacted by means of electronic commerce will grow substantially from present
levels. The United States Department of Commerce has estimated that
business-to-business commerce by means of the Internet will be a $300 billion
dollar marketplace by the year 2002. IDC has estimated that the total value of
goods and services purchased over the Internet grew from $318 million in 1995 to
an annualized amount of $5.4 billion in December 1996, and that sales are
projected to increase to $95 billion in 2000 and to $400 billion by 2002. This
firm has also projected that by the year 2002, 78% of all Internet commerce will
occur in the business-to-business sector. Currently, KPMG estimates that
business to business Internet commerce doubles approximately every 90 days.

ELECTRONIC COMMERCE SERVICES MARKET

IDC forecasts that the market for Internet and electronic commerce services
worldwide will grow from $4.6 billion in 1997 to $43.7 billion by 2002.
Forrester Research, another technology industry research firm, estimates that
the market for Internet and electronic commerce services will grow from
$5.4 billion in 1998 to $32.7 billion by 2002. These projections represent a
compound annual growth rate of more than 55% over these periods.

The successful adoption of, and adaptation to, the Internet by companies and
the conduct of commerce by means of the Internet pose significant challenges,
including systems engineering, technical, commercial, strategic, and creative
design challenges and an understanding of how the Internet transforms
relationships between businesses and their internal organizations, customers,
and business partners. Companies facing technology investment decisions often
need outside technical expertise to recognize viable Internet tools, develop
feasible architectures, and implement strategies. Companies must also be able to
integrate new Internet applications with their existing systems. Finally, a
successful solution requires that the Internet application, particularly the
user interface, be engaging and easy to use.

We believe that few of the existing electronic commerce service providers
have the range of skills required to assist their clients in a coordinated
transformation of the way they use technology and implement Internet solutions.
Accordingly, we believe that organizations are increasingly searching for
professional services firms offering turn-key electronic commerce solutions,
including integrated strategy, technology and creative design, connectivity,
transaction processing, data warehousing, transaction reporting, help desk,
consulting, and training. Furthermore, we believe that organizations will
increasingly look to Internet solutions providers that can leverage industry and
client practices, increase predictability of success for Internet solutions, and
decrease risks associated with implementation by providing low-cost, scalable
solutions with minimal lead-time.

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THE NETGATEWAY SOLUTION

IN GENERAL

We have structured the ICC to provide scalable, fully integrated, turn-key
solutions. We develop customized interfaces to connect our clients' Web sites,
whether created and maintained by us or others on behalf of the clients, with
the ICC and our electronic commerce servers. As a result of our HUB and SPOKE
structure, we can offer rapidly deployed, low cost electronic commerce services,
which incorporate the sales and other practices of our clients and their
industries, as well as maintain our clients' prior investment in creating and
maintaining a Web presence.

THE ICC HUB

The ICC consists of hardware and proprietary and licensed software, as well
as related technical services, which are necessary in order to transact
electronic commerce. We have developed the ICC based upon an object-oriented,
modular strategy. As a result, we are able to reuse functional software
components of the ICC across different clients and industries, as well as allow
introduction of new capabilities and services without adversely effecting
existing systems.

The following features are designed to provide more complete electronic
commerce services by overcoming limitations in external systems.

- - INVENTORY MANAGEMENT
- - ORDER STATUS AND HISTORY
- - CUSTOMER SUPPORT FORUMS
- - PURCHASE ACTIVITY REPORTING
- - SECURE, WEB BROWSER BASED SYSTEM
ADMINISTRATION

- - REPORTING
- - UNIVERSAL CLIENT DIRECTORY MANAGEMENT

- - SALES AUTOMATION
- - CUSTOMER SURVEY SYSTEM
- - BUDGET REPORTING
- - CUSTOMER SELF-ADMINISTRATION
- - ORDER MANAGEMENT
- - SYSTEM STATUS MONITORING
- - PRODUCT CATALOG MANAGEMENT

THE INTERFACE SPOKE

We have the capability to rapidly design and deploy proprietary software
interfaces which permit client Web sites, networks, and enterprise resource
planning systems to connect with, receive relevant information from, and provide
relevant information to, the ICC. Data integration between the ICC and the buyer
or seller is managed in the SPOKE. Product catalogs, order information, order
status, customer data, etc. can be transferred between the HUB and the
buyer/seller by means of the SPOKE. Each interface or SPOKE is specific to a
client and industry and contains knowledge about specific products and services
as well as processes and business rules, including

- - CUSTOM PRICING
- - PURCHASING WORKFLOW
- - UNIQUE ORDER HEADER FOR EACH CUSTOMER
- - PRODUCT CONFIGURATION

- - GRAPHICAL INTERFACE
- - SPECIAL REPORTING NEEDS
- - PRODUCT VARIATION RULES
- - WORKFLOW WITH ROUTING AND APPROVALS

All spokes are developed according to a common methodology so that, as
clients in similar industries are added to the ICC, the cost and time of
development is reduced by duplicating previously created modules. We have
developed a substantial library of SPOKES which are available for future use.
Customization, or SPOKE development, for clients can include:

- - WEB SITE INTEGRATION
- - THIRD PARTY AND CUSTOMER DEVELOPED SYSTEMS
- - ORDER MANAGEMENT

- - ACCOUNTING
- - SHIPPING
- - ENTERPRISE RESOURCE PLANNING SYSTEMS

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ADVANTAGES

We believe that the following are significant advantages of our electronic
commerce solution over other currently available alternatives:

- Our customers do not invest in hardware, software, and staffing, but
rather connect to our existing Netgateway infrastructure, which we believe
is a highly economic method to obtain and maintain an electronic commerce
presence.

- Clients with existing Web sites can maintain their investment in the
creation of that presence while seamlessly adding electronic commerce
capabilities.

- Because our infrastructure permits scalable electronic commerce solutions,
we can offer incremental services to our clients through the activation of
additional proprietary software in response to client growth or commercial
requirements quickly and cost-effectively.

- Because our proprietary and other software resides only on our servers, we
can offer clients easy access to additional functionality on a test or
temporary basis in order to permit our clients to try new or additional
services with their respective customers on their Web sites, and can
provide real time updates, patches, and fixes to software with no
additional effort by the client.

BUSINESS STRATEGY

Key elements of our strategy are described below.

- IMPLEMENT COST EFFECTIVE SERVICES WITH BROAD APPEAL. We have designed our
operations and business model to focus upon the electronic commerce
services of highest value to our clients. These are services which require
high levels of investment of resources or technical expertise by clients
in the event that these clients were to decide to provide these services
themselves. By offering these services to a number of clients
simultaneously and by creating and utilizing reusable software modules, we
are able to spread the relatively fixed costs associated with the
creation, purchase, or customization of the software, processes,
procedures, or computer hardware over a larger volume of electronic
commerce transactions, permitting us to offer these services to our
clients on a highly cost effective basis.

- LEVERAGE RELATIONSHIPS WITH RESELLERS TO MAXIMIZE GROWTH. We have embraced
a channel strategy for distribution of our Internet storefront services.
We have found that this particular service offering matches well with any
organization that has existing business relationships whereby adding an
electronic commerce solution will strengthen the relationship. Examples of
our resellers include Internet portal companies, telecommunications
companies, Internet service providers, cable television companies, banks,
and computer hardware manufactures. See "Business--Clients and Strategic
Relationships."

- PROVIDE EASY ACCESS TO SCALABLE ELECTRONIC COMMERCE FUNCTIONALITY. We have
designed the ICC and our hardware and software infrastructure to permit
scalable electronic commerce solutions and can offer incremental services
to our clients through the activation of additional proprietary software
which provide additional services and added functionality in response to
client growth or commercial requirements quickly.

- OFFER ADDITIONAL FUNCTIONALITY OF ICC SERVICES. Our HUB and SPOKE approach
constantly generates new features for our ICC clients. For example, as the
SPOKE features become dominant in a particular industry, that feature is
integrated into the HUB to become a new standard feature of the ICC,
benefitting all ICC users in that industry.

- USE OF TECHNOLOGY TO CREATE ELECTRONIC COMMERCE HUBS. We have improved the
attractiveness of our services by creating electronic commerce HUBS in the
form of (1) private label Internet-based "shopping malls", where
electronic commerce sites sponsored by a common reseller or of similar

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product offerings are grouped together for convenient retail use by the
public, or (2) secure client extranets.

- INCORPORATE CLIENT AND INDUSTRY PRACTICES AND MAINTAIN CLIENTS' PRIOR
INVESTMENT. We have structured the ICC and our hardware and software
infrastructure, and have developed proprietary software, to permit the
easy interconnection of client Web sites, whether prepared and maintained
by us or others on behalf of our clients, with our electronic commerce
servers. As a result, we can offer electronic commerce services which
incorporate the sales and other practices of our clients and their
industries, as well as maintain the clients' prior investment in creating
and maintaining a Web presence.

- SEEK STRATEGIC ACQUISITIONS AND INVESTMENTS. We intend to seek strategic
acquisitions of, and investments in, businesses and technologies which we
believe will enhance the functionality of our services, operations, and
competitive position. In May 1999, we consummated the acquisition of the
technology of Shopping Planet, an electronic commerce applications
developer, which we believe will enhance our functionality. In exchange
for their technology, we agreed to the following:

- we issued to Shopping Planet 35,000 shares of our common stock; and

- leased the technology, including the right to enhancements, back to
Shopping Planet on a non-transferable basis for nominal consideration.
As a condition to this acquisition, we entered into an employment
agreement with the head developer of the Shopping Planet technology.

See "Risk Factors" and "Use of Proceeds."

SERVICES OFFERED

We offer our electronic commerce services which range, in general, from
simple Internet storefronts to highly complex systems. We currently offer the
following specific services to our clients:

- WEB SITE DEVELOPMENT AND DESIGN; DEVELOPMENT OF ELECTRONIC STOREFRONTS. We
believe that a professionally designed Web site is critical to the success
of business customers desiring to transact electronic commerce. We offer
Web site development, design, and maintenance solutions to our business
customers, including the development and design of the graphical
interfaces and applications necessary to fully integrate each customer's
Web site with its order and payment processing, order confirmation, and
fulfillment centers. Our proprietary software for Web site and electronic
storefront development features its own template system, multiple product
search engines, multiple price sets and catalogues, and support for
multiple currencies. Following this offering, we intend to further develop
and enhance this solution and to aggressively market these services
through our channel marketing strategy.

- INTERNET-BASED "SHOPPING MALL" DEVELOPMENT AND DESIGN. We believe that the
use of Internet-based shopping malls is critical to create an effective
electronic commerce marketplace. Through the creation and use of private
labeled Internet malls, users of our services can take advantage of both
the pre-existing relationships and marketing efforts of the reseller
sponsoring the private labeled mall, thereby increasing traffic to, and
exposure of, their site. In addition, we have developed and feature a
proprietary electronic commerce search engine that searches within each
Internet mall, as well as across all Internet malls served by our ICC. We
believe the use of malls and the availability of our robust electronic
commerce search engine adds substantial value to individual stores and
resellers alike. For our customers not otherwise affiliated with any mall,
we provide access to our own mall as a value-added service.

- TRANSACTION PROCESSING. We offer solutions which capture and transact
customer orders according to the business rules and specific "back office"
needs of the particular client. Our electronic

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commerce system solution allows us to receive and process orders and
payments, provide order confirmation and reporting, and organize order
fulfillment. We also have the ability to provide support for electronic
commerce transactions using checks, credit cards, electronic funds
transfers, purchase orders, and other forms of payment. We are currently
providing this capability in conjunction with certain third-party vendors,
including Payment Net in San Jose, California, Authorize Net in Salt Lake
City, Utah, Clear Commerce in Austin, Texas, eCommerce Exchange in Laguna
Hills, California, and Card Services International in Agoura Hills,
California. Following this offering, we plan to pursue our own secured
transaction clearing solutions as well as a strategic alliance or
acquisition of a secured transaction-processing center.

- DATA WAREHOUSING AND TRANSACTION REPORTING. We anticipate that, as our
business continues to grow, we will compile large amounts of transactional
and other data with respect to our clients and their businesses, markets,
customers, and electronic commerce transactions. We have the capability to
automatically generate reports relating to order confirmation, inventory
tracking, fulfillment, transaction details, customer data, market
research, and other sophisticated management reports based on the
transactions facilitated through our hardware and software infrastructure.
Following this offering, we plan to further develop these capabilities.

- CUSTOMER SUPPORT SERVICES. We provide our clients with 24 hour per day and
seven day per week customer service and support through our customer
support staff of six individuals.

- ADVERTISING. We have signed an agreement with 24/7, Inc. to manage
national banner advertising in our Internet-based shopping malls. We share
advertising revenues with the respective mall owner on whose Web site the
advertisement resides.

- CONNECTIVITY SOLUTIONS. In order for business customers to effectively
engage in electronic commerce, they must be connected to the Internet. We
assist our business customers in structuring and obtaining high-speed
Internet connectivity solutions to improve their business-to-business
communication by means of the Internet. We provide these connectivity
solutions to our business customers in conjunction with third party
Internet access providers. Our connectivity solutions also include the
ability to host clients' Web sites and provide clients with security
measures necessary for secure transmissions over the Internet. We support
our hosted Web sites by a connectivity enhancing, high-performance,
high-bandwidth server system.

- CABLECOMMERCE SOLUTIONS. In July 1999, we formed CableCommerce, a new
operating division which will focus on providing electronic commerce
services and solutions to cable television operators. See
"Business--Client and Strategic Relationships."

SALES AND MARKETING

IN GENERAL

We sell and market our services by means of a combination of direct sales
and authorized resellers. We maintain a direct sales force of 11 full-time
employees. We anticipate increasing our sales force substantially following this
offering, including creating a group within our sales force trained to assist
resellers in marketing our products and services. If a client requiring these
more sophisticated services is provided by a Netgateway reseller, we ordinarily
pay a finders fee to the reseller.

For entry level ICC services, such as simple Internet storefronts, we have
developed, and are continuing to develop, a series of channel partners to
distribute these services. Potential resellers include telecommunication
companies, value-added resellers, cable companies, Internet portals, and
Internet service providers. Reseller pricing has generally been dependent upon
volume and commitments from the reseller. We will "private label" the Internet
storefront service and establish private branded Internet-based shopping malls
for resellers in order to provide the resellers with the means to drive traffic
to these storefronts. The storefronts and mall will have a customized "look and
feel" of the reseller. For purposes of branded equity, such as XOOM.com's
Internet-based shopping

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mall located at WWW.XOOMMEMBERSTORES.COM, all sites will have the
"STORESONLINE.COM" logo as well as "POWERED BY NETGATEWAY" designation. We will
establish and maintain the mall for the reseller as long as the reseller drives
traffic to the mall by means of their marketing and advertising efforts.

In July 1999, we established our call center in American Fork, Utah. The
center has immediate capacity for 40 telephone salespeople, with future
expansion capabilities to add up to 130 telephone sales stations. The primary
focus of the call center is to produce revenues by means of outbound sales call
campaigns and selling our products and services. We believe that the center will
also produce revenues by performing outbound calling services for our reseller
channel partners charging hourly fees and for other clients requiring inbound or
outbound services by charging a combination of development, activation, and
hourly fees. The center also supports inbound technical questions from the
Company's user base 24 hours per day, seven days per week. The center is
equipped with the latest technology, affording the operators digital
capabilities such as queue control over voice, e-mail, and fax in digital
format, rapid development and deployment of outbound marketing campaigns,
database integration into the outbound queuing system, Web-based monitoring
tools, and drastically reduced costs as compared to other standard telephone
technologies.

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PACKAGED SERVICES

While clients can select ICC services and particular features individually,
we generally market our services through the use of packaged services. Below is
a table which summarizes the features of each of our service packages followed
by a detailed description of each package.

<TABLE>
<CAPTION>
PACKAGE THREE
BUSINESS TO
PACKAGE ONE PACKAGE TWO BUSINESS
INTRODUCTORY STORESONLINE.COM ELECTRONIC
FEATURES PACKAGE PACKAGE COMMERCE
- ---------------------------------------------- --------------- ------------------- -----------------
<S> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------
Web Account Access............................ - - -
Static Webpages............................... - - -
- -------------------------------------------------------------------------------------------------------
24/7 E-Mail support........................... - - -
Custom Templates.............................. - - -
- -------------------------------------------------------------------------------------------------------
WYSIWYG....................................... - - n/a
24/7 Phone Technical Support.................. - -
- -------------------------------------------------------------------------------------------------------
Shopping Cart................................. - -
Real-Time Credit Card Transactions............ - -
- -------------------------------------------------------------------------------------------------------
Multiple Price-Sets........................... - -
Custom Shipping Rules......................... - -
- -------------------------------------------------------------------------------------------------------
Order Status and Tracking..................... - -
Store Statistical Reporting................... - -
- -------------------------------------------------------------------------------------------------------
Unique Domain Name/Virtual Hosting............ - -
Custom Forms.................................. - -
- -------------------------------------------------------------------------------------------------------
Import and Export Data........................ - -
Search and Browse Functionality............... - -
- -------------------------------------------------------------------------------------------------------
E-Mail Confirmation to Customers.............. - -
Featured Products and Sale Items.............. - -
- -------------------------------------------------------------------------------------------------------
Printable Coupons............................. - -
Unlimited Products and Categories............. - -
- -------------------------------------------------------------------------------------------------------
Inventory Tracking............................ - -
Integration with Existing Web Site............ - -
- -------------------------------------------------------------------------------------------------------
Custom Price Discount Methods................. - -
Multimedia Support............................ -
- -------------------------------------------------------------------------------------------------------
Unique Catalog Per Customer................... -
Assigned Access Rights........................ -
- -------------------------------------------------------------------------------------------------------
Multiple Order Methods........................ -
Integration with External System.............. -
</TABLE>

SERVICE PACKAGE ONE -- INTRODUCTORY PACKAGE

Clients can design a professional three page Web site, choosing from a
selection of over 25 templates. This entry level service is available through
our resellers as an introduction to electronic commerce, and the sites are
static in nature. While we do not offer free help desk support or credit card
processing with this package, e-mail based customer support is available.

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SERVICE PACKAGE TWO--STORESONLINE.COM PACKAGE

This package is sold by means of authorized Netgateway resellers and permits
clients to have a fully functional electronic commerce store quickly and easily.
This service requires no investment in hardware or software and clients can
quickly and dynamically generate sales.

SERVICE PACKAGE THREE--BUSINESS TO BUSINESS ELECTRONIC COMMERCE

For businesses that need more robust electronic commerce services for
business to business applications, the Netgateway ICC offers additional highly
customized features, including those described under the heading "Business--The
Netgateway Solution--The ICC Hub," designed to meet the requirements of our
clients in an extranet setting. These features are sold directly by our sales
professionals as each business to business opportunity involves different uses
of these features.

CLIENTS AND STRATEGIC RELATIONSHIPS

We view our clients as both the sponsor or owner of the electronic commerce
site in question and our resellers. We are currently processing electronic
commerce transactions for over 1,600 clients. The clients are geographically
dispersed and represent a mix of businesses.

We require each client using our services to enter into a standard
subscription agreement. Each subscription agreement provides that the client
pays us both monthly subscription fees for the services requested and specified
fees per transaction. These contracts are terminable by the client upon 30 days
prior written notice. In addition, we enter into agreements with its resellers.
These agreements vary significantly by reseller based on the levels of service
the reseller will distribute and other factors.

The following are descriptions of a number of the contracts into which we
have recently entered:

MEDIAONE. In July 1999, we entered into a strategic relationship with
MediaOne, a leading cable television operator, under which we will design,
develop, host, and manage Internet-based shopping malls in each of MediaOne's
markets. These markets currently consist of more than five million households.
These shopping malls will be branded with the MediaOne name, brand, and image,
will feature businesses local to each market, and will offer additional online
services, such as classified advertisements, local community events calendars,
and coupons. MediaOne has agreed to contribute commercial advertising time on
their cable systems in order to promote these malls. As a term of this
relationship, MediaOne acquired 50,000 shares of our common stock and warrants,
exercisable for up to an aggregate of 200,000 shares of our common stock, which
vests in four installments upon the satisfaction of milestones relating to the
scope of the launch of these Internet-based shopping malls. See
"Business--Clients and Strategic Relationships."

WIRELESS ONE. In June 1999, we entered into a reseller and mall agreement
with Wireless One, Inc. under which we will design and develop an Internet-based
shopping mall, to be branded with the Wireless One name, brand, and image, and
will offer our storefront creation and maintenance services to Wireless One's
subscribers. We will also be responsible for marketing support, including
development of mall content, training of Wireless One sales people, development
of Wireless One branded collateral material and periodic distribution and
updating of advertising spots to promote their

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services. Wireless One will promote this mall with a total of 1,000 30-second
spots every month jointly developed by us and Wireless One in all systems in
which it is able to provide advertising.

FRONTIERVISION MEDIA SERVICES. In July 1999, we entered into a reseller and
mall agreement with Frontiervision Media Services, a provider of cable
television programming services, pursuant to which we will design and develop an
Internet-based shopping mall, to be branded with the Frontiervision name, brand
and image, and will offer our storefront creation and maintenance services to
Frontiervision's subscribers. We will also be responsible for marketing support,
including development of mall content, training of Frontiervision sales people,
and production of advertising spots to promote their services. Frontiervision
will promote this mall with a minimum of 1,000 cablecasts per broadcast month in
each broadcast market where the mall services are offered.

XOOM.COM. In March 1999, we entered into an agreement with XOOM.com (NMS:
XMCM), an electronic commerce Web portal with over 7.8 million members. Under
the terms of the agreement:

- we are the sole provider of a private labeled version of XOOM.com's
products and services which permit its members to create and maintain
storefronts on the Web through XOOM.com;

- we developed XOOM.com's Internet-based shopping mall located at
WWW.XOOMMEMBERSTORES.COM;

- we are the sole provider of electronic commerce processing services to
XOOM.com's electronic commerce customers; and

- we will utilize XOOM.com as a Netgateway reseller to provide electronic
commerce solutions and services to its member companies.

B2BSTORES.COM INC. In July 1999, we entered into an electronic commerce
services agreement with B2BStores.com Inc., a catalog aggregator and procurement
company, under which we will develop, manage, and service an Internet commerce
site for B2BStores.com which will use the Internet commerce site to offer and
sell goods and services to businesses.

CB RICHARD ELLIS. In March 1999, we entered into an electronic commerce
services agreement with CB Richard Ellis (NYSE: CBG), one of the world's largest
building management and real estate services companies with over 12,000
properties under management and over $1 billion in revenue during 1998. Under
this agreement, we have been engaged to develop, manage, and service CB Richard
Ellis' Internet-based shopping mall and client extranet. This Web site is
designed to permit CB Richard Ellis personnel to conduct all of their corporate
materials purchasing, including computers and building and maintenance supplies,
and all global facilities management by means of the Internet. In addition, CB
Richard Ellis will offer to the tenants in the buildings they manage volume
purchasing services on the Internet for a variety of office products and
supplies.

RELIANT INNOVATIONS. In June 1999, we entered into an electronic commerce
services agreement with Reliant Innovations under which we will develop an
electronic commerce site that will enable Reliant Innovations to sell computer
products to clients who are members of specific associations with which Reliant
Innovations has formed a partnership.

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BERGEN BRUNSWIG DRUG COMPANY. In October 1999, we entered into an internet
services agreement with Bergen Brunswig Drug Company, a leading supplier of
pharmaceuticals, medical-surgical supplies, and specialty healthcare products,
under which we will design, develop, manage, and service an Internet-based
shopping mall to be branded with the Bergen Brunswig name, brand, and image and
which will contain on-line storefronts for affiliated local pharmacies. We will
also be responsible for training of Bergen Brunswig personnel.

OTHER RESELLERS. We have also recently entered into reseller agreements,
under which the reseller offers our services to their customers, with FedPage
(WWW.FEDPAGE.COM), a division of Federal Business Council, Inc., the industry
leader in the production of on site federal technology shows, Ayrix
Technologies, OKC Webshopper, Country Wide Net, Hill Country Network, Encom
Industries, Epicycle Business Solutions, Integrated Systems Solutions, Found.com
Inc., Card Service International and O.T.I. Cable Advertising.

Initial customer service and support for our customers will be provided
through our customer support staff of ten individuals that provides telephone
customer service and support 24 hours a day, 365 days a year. We can also
provide customers with access to information and customer support services by
means of the Internet.

RESEARCH AND DEVELOPMENT

Since June 1998, we have conducted extensive research and development with
respect to our technology. During the year ended June 30, 1999, we invested
approximately $499,000 in the research and development of our technology. Our
research and development efforts have:

- emphasized the development of advanced technology and new services and the
enhancement and refinement of existing services in response to rapidly
changing client specifications and industry needs, and

- included introducing support for evolving communications methodologies and
protocols, software methodologies and protocols, and computer hardware
technologies, as well as improving functionality, flexibility, ease of use
and enhancing the quality of documentation, training materials, and
technical support tools.

We intend to conduct additional research and development to, among other
things, further our strategy of developing cost effective services with broad
appeal, to provide easy access to scalable electronic commerce services, and to
offer additional functionality of our ICC services. At June 30, 1999, our
research and development activities utilized 22 computer programmers and
technicians.

COMPETITION

The electronic commerce services market is intensely competitive and
characterized by rapidly evolving technologies. We currently face substantial
competition in all of our product and service lines. We expect such competition
to continue and to increase in the future, as new competitors enter the Internet
market and existing competitors expand their product and service offerings. Our
target market is rapidly evolving and is subject to continuous technological
change. As a result, our competitors may be better positioned to address these
developments or may react more favorably to these changes, which could have a
material adverse effect on our business, prospects, financial condition, and
results of operations. We compete on the basis of a number of factors, including
the attractiveness of the electronic commerce services offered, the breadth and
quality of these services, creative design, engineering expertise, pricing,
technological innovation, and understanding clients' strategies and needs.

A number of these factors are beyond our control. Existing or future
competitors may develop or offer electronic commerce services that provide
significant technological, creative, performance, price, or other advantages
over the services offered by us.

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Our current and potential competitors include:

- Internet integrators and Web presence providers, such as IBM, iXL, Organic
Online, Proxicom, and USW;

- large information technology consulting service providers, such as
Andersen Consulting, Cambridge Technology Partners, and EDS;

- Internet commerce providers, such as Yahoo! Stores, Ariba, and
VerticalNet;

- software development companies, such as Microsoft, Broadvision, Open
Market, and InterShop;

- telecommunications companies, such as AT&T and MCI;

- application service providers, such as US Internetworking and the recently
announced EDS/SAP relationships, and

- Internet and online service providers, such as America Online, Lycos, and
Earthlink.

Although most of these types of competitors to date have not offered a full
range of Internet professional services, many are currently offering these
services or have announced their intention to do so. These competitors at any
time could elect to focus additional resources in our target markets, which
could materially adversely affect our business, prospects, financial condition,
and results of operations. Many of our current and potential competitors have
longer operating histories, larger customer bases, longer relationships with
clients, and significantly greater financial, technical, marketing, and public
relations resources than we do. Competitors that have established relationships
with large companies, but have limited expertise in providing Internet
solutions, may nonetheless be able to successfully use their client
relationships to enter our target market or prevent our penetration into their
client accounts.

Additionally, in pursuing acquisition opportunities, we may compete with
other companies with similar growth strategies, certain of which competitors may
be larger and have greater financial and other resources than we have.
Competition for these acquisition targets likely could also result in increased
prices of acquisition targets and a diminished pool of companies available for
acquisition.

There are relatively low barriers to entry into our business. We have
limited proprietary technology that would preclude or inhibit competitors from
entering the electronic commerce services market. Therefore, we must rely on the
skill of our personnel and the quality of our client service. The costs to
develop and provide electronic commerce services are low. Therefore, we expect
that we will continually face additional competition from new entrants into the
market in the future, and we are subject to the risk that our employees may
leave us and start competing businesses. The emergence of these enterprises
could have a material adverse effect on our business, prospects, financial
condition, and results of operations.

INTELLECTUAL PROPERTY

Our success is dependent upon our proprietary technology and other
intellectual property and on our ability to protect our proprietary technology
and other intellectual property rights. In addition, we must conduct our
operations without infringing on the proprietary rights of third parties. We
also intend to rely upon unpatented trade secrets and the know-how and expertise
of our employees. To protect our proprietary technology and other intellectual
property, we rely primarily on a combination of the protections provided by
applicable copyright, trademark, and trade secret laws as well as on
confidentiality procedures and licensing arrangements. We have one patent
application pending with the United States Patent and Trademark Office for our
electronic commerce system and method. We also have trademark applications
pending with the United States Patent and Trademark Office for NETGATEWAY,
NETGATEWAY ICC, NETGATEWAY INTERNET COMMERCE CENTER, NETGATEWAY "WHERE BUSINESS
DOES

50
<PAGE>
BUSINESS ON THE INTERNET," STORESONLINE, STORESONLINE.COM, STORESONLINE.COM
"WHERE MERCHANTS DO BUSINESS ON THE INTERNET", NETGATEWAY KNOWLEDGE AND COMMERCE
OF THE DIGITAL AGE, NETGATEWAY, THE POWER OF ORGANIZED INTERNET COMMERCE,
CABLECOMMERCE and two NETGATEWAY logos. Although we believe that we have taken
appropriate steps to protect our unpatented proprietary rights, including
requiring that our employees and third parties who are granted access to our
proprietary technology enter into confidentiality agreements with us, there can
be no assurance that these measures will be sufficient to protect our rights
against third parties. Others may independently develop or otherwise acquire
unpatented technologies or products similar or superior to ours.

We license from third parties certain software and Internet tools that we
include in our services and products. If any of these licenses were terminated,
we could be required to seek licenses for similar software and Internet tools
from other third parties or develop these tools internally. We may not be able
to obtain such licenses or develop such tools in a timely fashion, on acceptable
terms, or at all. Companies participating in the software and Internet
technology industries are frequently involved in disputes relating to
intellectual property. We may in the future be required to defend our
intellectual property rights against infringement, duplication, discovery, and
misappropriation by third parties or to defend against third-party claims of
infringement. Likewise, disputes may arise in the future with respect to
ownership of technology developed by employees who were previously employed by
other companies. Any such litigation or disputes could result in substantial
costs to, and a diversion of effort by, us. An adverse determination could
subject us to significant liabilities to third parties, require us to seek
licenses from, or pay royalties to, third parties, or require us to develop
appropriate alternative technology. Some or all of these licenses may not be
available to us on acceptable terms or at all, and we may be unable to develop
alternate technology at an acceptable price or at all. Any of these events could
have a material adverse effect on our business, prospects, financial condition,
and results of operations.

EMPLOYEES

As of the date of this prospectus, we had 101 full-time employees:
35 engaged in sales and marketing, 39 engaged in the development of our
electronic commerce solutions, six in customer support, and 21 in general
administration and finance. We intend to hire additional key personnel in the
near future.

FACILITIES

Our headquarters are located at 300 Oceangate, Suite 500, Long Beach,
California 90802. These premises, which occupy 9,100 square feet, are subject to
a lease between Netgateway and an unaffiliated third party. The lease expires on
July 9, 2001 and our monthly payments under this lease are currently
approximately $8,500. We believe that, in the event alternative or larger
offices are required, such space is available at competitive rates.

To house and support the ICC, Netgateway maintains its equipment in Exodus'
state-of-the-art data center, which provides a 24 hour per day, seven day per
week accessible operating environment with multiple redundant high-speed
connections to the Internet backbone. This data center features raised floors,
HVAC temperature control systems, and seismically braced racks. All systems are
connected to high capacity uninterruptable power supplies, which are in turn
backed by a high output diesel generator. Main power is provided to the facility
through connectivity to two separate power grids. Non-stop connectivity is
provided through multiple fiber egresses using different bandwidth providers.
Facility security includes 24 hour per day, seven day per week keycard access,
video monitors, motion sensors, and staff members on-site.

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<PAGE>
GOVERNMENTAL REGULATION

We are not currently subject to direct regulation by any government agency,
other than regulations applicable to businesses generally, and there are
currently few laws or regulations directly applicable to access to, or commence
on, the Internet. However, due to the increasing popularity and use of the
Internet, it is possible that various laws and regulations may be adopted with
respect to the Internet, covering issues such as taxation, user privacy,
pricing, and characteristics and quality of products and services. In 1998, the
United States Congress established the Advisory Committee on Electronic Commerce
which is charged with investigating, and making recommendations to Congress
regarding, the taxation of sales by means of the Internet. The adoption of any
such laws or regulations upon the recommendation of this Advisory Committee or
otherwise may decrease the growth of the Internet, which could in turn decrease
the demand for our products or services, our cost of doing business or otherwise
have an adverse effect on our business, prospects, financial condition, or
results of operations. Moreover, the applicability to the Internet of existing
laws governing issues, such as property ownership, libel, and personal privacy
is uncertain. Future federal or state legislation or regulation could have a
material adverse effect on our business, prospects, financial condition, and
results of operations.

LEGAL MATTERS

We are not a party to any material litigation or legal proceeding relating
to our products and services or otherwise. Except as described below, we are not
aware of any material legal proceedings threatened against us.

In January 1999, we entered into a binding letter of intent to acquire the
assets and technology of iShopper, an Internet-based shopping mall. The purchase
price in the letter of intent was (1) $50,000, (2) 50,000 shares of our common
stock upon closing, and (3) up to an additional 100,000 shares of our common
stock based upon meeting designated financial milestones. The letter of intent
included a number of conditions to our obligation to consummate the acquisition,
including:

- our satisfaction with our due diligence review of iShopper; and

- that iShopper's technology permitted the portability of the stores in
their mall to our technology.

In June 1999, we terminated this letter of intent because these conditions were
not satisfied. iShopper contacted us contesting this termination and alleging
bad faith. We afforded iShopper the opportunity to demonstrate that these
conditions can be met. We were later informed that iShopper sold its assets to a
third party. iShopper has claimed they have been damaged by us. To date, no
litigation has been commenced.

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<PAGE>
MANAGEMENT

OUR DIRECTORS AND EXECUTIVE OFFICERS

The directors and executive officers of Netgateway, their ages, and their
positions held with Netgateway are as follows:

<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------------------- ----------- ----------------------------------------------
<S> <C> <C>
Keith D. Freadhoff..................... 40 Chairman of the Board
Roy W. Camblin III..................... 52 Chief Executive Officer, Chief Information
Officer, and Director Nominee
Donald M. Corliss, Jr. ................ 49 President and Director
David Bassett-Parkins.................. 38 Chief Financial Officer, Chief Operating
Officer, and Director
Hanh Ngo............................... 28 Executive Vice President--Operations
John M. Wendel......................... 42 Senior Vice President
Craig Gatarz........................... 37 General Counsel
Scott Beebe............................ 47 Director
William Brock.......................... 49 Director
Ronald Spire........................... 49 Director
James Demetriades...................... 37 Director Nominee
John Dillon............................ 50 Director Nominee
</TABLE>

The following is certain summary information with respect to the directors,
director-nominee, and executive officers of Netgateway.

KEITH D. FREADHOFF, has served as Chairman of the Board of Directors of
Netgateway since our inception and has also served as Chief Executive Officer of
Netgateway since our inception through September 1999. From November 1994 to
November 1997, Mr. Freadhoff was the co-founder, Chairman of the Board of
Directors, and Chief Executive Officer of Prosoft I-Net Solutions, a public
company engaged in development and provision of software and Internet training
solutions. From November 1993 to November 1994, Mr. Freadhoff has served as the
Executive Director of Career Planning Center, a community based organization
serving disadvantage populations with job training and social services. From
1993 to 1994, he also served as President of the Focus Institute, a California
based Microsoft Authorized Training and Education Center. From 1991 to 1992,
Mr. Freadhoff served as a Vice President of Frojen Advertising, an advertising
and marketing firm. From 1987 to 1991, Mr. Freadhoff founded and served as
President of Oasis Corporate Education and Training, a customized training
company that developed courseware for manufacturing, financial, service, and
public organizations. Mr. Freadhoff completed graduate level work at the
University of Southern California and earned his undergraduate degree at the
University of Nebraska.

ROY W. CAMBLIN III, has served as Chief Executive Officer of Netgateway
commencing on October 1, 1999. Mr. Camblin has also served as Chief Information
Officer of Netgateway since July 1999. Prior to joining Netgateway, from May
1998 until July 1999, Mr. Camblin was the Chief Information Officer and an
Executive Vice President of CB Richard Ellis. From January 1996 to April 1998,
Mr. Camblin was the Head of Global Operations and Technology and a Vice
President at Citibank. From July 1993 to December 1995, Mr. Camblin was the
Chief Information Officer and Senior Vice President of Oracle Corporation.

DONALD M. CORLISS, JR., joined Netgateway in January 1998 and has served as
the President and a Director of Netgateway since March 1998. From 1993 to
June 1998, Mr. Corliss was an independent investor and owned, developed, and
served in senior management positions with several business and development
ventures. From July 1993 through June 1998, Mr. Corliss served as a vice
president and a

53
<PAGE>
director of Westover Hills Development, Inc., a real estate development company.
From August 1993 through June 1998, Mr. Corliss served as a vice president and a
director of the general partner of Brentwood Development, a residential real
estate development company, which was charged with management of the development
projects undertaken by the partnership. From August 1994 through March 1998,
Mr. Corliss served as a consultant and was a founder of Ice Specialty
Entertainment, a developer of ice arena complexes, which was charged with the
structuring and negotiation of the business and projects undertaken by ICE
Specialty Entertainment. From June 1995 to date, Mr. Corliss served as a
director and secretary of SHH Properties, Inc., a real estate investment
company. From 1996 to June 1998, Mr. Corliss served as a vice president and a
director of, Brentwood Development III, Inc., a real estate development company,
which was one of two corporate general partners of Inglehave Farm L.P. From 1997
through May 1998, Mr. Corliss served as a vice president and a director of
Executive Property Management Services, Inc. a provider of executive management
services relating to real estate development. As co-founder in many of these
projects, responsibilities included the operation, management, structuring, and
implementation of business strategies and plans, as well as the development and
implementation of the general business and accounting systems necessary for such
business operations. From 1977 to 1993, Mr. Corliss was engaged in private law
practice. Mr. Corliss earned a LLM in Taxation from New York University, his
Juris Doctorate degree from the University of Santa Clara, and a Bachelor of
Arts degree from the University of California at Santa Barbara. Of the ventures
of Mr. Corliss, two real estate development ventures, Westover Hills
Development, Inc. and Inglehame Farms L.P. sought protection from creditors
pursuant to Chapter 11 of the United States Bankruptcy Code in 1997 and 1998,
respectively. Westover has since emerged from Chapter 11 and has commenced
operations.

DAVID BASSETT-PARKINS, has served as Chief Financial Officer, Chief
Operating Officer, and a Director of Netgateway since our inception in
March 1998. From February 1992 to May 1998, Mr. Bassett-Parkins held various
senior management positions at Wedbush Morgan Securities, a privately held
regional securities firm, including Vice President of Management Information
Systems, Vice President of Customer Services, and Vice President of Client
Banking Services. From 1988 to February 1992, Mr. Bassett-Parkins served as a
Director of Automation for ISD, a privately held Interior Architecture firm
based in Chicago. From 1985 to 1988, Mr. Bassett-Parkins was managing partner
for Architectural CADD Systems, a privately held software developer and
reseller. Mr. Bassett-Parkins holds a B.S. in Management from California State
Polytechnic University, Pomona and an Executive Education Certificate from
University of California at Los Angeles.

HANH NGO, has served as Executive Vice President--Operations of Netgateway
since June 1998. Prior to joining Netgateway, Ms. Ngo held the position in
Financial Planning and Analysis as a Financial Analyst for Nissan Motor
Corporation from June 1997 to June 1998. From March 1992 to June 1997, Ms. Ngo
worked in various capacities at Wedbush Morgan Securities, a privately held
regional securities firm, including as a business analyst for the vice president
and as a client banking officer and licensed stockbroker. Ms. Ngo holds a M.B.A.
in Finance from California State University, Northridge, and a B.A. in Economics
from University of California, Irvine.

JOHN M. WENDEL, has served as Senior Vice President since June 1999.
Mr. Wendel directs marketing, sales and call center support operations.
Mr. Wendel served as the Executive Vice President and General Manager of Sento
Training, a training solutions and information technology support solutions
company from June 1998 to June 1999. Mr. Wendel served as Executive Vice
President from January 1996 to June 1998 of Interactive Teleservices Corporation
and as Senior Worldwide Director of Sykes Enterprises from 1994 to
January 1996. Mr. Wendel has consulted with and/or published help desk
strategies for such organizations as SSI (Matrixx), Stream, MicroAge, and
Unisys. Mr. Wendel worked at Microsoft where he directed National Accounts and
Strategies.

CRAIG GATARZ, has served as General Counsel of Netgateway since April 1999.
From 1989 until April 1999, Mr. Gatarz was an attorney at Jones, Day, Reavis &
Pogue, a law firm, and specialized in

54
<PAGE>
corporate law, particularly corporate restructurings and asset-based lending
transactions. Mr. Gatarz received his law degree in 1987 from the University of
Virginia School of Law and is admitted to practice in New York, New Jersey, and
California. Mr. Gatarz serves on the board of directors of BBMG Entertainment,
Inc., a California-based film production company.

SCOTT BEEBE, has served as a Director of Netgateway since June 1998. From
April 1987 through June 1998, Mr. Beebe served as the managing partner of Steps,
an investment and consulting firm specializing in high tech growth companies.
Mr. Beebe was a registered representative in the securities industry from 1982
through 1998. Mr. Beebe graduated from the University of California at Berkeley
in 1973.

WILLIAM BROCK has served as a Director of Netgateway since July 1999. Since
May 1999, Mr. Brock has served as the President and Chief Operating Officer of
Marketplace Technologies, Inc., a corporate finance electronic commerce company.
From September 1996 to April 1999, Mr. Brock served as vice president and Head
of the Structured Note Group in the Fixed Income Division of Salomon Smith
Barney. From December 1994 to August 1996, Mr. Brock served as Managing Director
of Blizzard Capital Markets, a leveraged buyout company. From 1987 to November
1994, Mr. Brock served as Vice President and Co-Head of Medium Term Notes at
Goldman, Sachs & Co. From 1980 to 1987, Mr. Brock served as Vice President,
Short Term Debt at The First Boston Corporation. Since April 1996, Mr. Brock has
served as a Director and owner of Middleton's, a mill working company.

RONALD SPIRE has served as a Director of Netgateway from September 1998 to
December 1998 and since April 1999. Since September 1989, Mr. Spire has been
retired. From June 1984 to September 1989, Mr. Spire was the co-founder and an
executive of PCI Group, Inc., a subcontractor for aerospace manufacturers. From
December 1981 to June 1984, Mr. Spire was a partner with Wolfgang Puck in
Chinois on Main, Inc. and other restaurants in the Los Angeles area. Mr. Spire
earned his Juris Doctorate degree from Southwestern University School of Law,
and his Bachelor or Arts degree from the University of California at Los
Angeles.

DIRECTOR NOMINEES

The following individuals are nominees to our Board of Directors and will be
appointed as a Director upon the closing of this offering.

ROY W. CAMBLIN III. See "Management--Our Directors and Executive Officers."

JAMES DEMETRIADES. In 1991, Mr. Demetriades formed Software Technologies
Corporation, a provider of solutions for integrating applications, databases and
legacy systems, in real-time and batch, across the entire enterprise. He has
served as Chairman, Chief Executive Officer and President of Software
Technologies Corporation. Mr. Demetriades graduated from Loyola Marymount in
1985 with majors in Computer Science and Economics and a minor in Business.

JOHN DILLON. In September 1999, Mr. Dillon joined Salesforce.com, a second
generation Internet ASP start-up company focused on business application
services, as President and Chief Executive Officer. Mr. Dillon served as the
interim President and Chief Executive Officer of Perfecto Technologies, a
start-up company delivering products for insuring Internet application security
from May 1999 to September 1999. Mr. Dillon served as President and Chief
Executive Officer for Hyperion Solutions, the global company formed through the
merger of Arbor Software and Hyperion Software from May 1998 to May 1999. From
December 1993 through May 1998, Mr. Dillon worked at Arbor Software, first as
vice president of sales and then as President and Chief Executive Officer. Mr.
Dillon received a Bachelor of Science degree in engineering from the United
States Naval Academy at Annapolis and an MBA from Golden Gate University. He
served for five years on active duty in the United States Navy nuclear submarine
service and retired with the rank of Commander from the Naval Reserve.

55
<PAGE>
ELECTION OF OFFICERS

Officers are elected annually by the board of directors and hold office at
the discretion of the board of directors. There are no family relationships
among our directors and executive officers.

MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS

During our fiscal year ended June 30, 1999, our Board of Directors held one
meeting and took action an additional 22 times by written consent.

In September 1998, the board of directors created a compensation committee,
which will, upon the closing of the offering, be comprised of Messrs. Brock,
Beebe, and Spire. The compensation committee has (1) full power and authority to
interpret the provisions of, and supervise the administration of, our stock
option plans and (2) the authority to review all of our compensation matters.

In April 1999, the board of directors created an audit committee, which is
currently comprised of Messrs. Corliss, Brock, and Spire. The audit committee is
responsible for reviewing the results of the audit engagement with the
independent auditors; reviewing the adequacy, scope, and results of the internal
accounting controls and procedures; reviewing the degree of independence of the
auditors; reviewing the auditors' fees; and recommending the engagement of
auditors to the full board of directors.

EXECUTIVE COMPENSATION

None of our executive officers received cash compensation during the period
from our inception on March 4, 1998 to June 30, 1998.

56
<PAGE>
The following table sets forth the compensation earned during the fiscal
year ended June 30, 1999, by our Chief Executive Officer and our six other most
highly compensated executive officers for services rendered in all capacities
for that fiscal year.

SUMMARY COMPENSATION TABLE FOR LAST FISCAL YEAR

<TABLE>
<CAPTION>
LONG TERM
COMPENSATION AWARD
------------------------------------
ANNUAL COMPENSATION RESTRICTED SECURITIES
--------------------- STOCK UNDERLYING
NAME AND PRINCIPAL POSITION SALARY($) BONUS($) AWARDS(1) OPTIONS(#)
- -------------------------------- ---------- --------- --------------- -------------------
<S> <C> <C> <C> <C>
Keith D. Freadhoff, ............
Chairman of the Board of
Directors $ 100,625 $ 57,500 $ 3,200,000(2) 0(2)

Roy W. Camblin III .............
Chief Executive Officer,
Chief Information Officer,
and Director-Nominee 0 0 0 0

Donald M. Corliss, Jr. .........
President and Director 96,250 50,000 3,200,000(3) 0(3)

David Bassett-Parkins ..........
Chief Financial Officer,
Chief Operating Officer,
And Director 87,500 50,000 3,200,000(4) 0(4)

Hahn Ngo .......................
Executive Vice
President--Operations 75,000 25,000 0 75,000(5)

John M. Wendel .................
Senior Vice President 10,833 0 0 0

Craig Gatarz ...................
General Counsel 30,000 7,500 0 21,703(6)
</TABLE>

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

(1) Subsequent to June 30, 1999, we terminated performance-based stock options
exercisable for an aggregate of 780,000 shares of common stock and other
stock options exercisable for an aggregate 1,200,000 shares of common stock
granted to Messrs. Freadhoff, Corliss, and Bassett-Parkins and issued in
lieu of these options restricted stock awards of an aggregate of 1,200,000
shares of common. Subsequent to June 30, 1999, we terminated
performance-based stock options exercisable for an aggregate of 200,000
shares of common stock and other stock options exercisable for an aggregate
of 116,667 shares of common stock granted to Ms. Ngo.

(2) During the year ended June 30, 1999, Mr. Freadhoff earned
performance-based stock options exercisable for an aggregate of 69,000
shares of common stock and other options exercisable for an aggregate of
200,000 shares of common stock. Subsequent to June 30, 1999, all performance
and other options granted to Mr. Freadhoff, including the options referenced
in the preceding sentence, were terminated. In lieu of these options, Mr.
Freadhoff received a restricted stock award of 400,000 shares of common
stock.

(3) During the year ended June 30, 1999, Mr. Corliss earned performance-based
stock options exercisable for an aggregate of 64,000 shares of common stock
and other options exercisable for an aggregate of 200,000 shares of common
stock. Subsequent to June 30, 1999, all performance and

57
<PAGE>
other options granted to Mr. Corliss, including the options referenced in
the preceding sentence, were terminated. In lieu of these options, Mr.
Corliss received a restricted stock award of 400,000 shares of common stock.

(4) During the year ended June 30, 1999, Mr. Bassett-Parkins earned
performance-based stock options exercisable for an aggregate of 60,000
shares of common stock and other options exercisable for an aggregate of
200,000 shares of common stock. Subsequent to June 30, 1999, all performance
and other options granted to Mr. Bassett-Parkins, including the options
referenced in the preceding sentence, were terminated. In lieu of these
options, Mr. Bassett-Parkins received a restricted stock award of 400,000
shares of common stock.

(5) During the year ended June 30, 1999, Ms. Ngo earned performance-based
stock options exercisable for an aggregate of 50,000 shares of common stock
and other options exercisable for an aggregate of 133,333 shares of common
stock. Subsequent to June 30, 1999, all performance options granted to Ms.
Ngo, including the performance options referenced in the preceding sentence,
were terminated and all other options awarded to Ms. Ngo were reduced so as
to be exercisable for an aggregate of 150,000 shares of common stock.

(6) Subsequent to June 30, 1999, we amended performance-based stock options
exercisable for an aggregate of 150,000 shares of common stock granted to
Mr. Gatarz so as to provide that these warrants would vest over a period of
two years and not as a result of the satisfaction of performance milestones.
As a result of this amendment, of such options, options exercisable for an
aggregate of 21,703 shares of common stock were deemed to have vested by
June 30, 1999.

For further information with respect to the employment agreements of these
individuals, see "Management--Employment Agreements."

OPTION GRANTS IN LAST FISCAL YEAR

The following table sets forth each grant of stock options during the fiscal
year ended June 30, 1999 to our Chief Executive Officer and our six other most
highly compensated executive officers. The assumed 5% and 10% rates of stock
price appreciation are provided in accordance with rules of the Commission and
do not represent our estimate or projection of our common stock price. Actual
gains, if any, on stock option exercises are dependent on the future performance
of our common stock, overall market conditions, and the option holders'
continued employment through the vesting period. Unless the market price of our
common stock appreciates over the option term, no value will be realized from
the option grants made to these executive officers. The potential realizable
values shown in the table are calculated by assuming that the estimated fair
market value of our common stock on the date of grant increases by 5% and 10%,
respectively, during each year of the option term. The fair market value of our
common stock was determined on the basis of the closing sales price of our
common stock on June 30, 1999. Each of the options has a ten-year term. However,
the options will

58
<PAGE>
terminate earlier if the optionee ceases service with us unless the option is an
employee terminated without cause and certain instances in cases of changes in
control of Netgateway.
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE
VALUE AT
ASSUMED
ANNUAL
RATES OF
STOCK
INDIVIDUAL GRANTS PRICE
---------------------------- APPRECIATION
NUMBER OF PERCENT OF FOR
SECURITIES TOTAL OPTIONS OPTION
UNDERLYING GRANTED TO TERM($)
OPTIONS EMPLOYEES IN EXERCISE OR CLOSING ---------
NAME GRANTED(#) FISCAL YEAR(6) BASE PRICE($) EXPIRATION DATE SALE PRICE($) 5%
- ---------------------------- ----------- --------------- ----------------- ----------------- --------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Keith D. Freadhoff ......... 276,000(1) 7.7 2.50 December 15, 2008 4.87 1,499,430
400,000(1) 11.1 4.87 December 15, 2008 4.87 1,225,087

Roy W. Camblin III (2) ..... -- -- -- -- -- --

Donald M. Corliss, Jr. ..... 264,000(3) 7.3 2.50 December 15, 2008 4.87 1,434,237

400,000(3) 11.1 4.87 December 15, 2008 4.87 1,225,087

David Bassett-Parkins ...... 240,000(4) 6.7 2.50 December 15, 2008 4.87 1,303,852

400,000(4) 11.1 4.87 December 15, 2008 4.87 1,225,087

Hahn Ngo ................... 200,000(5) 5.6 2.50 December 15, 2008 4.87 1,086,543

266,667(5) 7.4 4.87 December 15, 2008 4.87 816,726

John M. Wendel ............. -- -- -- -- -- --

Craig Gatarz ............... 150,000 4.2 6.50 April 4, 2009 12.88 2,172,024

11,812 0.3 5.17 April 4, 2009 12.88 186,750

NAME 10% 0%(6)
- ---------------------------- --------- ---------
<S> <C> <C>
Keith D. Freadhoff ......... 2,796,301 1,262,560
3,104,610 --
Roy W. Camblin III (2) ..... -- --
Donald M. Corliss, Jr. ..... 2,674,723 1,207,666
3,104,610 --
David Bassett-Parkins ...... 2,431,566 1,097,878
3,104,610 --
Hahn Ngo ................... 2,026,305 914,898
2,069,743 --
John M. Wendel ............. -- --
Craig Gatarz ............... 4,036,110 1,815,921
333,540 144,147
</TABLE>

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

* Less than one percent.

(1) Subsequent to June 30, 1999, all of these options granted to Mr. Freadhoff
were terminated.

(2) Mr. Camblin commenced his employment with us in August 1999.

(3) Subsequent to June 30, 1999, all of these options granted to Mr. Corliss
were terminated

(4) Subsequent to June 30, 1999, all of these options granted to Mr.
Bassett-Parkins were terminated.

(5) Subsequent to June 30, 1999, options exercisable for an aggregate of 316,667
shares of common stock granted to Ms. Ngo were terminated.

(6) Calculated using the Black Scholes pricing model with the following
assumptions: (a) volatility - 100%, (b) risk free rate - 5%, (c) dividend
yield - 0% and (d) time of exercise - 10 years.

59
<PAGE>
AGGREGATE FISCAL YEAR-END OPTION VALUES

The following table sets forth information concerning the year-end number
and value of unexercised options with respect to each of these executive
officers. None of these individuals exercised any options during this period.

<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS IN-THE-MONEY OPTIONS
AT FISCAL YEAR-END(#) AT FISCAL YEAR-END($)(1)
-------------------------- ----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----------------------------------------------------------- ----------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Keith D. Freadhoff(2)...................................... -- -- -- --

Roy W. Camblin III(3)...................................... -- -- -- --

Donald M. Corliss, Jr.(4).................................. -- -- -- --

David Bassett-Parkins(5)................................... -- -- -- --

Hahn Ngo(6)................................................ 75,000 75,000 478,500 478,500

John M. Wendel(7).......................................... -- -- -- --

Craig Gatarz(8)............................................ 21,703 140,109 103,089 665,118
</TABLE>

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

(1) Based on the closing sale price of our common stock on the OTC bulletin
board at fiscal year end of $11.25 per share less the exercise price payable
for such shares. The fair market value of our common stock at June 30, 1999
was determined on the basis of the closing sale price of our common stock on
June 30, 1999.

(2) At June 30, 1999, Mr. Freadhoff held stock options under our plans
exercisable for an aggregate of 676,000 shares of common stock. Subsequent
to June 30, 1999, all of these options granted to Mr. Freadhoff were
terminated. In lieu of these options, Mr. Freadhoff received a restricted
stock award of 400,000 shares of common stock. At June 30, 1999, Mr.
Freadhoff held exercisable in-the-money stock options for an aggregate of
200,000 shares of common stock with a value of $1,276,000 and held
unexercisable in-the-money stock options for an aggregate of 476,000 shares
of common stock with a value of $3,036,880.

(3) Mr. Camblin commenced his employment with us in August 1999.

(4) At June 30, 1999, Mr. Corliss held stock options under our plans exercisable
for an aggregate of 664,000 shares of common stock. Subsequent to June 30,
1999, all of these options granted to Mr. Corliss were terminated. In lieu
of these options, Mr. Corliss received a restricted stock award of 400,000
shares of common stock. At June 30, 1999, Mr. Corliss held exercisable
in-the-money stock options for an aggregate of 200,000 shares of common
stock with a value of $1,276,000 and held unexercisable in-the-money stock
options for an aggregate of 464,000 shares of common stock with a value of
$2,960,320.

(5) At June 30, 1999, Mr. Bassett-Parkins held stock options under our plans
exercisable for an aggregate of 640,000 shares of common stock. Subsequent
to June 30, 1999, all of these options granted to Mr. Bassett-Parkins were
terminated. In lieu of these options, Mr. Bassett-Parkins received a
restricted stock award of 400,000 shares of common stock. At June 30, 1999,
Mr. Bassett-Parkins held exercisable in-the-money stock options for an
aggregate of 200,000 shares of common stock with a value of $1,276,000 and
held unexercisable in-the-money stock options for an aggregate of 440,000
shares of common stock with a value of $2,807,200.

(6) At June 30, 1999, Ms. Ngo held stock options under our plans exercisable for
an aggregate of 466,667 shares of common stock. Subsequent to June 30, 1999,
options exercisable for an aggregate

60
<PAGE>
of 316,667 shares of common stock granted to Ms. Ngo were terminated. At
June 30, 1999, Ms. Ngo held exercisable in-the-money stock options for an
aggregate of 133,333 shares of common stock with a value of $850,665 and
held unexercisable in-the-money stock options for an aggregate of 333,334
shares of common stock with a value of $2,126,671.

(7) At June 30, 1999, Mr. Wendel held no stock options.

(8) At June 30, 1999, Mr. Gatarz held stock options under our plans exercisable
for an aggregate of 161,812 shares of common stock. Subsequent to June 30,
1999, we amended performance-based stock options exercisable for an
aggregate of 150,000 shares of common stock granted to Mr. Gatarz so as to
provide that these warrants would vest over a period of two years and not as
a result of the satisfaction of performance milestones. As a result of this
amendment, of such options, options exercisable for an aggregate of 21,703
shares of common stock were deemed to have vested by June 30, 1999.
Accordingly, at June 30, 1999, Mr. Gatarz held exercisable in-the-money
stock options for an aggregate of 21,703 shares of common stock with a value
of $103,089 and held unexercisable in-the-money stock options for an
aggregate of 140,109 shares of common stock with a value of $665,118.

DIRECTOR COMPENSATION

To date, directors have received no compensation for their services other
than reimbursement of expenses relating to attending meetings of the board of
directors. However, in connection with Mr. Brock joining our Board of Directors,
the Compensation Committee granted Mr. Brock stock options under our 1999 stock
compensation program exercisable for an aggregate of 150,000 shares of common
stock exercisable at $11.00 per share, which options vest as follows: 50,000 at
July 20, 1999 and the remainder in equal quarterly increments for two years.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

We did not have a compensation committee during the period from our
inception on March 4, 1998 through September 29, 1998. On December 15, 1998 the
compensation committee determined to accrue salary retroactively for the
executive officers of Netgateway commencing July 1, 1998. The executive officers
of Netgateway have since waived this salary. There were no interlocking
relationships between us and other entities that might affect the determination
of the compensation of our directors and executive officers.

EMPLOYMENT AGREEMENTS

The table below is a summary of the provisions of the employment agreements
of our executive officers.

<TABLE>
<CAPTION>
CONTRACT
COMMENCEMENT CONTRACT
NAME DATE TERMINATION DATE PER ANNUM SALARY BONUS ARRANGEMENTS
- --------------------------------- -------------- ----------------- ------------------ ---------------------------
<S> <C> <C> <C> <C>
Keith D. Freadhoff, January 1, December 31, 2001 $185,000 through $57,500 payable in July
Chairman of the Board of 1999 June 30, 1999 1999
Directors $201,500 Eligible for bonus of up to
thereafter $28,750 for each of the
three month periods ended
September 30, 1999 and
December 31, 1999 upon
satisfaction of earnings
milestones
Otherwise as determined by
the board of directors

Roy W. Camblin III, July 26, 1999 July 25, 2000 $175,000 As determined by the board
Chief Executive Officer, of directors
Chief Information Officer, and
Director-Nominee
</TABLE>

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<PAGE>
<TABLE>
<CAPTION>
CONTRACT
COMMENCEMENT CONTRACT
NAME DATE TERMINATION DATE PER ANNUM SALARY BONUS ARRANGEMENTS
- --------------------------------- -------------- ----------------- ------------------ ---------------------------
Donald M. Corliss, Jr., January 1, December 31, 2001 $185,000 through $55,000 payable in July
President and Director 1999 June 30, 1999 1999
$192,500 Eligible for bonus of up to
thereafter $27,500 for each of the
three month periods ended
September 30, 1999 and
December 31, 1999 upon
satisfaction of earnings
milestones
Otherwise as determined by
the board of directors
<S> <C> <C> <C> <C>

David Bassett-Parkins, January 1, December 31, 2001 $175,000 $50,000 payable in July
Chief Operating Officer, Chief 1999 1999
Financial Officer, and Director Eligible for bonus of up to
$25,000 for each of the
three month periods ended
September 30, 1999 and
December 31, 1999 upon
satisfaction of earnings
milestones
Otherwise as determined by
the board of directors

Hanh Ngo, January 1, December 31, 2001 $135,000 $25,000 payable in July
Executive Vice President-- 1999 1999
Operations Eligible for bonus of up to
$12,500 for each of the
three month periods ended
September 30, 1999 and
December 31, 1999 upon
satisfaction of earnings
milestones
Otherwise as determined by
the board of directors

John M. Wendel June 1, 1999 May 31, 2001 $130,000 $40,000 payable in June
Senior Vice President 1999
Eligible for bonus of up to
$7,500 for each of the
three month periods ended
May 31, 2000 and upon
satisfaction of earnings
milestones
Eligible for bonus of up to
$17,500 for each of the
three month periods ended
May 31, 2001 and upon
satisfaction of earnings
milestones

Craig Gatarz, April 5, 1999 April 5, 2002 $120,000 through Monthly bonus of $3,750 for
General Counsel December 31, 1999 the period from July 1,
$150,000 1999 through December 31,
thereafter 1999. Otherwise as
determined by the board of
directors.
</TABLE>

In the event of a change in control of Netgateway, all options previously
granted to these individuals which remain unvested will automatically vest
immediately. Upon a termination of the employment of any of these individuals
following a change in control for any reason other than the relevant officer's
death or disability or for cause we are required to pay to such individual in
the case of Messrs. Freadhoff, Corliss, Wendel and Bassett-Parkins, a lump sum
severance payment equal to three times the sum of (1) his then current annual
salary and (2) his highest bonus in the three year period preceding the change
in control, and in the case of Ms. Ngo, Mr. Gatarz, or Mr. Camblin a lump sum
severance payment equal to two times the sum of (1) her or his then current
annual salary and (2) her or his highest bonus in the two year period preceding
the change in control. If this severance payment results in the imposition of an
excise tax on the relevant individual, we are required to gross up this
individual for such excess tax and any income taxes arising as a result of the
gross up payment. In addition, if the relevant individual's employment is
terminated by us without cause or by the relevant individual with good reason
then we are required to pay the relevant individual a lump

62
<PAGE>
sum severance payment equal to his or her current annual salary for the
remainder of the employment period. The relevant individual may terminate his or
her employment at any time upon at least 30 days written notice to us. Upon the
termination of such agreement, the relevant individual is subject to
non-compete, non-disclosure, and non-solicitation provisions for one year.

STOCK OPTION PLANS

1998 STOCK OPTION PLAN FOR SENIOR EXECUTIVES

In December 1998, the board of directors adopted, and our stockholders
approved, the 1998 stock option plan for senior executives. This plan provides
for the grant of options to purchase up to 5,000,000 shares of common stock to
senior executives of Netgateway. Options may be either "incentive stock options"
or non-qualified stock options under Federal tax laws.

This plan will be administered by the compensation committee of the board of
directors, a majority of the members of which consist of "non-employee
directors" of the board of directors. The committee will determine, among other
things, the individuals who shall receive options, the time period during which
the options may be partially or fully vested and exercisable, the number of
shares of common stock issuable upon the exercise of each option, and the option
exercise price.

The exercise price per share of common stock subject to an incentive option
may not be less than the fair market value per share of common stock on the date
the option is granted. The per share exercise price of the common stock subject
to a non-qualified option may be established by the committee, but shall not be
less than 50% of the fair market value per share of common stock on the date the
option is granted. The aggregate fair market value of common stock for which any
person may be granted incentive stock options which first become exercisable in
any calendar year may not exceed $100,000 on the date of grant.

No stock option may be transferred by an optionee other than by will or the
laws of descent and distribution or, if permitted, pursuant to a qualified
domestic relations order and, during the lifetime of the optionee, the option
will be exercisable only by the optionee. In the event of termination of
employment by reason of death, disability, or by us for cause (as defined in
each optionee's employment agreement), the optionee will have no more than
365 days after such termination during which the optionee shall be entitled to
exercise the vested options, unless otherwise determined by the board of
directors. Upon termination of employment by us without cause or by the optionee
for good reason (as defined in the optionee's employment agreement), the
optionee's options remain exercisable to the extent the options were exercisable
on the date of such termination until the expiration date of the options
pursuant to the option agreement.

We may grant options under this plan within ten years from the effective
date of the plan. The effective date of this plan is December 31, 1998. Holders
of incentive stock options granted under this plan cannot exercise these options
more than ten years from the date of grant. Options granted under this plan
generally provide for the payment of the exercise price in cash and may provide
for the payment of the exercise price by delivery to us of shares of common
stock already owned by the optionee having a fair market value equal to the
exercise price of the options being exercised or by a combination of these
methods. Therefore, if it is provided in an optionee's option agreement, the
optionee may be able to tender shares of common stock to purchase additional
shares of common stock and may theoretically exercise all of his stock options
with no additional investment other than the purchase of his original shares.

Any unexercised options that expire or that terminate upon an optionee's
ceasing to be employed by us become available again for issuance under this
plan.

On the date of this prospectus, options exercisable for an aggregate of
500,000 shares of common stock were outstanding pursuant to this plan at a
weighted average exercise price of $6.68 per share.

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<PAGE>
1999 STOCK OPTION PLAN FOR NON-EXECUTIVES

In July 1999, the board of directors adopted, subject to approval by our
stockholders, the 1999 Stock Option Plan for Non-Executives. This plan provides
for the grant of options to purchase up to 2,000,000 shares of common stock to
non-executives of Netgateway. Options may be either "incentive stock options" or
non-qualified stock options under Federal tax laws.

No stock option may be transferred by an optionee other than by will or the
laws of descent and distribution or, if permitted, pursuant to a qualified
domestic relations order and, during the lifetime of the optionee, the option
will be exercisable only by the optionee. In the event of termination of
employment by reason of death, disability, or any us for cause (as defined in
each optionee's employment agreement), the optionee will have no more than 365
days after such termination during which the optionee shall be entitled to
exercise the vested options, unless otherwise determined by the board of
directors. Upon termination of employment by us without cause or by the optionee
for good reason (as defined in the optionee's employment agreement), the
optionee's options remain exercisable to the extent the options were exercisable
on the date of such termination until the expiration date of the options
pursuant to the option agreement.

We may grant options under this plan within ten years from the effective
date of the plan. The effective date of this plan is July 1, 1999. Holders of
incentive stock options granted under this plan cannot exercise these options
more than ten years from the date of grant. Options granted under this plan
generally provide for the payment of the exercise in cash and may provide for
the payment of the exercise price by delivery to us of shares of common stock
already owned by the optionee having a fair market value equal to the exercise
price of the options being exercised, or by a combination of these methods.
Therefore, if it is provided in an optionee's option agreement, the optionee may
be able to tender shares of common stock to purchase additional shares of common
stock and may theoretically exercise all of his stock options with no additional
investment other than the purchase of his original shares.

Any unexercised options that expire or terminate upon an optionee's easing
to be employed by us become available again for issuance under this plan.

On the date of this prospectus, options exercisable for an aggregate of
555,764 shares of common stock were outstanding pursuant to this plan, subject
to stockholder approval, at a weighted averaged exercise price of $10.18 per
share.

1998 STOCK COMPENSATION PROGRAM

In July 1998, the board of directors adopted the 1998 stock compensation
program. This program provides for the grant of options to purchase up to
1,000,000 shares of common stock to officers,

64
<PAGE>
employees, directors, and independent contractors and agents of Netgateway.
Options may be either "incentive stock options" or non-qualified stock options
under Federal tax laws.

This program will be administered by the board of directors, or, if options
are being granted to one or more of our executive officers by a committee of the
board a majority of the members of which shall consist of "non-employee
directors" of the board of directors. The board of directors or the committee,
as the case may be, will determine, among other things, the individuals who
shall receive options, the time period during which the options may be partially
or fully vested and exercisable, the number of shares of common stock issuable
upon the exercise of each option, and the option exercise price.

The exercise price per share of common stock subject to an option may not be
less than the fair market value per share of common stock on the date the option
is granted. The aggregate fair market value of common stock for which any person
may be granted incentive stock options which first become exercisable in any
calendar year may not exceed $100,000 on the date of grant.

No stock option may be transferred by an optionee other than by will or the
laws of descent and distribution or, if permitted, pursuant to a qualified
domestic relations order and, during the lifetime of the optionee, the option
will be exercisable only by the optionee. In the event of termination of
employment for reasons other than the death or disability of the optionee, the
option shall terminate immediately, provided, however, that the board of
directors may, in its sole discretion, allow the option to be exercised, to the
extent exercisable on the date of termination of employment or service, at any
time within 60 days from the date of termination of employment or service. In
the event of termination of employment by reason of the death or disability of
the optionee, the option may be exercised, to the extent exercisable on the date
of death or disability, within one year from such date.

We may grant options under this program within ten years from the effective
date of the plan. The effective date of this program is July 31, 1998. Holders
of incentive stock options granted under this program cannot exercise these
options more than ten years from the date of grant. Options granted under this
program generally provide for the payment of the exercise price in cash and may
provide for the payment of the exercise price by delivery to us of shares of
common stock already owned by the optionee having a fair market value equal to
the exercise price of the options being exercised, or by a combination of these
methods. Therefore, if that is provided in an optionee's option agreement, the
optionee may be able to tender shares of common stock to purchase additional
shares of common stock and may theoretically exercise all of his stock options
with no additional investment other than the purchase of his original shares.

Any unexercised options that expire or that terminate upon an optionee's
ceasing to be employed by us become available again for issuance under this
program.

Although this program permits us to grant, in addition to incentive stock
options and non-qualified stock options,

- rights to purchase shares of our common stock to employees,

- restricted shares of our common stock,

- stock appreciation rights, and

- performance shares of common stock,

we have not issued any other type of compensation under this program other than
non-qualified stock options and have agreed not to do so in the future.

On date of this prospectus, options exercisable for an aggregate of
814,019 shares of common stock were outstanding pursuant to this plan at a
weighted average exercise price of $3.44 per share. We have agreed not to grant
any additional compensation pursuant to this plan.

65
<PAGE>
DIRECTORS' LIMITATION OF LIABILITY

Our certificate of incorporation and/or by-laws include provisions to
(1) indemnify the directors and officers to the fullest extent permitted by the
Delaware General Corporation Law including circumstances under which
indemnification is otherwise discretionary and (2) eliminate the personal
liability of directors and officers for monetary damages resulting from breaches
of their fiduciary duty, except for liability for breaches of the duty of
loyalty, acts, or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, violations under Section 174 of the
Delaware General Corporation Law, or for any transaction from which the director
derived an improper personal benefit. We believe that these provisions are
necessary to attract and retain qualified persons as directors and officers.

We have a directors and officers liability insurance policy in an amount of
not less than $9 million.

Insofar as indemnification for liability arising under the Securities Act
may be permitted to our directors, officers, and controlling persons pursuant to
the foregoing provisions or otherwise, we have been advised that, in the opinion
of the Commission, such indemnification is against public policy as expressed in
the Securities Act and is, therefore, unenforceable.

66
<PAGE>
PRINCIPAL STOCKHOLDERS

The following table sets forth, as of this prospectus,

- each person who is known by us to be the owner of record or beneficial
owner of more than 5% of the outstanding common stock,

- each of our directors and executive officers, and

- all of our directors and executive officers as a group,

the number of shares of common stock beneficially owned by each such person and
such group, and the percentage of the outstanding shares owned by each such
person and such group.

Except as otherwise noted below, the address of each of the persons in the
table is c/o Netgateway, Inc., 300 Oceangate, 5(th) Floor, Long Beach,
California 90802.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP
-----------------------------------------------------------------------------
NUMBER OF WARRANTS,
OPTIONS GRANTED UNDER
OUR STOCK OPTION PLANS
OR SHARES OF COMMON
STOCK
SUBJECT TO FORFEITURE
INCLUDED IN NUMBER OF PERCENT PRIOR PERCENT AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER OF SHARES SHARES TO OFFERING OFFERING
- -------------------------------------------- ----------------- ------------------------ --------------- ---------------
<S> <C> <C> <C> <C>
Keith D. Freadhoff.......................... 2,118,549(1) 400,000 16.9% 13.4%
Roy W. Camblin III.......................... 50,000 50,000 * *
Donald M. Corliss, Jr....................... 552,000 400,000 4.4 3.5
David Bassett-Parkins....................... 585,000 400,000 4.7 3.7
Hanh Ngo.................................... 255,000 150,000 2.0 1.6
John W. Wendel.............................. 62,500 62,500 * *
Craig Gatarz................................ 65,109 65,109 * *
Scott Beebe................................. 943,651 0 7.6 6.0
1845 Baywood
Salt Lake City, Utah 84117
William Brock............................... 50,000 50,000 * *
Marketplace Technologies, Inc.
125 Cambridge Park Drive
Cambridge, Massachusetts 02140
Ronald Spire................................ 87,302 0 * *
10880 Wilshire Boulevard
Suite 1050
Los Angeles, California 90024
Michael Khaled.............................. 787,302 0 6.3 5.0
42690 Rio Nedo #E
Temecula, California 92590
Donald Danks................................ 743,640 0 6.0 4.7
2333 East Coast Highway
Suite D
Corona Del Mar, California 92625
Michael Vanderhoff.......................... 646,151 0 5.2 4.1
6512 North State Road 32
Peoa, Utah 84061
All directors and executive officers of
Netgateway as a group (six persons)....... 4,769,101 1,577,609 37.0 30.2

OPTIONS
GRANTED
UNDER OUR
STOCK OPTION
PLANS
NOT INCLUDED
IN NUMBER OF
NAME AND ADDRESS OF BENEFICIAL OWNER SHARES
- -------------------------------------------- ------------
<S> <C>
Keith D. Freadhoff.......................... 0
Roy W. Camblin III.......................... 150,000
Donald M. Corliss, Jr....................... 0
David Bassett-Parkins....................... 0
Hanh Ngo.................................... 0
John W. Wendel.............................. 37,500
Craig Gatarz................................ 119,396
Scott Beebe................................. 0
1845 Baywood
Salt Lake City, Utah 84117
William Brock............................... 100,000
Marketplace Technologies, Inc.
125 Cambridge Park Drive
Cambridge, Massachusetts 02140
Ronald Spire................................ 0
10880 Wilshire Boulevard
Suite 1050
Los Angeles, California 90024
Michael Khaled.............................. 0
42690 Rio Nedo #E
Temecula, California 92590
Donald Danks................................ 0
2333 East Coast Highway
Suite D
Corona Del Mar, California 92625
Michael Vanderhoff.......................... 0
6512 North State Road 32
Peoa, Utah 84061
All directors and executive officers of
Netgateway as a group (six persons)....... 406,896
</TABLE>

- ------------------------
* Less than one percent.

(1) Includes 750,000 shares of common stock currently held by the Individual
Trusts, of which Mr. Freadhoff is trustee and over which Mr. Freadhoff has
beneficial ownership. However, see "Risk Factors--As Our Chairman and Chief
Executive Has Pledged His Stock, We May Experience A Change Of Control" and
"Related Party Transactions."

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<PAGE>
As used in the table above and elsewhere in this prospectus, the term
BENEFICIAL OWNERSHIP with respect to a security consists of sole or shared
voting power, including the power to vote or direct the vote, and/or sole or
shared investment power, including the power to dispose or direct the
disposition, with respect to the security through any contract, arrangement,
understanding, relationship, or otherwise, including a right to acquire such
power(s) during the next 60 days following the date of this prospectus. Except
as otherwise indicated, the stockholders listed in the table have sole voting
and investment powers with respect to the shares indicated. Because the table
above provides information with respect to the securities of Netgateway
beneficially owned by the persons indicated, we have segregated from this
information the information relating to securities of Netgateway owned, but not
beneficially owned, by the persons indicated according to this definition. At
the date of this prospectus, these securities consist of shares of common stock
issuable upon the exercise of options granted under our stock option plans
described in "Management--Stock Option Plans." In addition, we have excluded
from the beneficial ownership of Messrs. Corliss and Bassett-Parkins and
Ms. Ngo the shares of common stock currently in the Individual Trusts, as
described under "Related Party Transactions."

68
<PAGE>
RELATED PARTY TRANSACTIONS

In July 1998 and August 1998, we loaned $600,000 and an additional $200,000,
respectively, to Admor Memory Corp., a California-based computer memory maker,
during our then pending acquisition of Admor, which acquisition was not
consummated. This loan is due and payable on December 31, 1999 and accrues
interest at the rate of 9.5% per annum until October 1999 and 10% thereafter per
annum. In August 1998, we agreed to subordinate this obligation to a credit
facility obtained by Admor and to receive payment of this obligation from the
net income and the proceeds of equity sales of Admor. Subsequently, Admor
defaulted on this credit facility and entered receivership. We have reduced the
value of this loan in our financial statements to $0 effective December 31,
1998. Keith D. Freadhoff, our Chairman of the Board of Directors, and Scott
Beebe, one of our Directors, beneficially own less than 1% and 2.89%,
respectively, of the outstanding capital stock of Admor. Donald Danks, the
beneficial owner of 699,000 shares of our common stock, owned approximately 1.6%
of the outstanding common stock of Admor. Such individuals did not directly or
indirectly receive any of the proceeds of these loans.

From our inception on March 1, 1998 until June 1998, our business plan was
to engage in the licensing and distribution of software support materials for
the governmental and educational markets. In June 1998, we determined to change
our business model to the development of technology to enable businesses and
other organizations to engage in electronic commerce. In connection with the
implementation of our initial business plan, we entered into sublicensing
agreements related to proprietary courseware of ProSoft, an Internet training
solutions provider based in Austin, Texas. ProSoft entered into a courseware
reproduction and licensing agreement with Steps granting this firm the exclusive
right to sell courseware to the Federal government. This licensing obligation
was personally guaranteed by Scott Beebe. ProSoft also entered into a courseware
reproduction and licensing agreement with Training Resources International,
granting an exclusive right to sell courseware in the education market. This
licensing obligation was personally guaranteed by Michael Khaled, one of our
significant stockholders. We, with the consent of ProSoft, entered into
exclusive sublicense agreements with each of Steps and Training Resources. In
consideration of the sublicense from Training Resources, we agreed to assume the
minimum royalty payments required under their master license, totaling
$1,600,000. In consideration of the sublicense from Steps, we

- assumed the minimum royalty payments required under their master license,
totaling $1,500,000,

- assumed Steps' $200,000 obligation to Vision Holdings, Inc., which had
advanced funds to Steps in connection with its master license, and

- issued 1,000,000 shares of common stock to Steps.

Of this aggregate obligation of $3,300,000, we paid approximately $1,500,000.
Due to a lack of revenue derived from these licenses, we terminated the licenses
and, in December 1998, entered into a settlement agreement with such corporation
pursuant to which we have been released from all further obligation with respect
to the remaining amounts payable. Steps is substantially owned by Scott Beebe,
one of our Directors and significant stockholders. Training Resources is owned
by Michael Khaled, another of our significant stockholders. Mr. Freadhoff was a
founder of ProSoft and ProSoft's Chief Executive Officer and a director until
his resignation in November 1997. Mr. Freadhoff beneficially owns approximately
3.32% of the outstanding common stock of ProSoft. Donald M. Corliss, Jr., our
President and a Director, and Scott Beebe, one of our Directors' each
beneficially owns less than 1%, of the outstanding common stock of ProSoft.
Donald Danks, the beneficial owner of 699,000 shares of our common stock, was an
officer, director, and significant stockholder of ProSoft until early 1998.

During the period from March 4, 1998 through June 30, 1998, Mr. Freadhoff
loaned us $132,429, $100,000 of which was converted into a capital contribution
in June 1998. The remaining balance of

69
<PAGE>
$32,429 is not interest bearing and is repayable upon demand. During the year
ended June 30, 1999, $30,630 was repaid.

During the period from March 4, 1998 through June 30, 1998, Michael Khaled,
Donald Danks, and Lynn Turnbow, stockholders of Netgateway, paid on our behalf
to ProSoft pursuant to its master licenses $200,000, $100,000, and $100,000,
respectively, in exchange for an aggregate of 600,000 shares of common stock.

In May 1999, Mr. Freadhoff loaned us $100,000, which loan is non-interest
bearing. This loan was repaid with a portion of the proceeds of our May through
September 1999 private placement. In June 1999, the Company loaned
Mr. Freadhoff $30,000 which was repaid in July 1999.

In November 1998, we issued warrants exercisable for an aggregate of 300,000
shares of common stock, 50,000 shares of common stock to each of Messrs.
Freadhoff, Beebe, Danks, and Vanderhoff, and 100,000 shares of common stock to
Michael Khaled, a significant stockholder of Netgateway. The warrants were
issued in order to reimburse Messrs. Freadhoff, Beebe, Danks, and Vanderhoff for
voluntarily transferring to Mr. Khaled an equal number shares of common stock in
order to settle a dispute between Netgateway and Mr. Khaled. These warrants are
exercisable at $1.00 per share and expire in November 2000.

In December 1998, Messrs. Freadhoff, Beebe, Danks, and Vanderhoff,
contributed to a trust (the "Master Trust") 450,000, 100,000, 100,000, and
100,000 shares of common stock, respectively. The trustee of the Master Trust is
Mr. Freadhoff and these individuals are the beneficiaries of this trust. This
trust sold 350,000 of these shares to each of two trusts the trustee of which is
Mr. Freadhoff and the beneficiary of one of which is Donald M. Corliss, Jr., our
President and one of our Directors, and the beneficiary of one of which is David
Bassett-Parkins, our Chief Financial Officer and Chief Operating Officer, and
one of our Directors, in exchange for a promissory note from each of these
trusts in the principal amount of $350,000. Each of these individuals has
delivered to their respective trust a promissory note in the principal amount of
$350,000. The Master Trust sold the remaining 50,000 of these shares to a trust
the trustee of which is Mr. Freadhoff and the beneficiary of which is Hanh Ngo,
our Executive Vice President--Operations, in exchange for a promissory note from
this trust in the principal amount of $50,000. Ms. Ngo has delivered to this
trust a promissory note in the principal amount of $50,000. The trusts (the
"Individual Trusts") of which Messrs. Corliss and Bassett-Parkins and Ms. Ngo
are beneficiaries are, by their terms, permitted to deliver the shares of common
stock to their beneficiaries in three equal installments for a purchase price of
$1.00 per share on or after January 1, 2000, 2001, and 2002 (subject to
acceleration in the event of a change of control), provided that the individual
beneficiary of the Individual Trust in question has not voluntarily terminated
their employment with us prior to these dates. These individuals will satisfy
the purchase price for their shares by means of the repayment of their
respective promissory note to the respective Individual Trust. In the event that
any of these beneficiaries should so terminate their employment with us prior to
these dates, the trustee of the respective Individual Trust will return these
shares in such Individual Trust to the Master Trust in satisfaction of the
promissory note from this Individual Trust to the Master Trust. The Master Trust
will then deliver these shares to its beneficiaries in proportion to their
contributions of shares of common stock to the Master Trust.

During May through September 1999, we conducted our May through September
1999 private placement. Cruttenden Roth acted as one of the placement agents of
that offering and received compensation for their services in the form of
$229,500 in cash and warrants exercisable for an aggregate of 139,750 shares of
common stock for a period of four years commencing one year after the initial
closing of that offering at the exercise price of $11.55 per share.

We have agreed with Cruttenden Roth Incorporated, as representative of the
several underwriters, that all future transactions between us and any of our
officers, directors, and 5% stockholders will be on terms no less favorable to
us than can be obtained from unaffiliated third parties and will be approved by
a majority of our independent and disinterested directors.

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<PAGE>
DESCRIPTION OF SECURITIES

The following description of our capital stock and certain provisions of our
certificate of incorporation and bylaws is a summary and is qualified in its
entirety by the provisions of our certificate of incorporation and bylaws, which
have been filed as exhibits to our registration statement of which this
prospectus is a part.

IN GENERAL

We are authorized by our certificate of incorporation to issue an aggregate
of 40,000,000 shares of common stock, par value $.001 per share, and 5,000,000
shares of preferred stock, par value $.001 per share. At the date of this
prospectus, 12,495,768 shares of common stock were outstanding and held of
record by approximately 457 stockholders and no shares of preferred stock were
outstanding.

COMMON STOCK

Holders of common stock are entitled to one vote for each share held of
record on each matter submitted to a vote of stockholders. Holders of the common
stock do not have cumulative voting rights, which means that the holders of more
than one half of our outstanding shares of common stock, subject to the rights
of the holders of preferred stock, can elect all of our directors, if they
choose to do so. In this event, the holders of the remaining shares of common
stock would not be able to elect any directors. Subject to the prior rights of
any class or series of preferred stock which may from time to time be
outstanding, if any, holders of common stock are entitled to receive ratably,
dividends when, as, and if declared by the board of directors out of funds
legally available for that purpose and, upon our liquidation, dissolution, or
winding up, are entitled to share ratably in all assets remaining after payment
of liabilities and payment of accrued dividends and liquidation preferences on
the preferred stock, if any. Holders of common stock have no preemptive rights
and have no rights to convert their common stock into any other securities. The
outstanding common stock is validly authorized and issued, fully-paid, and
nonassessable. In the event we were to elect to sell additional shares of common
stock following this offering, investors in this offering would have no right to
purchase additional shares. As a result, their percentage equity interest in us
would be diluted.

The shares of our common stock offered in this offering will be, when issued
and paid for, fully paid and not liable for further call and assessment. Except
as otherwise permitted by Delaware law, and subject to the rights of the holders
of preferred stock, all stockholder action is taken by the vote of a majority of
the outstanding shares of common stock voted as a single class present at a
meeting of stockholders at which a quorum consisting of a majority of the
outstanding shares of common stock is present in person or proxy.

PREFERRED STOCK

We may issue preferred stock in one or more series and having the rights,
privileges, and limitations, including voting rights, conversion privileges, and
redemption rights, as may, from time to time, be determined by the board of
directors. Preferred stock may be issued in the future in connection with
acquisitions, financings, or other matters as the board of directors deems
appropriate. In the event that we determine to issue any shares of preferred
stock, a certificate of designation containing the rights, privileges, and
limitations of this series of preferred stock shall be filed with the Secretary
of State of the State of Delaware. The effect of this preferred stock is that
our board of directors alone, and subject to Federal securities laws, applicable
blue sky laws, and Delaware law, may be able to authorize the issuance of
preferred stock which could have the effect of delaying, deferring, or
preventing a change in control of Netgateway without further action by the
stockholders, and may adversely affect the voting and other rights of the
holders of the common stock. The issuance of

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<PAGE>
preferred stock with voting and conversion rights may also adversely affect the
voting power of the holders of common stock, including the loss of voting
control to others.

REGULATION OF THE INTRODUCTION OF BUSINESS AT ANNUAL MEETINGS OF STOCKHOLDERS

Our by-laws include provisions which regulate the submission by persons
other than the board of directors of matters to a vote of stockholders.
Generally, at an annual meeting of the stockholders, the only business conducted
must be brought before the annual meeting either by, or at the direction of, the
board of directors or by any of our stockholders who is a stockholder of record
at the time of giving of notice for such meeting, who shall be entitled to vote
at such annual meeting, and who complies with the notice procedures set forth in
the by-laws. For business to be properly brought before an annual meeting by a
stockholder, the stockholder must be given timely notice thereof in writing to
our Secretary. To be timely, a stockholder's notice must be delivered or mailed
to, and received at, our principal executive offices not less than 60 days nor
more than 90 days prior to the annual meeting, regardless of any postponement,
deferrals, or adjournments of that meeting to a later date; provided, however,
that in the event that less than 70 days' notice or prior public disclosure of
the date of the annual meeting is given or made to stockholders, notice by the
stockholder to be timely must be received no later than the close of business on
the 10(th) day following the day on which notice of the date of the annual
meeting was mailed or public disclosure was made. A stockholder's notice to the
Secretary shall set forth as to each matter the stockholder proposes to bring
before the annual meeting the following:

- a brief description of the business desired to be brought before the
annual meeting and the reasons for conducting this business at the
annual meeting,

- the name and address, as they appear on our books, of the stockholder
proposing this business,

- the class and number of our shares which are beneficially owned by the
stockholder, and

- any material interest of the stockholder in the business he wishes to
bring before the annual meeting.

Notwithstanding anything in the by-laws to the contrary, no business shall
be conducted at the stockholder meeting, except in accordance with the
procedures set forth in the by-laws. The chairman of the meeting, as determined
in accordance with the by-laws, shall, if the facts warrant, determine and
declare to the meeting that business was not properly brought before the meeting
and, in accordance with the provisions of these by-laws, and if he should so
determine, he shall so declare to the meeting and any business not properly
brought before the meeting shall not be transacted. Notwithstanding the
foregoing, a stockholder shall also comply with all applicable requirements of
the Exchange Act with respect to the above.

QUOTATION ON NASDAQ NATIONAL MARKET

We have applied to have our common stock quoted on the Nasdaq National
Market under the symbol "NGWY." Our common stock currently trades on the OTC
Bulletin Board under this symbol.

TRANSFER AGENT

The transfer agent and registrar for our common stock is Colonial Stock
Transfer Co., 455 East 400 South, Suite 100, Salt Lake City, Utah 84111.

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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE

Upon completion of this offering, we will have 15,795,768 shares of common
stock outstanding, assuming no exercise of the underwriters' over-allotment
option, and no exercise of outstanding options or warrants, no conversion of any
outstanding convertible securities, and no exchange of any outstanding
exchangeable securities. Of these shares, 5,609,913 shares, including the
3,300,000 shares offered in this offering, will be freely tradeable without
further registration under the Securities Act. All of our officers and directors
and certain of our current stockholders holding an aggregate of
7,698,988 shares of our common stock have agreed not to sell, or otherwise
dispose of, any of our securities for a period of at least six months from the
date of this offering without the underwriters' prior written consent.

Of the presently outstanding 12,495,768 shares of common stock, 11,491,310
are "restricted securities" within the meaning of Rule 144 under the Securities
Act and, if held for at least one year, would be eligible for sale in the public
market in reliance upon, and in accordance with, the provisions of Rule 144
following the expiration of such one-year period. In general, under Rule 144 as
currently in effect, a person or persons whose shares are aggregated, including
a person who may be deemed to be an "affiliate" of ours as that term is defined
under the Securities Act, would be entitled to sell within any three month
period a number of shares beneficially owned for at least one year that does not
exceed the greater of (1) 1% of the then outstanding shares of common stock, or
(2) the average weekly trading volume in the common stock during the four
calendar weeks preceding such sale. Sales under Rule 144 are also subject to
certain requirements as to the manner of sale, notice, and the availability of
current public information about us. However, a person who is not deemed to have
been an affiliate of us during the 90 days preceding a sale by such person and
who has beneficially owned such shares of common stock for at least two years
may sell such shares without regard to the volume, manner of sale, or notice
requirements of Rule 144.

Following this offering, we cannot predict the effect, if any, that sales of
shares of common stock pursuant to Rule 144 or otherwise, or the availability of
such shares for sale, will have on the market price prevailing from time to
time. Nevertheless, sales by the current stockholders of a substantial number of
shares of common stock in the public market could materially adversely affect
prevailing market prices for the common stock. In addition, the availability for
sale of a substantial number of shares of common stock acquired through the
exercise of the representative's warrants or the outstanding options under our
existing stock option plans or outstanding warrants or convertible securities
could materially adversely affect prevailing market prices for our common stock.
See "Risk Factors--Future Sales of Common Stock By Our Existing Stockholders
Could Adversely Affect Our Stock Price."

Some of our stockholders, holding in the aggregate approximately 1,511,429
shares of common stock or holding securities convertible into or exercisable or
exchangeable for shares of common stock, have the right, subject to a number of
conditions and limitations, to include their shares in registration statements
relating to our securities. Stockholders holding these shares of common stock
have waived these rights with respect to this offering. By exercising their
registration rights and causing a large number of shares to be registered and
sold in the public market, these holders may cause the market price of the
common stock to fall.

Up to 190,250 additional shares of common stock may be purchased by the
underwriters during the period commencing on the first anniversary of the date
of this prospectus and terminating on the fifth anniversary of the date of this
prospectus through the exercise of the representative's warrants. Any and all
securities purchased upon the exercise of the representative's warrants may be
freely tradeable, provided that we satisfy certain securities registration and
qualification requirements in accordance with the terms of the representative's
warrants. See "Underwriting."

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<PAGE>
UNDERWRITING

Subject to the terms and conditions contained in the underwriting agreement,
we have agreed to sell to each of the underwriters named below, and each of the
underwriters, for which Cruttenden Roth and Pennsylvania Merchant Group are
acting as representatives, has severally, and not jointly, agreed to purchase
the number of shares offered hereby set forth opposite their respective names
below.

<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
- --------------------------------------------------------------------------------- ----------
<S> <C>
Cruttenden Roth Incorporated..................................................... 1,050,000
Pennsylvania Merchant Group...................................................... 1,050,000

Banc of America Securities LLC................................................... 200,000
Hambrecht & Quist LLC............................................................ 200,000
SG Cowen Securities Corporation.................................................. 200,000

Janney Montgomery Scott LLC...................................................... 100,000
Legg Mason Wood Walker, Incorporated............................................. 100,000
The Robinson-Humphrey Company, LLC............................................... 100,000
C.E. Unterberg, Towbin........................................................... 100,000

J.W. Barclay & Co., Inc.......................................................... 50,000
Hoak Breedlove Wesneski & Co..................................................... 50,000
JWGenesis Securities, Inc........................................................ 50,000
H.C. Wainwright & Co., Inc....................................................... 50,000
----------
Total............................................................................ 3,300,000
</TABLE>

A copy of the underwriting agreement has been filed as an exhibit to the
registration statement of which this prospectus is a part. The underwriting
agreement provides that the obligation of the underwriters to purchase the
shares is subject to some conditions. The underwriters shall be obligated to
purchase all of the shares (other than those covered by the underwriters'
over-allotment option described below), if any are purchased.

The representatives have advised us that the underwriters propose initially
to offer the shares of common stock to the public at the public offering price
set forth on the cover page of this prospectus and that they may allow certain
dealers who are members of the NASD, and some foreign dealers, concessions not
in excess of $0.28 per share, of which amount a sum not in excess of $0.10 per
share may in turn be reallowed by such dealers to other dealers who are members
of the NASD and to some foreign dealers. After the commencement of this
offering, the offering price, the concession to selected dealers, and the
reallowance to other dealers may be changed by the representatives.

The representatives may elect to change the offering price, concession to
selected dealers, or the reallowance to other dealers under certain
circumstances. Some examples of such circumstances would include the following:

(i) if some or all of the members of the selling syndicate are not prepared
to go forward with the offering, due to market conditions or demand for the
issuer's securities, either as priced or at the volume of shares to be sold,
then the representatives may adjust the concession to selected dealers and the
reallowance to other dealers in order to provide sufficient economic incentives
to the selling syndicate to complete the offering. Any change in such
concessions or reallowances would not, however, change the total compensation to
be received by the underwriters, as such was approved by the NASD as fair and
reasonable;

(ii) if the representatives receive indications from members of the selling
syndicate that the offering price is too high to enable them to sell all of the
proposed shares of common stock, they could

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<PAGE>
decide to reduce the offering price. If the representatives lower the offering
price, the total compensation to be received by the underwriters should still be
fair and reasonable, as a lowering of the offering price would lower the total
amount of the offering, thus, increasing the amount of compensation to which the
underwriters would be entitled under the NASD rules; and

(iii) if demand for the issuer's securities from members of the selling
syndicate is significantly greater than expected, then the representatives could
decide to increase the offering price, provided that such an increase would not
render the underwriters compensation, as previously approved by the NASD, unfair
or unreasonable.

If the representatives change the offering price, the concession to the
selected dealers, or the reallowance to other dealers, they would implement the
following procedures to adequately advise the appropriate people: (i) file a
press release; (ii) give notice to all members of the selling group and receive
confirmation from them that the changes were conveyed to the investors; and
(iii) file a post-effective amendment.

We have agreed to indemnify the underwriters against certain liabilities,
including civil liabilities under the Securities Act, or will contribute to
payments the underwriters may be required to make in respect.

We have agreed to pay to the representatives an expense allowance, on a
non-accountable basis, equal to 1.518% of the gross proceeds derived from the
sale of 3,300,000 shares offered in this offering, or 3,795,000 shares if the
underwriters' over-allotment option is exercised in full. We paid an advance on
this allowance in the amount of $25,000. We have also agreed to pay some of the
representatives' expenses in connection with this offering, including expenses
in connection with qualifying the shares offered hereby for sale under the laws
of such states as the representative may designate and the placement of
tombstone advertisements. We estimate that the total expenses of the offering,
excluding underwriting discounts and commissions, will be approximately
$530,000.

The following table sets forth the amount of discounts and commissions to be
paid to the underwriters by Netgateway in connection with the offering:

<TABLE>
<CAPTION>
TOTAL WITHOUT EXERCISE TOTAL WITH EXERCISE
OF OVER-ALLOTMENT OF OVER-ALLOTMENT
DISCOUNT PER SHARE OPTION OPTION
- ------------------ ----------------------- -----------------------
<S> <C> <C>
$0.49 $ 1,617,000 $ 1,859,550
</TABLE>

The following table sets forth the amount and nature of other forms of
compensation to be paid to the representatives by Netgateway in connection with
the offering:

<TABLE>
<CAPTION>
TYPE OF COMPENSATION TERMS TOTAL AMOUNT
- --------------------------------- --------------------------------- ---------------------------------
<S> <C> <C>
Non-Accountable Expense Allowance 1.518% of the gross proceeds of $350,658 ($403,256.70 if the
the offering underwriters' over-allotment
option is exercised in full)

Underwriters Warrant Warrant to purchase up to 190,250 Depends on the market price of
shares at an exercise price per common stock at the time of
share of $11.55 (165% of the exercise
public offering price)

Two Year Consulting Agreement(1) Provide financial advisory $200,000 payable at the closing
services of this offering
</TABLE>

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

(1) Two year consulting agreement is between Netgateway and Cruttenden Roth.

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<PAGE>
We have agreed to retain the representatives as financial consultants for a
period of two years to commence on the closing of this offering at an aggregate
fee of $200,000, payable at the closing of this offering. Under this agreement,
the representatives shall provide advisory services related to mergers and
acquisitions activity, corporate finance and other related matters.

In connection with this offering, we have granted the representatives the
right, for the three-year period commencing on the closing date of this
offering, to appoint an observer to attend all meetings of our board of
directors. This designee has the right to notice of all meetings of the board of
directors and to receive reimbursement for all out-of-pocket expenses incurred
in attending these meetings. In addition, such designee will be entitled to
indemnification to the same extent as our directors.

The representatives have advised us that the underwriters do not intend to
confirm sales of the shares of common stock offered hereby to any account over
which they exercise discretionary authority.

We and our officers, directors, and certain of our current stockholders,
have agreed not to offer, assign, issue, sell, hypothecate, or otherwise dispose
of any shares of our common stock, our securities convertible into, or
exercisable or exchangeable for, shares of our common stock, or shares of our
common stock received upon conversion, exercise, or exchange of such securities,
to the public without the prior written consent of Cruttenden Roth and
Pennsylvania Merchant Group for a period of at least six months after the date
of this prospectus. Cruttenden Roth and Pennsylvania Merchant Group may grant or
withhold their respective consent in their sole discretion based upon their
judgment as to whether any such proposed sales or transfers of our common stock
would have an adverse effect on the market price of our publicly traded shares.
Cruttenden Roth and Pennsylvania Merchant Group's decision whether to grant or
withhold its consent will not be based upon, nor take into account, its own
holdings of our common stock.

Prior to this offering, our common stock traded on the OTC Bulletin Board.
We have applied to have our common stock quoted on the Nasdaq National Market.
The public offering price for the shares has been determined by arms-length
negotiations between us and the representatives principally on the basis of the
market price for our common stock prior to the date of this prospectus. The
factors considered in such negotiations were prevailing market conditions, our
history and prospects, and the history and prospects of the industry in which we
compete, an assessment of our management, our capital structure, and such other
factors deemed relevant.

Cruttenden Roth acted as one of the placement agents in our May through
September 1999 private placement. They received compensation for their services
in the form of $229,500 in cash and warrants exercisable for an aggregate of
139,750 shares of our common stock for a period of four years commencing one
year after the initial closing of that offering at an exercise price of $11.55
per share.

ISG Solid Capital Markets, LLC, a member of the NASD, acted as the other
placement agent in our May through September 1999 private placement. They
received compensation for their services in the form of $188,250 in cash and
warrants exercisable for an aggregate of 94,875 shares of our common stock for a
period of four years commencing one year after the initial closing of that
offering at an exercise price of $10.00 per share.

We have also granted to the underwriters an option, exercisable during the
45-day period commencing on the date of this prospectus, to purchase at the
public offering price per share, less underwriting discounts and commissions, up
to an aggregate of 495,000 shares of common stock. To the extent this option is
exercised, the underwriters will become obligated, subject to some conditions,
to purchase additional shares of common stock. The underwriters may exercise
such right of purchase only for the purpose of covering over-allotments, if any,
made in connection with the sale of shares. Purchases of shares of common stock
upon exercise of the over-allotment option will result in the realization of
additional compensation by the underwriters.

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<PAGE>
In connection with this offering, we have agreed to sell to the
representatives, individually and not as representatives of the several
underwriters, at the price of $.001 per warrant, the representatives' warrants
to purchase an aggregate of 190,250 shares of common stock. The representatives'
warrants are exercisable for a period of four years commencing one year after
the date of this prospectus at an exercise price per share equal to $11.55 (165%
of the public offering price). The representatives' warrants may not be sold,
transferred, assigned, pledged, or hypothecated for a period of 12 months from
the date of the prospectus, except to members of the selling group and to
officers and partners of the representative and members of the selling group.
The representatives' warrants contain anti-dilution provisions providing for
adjustments of the exercise price and number of shares issuable on exercise of
the representatives' warrants, upon the occurrence of specified events,
including stock dividends, stock splits, and recapitalizations. The holders of
the representatives' warrants have no voting, dividend, or other rights as
stockholders of Netgateway with respect to shares of common stock underlying the
representatives' warrants, unless the representatives' warrants shall have been
exercised.

A new registration statement or post-effective amendment to the registration
statement will be required to be filed and declared effective under the
Securities Act before distribution to the public of the representatives'
warrants and the underlying shares. We have agreed, on one occasion during the
period beginning one year after the date of this prospectus and ending five
years after the date of this prospectus, if requested by the holders of a
majority of the representatives' warrants or shares of common stock issued upon
their exercise, to make all necessary filings to permit a public offering of the
representatives' warrants and underlying shares and to use our best efforts to
cause such filing to become effective under the Securities Act and to remain
effective for at least 12 months, at our sole expense. In addition, we have
agreed to give advance notice to holders of the representatives' warrants and
the underlying shares of common stock of our intention to file a registration
statement, and in such case, holders of the representatives' warrants and the
underlying shares shall have the right to require us to include such shares of
common stock in such registration statement at our expense (subject to specified
limitations).

During and after this offering, the underwriters may purchase and sell
shares of common stock in the open market. These transactions may include
over-allotment and stabilizing transactions and purchases to cover syndicate
short positions created in connection with this offering. The underwriters also
may impose a penalty bid, whereby selling concessions allowed to syndicate
members or other broker-dealers in respect of the common stock sold in this
offering for their account may be reclaimed by the syndicate if such shares are
repurchased by the syndicate in stabilizing or covering transactions. These
activities may stabilize, maintain, or otherwise affect the market price of the
common stock, which may be higher than the price that might otherwise prevail in
the open market. Neither we nor the underwriters make any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the common stock. In addition, neither
we nor the underwriters make any representation that the underwriters will
engage in such transactions or that such transactions, once commenced, will not
be discontinued at any time.

LEGAL MATTERS

The validity of the shares of common stock offered hereby will be passed
upon for us by Brock Silverstein LLC, New York, New York. The validity of the
shares of common stock offered hereby will be passed upon for the underwriters
by Greenberg Traurig, New York, New York. Brock Silverstein LLC renders legal
services to Cruttenden Roth in connection with matters other than this offering.
Robert Steven Brown, a member of Brock Silverstein LLC, owns beneficially and of
record an aggregate of 5,000 shares of common stock.

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<PAGE>
EXPERTS

The consolidated financial statements of Netgateway, Inc. and subsidiaries
as of June 30, 1999 and 1998 and for the period from March 4, 1998 (inception)
to June 30, 1998 and the year ended June 30, 1999 have been included herein and
in the Form S-1 in reliance upon the report of KPMG LLP, independent certified
public accountants, appearing elsewhere herein upon the authority of said firm
as experts in accounting and auditing.

The financial statements of Infobahn Technologies LLC dba Digital Genesis as
of December 31, 1997 and 1996 and for the years ended December 31, 1997 and 1996
have been included herein and in the Form S-1 in reliance upon the report of
KPMG LLP, independent certified public accountants, appearing elsewhere herein
upon the authority of said firm as experts in accounting and auditing.

The financial statements of Spartan Multimedia, Inc. as of August 31, 1998
and for the year ended August 31, 1998 have been included herein and in the
Form S-1 in reliance upon the report of Allan Hogenson, Chartered Accountant,
appearing elsewhere herein upon the authority of said individual as expert in
accounting and auditing.

The financial statements of Video Calling Card, Inc. as of December 31, 1997
and 1996 and the years then ended and as of December 31, 1996 and 1995 and for
the year ended December 31, 1996 and the period from inception (April 13, 1995)
through December 31, 1995, have been included herein and in the Form S-1 in
reliance upon the reports of Ted A. Madsen, independent certified public
accountant, appearing elsewhere herein upon the authority of said individual as
expert in accounting and auditing.

ADDITIONAL INFORMATION

We have filed with the Securities and Exchange Commission a registration
statement on Form S-1, including the exhibits, schedules, and amendments to this
registration statement, under the Securities Act with respect to the shares of
common stock to be sold in this offering. This prospectus does not contain all
the information set forth in the registration statement. For further information
with respect to us and the shares of our common stock to be sold in this
offering, we make reference to the registration statement. Although this
prospectus contains all material information regarding us, statements contained
in this prospectus as to the contents of any contract, agreement or other
document referred to are not necessarily complete, and in each instance we make
reference to the copy of such contract, agreement, or other document filed as an
exhibit to the registration statement, each such statement being qualified in
all respects by such reference.

You may read and copy all or any portion of the registration statement or
any other information which we file at the Securities and Exchange Commission's
public reference room at 450 Fifth Street, N.W., Washington, D.C. 20549. You can
request copies of these documents, upon payment of a duplicating fee, by writing
to the Securities and Exchange Commission. Please call the Securities and
Exchange Commission at 1-800-SEC-0330 for further information on the operation
of the public reference rooms. Our Securities and Exchange Commission filings,
including the registration statement, are also available to you on the
Securities and Exchange Commission's Web site (http://www.sec.gov).

As a result of this offering, we will become subject to the information and
reporting requirements of the Exchange Act and, in accordance with this Act,
will file periodic reports, proxy and information statements, and other
information with the Securities and Exchange Commission.

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<PAGE>
INDEX TO FINANCIAL STATEMENTS

<TABLE>
<S> <C>
NETGATEWAY, INC. AND SUBSIDIARIES PRO FORMA STATEMENTS
Unaudited Pro Forma Consolidated Statement of Operations for the period March 4,
1998 (Inception) through June 30, 1998........................................... F-4
Unaudited Pro Forma Consolidated Statement of Operations for the year ended
June 30, 1999.................................................................... F-5
Notes to Unaudited Pro Forma Consolidated Statement of Operations.................. F-6

NETGATEWAY, INC. AND SUBSIDIARY
Independent Auditor's Report for Netgateway, Inc................................... F-7
Consolidated Balance Sheets as of June 30, 1999 and 1998........................... F-8
Consolidated Statements of Operations for the year ended June 30, 1999, the period
March 4, 1998 (Inception) through June 30, 1998 and the cumulative period
March 4, 1998 (Inception) through June 30, 1999.................................. F-9
Consolidated Statements of Changes in Shareholders' Equity (Deficit) for the period
March 4, 1998 (Inception) through June 30, 1999.................................. F-10
Consolidated Statements of Cash Flows for the year ended June 30, 1999, the period
March 4, 1998 (Inception) through June 30, 1998 and the cumulative period
March 4, 1998 (Inception) through June 30, 1999.................................. F-11
Notes to Consolidated Financial Statements......................................... F-12
Unaudited Consolidated Balance Sheet as of September 30, 1999...................... F-27
Unaudited Consolidated Statements of Operations for the three months ended
September 30, 1999 and 1998 and the cumulative period March 4, 1998 (Inception)
through September 30, 1999....................................................... F-28
Unaudited Consolidated Statements of Changes in Shareholders' Equity (Deficit) for
the period March 4, 1998 (Inception) through September 30, 1999.................. F-29
Unaudited Consolidated Statements of Cash Flows for the three months ended
September 30, 1999 and 1998 and the cumulative period March 4, 1998 (Inception)
through September 30, 1999....................................................... F-31
Notes to Unaudited Consolidated Financial Statements............................... F-32

INFOBAHN TECHNOLOGIES, LLC DBA DIGITAL GENESIS
Independent Auditor's Report for Infobahn Technologies, LLC dba Digital Genesis.... F-36
Balance Sheets as of December 31, 1997 and 1996.................................... F-37
Statements of Operations for the Year Ended December 31, 1997 and the period from
February 2, 1996 (inception) through December 31, 1996........................... F-38
Statements of Members' Equity (Deficit) for the Year Ended December 31, 1997 and
the period from February 2, 1996 (inception) through December 31, 1996........... F-39
Statements of Cash Flows for the Year Ended December 31, 1997 and the period from
February 2, 1996 (inception) through December 31, 1996........................... F-40
Notes to Financial Statements...................................................... F-41
Unaudited Balance Sheets as of March 31, 1998 and December 31, 1997................ F-43
Unaudited Statements of Earnings and Members' Equity for the three months ended
March 31, 1998 and 1999.......................................................... F-44
Unaudited Statements of Cash Flows for the three months ended March 31, 1998 and
1997............................................................................. F-45
Notes to Unaudited Financial Statements............................................ F-46

SPARTAN MULTIMEDIA, INC.
Auditor's Report for Spartan Multimedia, Inc....................................... F-48
</TABLE>

F-1
<PAGE>
<TABLE>
<S> <C>
Balance Sheet as of August 31, 1998................................................ F-49
Statement of Earnings and Retained Earnings for the Year Ended August 31, 1998..... F-50
Statement of Changes in Financial Position for the Year Ended August 31, 1998...... F-51
Notes to Financial Statements...................................................... F-52
Unaudited Balance Sheets as of November 30, 1998 and August 31, 1998............... F-54
Unaudited Statements of Earnings and Retained Earnings for the three months ended
November 30, 1998 and for the period September 19, 1997 (Inception) through
November 30, 1997................................................................ F-55
Unaudited Statements of Changes in Financial Position for the three months ended
November 30, 1998 and for the period September 19, 1997 (Inception) through
November 30, 1997................................................................ F-56
Notes to Unaudited Financial Statements............................................ F-57
VIDEO CALLING CARD, INC.
Auditor's Report for Video Calling Card, Inc....................................... F-59
Balance Sheet as of December 31, 1997 and 1996..................................... F-60
Statement of Operations for the years ended December 31, 1997 and 1996............. F-61
Statement of Cash Flows for the years ended December 31, 1997 and 1996............. F-62
Statement of Stockholders' Equity from Date of Inception (April 13, 1995) to
December 31, 1997................................................................ F-63
Notes to Financial Statements...................................................... F-64
Auditor's Report for Video Calling Card, Inc....................................... F-65
Balance Sheet as of December 31, 1996 and 1995..................................... F-66
Statement of Operations for the year ended December 31, 1996 and the period from
Inception (April 13, 1995) through December 31, 1995............................. F-67
Statement of Cash Flows for the year ended December 31, 1996 and the period from
Inception (April 13, 1995) through December 31, 1995............................. F-68
Statement of Stockholders' Equity from Date of Inception (April 13, 1995) to
December 31, 1996................................................................ F-69
Notes to Financial Statements...................................................... F-70
Unaudited Balance Sheet as of March 31, 1998 and December 31, 1997................. F-71
Unaudited Statement of Operations for the three months ended March 31, 1998 and
1997............................................................................. F-73
Unaudited Statement of Cash Flows for the three months ended March 31, 1998 and
1997............................................................................. F-74
Unaudited Statement of Stockholders' Equity from Date of Inception (April 13, 1995)
to March 31, 1998................................................................ F-75
Notes to Unaudited Financial Statements............................................ F-76
</TABLE>

F-2
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS

The following unaudited pro forma consolidated data present the Unaudited
Pro Forma Consolidated Statement of Operations of the Company for the year ended
June 30, 1999, and the period since inception (March 4, 1998) to June 30, 1998
after giving effect to the acquisitions of Spartan Multimedia and Infobahn
Technologies (dba Digital Genesis) as if they had been consummated at the
beginning of the respective periods presented. The Company's fiscal year ends on
June 30.

The pro forma data are based on the historical consolidated statements of
the Company, Spartan Multimedia and Infobahn Technologies, giving effect to the
acquisitions using the purchase method of accounting and the assumptions and
adjustments outlined in the accompanying Notes to Unaudited Pro Forma
Consolidated Financial Statements.

The following unaudited pro forma consolidated financial data do not give
effect to anticipated expenses related to the acquisition and do not reflect
certain cost savings that management of the Company believes may be realized
following the acquisition. These savings are expected to be realized primarily
through integration of operations.

The pro forma data are provided for comparative purposes only. They do not
purport to be indicative of the results that actually would have occurred if the
acquisitions had been consummated on the dates indicated or that may be obtained
in the future. The unaudited pro forma consolidated financial data should be
read in conjunction with the Notes thereto, the audited Consolidated Financial
Statements of the Company and the Notes thereto and the audited Financial
Statements of Infobahn Technologies and Spartan Multimedia, and the Notes
thereto, all included in this registration statement.

F-3
<PAGE>
NETGATEWAY, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)

UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS

FOR THE PERIOD MARCH 4, 1998 (INCEPTION) THROUGH JUNE 30, 1998

<TABLE>
<CAPTION>
HISTORICAL
-------------------------------------- PRO FORMA
DIGITAL SPARTAN -------------------------------------
NETGATEWAY GENESIS MULTIMEDIA ADJUSTMENTS REFS. TOTAL
------------- ---------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Service revenue........................ $ 2,800 115,651 5,874 124,325
Operating expenses:
License fees......................... 3,822,000 -- -- 3,822,000
Depreciation and amortization........ 12,249 228 -- 99,480 1,2 111,957
Selling, general and
administrative..................... 721,210 62,030 19,360 -- 802,600
------------- ---------- --------- --------- --------- -----------
Total operating expenses......... 4,555,459 62,258 19,360 99,480 4,736,557
------------- ---------- --------- --------- --------- -----------
Income (loss) from operations.... (4,552,659) 53,393 (13,486) (99,480) (4,612,232)
Interest expense....................... 19,277 -- -- -- 19,277
------------- ---------- --------- --------- --------- -----------
Net income (loss)................ $ (4,571,936) 53,393 (13,486) (99,480) (4,631,509)
============= ========== ========= ========= ========= ===========
Basic and diluted loss per share....... $ (0.84) -- -- -- (0.81)
============= ========== ========= ========= ========= ===========
Weighted average common shares
outstanding -- basic and diluted..... 5,416,242 -- -- 400,000 3 5,721,327
============= ========== ========= ========= ========= ===========
</TABLE>

F-4
<PAGE>
NETGATEWAY, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JUNE 30, 1999

<TABLE>
<CAPTION>
HISTORICAL
--------------------------- PRO FORMA
SPARTAN ---------------------------------------
NETGATEWAY MULTIMEDIA ADJUSTMENTS REFS TOTAL
-------------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Service revenue.................................. $ 143,426 3,441 146,867
Operating expenses:
Depreciation and amortization.................. 257,342 -- 139,055 1 396,397
Selling, general and administrative............ 11,046,506 75,995 11,122,501
-------------- --------- --------- -------------
Total operating expenses................. 11,303,848 75,995 139,055 11,518,898
-------------- --------- --------- -------------
Loss from operations..................... (11,160,422) (72,554) (139,055) (11,372,031)
Loss on sale of equity securities................ 54,729 -- -- 54,729
Interest expense................................. 925,097 -- -- 925,097
-------------- --------- --------- -------------
Loss before extraordinary item........... (12,140,248) (72,554) (139,055) (12,351,857)
Extraordinary gain on extinguishment
of debt........................................ 1,653,232 -- -- 1,653,232
-------------- --------- --------- -------------
Net loss................................. $ (10,487,016) (72,554) (139,055) (10,698,625)
============== ========= ========= =============
Basic and diluted extraordinary gain
per share...................................... .19 -- -- .19
============== ========= ========= =============
Basic and diluted loss per share................. $ (1.18) -- -- (1.20)
============== ========= ========= =============
Weighted average common shares outstanding -
basic and diluted.............................. 8,912,041 -- -- 8,912,041
============== ========= ========= =============
</TABLE>

F-5
<PAGE>
NETGATEWAY, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS (CONTINUED)
FOR THE PERIOD MARCH 4, 1998 (INCEPTION) THROUGH JUNE 30, 1998 AND
FOR THE YEAR ENDED JUNE 30, 1999

NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS

The unaudited pro forma consolidated statements of operations have been
prepared to reflect the acquisition of substantially all of the assets and
liabilities of Infobahn Technologies (d/b/a Digital Genesis) and all outstanding
capital stock of Spartan Multimedia in exchange for 400,000 shares of the
Company's Common Stock valued at $400,000 and 371,429 shares of common stock of
Storesonline.com, a wholly-owned subsidiary of the Company valued at $1,392,858,
which was convertible into the Company's common stock on a one-to-one basis,
respectively, as if the transactions were effective at the beginning of the
respective periods. The transactions are accounted for under the purchase
method. To give effect to this assumption, the following adjustments were made:

1. The acquisition of Spartan Multimedia resulted in acquired technology and
trade secrets of $1,390,548, which is being amortized on a straight line
basis over a five year useful life. Additional amortization of $92,703 for
the period from March 4, 1998 (inception) to June 30, 1998 and $139,055 for
the period from July 1, 1998 until the actual acquisition date of January
15, 1999 are shown.

2. The acquisition of Infobahn Technologies resulted in an intangible asset
representing the value of acquired technology of $120,000 and goodwill
valued at $235,193, which are being amortized on a straight line basis over
useful lives of seven years and ten years, respectively. Additional
amortization of $6,777 for the period since March 4, 1998 (inception) to the
acquisition date of June 2, 1998 is shown. The impact on income taxes would
be minor due to historical losses of NetGateway.

3. The Company issued 400,000 shares of common stock valued at $400,000 to
acquire Infobahn Technologies.

F-6
<PAGE>
INDEPENDENT AUDITORS' REPORT

The Board of Directors
Netgateway, Inc.:

We have audited the accompanying consolidated balance sheets of
Netgateway, Inc. and subsidiaries (a development stage enterprise) as of
June 30, 1999 and 1998, and the related consolidated statements of operations,
changes in shareholders' deficit and cash flows for the year ended June 30,
1999, the period March 4, 1998 (inception) through June 30, 1998 and the
cumulative period March 4, 1998 (inception) through June 30, 1999. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Netgateway, Inc. and subsidiaries as of June 30, 1999 and 1998 and the results
of its operations and its cash flows for the year ended June 30, 1999, the
period March 4, 1998 (inception) through June 30, 1998 and the cumulative period
March 4, 1998 (inception) through June 30, 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 discussed in note 2 to the
financial statements, the Company's planned principal operations have commenced,
however, minimal revenues have been generated. Additionally, the Company
continues to incur net losses and has continuing financial needs. These matters
raise substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in note 2. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.

KPMG LLP
Los Angeles, California
August 23, 1999

F-7
<PAGE>
NETGATEWAY, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)

CONSOLIDATED BALANCE SHEETS

JUNE 30, 1999 AND 1998

<TABLE>
<CAPTION>
1999 1998
-------------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash.............................................................................. $ 569,472 254,597
Accounts receivable less allowance for doubtful accounts of $3,000 and $0 as of
June 30, 1999 and 1998, respectively............................................ 44,198 21,305
Note receivable from officer (note 6)............................................. 30,000 --
Short-term notes receivable, net (note 6)......................................... -- 50,000
Debt issue costs.................................................................. 336,288 --
Prepaid offering costs............................................................ 325,887 --
Other current assets.............................................................. 73,481 45,565
-------------- -----------
Total current assets............................................................ 1,379,326 371,467
Property and equipment, net (note 4)................................................ 496,536 143,384
Intangible assets, net (note 5)..................................................... 1,562,635 351,804
Other assets........................................................................ 19,853 4,897
-------------- -----------
$ 3,458,350 871,552
============== ===========

LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Current portion of notes payable (note 8)......................................... $ 1,496,000 --
Convertible debentures (note 8)................................................... 200,000 --
Accounts payable.................................................................. 278,723 106,242
Accrued wages and benefits........................................................ 278,741 12,720
Accrued interest.................................................................. 44,301 130,122
Accrued liabilities............................................................... 543,632 30,000
Deferred revenue.................................................................. 81,550 --
Current portion of notes payable to related parties (note 8)...................... 1,799 2,052,159
-------------- -----------
Total current liabilities....................................................... 2,924,746 2,331,243
Notes payable to related parties, less current portion (note 8)..................... -- 367,892
-------------- -----------
Total liabilities............................................................... 2,924,746 2,699,135
-------------- -----------
Shareholders' deficit (notes 9 and 10):
Preferred stock, par value $.001 per share, Authorized 5,000,000 shares; issued
and outstanding at June 30, 1999 and 1998 0..................................... -- --
Common stock, par value $.001 per share. Authorized 40,000,000 shares; issued and
outstanding 9,912,304 and 7,510,000 at June 30, 1999 and 1998, respectively..... 9,913 7,510
Additional paid-in capital........................................................ 15,639,160 2,849,163
Deferred compensation............................................................. (52,919) (112,320)
Accumulated other comprehensive loss.............................................. (3,598) --
Deficit accumulated during development stage...................................... (15,058,952) (4,571,936)
-------------- -----------
Total shareholders' deficit..................................................... 545,291 (1,827,583)
Commitments and subsequent events (notes 12 and 13)
-------------- -----------
Total liabilities and shareholders' deficit..................................... $ 3,458,254 871,552
============== ===========
</TABLE>

See accompanying notes to consolidated financial statements.

F-8
<PAGE>
NETGATEWAY, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
PERIOD CUMULATIVE
MARCH 4, 1998 PERIOD FROM
YEAR (INCEPTION) MARCH 4, 1998
ENDED THROUGH (INCEPTION)
JUNE 30, JUNE 30, THROUGH
1999 1998 JUNE 30, 1999
-------------- ------------- -------------
<S> <C> <C> <C>
Service revenue.................................................... $ 143,426 2,800 146,226
Operating expenses:
License fees (note 7)............................................ -- 3,822,000 3,822,000
Depreciation and amortization.................................... 257,342 12,249 269,591
Selling, general and administrative.............................. 11,046,506 721,210 11,767,716
-------------- ----------- -----------
Total operating expenses....................................... 11,303,848 4,555,459 15,859,307
-------------- ----------- -----------
Loss from operations........................................... (11,160,422) (4,552,659) (15,713,081)
Loss on sale of equity securities.................................. 54,729 -- 54,729
Interest expense................................................... 925,097 19,277 944,374
-------------- ----------- -----------
Loss before extraordinary item................................. (12,140,248) (4,571,936) (16,712,184)
Extraordinary gain on extinguishment of debt....................... 1,653,232 -- 1,653,232
-------------- ----------- -----------
Net loss....................................................... $ (10,487,016) (4,571,936) (15,058,952)
============== =========== ===========
Basic and diluted extraordinary gain per share..................... $ 0.19 -- 0.21
============== =========== ===========
Basic and diluted loss per share................................... $ (1.18) (0.84) (1.87)
============== =========== ===========
Weighted average common shares outstanding--basic and diluted...... $ 8,912,041 5,416,242 8,058,886
============== =========== ===========
</TABLE>

See accompanying notes to consolidated financial statements.

F-9
<PAGE>
NETGATEWAY, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' DEFICIT
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
PRICE -------------------- PAID-IN DEFERRED
DATE PER SHARE SHARES AMOUNT CAPITAL COMPENSATION
---------- ---------- --------- --------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Sale of common stock for cash.......................... 3/98 $ .07--.33 754,545 $ 755 199,245 --
Common stock issued for services....................... 3/98 0.22 1,445,455 1,445 316,555 --
Common stock issued in exchange for shareholder's
payment of Company debt.............................. 3/98 0.50 400,000 400 199,600 --
Common stock issued to acquire license................. 3/98 0.22 1,000,000 1,000 219,000 --
Common stock issued for services....................... 4/98 0.22 100,000 100 21,900 --
Deferred compensation on stock issued for services..... 4/98 -- -- -- (14,080)
Amortization of deferred compensation.................. 4/98--6/98 -- -- -- 1,760
Common stock issued to acquire license................. 4/98 0.22 1,900,000 1,900 416,100 --
Common stock issued for services....................... 5/98 0.22 200,000 200 43,800 --
Common stock issued in exchange for shareholder's
payment of Company debt.............................. 5/98 1.00 200,000 200 199,800 --
Sale of common stock for cash.......................... 5/98--6/98 1.00 303,000 303 302,697 --
Conversion of debt to capital contribution............. 6/98 -- -- 100,000 --
Adjustment resulting from reverse acquisition.......... 6/98 450,000 450 (310) --
Shares issued in business acquisition.................. 6/98 1.00 400,000 400 399,600 --
Conversion of debt to common stock, including
interest............................................. 6/98 1.00 184,000 184 185,349 --
Stock issued for deferred compensation................. 6/98 1.00 100,000 100 99,900 (100,000)
Sale of common stock for cash.......................... 6/98 2.00 73,000 73 145,927 --
Comprehensive loss:
Net loss............................................. -- -- -- --
Total comprehesive loss................................
--------- --------- ----------- ---------
Balance at June 30, 1998............................... 7,510,000 7,510 2,849,163 (112,320)
Sale of common stock for cash.......................... 7/98--9/98 2.00 949,800 950 1,898,650 --
Exercise of warrants................................... 7/98--9/98 2.00 132,100 132 264,068 --
Warrants granted for services.......................... 10/98--6/99 2.00--5.50 -- -- 2,340,720 --
Stock compensation paid by shareholders................ 11/98 2.00 -- -- 400,000 --
Stock option compensation.............................. -- -- 233,211 (233,211)
Amortization of deferred compensation.................. -- -- -- 282,052
Forfeited stock........................................ (48,000) (48) (10,512) 10,560
Capital contributed upon extinguishment of debt........ 12/98 -- -- 200,000 --
Subsidiary convertible common stock issued in business
acquisition.......................................... 1/99--4/99 3.00--4.50 -- -- 1,392,858 --
Options issued for legal services...................... 2/99 5.50 -- -- 479,708 --
Warrants granted for debt issue costs.................. 2/99--6/99 3.50--5.50 -- -- 775,585 --
Shares issued for debenture conversion................. 3/99--5/99 2.50 320,000 320 950,680 --
Shares issued for services............................. 10/98--6/99 2.00--5.50 366,500 366 1,261,834 --
Shares issued for debt issue costs..................... 3/99 4.00 30,000 30 127,470 --
Sale of common stock for cash, net..................... 3/99--6/99 3.00-5.50 614,334 615 2,300,763 --
Cashless exercise of warrants.......................... 4/99 2,570 3 (3) --
Shares issued for technology........................... 5/99 5.00 35,000 35 174,965 --
Comprehensive loss:
Net loss............................................. -- -- -- --
Foreign currency translation adjustment.............. -- -- -- --
Total comprehensive loss...............................
--------- --------- ----------- ---------
Balance at June 30, 1999............................... 9,912,304 $ 9,913 15,639,160 (52,919)
========= ========= =========== =========

<CAPTION>
DEFICIT
ACCUMULATED ACCUMULATED TOTAL
DURING OTHER SHAREHOLDERS'
COMPREHENSIVE DEVELOPMENT COMPREHENSIVE EQUITY
LOSS STAGE LOSS (DEFICIT)
-------------- ----------- -------------- -------------
<S> <C> <C> <C> <C>
Sale of common stock for cash.......................... -- -- 200,000
Common stock issued for services....................... -- -- 318,000
Common stock issued in exchange for shareholder's
payment of Company debt.............................. -- -- 200,000
Common stock issued to acquire license................. -- -- 220,000
Common stock issued for services....................... -- -- 22,000
Deferred compensation on stock issued for services..... -- -- (14,080)
Amortization of deferred compensation.................. -- -- 1,760
Common stock issued to acquire license................. -- -- 418,000
Common stock issued for services....................... -- -- 44,000
Common stock issued in exchange for shareholder's
payment of Company debt.............................. -- -- 200,000
Sale of common stock for cash.......................... -- -- 303,000
Conversion of debt to capital contribution............. -- -- 100,000
Adjustment resulting from reverse acquisition.......... -- -- 140
Shares issued in business acquisition.................. -- -- 400,000
Conversion of debt to common stock, including
interest............................................. -- -- 185,533
Stock issued for deferred compensation................. -- -- --
Sale of common stock for cash.......................... -- -- 146,000
Comprehensive loss:
Net loss............................................. (4,571,936) (4,571,936) -- (4,571,936)
----------
Total comprehesive loss................................ (4,571,936)
==========
--------- ---------- -----------
Balance at June 30, 1998............................... (4,571,936) -- (1,827,583)
Sale of common stock for cash.......................... -- -- 1,899,600
Exercise of warrants................................... -- -- 264,200
Warrants granted for services.......................... -- -- 2,340,720
Stock compensation paid by shareholders................ -- -- 400,000
Stock option compensation.............................. -- -- --
Amortization of deferred compensation.................. -- -- 282,052
Forfeited stock........................................ -- -- --
Capital contributed upon extinguishment of debt........ -- -- 200,000
Subsidiary convertible common stock issued in business
acquisition.......................................... -- -- 1,392,858
Options issued for legal services...................... -- -- 479,708
Warrants granted for debt issue costs.................. -- -- 775,585
Shares issued for debenture conversion................. -- -- 951,000
Shares issued for services............................. -- -- 1,262,200
Shares issued for debt issue costs..................... -- -- 127,500
Sale of common stock for cash, net..................... -- -- 2,301,378
Cashless exercise of warrants.......................... -- -- --
Shares issued for technology........................... -- -- 175,000
Comprehensive loss:
Net loss............................................. (10,487,016) (10,487,016) -- (10,487,016)
Foreign currency translation adjustment.............. (3,598) -- (3,598) (3,598)
----------
Total comprehensive loss............................... (10,490,614)
==========
--------- ---------- -----------
Balance at June 30, 1999............................... (15,058,952) (3,598) (533,604)
========= ========== ===========
</TABLE>

See accompanying notes to consolidated financial statements.

F-10
<PAGE>
NETGATEWAY, INC. AND SUBSIDIARY

(A DEVELOPMENT STAGE ENTERPRISE)

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
CUMULATIVE
PERIOD FROM
MARCH 4, 1998 MARCH 4, 1998
(INCEPTION) (INCEPTION)
YEAR ENDED THROUGH THROUGH
JUNE 30, 1999 JUNE 30, 1998 JUNE 30, 1999
------------- ------------- ------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss......................................................... $(10,487,016) (4,571,936) (15,058,952)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization.................................. 257,432 12,249 269,591
Common stock issued for services............................... 1,262,200 371,680 1,633,880
Amortization and write-off of license fees..................... -- 3,822,000 3,822,000
Loss on sale of equity securities.............................. 54,729 -- 54,729
Amortization of deferred compensation.......................... 282,052 -- 282,052
Gain on extinguishment of debt................................. (1,653,232) -- (1,653,232)
Stock compensation paid by shareholders........................ 400,000 -- 400,000
Interest expense on debt converted to equity................... 236,488 19,277 255,765
Interest expense on warrants issued as debt issue costs........ 535,535 -- 535,535
Amortization of debt issue costs............................... 144,000 -- 144,000
Options and warrants issued for services....................... 2,820,428 -- 2,820,428
Provision for doubtful accounts................................ 26,876 25,000 51,876
Write-off of note receivable................................... 800,000 -- 800,000
Changes in assets and liabilities:
Accounts receivable.......................................... (49,769) (2,000) (51,769)
Prepaid offering costs....................................... (325,887) -- (325,887)
Other assets................................................. (76,668) (45,422) (122,090)
Accounts payable and accrued expenses........................ 1,220,010 116,033 1,336,043
----------- --------- ------------
Net cash used in operating activities...................... (4,552,912) (253,119) (4,806,031)
----------- --------- ------------
Cash flows from investing activities:
Cash assumed in business acquisition........................... 4,781 3,321 8,102
Loan for notes receivable...................................... (830,000) (75,000) (905,000)
Repayment of notes receivable.................................. 50,000 -- 50,000
Purchase of equity securities.................................. (100,733) -- (100,733)
Proceeds from sale of equity securities........................ 46,004 -- 46,004
Purchase of property and equipment............................. (250,579) (102,034) (352,613)
----------- --------- ------------
Net cash used in investing activities...................... (1,080,527) (173,713) (1,254,240)
----------- --------- ------------
Cash flows from financing activities:
Proceeds from issuance of common stock......................... 4,253,360 649,000 4,902,360
Proceeds from exercise of warrants............................. 264,200 -- 264,200
Proceeds from issuance of notes payable to related parties..... 100,000 132,429 232,429
Proceeds from issuance of notes payable and
convertible debentures....................................... 2,506,000 -- 2,506,000
Cash paid for debt issue costs................................. (181,018) -- (181,018)
Repayment of notes payable to related parties.................. (990,630) (100,000) (1,090,630)
----------- --------- ------------
Net cash provided by financing activities.................. 5,951,912 681,429 6,633,341
----------- --------- ------------
Net increase in cash....................................... 318,473 254,597 573,070
Cash at beginning of period........................................ 254,597 -- --
Effect of exchange rate changes on cash balances................... (3,598) -- (3,598)
----------- --------- ------------
Cash at end of period.............................................. $ 569,472 254,597 569,472
=========== ========= ============
Supplemental schedule of noncash activities:
Issuance of common stock for business acquisition................ $ -- 400,000 400,000
Issuance of convertible stock in business acquisition............ 1,392,858 -- 1,392,858
Accrued asset purchases.......................................... -- 27,743 27,743
Conversion of debt to common stock............................... 800,000 284,000 1,084,000
Common stock issued in exchange for shareholders' payment of
Company debt................................................... -- 400,000 400,000
Capital contributed upon extinguishment of debt................ 200,000 -- 200,000
Common stock issued for internal-use software.................. 175,000 -- 175,000
Warrants issued for debt issue costs........................... 723,203 -- 723,203
Stock issued for debt issue costs.............................. 77,500 -- 77,500
=========== ========= ============
</TABLE>

See accompanying notes to consolidated financial statements.

F-11
<PAGE>
NETGATEWAY, INC. AND SUBSIDIARY

(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) DESCRIPTION OF BUSINESS

Netgateway, Inc. and subsidiary ("Netgateway" or the "Company"), was formed
on March 4, 1998 as a Nevada corporation. Netgateway is an internet commerce
and connectivity company which provides turn-key solutions designed to
enable companies of any size to extend their business to the internet for a
wide variety of purposes, including the advertising and sale of products or
services by retailers and the conduct of commercial transactions between
business enterprises.

The Company is a development stage enterprise as defined in Statement of
Financial Accounting Standards ("SFAS") No. 7. The Company is devoting
substantially all of its present efforts to developing technology. Planned
principal operations have commenced, but have not produced significant
revenue. Only minimal service and consulting revenues were generated through
June 30, 1999.

On June 2, 1998, Video Calling Card, Inc. ("VCC"), a Nevada public shell
corporation, acquired 100 percent of the outstanding common stock of
Netgateway in exchange for 5,900,000 shares of common stock of VCC.
Immediately prior to the acquisition, VCC had 450,000 shares of common stock
outstanding and Netgateway had 590,000 shares of common stock outstanding.
Since the shareholders of Netgateway received the majority voting interests
in the combined company, Netgateway is the acquiring enterprise for
financial reporting purposes. The transaction was recorded as a reverse
acquisition using the purchase method of accounting whereby equity of
Netgateway was adjusted for the fair value of the acquired tangible net
assets of VCC. The historical financial statements of Netgateway since
March 4, 1998 (inception) have been adjusted retroactively to reflect the
equivalent number of shares received in the business combination prior to
the reverse acquisition. The 450,000 shares of common stock issued in the
reverse acquisition have been included in the weighted-average common shares
outstanding since the date of acquisition, June 2, 1998.

Also on June 2, 1998, the Company acquired certain assets and liabilities of
Infobahn Technologies, LLC (d/b/a Digital Genesis), a California limited
liability company, in exchange for 400,000 shares of common stock of the
Company valued at $400,000. The consideration was allocated based on the
relative fair values of the tangible and intangible assets and liabilities
acquired, including acquired technology of $120,000, with the excess
consideration of $235,193 recorded as goodwill. The operations of Digital
Genesis are included in the consolidated statements of operations of the
Company since the date of acquisition, June 2, 1998.

In January 1999, the Company acquired 100% of the outstanding stock of
Spartan Multimedia, Inc., a Canadian corporation, in exchange for 185,715
shares of common stock of StoresOnline.com, LTD, a wholly-owned Canadian
subsidiary valued at $557,145. The shares are convertible on a one-to-one
basis into common stock of the Company. The issuance of an additional
185,714 shares was contingent upon the attainment of certain performance
standards in future periods. In April 1999, the Board of Directors approved
the issuance of the contingent shares and waived the performance standards.
Accordingly, the consideration increased to $1,392,858. The acquisition of
Spartan Multimedia, Inc. was recorded using the purchase method of
accounting. The consideration was allocated based on the relative fair
values of the tangible and intangible assets and liabilities acquired. The
operations of Spartan Multimedia, Inc. are included in the consolidated
statement of operations of the Company from January 15, 1999 through

F-12
<PAGE>
NETGATEWAY, INC. AND SUBSIDIARY

(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(1) DESCRIPTION OF BUSINESS (CONTINUED)
June 30, 1999. Unaudited pro forma consolidated results of operations are
summarized below to reflect the acquisition of Spartan Multimedia, Inc. as
if it had occurred on July 1, 1998:

<TABLE>
<S> <C>
Revenue......................................................... $ 146,867
==========
Net loss........................................................ (10,698,625)
==========
Loss per share.................................................. (1.20)
==========
</TABLE>

(2) LIQUIDITY

The accompanying financial statements have been prepared on the basis that
the Company will continue as a going concern, which contemplates the
realization of assets and satisfaction of liabilities in the normal course
of business. As of the date of this report, the Company's planned principal
operations have commenced, however, minimal revenues have been generated.
The Company has relied upon private placements of its stock and issuances of
debt to generate funds to meet its operating needs and plans to continue
pursuing financing in this manner during the next year. However, there are
no assurances that such financing will be available when and as needed to
satisfy current obligations. As such, substantial doubt exists as to whether
the Company will continue as a going concern.

(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(A) PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.

(B) REVENUE RECOGNITION

Revenue generated from consulting services is recognized as services are
provided. Web-site development revenues are recognized upon completion of
each project. Services billed in advance are recorded as deferred revenue
and recognized when revenue is earned.

Intangible assets are amortized on a straight-line basis over their
estimated useful lives as follows:

<TABLE>
<S> <C>
5 to 7
Acquired technology............................................ years
Goodwill....................................................... 10 years
</TABLE>

F-13
<PAGE>
NETGATEWAY, INC. AND SUBSIDIARY

(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(D) PROPERTY AND EQUIPMENT

Property and equipment, stated at cost, is comprised of computer and
office equipment. Depreciation is computed using the straight-line method
over the estimated useful lives of the related assets ranging from 3 to
5 years.

(E) RESEARCH AND DEVELOPMENT EXPENDITURES

Research and development costs are expensed as incurred.

(F) INCOME TAXES

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

(G) IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF

The Company reviews long-lived assets and certain identifiable
intangibles for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison
of the carrying amount of an asset to future undiscounted operating cash
flows expected to be generated by the asset. If such assets are
considered to be impaired, the impairment to be recognized is measured by
the amount by which the carrying amount of the assets exceeds the fair
value of the assets. Assets to be disposed of are reported at the lower
of the carrying amount or fair value less costs to sell.

(H) FINANCIAL INSTRUMENTS

The carrying values of cash, accounts receivable, notes receivable,
accounts payable, accrued liabilities and current portion of notes
payable at June 30, 1999 and 1998 approximated fair value due to the
short maturity of those instruments. The fair value of the notes
receivable from and payable to related parties could not be estimated due
to the nature of the borrowings. All financial instruments are held for
purposes other than trading.

(I) ACCOUNTING FOR STOCK OPTIONS

The Company applies the intrinsic value-based method of accounting
prescribed by Accounting Principles Board (APB) Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations,
in accounting for its fixed plan employee stock options. As such,
compensation expense would be recorded on the date of grant only if the
current market price of the underlying stock exceeded the exercise price.
Compensation

F-14
<PAGE>
NETGATEWAY, INC. AND SUBSIDIARY

(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
expense related to stock options granted to non-employees is accounted
for under Statement of Financial Accounting Standards (SFAS) No. 123,
"Accounting for Stock-Based Compensation," whereby compensation expense
is recognized over the vesting period based on the fair value of the
options on the date of grant.

(J) COMPREHENSIVE INCOME

SFAS 130, "Reporting Comprehensive Income" (SFAS No. 130) establishes
standards for reporting and displaying comprehensive income (loss) and
its components in a full set of general-purpose financial statements.
This statement requires that an enterprise classify items of other
comprehensive income (loss) by their nature in a financial statement and
display the accumulated balance of other comprehensive income (loss)
separately from retained earnings and additional paid-in capital in the
equity section of a statement of financial position. The Company has
components of other comprehensive income (loss), which are classified in
the statement of shareholders' deficit.

(K) BUSINESS SEGMENTS AND RELATED INFORMATION

Statement No. 131, "Disclosures about Segments of an Enterprise and
Related Information" (SFAS No. 131) establishes standards for the way
public business enterprises are to report information about operating
segments in annual financial statements and requires enterprises to
report selected information about operating segments in interim financial
reports issued to shareholders. Is also establishes standards for related
disclosure about products and services, geographic areas and major
customers. It replaces the "industry segment" concept of SFAS No. 14,
"Financial Reporting for Segments of a Business Enterprise," with a
"management approach" concept as the basis for identifying reportable
segments. The Company has only one operating segment. The Company formed
its wholly-owned Canadian subsidiary, StoresOnline.com, in January 1999.
Prior to that time, the Company only had operations in the United States
All revenues during the year ended June 30, 1999 and the period March 4,
1998 (inception) through June 30, 1998 were generated in the United
States. Substantially all of the Company's long-lived assets were located
in the United States at June 30, 1999 and 1998.

(L) INVESTMENT SECURITIES

The Company accounts for investment securities in accordance with
Financial Accounting Standards Board Statement No. 115, "Accounting for
Certain Investments in Debt and Equity Securities" (SFAS 115). SFAS 115
requires investments to be classified based on management's intent in one
of the three categories: held-to-maturity securities, available-for-sale
securities and trading securities. Held-to-maturity securities are
recorded at amortized cost. Available-for-sale securities are recorded at
fair value with unrealized gains and losses reported as a separate
component of shareholders' equity and comprehensive income (loss).
Trading securities are recorded at market value with unrealized gains and
losses reported in operations. The Company's investment securities have
been classified as available-for-sale.

F-15
<PAGE>
NETGATEWAY, INC. AND SUBSIDIARY

(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(M) FOREIGN CURRENCY TRANSLATION

The financial statements of the Company's Canadian subsidiary,
StoresOnline.com, have been translated into U.S. dollars from its
functional currency in the accompanying consolidated financial statements
in accordance with Statement of Financial Accounting Standards No. 52,
"Foreign Currency Translation." Balance sheet accounts of
StoresOnline.com are translated at year-end exchange rates while income
and expenses are translated at weighted-average exchange rates for the
year. Translation gains or losses that related to StoresOnline.com's net
assets are shown as a separate component of shareholders' equity
(deficit) and comprehensive income (loss). There were no gains or losses
resulting from realized foreign currency transactions (transactions
denominated in a currency other than the entities' functional currency)
during the year ended June 30, 1999 and the period March 4, 1998
(inception) through June 30, 1998.

(N) LOSS PER SHARE

Basic earnings (loss) per share is computed by dividing net income (loss)
available to common shareholders by the weighted average number of common
shares outstanding during the period in accordance with SFAS No. 128
"Earnings Per Share". Diluted earnings (loss) per share reflects the
potential dilution that could occur if securities or other contracts to
issue common stock were exercised or converted into common stock or
resulted in the issuance of common stock that then shared in the earnings
of the entity. Diluted earnings (loss) per share is computed similarly to
fully diluted earnings (loss) per share pursuant to Accounting Principles
Board (APB) Opinion No. 15. There were 3,840,956 options and 1,750,100
warrants to purchase shares of common stock that were outstanding during
the year ended June 30, 1999 which were not included in the computation
of diluted loss per share because the impact would have been
antidilutive. There were 200,000 options and 73,000 warrants to purchase
shares of common stock that were outstanding during the period March 4,
1998 (inception) through June 30, 1998 which were not included in the
computation of diluted loss per share because the impact would have been
antidilutive.

(O) COSTS OF START-UP ACTIVITIES

Pursuant to AICPA Statement of Position No. 98-5, "Reporting on the Costs
of Start-Up Activities," the Company expenses all the costs of start-up
activities as incurred.

(P) USE OF ESTIMATES

Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities at the balance sheet date and the
reporting of revenues and expenses during the reporting periods to
prepare these financial statements in conformity with generally accepted
accounting principles. Actual results could differ from those estimates.

(Q) RECLASSIFICATIONS

Certain amounts have been reclassified to conform with current year
presentation.

F-16
<PAGE>
NETGATEWAY, INC. AND SUBSIDIARY

(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(4) PROPERTY AND EQUIPMENT

Property and equipment balances at June 30, 1999 and 1998 are summarized as
follows:

<TABLE>
<CAPTION>
1999 1998
---------- ---------
<S> <C> <C>
Computers and office equipment......................................... $ 583,021 152,244
Less accumulated depreciation.......................................... (86,485) (8,860)
---------- ---------
496,536 143,384
========== =========
</TABLE>

(5) INTANGIBLE ASSETS

Intangible assets balances at June 30, 1999 and 1998 are summarized as
follows:

<TABLE>
<CAPTION>
1999 1998
------------ ---------
<S> <C> <C>
Acquired technology.................................................. $ 1,510,548 120,000
Goodwill............................................................. 235,193 235,193
------------ ---------
1,745,741 355,193
Less accumulated amortization........................................ (183,106) (3,389)
------------ ---------
$ 1,562,635 351,804
============ =========
</TABLE>

(6) NOTES RECEIVABLE AND NOTES RECEIVABLE FROM OFFICER

During the period March 4, 1998 (inception) through June 30, 1998, the
Company issued a $50,000 note receivable to a customer which was repaid
during the year ended June 30, 1999. In July 1998 and August 1998, the
Company advanced $800,000 to an entity with which the Company was in merger
discussions. Certain Company officers and directors were minor shareholders
of the potential merger entity. The merger was not consummated and the
advance was deemed uncollectible in December 1998 and written-off. During
June 1999, the Company issued its chief executive officer, Keith Freadhoff,
a non-interest bearing $30,000 note receivable. The note was repaid in
July 1999.

(7) LICENSE AGREEMENTS

In March 1998, the Company entered into a sublicense agreement related to
proprietary courseware with Training Resources International (TRI), which is
wholly-owned by Michael Khaled, a stockholder of the Company, in exchange
for the assumption of TRI's obligation of $1,600,000 to the original
licensor, ProSoft I-Net Solutions, Inc. (ProSoft). Michael Khaled personally
guaranteed the repayment of the Company's obligation under the sublicense
agreement with TRI to ProSoft. TRI entered into the original license
agreement with ProSoft in January 1998.

In April 1998, the Company entered into a sublicense agreement related to
proprietary courseware with S.T.E.P.S., Inc. (Steps), whose primary
stockholder is Scott Beebe, a stockholder and director of the Company, in
exchange for (1) the assumption of Steps' remaining obligation of $1,500,000
to the original licensor, ProSoft, (2) the assumption of Step's obligation
of $200,000 to Vision Holdings Inc. (Vision), an unrelated entity, which had
advanced funds to Steps, and (3) the

F-17
<PAGE>
NETGATEWAY, INC. AND SUBSIDIARY

(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(7) LICENSE AGREEMENTS (CONTINUED)
issuance of 1,000,000 shares of common stock valued at $220,000 to Steps.
Scott Beebe personally guaranteed the repayment of the Company's obligation
under the sublicense agreement with Steps to ProSoft. Additionally, the
Company acquired supplies, books and other materials related to the licensed
technology from Vision in exchange for $84,000. The Company had previously
entered into a separate loan agreement for $100,000 with Vision. The
Company's chief executive officer, Keith Freadhoff, was the chief executive
officer at ProSoft when the original license agreement with Steps was
entered into. Don Danks is a stockholder of the Company and was an officer
of ProSoft at the time the original license agreements were entered into.

In April 1998, the Company converted the $300,000 obligation to Vision into
1,900,000 shares of common stock, valued at $418,000. As a result, license
fees of $418,000 were recorded for the incremental increase of the stock
exchanged for the note payable cancellation.

In June 1998, the Company changed its business plan and began focusing on
developing technology to enable businesses and other organizations to
conduct commerce over the internet. Therefore, the Company determined that
the license fees would not ultimately be recoverable. Accordingly, the costs
of acquiring the sub-license agreements and related supplies are included as
license fees expense in the accompanying consolidated statements of
operations.

(8) CONVERTIBLE DEBENTURES AND NOTES PAYABLE

During December 1998 and January 1999, the Company issued $1,000,000 of
convertible debentures bearing interest at the 90-day Treasury Bill rate
plus 4 percent and issued 274,350 detachable stock purchase warrants valued
at $405,395. The debentures are convertible into the Company's common stock
at $2.50 per share at the Company's option. The Company recorded interest
expense of $151,000 related to the beneficial conversion feature. The
debentures are due in December 1999. As of June 30, 1999, $800,000 of the
debentures had been converted into 320,000 shares of common stock. The
convertible debentures are secured by the Company's accounts receivable and
intellectual property.

In March 1999, Keith Freadhoff, the chief executive officer of the Company,
loaned the Company $100,000 which is due within 10 days of the close of
bridge financing. In March 1999, the Company issued $160,000 of non-interest
bearing notes payable to third parties, which are due within 10 days of the
close of bridge financing. The notes were repaid in June 1999.

In May and June 1999, the Company obtained bridge financing whereby 12%
senior notes payable and 288,000 shares of common stock were issued
generating proceeds of $2,592,000, net of $288,000 of issuance costs. The
senior notes payable are due the earlier of April 30, 2000 or upon the close
of a public sale of the Company's common stock. The Company also granted
144,000 warrants to purchase an equivalent number of shares of common stock
at an exercise price of $10 per share as additional issuance costs. The
warrants are exercisable for a period of four years commencing May 18, 2000.
The fair value of the warrants on the dates of issuance was estimated to be
$301,300 using the Black-Scholes option-pricing model with the following
assumptions: dividend yield of 0%; risk-free interest rate of 5%; volatility
of 100% and an expected life of 2 years. The net proceeds from the bridge
financing were allocated to the senior notes payable and common stock based
on their relative fair values, taking into consideration recent debt and
equity

F-18
<PAGE>
NETGATEWAY, INC. AND SUBSIDIARY

(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(8) CONVERTIBLE DEBENTURES AND NOTES PAYABLE (CONTINUED)
transactions. Accordingly, $1,346,000 was recorded as notes payable,
$1,488,952 as equity, net of $346,349 of stock issuance costs, and $302,952
as debt issuance costs. Under the Securities Act, the rules and regulations
under the Securities Act, and the interpretations of the Commission, we may
be required to offer rescission to investors in our May through
September 1999 private placement. If the Company is required to rescind the
May through September private placement in its entirety, the Company would
be required to refund all of the gross proceeds of the May through September
private placement to the investors. Even following the repayment of the
notes, based on the Securities Act, the rule and regulations under the
Securities Act, and the interpretations of the Commission, the investors in
the May through September private placement may have the right to require
the Company to repurchase the shares of common stock which they received in
the May through September private placement if they can successfully argue
that those shares were issued in lieu of a higher interest rate on those
notes.

In June 1999, the Company issued a 12% senior note payable of $150,000 and
15,000 shares of common stock valued at $75,000 as settlement of a legal fee
obligation. The note is due the earlier of April 30, 2000 or upon the close
of a public sale of the Company's common stock. The Company also granted
3,750 warrants to purchase an equivalent number of shares of common stock at
an exercise price of $10 per share. The warrants are exercisable for a
period of four years commencing May 18, 2000. The fair value of the warrants
on the dates of issuance was estimated to be $7,098 using the Black-Scholes
option-pricing model with the following assumptions: dividend yield of 0%;
risk-free interest rate of 5%; volatility of 100% and an expected life of
2 years. As a result, $7,098 of additional legal expense was recorded in the
accompanying consolidated financial statements.

Notes payable and notes payable to related parties at June 30, 1999 and 1998
consists of the following:

<TABLE>
<CAPTION>
1999 1998
------------ -----------
<S> <C> <C>
12% senior notes payable due the earlier of April 30, 2000 or upon the close of a
public sale of the Company's common stock...................................... $ 1,496,000 --
Non-interest bearing note payable to ProSoft I-Net Solutions, Inc. under license
agreements, maturing through October 15, 1998.................................. -- 1,100,000
Non-interest bearing note payable to ProSoft I-Net Solutions, Inc. under license
agreements, payable in quarterly principal and interest installments of
$200,000 and maturing through December 31, 1999................................ -- 1,287,622
Non-interest bearing note payable to an officer and shareholder, due within
10 days of the close of bridge financing....................................... 1,799 32,429
------------ -----------
1,497,799 2,420,051
Less current portion............................................................. 1,497,799 (2,052,159)
------------ -----------
$ -- 367,892
============ ===========
</TABLE>

During the period from March 4, 1998 (inception) through June 30, 1998, an
officer and shareholder loaned the Company $132,429 of which $100,000 was
converted into a capital

F-19
<PAGE>
NETGATEWAY, INC. AND SUBSIDIARY

(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(8) CONVERTIBLE DEBENTURES AND NOTES PAYABLE (CONTINUED)
contribution in June 1998. During the year ended June 30, 1999, the Company
repaid $30,630 of the note payable.

The non-interest bearing note payable to ProSoft I-Net Solutions, Inc. under
license agreements due December 31, 1999, is net of imputed interest of
$112,378 at June 30, 1998.

In August 1998, the notes payable agreements to ProSoft I-Net
Solutions, Inc. (ProSoft) aggregating $2,387,622 were amended whereby the
scheduled principal payments of $2,100,000 and $400,000 due in fiscal years
1999 and 2000, were changed to $1,800,000 and $700,000, respectively. During
the year ended June 30, 1999, the Company repaid $700,000 of the notes
payable to ProSoft. In December 1998, ProSoft released the Company of its
remaining obligation under the notes payable agreements. As of
December 1998, the Company recognized $35,488 of imputed interest as
interest expense. The remaining imputed interest balance was expensed upon
extinguishment of the debt in December 1998. Additionally, Michael Khaled
and Scott Beebe, who personally guaranteed repayment of the Company's
obligations to ProSoft, paid ProSoft $200,000 in the aggregate to terminate
their individual personal guarantees of the notes payable which was recorded
as a capital contribution upon extinguishment of debt. Accordingly, the
Company recognized $1,653,232 as gain on extinguishment of debt during the
year ended June 30, 1999.

(9) SHAREHOLDERS' EQUITY (DEFICIT)

During the period March 4, 1998 (inception) through June 30, 1998, the
Company issued 1,645,455 shares of common stock valued at $362,000 to
certain officers and employees in exchange for compensation. The shares
vested immediately upon grant. In April 1998, the Company granted 100,000
shares of common stock under a consulting agreement in exchange for services
valued at $22,000. Compensation expense of $7,920 was recognized for the
value of the shares which vested immediately upon grant. Under the
agreement, the Company may repurchase up to 64,000 shares of the common
stock issued to the consultant. The shares eligible for repurchase vest
ratably over a 24 month period upon performance of services under the
consulting agreement. Deferred compensation of $14,080 was recorded in the
accompanying consolidated statement of changes in shareholders' deficit to
reflect the unearned compensation. During the period March 4, 1998
(inception) through June 30, 1998, 8,000 of the shares eligible for
repurchase vested resulting in $1,760 of compensation. During the year ended
June 30, 1999, 8,000 of the shares eligible for repurchase vested and the
consulting agreement was subsequently canceled. As a result, $1,760 of
additional compensation was recorded and the 48,000 remaining unvested
common shares were forfeited.

In June 1998, the Company issued 100,000 shares of common stock to an
employee in exchange for services valued at $100,000. Half of the shares
vested on July 1, 1998 with the remaining shares vesting ratably over a
12 month period. Accordingly, deferred compensation of $100,000 was recorded
at June 30, 1998. During the year ended June 30, 1999, the 100,000 shares
vested resulting in compensation of $100,000.

During the period March 4, 1998 (inception) through June 30, 1998, Michael
Khaled, Don Danks and Lynn Turnbow, shareholders of the Company, paid, on
behalf of the Company, $400,000 of the

F-20
<PAGE>
NETGATEWAY, INC. AND SUBSIDIARY

(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(9) SHAREHOLDERS' EQUITY (DEFICIT) (CONTINUED)
scheduled payments under the $3,000,000 notes payable to ProSoft in exchange
for 600,000 shares of common stock valued at $400,000.

In March 1998, an officer and shareholder of the Company, Keith Freadhoff,
loaned the Company $100,000. In June 1998, the note was contributed to
capital.

In June 1998, $184,000 of notes payable to third parties was converted into
184,000 shares of common stock valued at $185,333, including $1,533 of
accrued interest.

During the period March 4, 1998 (inception) through June 30, 1998, the
Company sold 1,057,545 shares of common stock for $503,000 in cash. In
June 1998, the Company sold 73,000 units in exchange for $146,000. In
July 1998 through September 1998, the Company sold 949,800 units in exchange
for $1,899,600. Each unit consisted of one share of common stock and one
warrant to purchase an equivalent number of shares of common stock at an
exercise price of $4.00. The warrants were exercisable at any time prior to
September 1, 1998. The estimated fair value of the warrants on the date of
the grant was estimated to be $.02 using the Black-Scholes option-pricing
model with the following assumptions: dividend yield of 0%; risk-free
interest rate of 5.16%; volatility of 100%; and an expected life of two
months. The warrants were subsequently repriced to $2.00 per share and the
exercise date was extended to October 1, 1998. The estimated fair value of
the warrants on the date of repricing remained consistent with the fair
value on date of grant. In October 1998, 132,100 warrants were exercised to
purchase 132,100 shares of common stock generating proceeds of $264,200.

During the year ended June 30, 1999, the Company issued warrants as
consideration for various consulting fees and debt issue costs associated
with the convertible debentures. The warrants were exercisable within two
years from the dates of issuance. The fair value of the warrants on the
dates of issuance was estimated to be $3,169,839 using the Black-Scholes
option-pricing model with the following assumptions: dividend yield of 0%;
risk-free interest rate of 5%; volatility of 100% and an expected life of
2 years. Accordingly, compensation expense of $2,394,254, debt issuance
costs of $187,668 and interest expense of $535,535 was recorded in the
accompanying consolidated financial statements.

During the year ended June 30, 1999, the Company issued 366,500 shares of
common stock valued at $1,262,200 as payment of consulting and legal
services. In May 1999, the Company issued 35,000 shares of common stock
valued at $175,000 to acquire internal-use software from UnitNetImaging
(Shopping Planet). The value of the technology was capitalized in the
accompanying consolidated financial statements.

During March 1999, the Company issued 30,000 shares of common stock valued
at $127,500 as payment of debt issuance costs associated with the issuance
of $160,000 of notes payable.

In November 1998, the Company entered into a settlement agreement with
Michael Khaled, a shareholder of the Company, whereby four shareholders of
the Company contributed 200,000 shares of common stock valued at $400,000 to
Mr. Khaled. Additionally, the Company granted warrants to purchase 100,000
shares of common stock to Mr. Khaled and warrants to purchase 200,000 shares
of common stock to the four shareholders who contributed their stock. The
fair value of the warrants on the issuance date was estimated to be $420,000
using the Black-Scholes

F-21
<PAGE>
NETGATEWAY, INC. AND SUBSIDIARY

(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(9) SHAREHOLDERS' EQUITY (DEFICIT)

option-pricing model with the following assumptions: dividend yield of 0%;
risk-free interest rate of 5%; volatility of 100% and an expected life of
2 years. Accordingly, compensation expense of $820,000 was recognized in the
accompanying consolidated financial statements.

From March 1999 through May 1999, the Company sold 326,334 shares of common
stock in exchange for cash of $979,000.

In April 1999, the Company issued 2,570 shares of common stock upon the
cashless exercise of 25,000 warrants at an exercise price of $12.00 per
share.

In May 1999, the Company authorized the issuance of 5,000,000 shares of
preferred stock, $.001 par value, and approved an increase in the authorized
number of common shares to 40,000,000.

(10) STOCK OPTIONS

In June 1998, the Board of Directors approved, for future grants, 500,000
options to acquire an equivalent number of shares of common stock at an
exercise price of $1 per share to certain senior management. No options were
granted as of June 30, 1998.

In June 1998, the Board of Directors granted 100,000 options to acquire an
equivalent number of shares of common stock at an exercise price of $6 per
share as consideration for legal fees. The options vest ratably as services
are provided and expire on April 30, 2005. As of June 30, 1998, only a
minimal amount of legal services had been provided under the agreement.
During the year ended June 30, 1999, under the anti-dilution clause of the
agreement, the number of options increased to 240,000 and the exercise price
was decreased to $2.50 per share. As a result, compensation for the fair
value of the options aggregating $479,708 was recorded. The fair value of
the options on the date of repricing was estimated using the Black-Scholes
option-pricing model with the following assumptions: dividend yield of 0%;
risk-free interest rate of 5%; volatility of 100% and an expected life of
1.5 years.

In June 1998, the Company granted a consultant 100,000 options to purchase
an equivalent number of shares of common stock at an exercise price of $3.50
per share as compensation for services. The options vest upon the consultant
achieving certain sales goals related to the sale of training courses under
the ProSoft license agreement by June 1999. The options expire on June 1,
2003. As of June 30, 1998, no options had been earned under the agreement.
The fair value of the options on the date of the grant was estimated to be
$.59 per share using the Black-Scholes option-pricing model with the
following assumptions: dividend yield of 0%; risk-free interest rate of
5.50%; volatility of 100%; and an expected life of 5 years. Subsequent to
June 30, 1998, these options were canceled.

In July 1998, the Board of Directors adopted the 1998 Stock Compensation
Program ("Program") which consists of an Incentive Stock Option Plan,
Non-Qualified Stock Option Plan, Restricted Share Plan, Employee Stock
Purchase Plan, Non-Employee Director Stock Option Plan, Stock Appreciation
Rights Plan and Other Stock Rights Plan. An aggregate of 1,000,000 shares
were reserved for issuance under the Program. During the year ended
June 30, 1999, the Company granted 998,301 options under the Program at
exercise prices greater than and below the estimated market price of the
Company's common stock on the date of grant ranging from $2.17 to $5.34 per
share. As a result, $180,292 of compensation expense was recognized during
the year ended

F-22
<PAGE>
NETGATEWAY, INC. AND SUBSIDIARY

(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(10) STOCK OPTIONS (CONTINUED)
June 30, 1999. The weighted-average fair value of options granted during the
year ended June 30, 1999 under the Program was $2.07 per share. As of
June 30, 1999, 1,699 options were available for future grants. The Company
applies APB Opinion No. 25 in accounting for stock options granted to
employees. Had the Company determined compensation cost based on the fair
value at the grant date for its stock options under SFAS No. 123, the
Company's net loss would have been increased to the pro forma amounts
indicated below for the year ended June 30, 1999:

<TABLE>
<S> <C>
Net loss--as reported.......... $(10,487,016)
Net loss--pro forma............ (13,000,791)
===========
</TABLE>

In December 1998, the Board of Directors adopted the 1998 Stock Option Plan
for Senior Executives. An aggregate of 5,000,000 shares were reserved for
issuance under the Plan. As of June 30, 1999, 2,596,656 options had been
granted under the Plan at an exercise prices ranging from $2.50 to $6.50 per
share. Because the grant price is greater than the market prices of the
Company's common stock on the date of grant, there was no intrinsic value on
the date of grant. The shares begin vesting on January 1, 2000. Accordingly,
compensation expense related to these stock option grants during the year
ended June 30, 1999 is the same under APB 25 and SFAS 123. The
weighted-average fair value of the options granted under the Plan during the
year ended June 30, 1999 was $1.81 per share. As of June 30, 1999, there
were 2,403,333 options available for future grants under the Plan.

The following is a summary of stock option activity:

<TABLE>
<CAPTION>
WEIGHTED AVERAGE
NUMBER OF SHARES EXERCISE PRICE
---------------- -----------------
<S> <C> <C>
Balance at March 4, 1998.................................. -- $ --
Granted................................................... 200,000 4.75
------------
Balance at June 30, 1998.................................. 200,000 4.75
Granted................................................... 3,734,968 3.85
Canceled.................................................. (100,000) 3.50
------------
Balance at June 30, 1999.................................. 3,834,968 3.80
============ =========
</TABLE>

The following table summarizes information about shares under option at
June 30, 1999:

<TABLE>
<CAPTION>
WEIGHTED-AVERAGE WEIGHTED
REMAINING WEIGHTED AVERAGE
RANGE OF NUMBER CONTRACTUAL AVERAGE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING LIFE EXERCISE PRICE EXERCISABLE PRICE
- ---------------- ----------- ---------------- --------------- ----------- -------------
<C> <C> <S> <C> <C> <C>
2$.46 to 3.71... 1,808,636 9.01 years $ 2.56 670,930 $ 2.50
3.78 to 6.06... 1,824,406 9.53 years 4.76 212,880 4.11
6.15 to 7.75... 191,926 9.83 years 6.58 35,730 6.75
13.30.......... 10,000 9.75 years 13.30 833 13.30
--------- ---------
3,834,968 3.80 920,373 3.05
========= ========= ========= =========
</TABLE>

F-23
<PAGE>
NETGATEWAY, INC. AND SUBSIDIARY

(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(11) INCOME TAXES

Income tax expense for the period March 4, 1998 (inception) through
June 30, 1998 and the year ended June 30, 1999 represents the California
state minimum franchise tax and is included in selling, general and
administrative expenses in the accompanying consolidated statement of
operations.

Income tax expense attributable to loss from operations during the year
ended June 30, 1999 and the period March 4, 1998 (inception) through
June 30, 1998, differed from the amounts computed by applying the U.S.
federal income tax rate of 34 percent to loss from operations as a result of
the following:

<TABLE>
<CAPTION>
1999 1998
------------- -----------
<S> <C> <C>
Computed "expected" tax benefit.................................. $ (3,565,585) (1,554,458)
Decrease (increase) in income taxes resulting from:
State and local income tax benefit, net of federal effect........ (618,227) (278,196)
Change in the valuation allowance for deferred tax assets........ 4,139,728 1,859,974
Other............................................................ 46,479 (26,520)
------------- -----------
Income tax expense............................................. $ 2,400 800
============= ===========
</TABLE>

The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
June 30, 1999 and 1998 are presented below:

<TABLE>
<CAPTION>
1999 1998
------------- -----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards............................... $ 4,620,070 1,669,316
Stock compensation expense..................................... 1,128,171 179,872
Intangible assets, principally due to differences in
amortization................................................. 16,902 10,290
Deferred compensation.......................................... 112,821 --
Accounts receivable principally due to allowance for doubtful
accounts..................................................... 1,200 --
Accrued expenses............................................... 106,640 --
Property and equipment, principally due to differences in
depreciation................................................. -- 496
------------- -----------
Total gross deferred tax assets.............................. 5,985,804 1,859,974
Less valuation allowance..................................... (5,968,503) (1,859,974)
Deferred tax liability:
Property and equipment, principally due to differences in
depreciation................................................. (17,301) --
------------- -----------
Net deferred tax assets...................................... $ -- --
============= ===========
</TABLE>

In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred
tax assets will not be realized. The ultimate realization of deferred tax
assets is dependent upon the generation of future taxable income during

F-24
<PAGE>
NETGATEWAY, INC. AND SUBSIDIARY

(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(11) INCOME TAXES (CONTINUED)
the periods in which those temporary differences become deductible.
Management considers the schedule reversal of deferred tax liabilities,
projected future taxable income, and tax planning strategies in making this
assessment. In order to fully realize the deferred tax assets, the Company
will need to generate future taxable income of approximately $11,550,000
prior to the expiration of the carryforward period in 2014. Based on the
projections for future taxable income over the periods which the deferred
tax assets are deductible, management believes it is more likely than not
that the Company will not realize the benefits of these deductible
differences. Such potential future benefits have been fully reserved, and
accordingly, there are no net deferred tax assets.

As of June 30, 1999, the Company had approximately $11,550,400 and
11,548,000 of net operating loss carryforwards available for Federal and
state income tax purposes, respectively, which expire between 2006 and 2018.
The ultimate realization of the net operating loss carryforwards will be
limited by Section 382 of the Internal Revenue Code as a result of a change
of control.

(12) LEASE COMMITMENTS

The Company has noncancelable operating leases for office space which expire
at various dates through July 2001. Minimum annual commitments under
noncancelable operates leases are $424,700, $237,300, $135,300 and $10,000
during the years ended June 30, 2000, 2001, 2002 and 2003, respectively. All
other operating leases are month-to-month arrangements.

Rent expense amounted to $115,237 and $18,367 during the year ended
June 30, 1999 and during the period March 4, 1998 (inception) through
June 30, 1998, respectively.

(13) SUBSEQUENT EVENTS

In July 1999, the Board of Directors adopted the 1999 Stock Option Plan for
Non-Executives. An aggregate of 2,000,000 shares were reserved for issuance
under the Plan. From July 1, 1999 through August 10, 1999, the Company
granted 367,266 options under the Plan at exercise prices ranging from $5.25
to $14.50 per share. The Company also granted 200,000 options under the 1998
Executive Plan in July 1999 at an exercise price of $8.18 per share.

In July 1999, the Company entered into a Cable Reseller and Mall agreement
with MediaOne of Colorado, Inc. (MediaOne) whereby the Company also issued
to MediaOne 50,000 shares of common stock and warrants to purchase 200,000
shares of common stock. The exercise price of the warrants is dependent upon
the market price of the Company's common stock on the date that the warrants
are earned under certain performance criteria.

From July 21, 1999 through August 18, 1999, the Company issued $503,000 of
12% senior notes payable which are due the earlier of April 30, 2000 or upon
the close of a public sale of the Company's common stock and 50,300 shares
of the Company's common stock in exchange for $503,000. The net proceeds
were allocated to the notes payable and common stock based on their relative
fair values. Under the Securities Act, the rules and regulations under the
Securities Act, and the interpretations of the Commission, we may be
required to offer rescission to investors in our May through September 1999
private placement. If the Company is required to rescind the May through
September private placement in its entirety, the Company would be required
to refund all of the gross proceeds of the May through September private
placement to the investors.

F-25
<PAGE>
NETGATEWAY, INC. AND SUBSIDIARY

(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(13) SUBSEQUENT EVENTS (CONTINUED)
Even following the repayment of the notes, based on the Securities Act, the
rule and regulations under the Securities Act, and the interpretations of
the Commission, the investors in the May through September private placement
may have the right to require the Company to repurchase the shares of common
stock which they received in the May through September private placement if
they can successfully argue that those shares were issued in lieu of a
higher interest rate on those notes.

(14) SUBSEQUENT EVENT--UNAUDITED

From August 24, 1999 through September 24, 1999, the Company issued
$3,075,500 of 12% senior notes payable which are due the earlier of April
30, 2000 or upon the close of a public sale of the Company's common stock
and 307,550 shares of the Company's common stock in exchange for $3,075,500.
The net proceeds were allocated to the notes payable and common stock based
on their relative fair values. Under the Securities Act, the rules and
regulations under the Securities Act, and the interpretations of the
Commission, we may be required to offer rescission to investors in our May
through September 1999 private placement. If the Company is required to
rescind the May through September private placement in its entirety, the
Company would be required to refund all of the gross proceeds of the May
through September private placement to the investors. Even following the
repayment of the notes, based on the Securities Act, the rule and
regulations under the Securities Act, and the interpretations of the
Commission, the investors in the May through September private placement may
have the right to require the Company to repurchase the shares of common
stock which they received in the May through September private placement if
they can successfully argue that those shares were issued in lieu of a
higher interest rate on those notes.

F-26
<PAGE>
NETGATEWAY, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)

UNAUDITED CONSOLIDATED BALANCE SHEET

SEPTEMBER 30, 1999

<TABLE>
<CAPTION>
SEPTEMBER 30,
1999
-------------
<S> <C>
ASSETS
Current assets:
Cash............................................................................................. $ 956,636
Accounts receivable.............................................................................. 104,687
Debt issue costs................................................................................. 439,956
Prepaid offering costs........................................................................... 617,791
Prepaid advertising.............................................................................. 300,000
Other current assets............................................................................. 22,381
-------------
Total current assets........................................................................... 2,441,451
Property and equipment, net........................................................................ 672,857
Intangible assets, net............................................................................. 1,482,942
Other assets....................................................................................... 19,864
-------------
$ 4,617,114
=============

LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of notes payable (note 5)........................................................ $ 3,222,531
Convertible debentures........................................................................... 200,000
Accounts payable................................................................................. 291,597
Accrued wages and benefits....................................................................... 561,116
Accrued interest................................................................................. 157,082
Accrued liabilities.............................................................................. 866,308
Deferred revenue................................................................................. 140,450
Accrued contract losses.......................................................................... 43,337
Current portion of notes payable to related party................................................ 1,799
-------------
Total current liabilities...................................................................... 5,484,220
-------------
Shareholders' equity (deficit) (notes 6 and 10):
Preferred stock, par value $.001 per share, Authorized 5,000,000 shares; issued and outstanding
0.............................................................................................. --
Common stock, par value $.001 per share. Authorized 40,000,000 shares; issued and outstanding
10,322,554..................................................................................... 10,323
Additional paid-in capital....................................................................... 18,402,614
Deferred compensation............................................................................ (34,380)
Stock subscription receivable (note 5)........................................................... (350,000)
Accumulated other comprehensive loss............................................................. (4,656)
Deficit accumulated during development stage..................................................... (18,891,007)
-------------
Total shareholders' equity (deficit)........................................................... (867,106)
Commitments and subsequent events (notes 12 and 13)
-------------
Total liabilities and shareholders' equity (deficit)........................................... $ 4,617,114
=============
</TABLE>

See accompanying notes to unaudited consolidated financial statements.

F-27
<PAGE>
NETGATEWAY, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
CUMULATIVE
PERIOD FROM
THREE MONTHS THREE MONTHS MARCH 4, 1998
ENDED ENDED (INCEPTION)
SEPTEMBER 30, SEPTEMBER 30, THROUGH
1999 1998 SEPTEMBER 30, 1999
-------------- ------------- ------------------
<S> <C> <C> <C>
Service revenue................................................ $ 212,733 22,470 358,959
Operating expenses:
License fees (note 7)........................................ -- -- 3,822,000
Depreciation and amortization................................ 132,702 23,026 402,293
Selling, general and administrative.......................... 2,882,274 1,755,147 14,649,990
-------------- ----------- --------------
Total operating expenses................................... 3,014,976 1,778,173 18,874,283
-------------- ----------- --------------
Loss from operations....................................... (2,802,243) (1,755,703) (18,515,324)
Loss on sale of equity securities.............................. -- -- 54,729
Interest expense, net.......................................... 1,029,812 2,408 1,974,186
-------------- ----------- --------------
Loss before extraordinary item............................. (3,832,055) (1,812,840) (20,544,239)
Extraordinary gain on extinguishment of debt................... -- -- 1,653,232
-------------- ----------- --------------
Net loss................................................... $ (3,832,055) (1,812,840) (18,891,007)
============== =========== ==============
Basic and diluted extraordinary gain per share................. $ -- -- .20
============== =========== ==============
Basic and diluted loss per share............................... $ (.38) (.22) (2.26)
============== =========== ==============
Weighted average common shares outstanding--basic and
diluted...................................................... $ 10,017,740 8,280,801 8,372,298
============== =========== ==============
</TABLE>

See accompanying notes to unaudited consolidated financial statements.

F-28
<PAGE>
NETGATEWAY, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' DEFICIT
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
PRICE -------------------- PAID-IN DEFERRED
DATE PER SHARE SHARES AMOUNT CAPITAL COMPENSATION
---------- ---------- --------- --------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Sale of common stock for cash.............. 3/98 $ .07--.33 754,545 $ 755 199,245 --
Common stock issued for services........... 3/98 0.22 1,445,455 1,445 316,555 --
Common stock issued in exchange for
shareholder's payment of Company debt.... 3/98 0.50 400,000 400 199,600 --
Common stock issued to acquire license..... 3/98 0.22 1,000,000 1,000 219,000 --
Common stock issued for services........... 4/98 0.22 100,000 100 21,900 --
Deferred compensation on stock issued for
services................................. 4/98 -- -- -- (14,080)
Amortization of deferred compensation...... 4/98--6/98 -- -- -- 1,760
Common stock issued to acquire license..... 4/98 0.22 1,900,000 1,900 416,100 --
Common stock issued for services........... 5/98 0.22 200,000 200 43,800 --
Common stock issued in exchange for
shareholder's payment of Company debt.... 5/98 1.00 200,000 200 199,800 --
Sale of common stock for cash.............. 5/98--6/98 1.00 303,000 303 302,697 --
Conversion of debt to capital
contribution............................. 6/98 -- -- 100,000 --
Adjustment resulting from reverse
acquisition.............................. 6/98 450,000 450 (310) --
Shares issued in business acquisition...... 6/98 1.00 400,000 400 399,600 --
Conversion of debt to common stock,
including interest....................... 6/98 1.00 184,000 184 185,349 --
Stock issued for deferred compensation..... 6/98 1.00 100,000 100 99,900 (100,000)
Sale of common stock for cash.............. 6/98 2.00 73,000 73 145,927 --
Comprehensive loss:
Net loss................................. -- -- -- --
--------- ---------
Total comprehensive loss...................
--------- --------- ----------- ---------
Balance at June 30, 1998................... 7,510,000 7,510 2,849,163 (112,320)
Sale of common stock for cash.............. 7/98--9/98 2.00 949,800 950 1,898,650 --
Exercise of warrants....................... 7/98--9/98 2.00 132,100 132 264,068 --
Warrants granted for services.............. 10/98--6/99 2.00--5.50 -- -- 2,340,720 --
Stock compensation paid by shareholders.... 11/98 2.00 -- -- 400,000 --
Stock option compensation.................. -- -- 233,211 (233,211)
Amortization of deferred compensation...... -- -- -- 282,052
Forfeited stock............................ (48,000) (48) (10,512) 10,560
Capital contributed upon extinguishment of
debt..................................... 12/98 -- -- 200,000 --
Subsidiary convertible common stock issued
in business acquisition.................. 1/99--4/99 3.00--4.50 -- -- 1,392,858 --
Options issued for legal services.......... 2/99 5.50 -- -- 479,708 --
Warrants granted for debt issue costs...... 2/99--6/99 3.50--5.50 -- -- 775,585 --
Shares issued for debenture conversion..... 3/99--5/99 2.50 320,000 320 950,680 --
Shares issued for services................. 10/98--6/99 2.00--5.50 366,500 366 1,261,834 --
Shares issued for debt issue costs......... 3/99 4.00 30,000 30 127,470 --
Sale of common stock for cash, net......... 3/99--6/99 3.00-5.50 614,334 615 2,300,763 --
Cashless exercise of warrants.............. 4/99 2,570 3 (3) --
Shares issued for technology............... 5/99 5.00 35,000 35 174,965 --
Comprehensive loss:
Net loss................................. -- -- -- --
Foreign currency translation
adjustment............................. -- -- -- --
Total comprehensive loss...................
--------- --------- ----------- ---------

<CAPTION>
DEFICIT
ACCUMULATED ACCUMULATED TOTAL
STOCK DURING OTHER SHAREHOLDERS'
SUBSCRIPTION COMPREHENSIVE DEVELOPMENT COMPREHENSIVE EQUITY
RECEIVABLE LOSS STAGE LOSS (DEFICIT)
------------ -------------- ----------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Sale of common stock for cash.............. -- -- -- 200,000
Common stock issued for services........... -- -- -- 318,000
Common stock issued in exchange for
shareholder's payment of Company debt.... -- -- -- 200,000
Common stock issued to acquire license..... -- -- -- 220,000
Common stock issued for services........... -- -- -- 22,000
Deferred compensation on stock issued for
services................................. -- -- -- (14,080)
Amortization of deferred compensation...... -- -- -- 1,760
Common stock issued to acquire license..... -- -- -- 418,000
Common stock issued for services........... -- -- -- 44,000
Common stock issued in exchange for
shareholder's payment of Company debt.... -- -- -- 200,000
Sale of common stock for cash.............. -- -- -- 303,000
Conversion of debt to capital
contribution............................. -- -- -- 100,000
Adjustment resulting from reverse
acquisition.............................. -- -- -- 140
Shares issued in business acquisition...... -- -- -- 400,000
Conversion of debt to common stock,
including interest....................... -- -- -- 185,533
Stock issued for deferred compensation..... -- -- -- --
Sale of common stock for cash.............. -- -- -- 146,000
Comprehensive loss:
Net loss................................. -- (4,571,936) (4,571,936) -- (4,571,936)

Total comprehensive loss................... (4,571,936)
----------
---------- --------- ---------- -----------
Balance at June 30, 1998................... -- (4,571,936) -- (1,827,583)
Sale of common stock for cash.............. -- -- -- 1,899,600
Exercise of warrants....................... -- -- -- 264,200
Warrants granted for services.............. -- -- -- 2,340,720
Stock compensation paid by shareholders.... -- -- -- 400,000
Stock option compensation.................. -- -- -- --
Amortization of deferred compensation...... -- -- -- 282,052
Forfeited stock............................ -- -- -- --
Capital contributed upon extinguishment of
debt..................................... -- -- -- 200,000
Subsidiary convertible common stock issued
in business acquisition.................. -- -- -- 1,392,858
Options issued for legal services.......... -- -- -- 479,708
Warrants granted for debt issue costs...... -- -- -- 775,585
Shares issued for debenture conversion..... -- -- -- 951,000
Shares issued for services................. -- -- -- 1,262,200
Shares issued for debt issue costs......... -- -- -- 127,500
Sale of common stock for cash, net......... -- -- -- 2,301,378
Cashless exercise of warrants.............. -- -- -- --
Shares issued for technology............... -- -- -- 175,000
Comprehensive loss:
Net loss................................. -- (10,487,016) (10,487,016) -- (10,487,016)
Foreign currency translation
adjustment............................. -- (3,598) -- (3,598) (3,598)
----------
Total comprehensive loss................... (10,490,614)
----------
---------- --------- ---------- -----------
</TABLE>

F-29
<PAGE>
NETGATEWAY, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' DEFICIT
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
PRICE -------------------- PAID-IN DEFERRED
DATE PER SHARE SHARES AMOUNT CAPITAL COMPENSATION
---------- ---------- --------- --------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1999................. 9,912,304 $ 9,913 15,639,160 (52,919)
Common stock issued for prepaid
advertising............................ 7/99 6.00 50,000 50 299,950 --
Common stock issued for services......... 7/99 6.00 2,400 2 14,398 --
Warrants issued for services............. 8/99 -- -- -- 53,534 --
Sale of common stock for cash, net....... 8/99-9/99 6.50-7.00 357,850 358 2,384,782 --
Common stock subscribed.................. 9/99 7.00 -- -- -- --
Options granted for services............. 7/99-9/99 700 -- 5,105 --
Stock option compensation................ 7/99-9/99 -- -- 5,685 (5,685)
Amortization of deferred compensation.... -- -- -- 24,224
Comprehensive loss
Net loss............................... -- -- -- --
Foreign currency transaction
adjustment............................. -- -- -- --
Total comprehensive loss...............
--------- --------- ----------- ---------
Balance at September 30, 1999............ 10,322,554 10,323 18,402,614 (34,380)
========= ========= =========== =========

<CAPTION>
DEFICIT
ACCUMULATED ACCUMULATED TOTAL
STOCK DURING OTHER SHAREHOLDERS'
SUBSCRIPTION COMPREHENSIVE DEVELOPMENT COMPREHENSIVE EQUITY
RECEIVABLE LOSS STAGE LOSS (DEFICIT)
-------------- -------------- ----------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Balance at June 30, 1999................. -- (15,058,952) (3,598) (533,604)
Common stock issued for prepaid
advertising............................ -- -- -- 300,000
Common stock issued for services......... -- -- -- 14,400
Warrants issued for services............. -- -- -- 53,534
Sale of common stock for cash, net....... -- -- -- 2,385,140
Common stock subscribed.................. (350,000) -- -- -- (350,000)
Options granted for services............. -- -- -- 5,105
Stock option compensation................ -- -- --
Amortization of deferred compensation.... -- -- -- 24,224
Comprehensive loss
Net loss............................... -- (3,832,055) (3,832,055) -- (3,832,055)
Foreign currency transaction
adjustment............................. -- (1,058) -- (1,058) (1,058)
----------
Total comprehensive loss............... (3,833,113)
---------- ---------- --------- ---------- -----------
Balance at September 30, 1999............ (350,000) (18,891,007) (4,656) (867,106)
========= ==========
</TABLE>

See accompanying notes to unaudited consolidated financial statements.

F-30
<PAGE>
NETGATEWAY, INC. AND SUBSIDIARY

(A DEVELOPMENT STAGE ENTERPRISE)

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
CUMULATIVE
PERIOD FROM
THREE MONTHS THREE MONTHS MARCH 4, 1998
ENDED ENDED (INCEPTION) THROUGH
SEPTEMBER 30, 1999 SEPTEMBER 30, 1998 SEPTEMBER 30, 1999
------------------ ------------------ --------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss............................................ $ (3,832,055) (1,812,840) (18,891,007)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization..................... 132,703 23,025 402,294
Common stock issued for services.................. 14,400 -- 1,648,280
Amortization and write-off of license fees........ -- -- 3,822,000
Loss on sale of equity securities................. -- 54,729 54,729
Amortization of deferred compensation............. 24,224 64,260 306,276
Gain on extinguishment of debt.................... -- -- (1,635,488)
Stock compensation paid by shareholders........... -- -- 400,000
Interest expense on debt converted to equity...... -- -- 255,765
Interest expense on warrants issued as debt issue
costs........................................... -- -- 535,535
Amortization of debt issue costs.................. 144,631 -- 288,631
Amortization of debt discount..................... 769,081 17,744 786,825
Options and warrants issued for services.......... 5,105 65,000 2,825,533
Provision for doubtful accounts................... -- 10,886 51,876
Write-off of note receivable...................... -- 800,000 800,000
Changes in assets and liabilities:
Accounts receivable............................. (60,489) (41) (112,258)
Prepaid offering costs.......................... (291,904) -- (617,791)
Other assets.................................... (51,089) (33,542) (71,001)
Accounts payable and accrued expenses........... 886,477 831,003 2,222,520
------------ ---------- ----------
Net cash used in operating activities......... (2,156,738) (418,192) (6,962,769)
------------ ---------- ----------
Cash flows from investing activities:
Cash assumed in business acquisition.............. -- -- 8,102
Loan for notes receivable......................... -- (800,000) (905,000)
Repayment of notes receivable..................... 30,000 50,000 80,000
Purchase of equity securities..................... -- (100,733) (100,733)
Proceeds from sale of equity securities........... -- 46,004 46,004
Purchase of property and equipment................ (229,331) (26,124) (581,994)
------------ ---------- ----------
Net cash used in investing activities......... (199,331) (830,853) (1,453,571)
------------ ---------- ----------
Cash flows from financing activities:
Proceeds from issuance of common stock, net....... 1,890,269 1,899,600 6,792,629
Proceeds from exercise of warrants................ -- 231,000 264,200
Proceeds from issuance of notes payable to related
parties......................................... -- -- 232,429
Proceeds from issuance of notes payable and
convertible debentures.......................... 957,450 -- 3,463,450
Cash paid for debt issue costs.................... (103,428) -- (284,446)
Repayment of notes payable to related parties..... -- (728,630) (1,690,630)
------------ ---------- ----------
Net cash provided by financing activities..... 2,744,291 1,401,970 9,377,632
------------ ---------- ----------
Net increase in cash.......................... 388,222 254,597 961,292
Cash at beginning of period........................... 569,472 -- --
Effect of exchange rate changes on cash balances...... (1,058) -- (4,656)
------------ ---------- ----------
Cash at end of period................................. $ 956,636 413,022 956,636
============ ========== ==========
Supplemental schedule of noncash activities:
Issuance of common stock for business acquisition... $ -- -- 400,000
Issuance of convertible stock in business
acquisition....................................... -- -- 1,392,858
Accrued asset purchases............................. -- -- 27,743
Conversion of debt to common stock.................. -- -- 1,084,000
Stock issued for prepaid advertising................ (300,000) -- (300,000)
Common stock issued in exchange for shareholders'
payment of Company debt........................... -- -- 400,000
Capital contributed upon extinguishment of debt..... -- -- 200,000
Common stock issued for internal-use software....... -- -- 175,000
Warrants issued for debt issue costs................ 144,871 -- 868,074
Warrants issued to settle an obligation............. 53,534 -- 53,534
Stock issued for debt issue costs................... -- -- 77,500
============ ========== ==========
</TABLE>

See accompanying notes to unaudited consolidated financial statements.

F-31
<PAGE>
NETGATEWAY, INC. AND SUBSIDIARY

(A DEVELOPMENT STAGE ENTERPRISE)

UNAUDITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) DESCRIPTION OF BUSINESS

(2) LIQUIDITY

(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(A) PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.

(B) REVENUE RECOGNITION

F-32
<PAGE>
NETGATEWAY, INC. AND SUBSIDIARY

(A DEVELOPMENT STAGE ENTERPRISE)

UNAUDITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
the United States. All revenues during the three months ended
September 30, 1999 and 1998 were generated in the United States.
Substantially all of the Company's long-lived assets were located in the
United States at September 30, 1999.

(D) INVESTMENT SECURITIES

(E) FOREIGN CURRENCY TRANSLATION

The financial statements of the Company's Canadian subsidiary,
StoresOnline.com, have been translated into U.S. dollars from its
functional currency in the accompanying consolidated financial statements
in accordance with Statement of Financial Accounting Standards No. 52,
"Foreign Currency Translation." Balance sheet accounts of
StoresOnline.com are translated at year-end exchange rates while income
and expenses are translated at weighted-average exchange rates for the
period. Translation gains or losses that related to StoresOnline.com's
net assets are shown as a separate component of shareholders' equity
(deficit) and comprehensive income (loss). There were no gains or losses
resulting from realized foreign currency transactions (transactions
denominated in a currency other than the entities' functional currency)
during the three months ended September 30, 1999 and 1998.

(F) LOSS PER SHARE

Basic earnings (loss) per share is computed by dividing net income (loss)
available to common shareholders by the weighted average number of common
shares outstanding during the period in accordance with SFAS No. 128
"Earnings Per Share". Diluted earnings (loss) per share reflects the
potential dilution that could occur if securities or other contracts to
issue common stock were exercised or converted into common stock or
resulted in the issuance of common stock that then shared in the earnings
of the entity. Diluted earnings (loss) per share is computed similarly to
fully diluted earnings (loss) per share pursuant to Accounting Principles
Board (APB) Opinion No. 15. There were 4,502,455 options and 2,127,475
warrants to purchase shares of common stock that were outstanding during
the three months ended September 30, 1999 which were not included in the
computation of diluted loss per share because the impact would have been
antidilutive. There were 333,286 options and 890,700 warrants to purchase
shares of common stock that were outstanding during the three months
ended September 30, 1998 which were not included in the computation of
diluted loss per share because the impact would have been antidilutive.

F-33
<PAGE>
NETGATEWAY, INC. AND SUBSIDIARY

(A DEVELOPMENT STAGE ENTERPRISE)

UNAUDITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(G) COSTS OF START-UP ACTIVITIES

Pursuant to AICPA Statement of Position No. 98-5, "Reporting on the Costs
of Start-Up Activities," the Company expenses all the costs of start-up
activities as incurred.

(H) USE OF ESTIMATES

(I) RECLASSIFICATIONS

Certain amounts have been reclassified to conform with current year
presentation.

(4) NOTES RECEIVABLE AND NOTES RECEIVABLE FROM OFFICER

During the period March 4, 1998 (inception) through June 30, 1998, the
Company issued a $50,000 note receivable to a customer which was repaid
during the year ended June 30, 1999. In July 1998 and August 1998, the
Company advanced $800,000 to an entity with which the Company was in merger
discussions. Certain Company officers and directors were minor shareholders
of the potential merger entity. The merger was not consummated and the
advance was deemed uncollectible and written-off during the three months
ended September 30, 1998. During June 1999, the Company issued its chief
executive officer, Keith Freadhoff, a non-interest bearing $30,000 note
receivable. The note was repaid in July 1999.

(5) NOTES PAYABLE

In August and September 1999, the Company obtained bridge financing whereby
12% senior notes payable and 357,850 shares of common stock were issued
generating proceeds of $2,744,290, net of $803,612 of issuance costs. The
senior notes payable are due the earlier of April 30, 2000 or upon the close
of a public sale of the Company's common stock. The Company also granted
149,375 warrants to purchase an equivalent number of shares of common stock
at an exercise price of $10 per share as additional issuance costs. The
warrants are exercisable for a period of four years commencing May 18, 2000.
The fair value of the warrants on the dates of issuance was estimated to be
$469,402 using the Black-Scholes option-pricing model with the following
assumptions: dividend yield of 0%; risk-free interest rate of 5%; volatility
of 100% and an expected life of 2 years. The net proceeds from the bridge
financing were allocated to the senior notes payable and common stock based
on their relative fair values. Accordingly, $957,450 was recorded as notes
payable, $2,035,140 as equity, net of $555,313 of stock issuance costs, and
$248,299 as debt issuance costs. Under the Securities Act, the rules and
regulations under the Securities Act, and the interpretations of the
Commission, we may be required to offer rescission to investors in our May
through September 1999 private placement.

In September 1999, the Company issued a 12% senior note payable of $500,000
and 50,000 shares of common stock valued at $350,000 stock, however, the
proceeds were received in October 1999. As a result, the Company recorded a
stock subscription receivable of $350,000 at September 30, 1999. The note is
due the earlier of April 30, 2000 or upon the close of a public sale of the

F-34
<PAGE>
NETGATEWAY, INC. AND SUBSIDIARY

(A DEVELOPMENT STAGE ENTERPRISE)

UNAUDITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(5) NOTES PAYABLE (CONTINUED)
Company's common stock. Under the Securities Act, the rules and regulations
under the Securities Act, and the interpretations of the Commission, we may
be required to offer rescission to investors in our May through September
1999 private placement. If the Company is required to rescind the May
through September private placement in its entirety, the Company would be
required to refund all of the gross proceeds of the May through September
private placement to the investors. Even following the repayment of the
notes, based on the Securities Act, the rule and regulations under the
Securities Act, and the interpretations of the Commission, the investors in
the May through September private placement may have the right to require
the Company to repurchase the shares of common stock which they received in
the May through September private placement if they can successfully argue
that those shares were issued in lieu of a higher interest rate on those
notes.

(6) SHAREHOLDERS' EQUITY (DEFICIT)

In July 1999, the Board of Directors adopted the 1999 Stock Option Plan for
Non-Executives. An aggregate of 2,000,000 shares were reserved for issuance
under the Plan. During the three months ended September 30, 1999, the
Company granted 555,764 options under the Plan at exercise prices ranging
from $5.25 to $12.50 per share. The Company also granted 200,000 options
under the 1998 Executive Plan in July 1999 at an exercise price of $8.18 per
share.

In July 1999, the Company issued 2,400 shares of common stock valued at
$14,400 for services.

(7) SUBSEQUENT EVENTS

In October 1999, the Company issued a 12% senior note payable of $25,000 and
2,500 shares of common stock valued at $17,500 generating net proceeds of
$22,500. The note is due the earlier of April 30, 2000 or upon the close of
a public sale of the Company's common stock. The Company also granted 1,250
warrants valued at $3,349. The net proceeds were allocated to the senior
notes payable and common stock based on their relative fair value. Under the
Securities Act, the rules and regulations under the Securities Act, and the
interpretations of the Commission, we may be required to offer rescission to
investors in our May through September 1999 private placement. If the
Company is required to rescind the May through September private placement
in its entirety, the Company would be required to refund all of the gross
proceeds of the May through September private placement to the investors.
Even following the repayment of the notes, based on the Securities Act, the
rule and regulations under the Securities Act, and the interpretations of
the Commission, the investors in the May through September private placement
may have the right to require the Company to repurchase the shares of common
stock which they received in the May through September private placement if
they can successfully argue that those shares were issued in lieu of a
higher interest rate on those notes.

In October 1999, the Company issued 962,344 shares of common stock upon the
cashless exercise of warrants, 100 shares of common stock upon the exercise
of warrants for $100, 1,200,000 shares of common stock to three executives
upon the cancelation of 1,980,000 options, and 8,000 shares of common stock
upon the conversion of $20,000 of convertible debentures. In November 1999,
the Company issued 270 shares of common stock upon the exercise of warrants
for $270.

F-35
<PAGE>
INDEPENDENT AUDITORS' REPORT

The Members
Infobahn Technologies, LLC (dba Digital Genesis):

We have audited the accompanying balance sheets of Infobahn Technologies,
LLC (a limited liability company) (dba Digital Genesis) as of December 31, 1997
and 1996 and the related statements of operations, members' equity (deficit) and
cash flows for the year ended December 31, 1997 and the period from February 2,
1996 (inception) through December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly,
in all materials respects, the financial position of Infobahn Technologies, LLC
(a limited liability company) (dba Digital Genesis) as of December 31, 1997 and
1996 and the results of its operations and its cash flows for the year ended
December 31, 1997 and the period from February 2, 1996 (inception) through
December 31, 1996 in conformity with generally accepted accounting principles.

KPMG LLP
Los Angeles, California
July 2,1999

F-36
<PAGE>
INFOBAHN TECHNOLOGIES, LLC

(DBA DIGITAL GENESIS)

BALANCE SHEETS

DECEMBER 31, 1997 AND 1996

<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash.................................................................................... $ 6,783 3,649
Accounts receivable less allowance for doubtful accounts of $0 and $1,295 as of
December 31, 1997 and 1996 respectively............................................... 75,174 20,351
Other current assets.................................................................... 3,450 3,450
---------- ----------
Total current assets.................................................................. 85,407 27,450
Property and equipment, net (note 3)...................................................... 17,755 1,999
---------- ----------
$ 103,162 29,449
========== ==========
LIABILITIES AND MEMBERS' EQUITY (DEFICIT)
Current Liabilities:
Accounts payable........................................................................ $ 19,387 11,179
Accrued expenses........................................................................ 2,398 1,955
Deferred revenue........................................................................ 37,666 25,787
---------- ----------
Total current liabilities............................................................. 59,451 38,921
---------- ----------
Members' equity (deficit):
Members' capital........................................................................ 43,979 34,906
---------- ----------
Accumulated deficit..................................................................... (268) (44,378)
---------- ----------
43,711 (9,472)
---------- ----------
Total members' equity (deficit)....................................................... $ 103,162 29,449
========== ==========
</TABLE>

See accompanying notes to financial statements.

F-37
<PAGE>
INFOBAHN TECHNOLOGIES, LLC

(DBA DIGITAL GENESIS)

STATEMENTS OF OPERATIONS

YEAR ENDED DECEMBER 31, 1997 AND THE PERIOD FROM
FEBRUARY 2, 1996 (INCEPTION) THROUGH DECEMBER 31, 1996

<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Service revenue........................................................................... $ 499,213 142,685
---------- ----------
Operating expenses:
Selling, general and administrative..................................................... 453,675 186,994
Depreciation............................................................................ 1,428 69
---------- ----------
Total operating expenses.............................................................. 455,103 187,063
---------- ----------
Net income (loss)..................................................................... $ 44,110 (44,378)
========== ==========
</TABLE>

See accompanying notes to financial statements.

F-38
<PAGE>
INFOBAHN TECHNOLOGIES, LLC

(DBA DIGITAL GENESIS)

STATEMENT OF MEMBERS' EQUITY (DEFICIT)

YEAR ENDED DECEMBER 31, 1997 AND THE PERIOD FROM
FEBRUARY 2, 1996 (INCEPTION) THROUGH DECEMBER 31, 1996

<TABLE>
<CAPTION>
TOTAL
MEMBERS'
MEMBERS' ACCUMULATED EQUITY
CAPITAL DEFICIT (DEFICIT)
----------- ------------ -------------
<S> <C> <C> <C>
Capital contribution..................................................... $ 34,906 -- 34,906
Net loss................................................................. -- (44,378) (44,378)
--------- ---------- ---------
Balance at December 31, 1996............................................. 34,906 (44,378) (9,472)
Capital contribution..................................................... 9,073 -- 9,073
Net income............................................................... -- 44,110 44,110
--------- ---------- ---------
Balance at December 31, 1997............................................. $ 43,979 (268) 43,711
========= ========== =========
</TABLE>

See accompanying notes to financial statements.

F-39
<PAGE>
INFOBAHN TECHNOLOGIES, LLC

(DBA DIGITAL GENESIS)

STATEMENT OF CASH FLOWS

YEAR ENDED DECEMBER 31, 1997 AND THE PERIOD FROM
FEBRUARY 2, 1996 (INCEPTION) THROUGH DECEMBER 31, 1996

<TABLE>
<CAPTION>
1997 1996
---------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)......................................................................... $ 44,110 (44,378)
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation............................................................................ 1,428 69
Allowance for doubtful accounts......................................................... -- 1,295
Changes in assets and liabilities:
Accounts receivable................................................................... (54,823) (21,646)
Other current assets.................................................................. -- (3,450)
Accounts payable...................................................................... 8,208 11,179
Accrued expenses...................................................................... 443 1,955
Deferred revenue...................................................................... 11,879 25,787
---------- ---------
Net cash provided by (used in) operating activities................................. 11,245 (29,189)
Cash flows from investing activities--purchase of property and equipment.................... (17,184) (2,068)
Cash flows from financing activities--Member contributions.................................. 9,073 34,906
---------- ---------
Increase in cash.................................................................... 3,134 3,649
Cash at beginning of period................................................................. 3,649 --
---------- ---------
Cash at end of period....................................................................... $ 6,783 3,649
========== =========
</TABLE>

See accompanying notes to financial statements.

F-40
<PAGE>
INFOBAHN TECHNOLOGIES, LLC

(DBA DIGITAL GENESIS)

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 1997 AND 1996

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(A) DESCRIPTION OF COMPANY

Infobahn Technologies, LLC (dba Digital Genesis) (Digital Genesis or the
Company) was formed on February 2, 1996 as a California limited
liability company. The Company is primarily an internet consulting
company, earning revenues from consulting services, website design and
development and website hosting services. The Company is also engaged in
developing electronic commerce applications.

(B) REVENUE RECOGNITION

Consulting and website hosting revenue is recognized as services are
performed. Website design and development revenue is recognized upon
completion of the contract.

Property and equipment are stated at cost. Depreciation is calculated
using the straight-line method over the following estimated useful lives
of the assets, five years.

(D) INCOME TAXES

Digital Genesis is a limited liability company taxed for Federal
purposes as a partnership; therefore, the net earnings of the Company
are included in the taxable income of its owners. The Company may be
subject to income taxes in certain jurisdictions that impose
unincorporated business or income taxes.

(E) FINANCIAL INSTRUMENTS

The carrying values of cash, accounts receivable, accounts payable and
accrued expenses at December 31, 1997 and 1996 approximated fair value
due to the short maturity of those instruments. All financial
instruments are held for purposes other than trading.

(F) COMPREHENSIVE INCOME

SFAS No. 130, "Reporting Comprehensive Income" (SFAS No. 130),
establishes standards for reporting and displaying comprehensive income
and its components in a full set of general-purpose financial
statements. The Company does not have components of other comprehensive
income. Therefore, comprehensive income is the same as net income (loss)
in 1997 and the period from February 2, 1996 (inception) through
December 31, 1996.

(G) COSTS OF START-UP ACTIVITIES

Pursuant to AICPA Statement of Position No. 98-5, "Reporting on the
Costs of Start-Up Activities," the Company expenses all of the costs of
start-up activities as incurred.

F-41
<PAGE>
INFOBAHN TECHNOLOGIES, LLC

(DBA DIGITAL GENESIS)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1997 AND 1996

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(H) USE OF ESTIMATES

Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities, the disclosure of
contingent assets and liabilities and the reported amounts of revenues
and expenses during the reporting period to prepare these financial
statements in conformity with generally accepted accounting principles.
Actual results could differ from those estimates.

(2) CONCENTRATION OF CREDIT RISK

The Company primarily provided consulting services to technology based
businesses. The Company had three customers for which revenues exceeded 10% of
total revenues in 1997, accounting for approximately 84% or $417,000 of total
service revenue for the year ended December 31, 1997. The Company had two
customers for which revenues exceeded 10% of total revenues in 1996, accounting
for approximately 25% or $37,000 of total service revenue for the period from
February 2, 1996 (inception) through December 31, 1996. In addition, the three
customer accounted for 81% of accounts receivable at December 31, 1997. There
were no customers which exceeded 10% of accounts receivable at December 31,
1996.

(3) PROPERTY AND EQUIPMENT

Property and equipment is stated at costs and consists of the following at
December 31, 1997 and 1996:

<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Computer equipment......................................................... $ 19,252 2,068
Less accumulated depreciation.............................................. 1,497 69
--------- ---------
$ 17,755 1,999
========= =========
</TABLE>

(4) OPERATING LEASES

The Company leased its office facilities under noncancellable operating leases,
with the option to extend under month to month terms. As of December 31, 1997,
there were no future minimum commitments under noncancelable leases.

Rent expense was $43,800 and $28,093 during the year ended December 31, 1997
and the period from February 2, 1996 (inception) through December 31, 1996,
respectively.

(5) SUBSEQUENT EVENTS

On June 2, 1998, Netgateway, Inc. acquired substantially all assets and assumed
substantially all liabilities of the Company in exchange for 400,000 shares of
Netgateway, Inc. common stock.

F-42
<PAGE>
INFOBAHN TECHNOLOGIES, LLC

(DBA DIGITAL GENESIS)

UNAUDITED BALANCE SHEETS

MARCH 31, 1998 AND DECEMBER 31, 1997

<TABLE>
<CAPTION>
1998 1997
--------- ---------

<S> <C> <C>
ASSETS

Current assets:
Cash.................................................................................... $ 4,057 6,783
Accounts receivable less allowance for doubtful accounts of $1,510 and $0 as of March
31, 1998 and December 31, 1997, respectively.......................................... 14,908 75,174
Other current assets.................................................................... -- 3,450
--------- ---------
Total current assets................................................................ 18,965 85,407
Property and equipment net.................................................................. 18,894 17,755
--------- ---------
$ 37,859 103,162
========= =========

LIABILITIES AND MEMBERS' EQUITY

Current liabilities:
Accounts payable........................................................................ $ 1,962 19,387
Accrued expenses........................................................................ 9,083 2,398
--------- ---------
Total current liabilities........................................................... 11,045 21,785
Members' equity............................................................................. 26,814 81,377
--------- ---------
$ 37,859 103,162
========= =========
</TABLE>

See accompanying notes to unaudited financial statements.

F-43
<PAGE>
INFOBAHN TECHNOLOGIES, LLC
(DBA DIGITAL GENESIS)

UNAUDITED STATEMENTS OF EARNINGS AND MEMBERS' EQUITY

THREE MONTHS ENDED MARCH 31, 1998 AND 1997

<TABLE>
<CAPTION>
1998 1997
---------- ---------
<S> <C> <C>
Service revenue (note 2).................................................................... $ 41,820 79,553

Operating expenses:
Selling, general and administrative....................................................... 67,270 38,777
Depreciation.............................................................................. 1,113 207
---------- ---------

Total operating expenses................................................................ 68,383 38,984
---------- ---------

Net income (loss)....................................................................... (26,563) 40,569

Members' equity, beginning of period........................................................ 81,377 16,315

Member draws................................................................................ (28,000) (17,200)

Members' equity, end of period.............................................................. $ 26,814 39,684
========== =========
</TABLE>

See accompanying notes to unaudited financial statements.

F-44
<PAGE>
INFOBAHN TECHNOLOGIES, LLC
(DBA DIGITAL GENESIS)

UNAUDITED STATEMENTS OF CASH FLOWS

THREE MONTHS ENDED MARCH 31, 1998 AND 1997

<TABLE>
<CAPTION>
1998 1997
---------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income (Loss)......................................................................... $ (26,563) 40,569
Adjustments to reconcile net income(loss) to net cash provided by operating activities:
Depreciation............................................................................ 1,113 207
Changes in assets and liabilities:
Accounts receivable................................................................... 60,266 (33,889)
Other current assets.................................................................. 3,450 3,450
Accounts payable...................................................................... (17,425) 1,344
Accrued expenses...................................................................... 6,685 1,939
---------- ---------

Net cash provided by operating activities........................................... 27,526 13,620
---------- ---------

Cash flows from investing activities--purchase of property and equipment.................... (2,252) (69)
---------- ---------

Cash flows from financing activities--member draws.......................................... (28,000) (17,200)
---------- ---------

Decrease in cash.................................................................... (2,726) (3,649)

Cash, beginning of period................................................................... 6,783 3,649
---------- ---------

Cash, end of period......................................................................... $ 4,057 --
========== =========
</TABLE>

See accompanying notes to unaudited financial statements.

F-45
<PAGE>
INFOBAHN TECHNOLOGIES, LLC
(DBA DIGITAL GENESIS)

NOTES TO UNAUDITED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

DESCRIPTION OF COMPANY

Infobahn Technologies, LLC dba Digital Genesis (Digital Genesis or the
Company) was formed in February 1996 as a California limited liability company.
The Company is primarily an internet consulting company, earning revenues from
consulting services, website design & development and web hosting. The Company
is also engaged in developing eCommerce applications.

REVENUE RECOGNITION

Revenue generated from consulting services is recognized as services are
performed.

INCOME TAXES

Digital Genesis is a limited liability company taxed for Federal purposes as
a partnership; therefore, the net earnings of the Company are included in the
taxable income of its owners. The Company may be subject to income taxes in
certain jurisdictions that impose unincorporated business or income taxes.

COMPREHENSIVE INCOME

SFAS No. 130, "Reporting Comprehensive Income" (SFAS No. 130) establishes
standards for reporting and displaying comprehensive income and its components
in a full set of general-purpose financial statements. The Company does not have
components of other comprehensive income. Therefore, comprehensive income is the
same as net income for the three months ended March 31, 1998 and 1997.

COSTS OF START-UP ACTIVITIES

Pursuant to AICPA Statement of Position No. 98-5, "Reporting on the Costs of
Start-Up Activities", the Company expenses all of the costs of start-up
activities as incurred.

USE OF ESTIMATES

Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities, the disclosure of
contingent assets and liabilities and the reported amounts of revenues and
expenses during the reporting period to prepare these financial statements in
conformity with generally accepted accounting principles. Actual results could
differ from those estimates.

F-46
<PAGE>
INFOBAHN TECHNOLOGIES, LLC
(DBA DIGITAL GENESIS)

NOTES TO UNAUDITED FINANCIAL STATEMENTS (CONTINUED)

2. CONCENTRATION OF CREDIT RISK

The Company primarily provided consulting services to technology based
businesses. The following customers comprised more than 10% of total revenues,
individually, during the three months ended March 31, 1998 and 1997.

<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Customer A...................................................................... 17% 62%
Customer B...................................................................... 37% --
Customer C...................................................................... 21% 2%
</TABLE>

Additionally, four customers accounted for 62% of accounts receivable at
March 31, 1998 and two customers accounted for 70% of accounts receivable at
March 31, 1997.

SUBSEQUENT EVENTS

On June 2, 1998, Netgateway, Inc. acquired certain assets and liabilities of
the Company, in exchange for 400,000 shares of Netgateway, Inc. common stock.

F-47
<PAGE>
AUDITOR'S REPORT

To the Shareholders
of Spartan Multimedia Inc.

I have audited the balance sheet of Spartan Multimedia Inc. as at
August 31, 1998 and the statement of earnings and retained earnings and changes
in financial position for the year then ended. These financial statements are
the responsibility of the company's management. My responsibility is to express
an opinion on these financial statements based on my audit.

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

In my opinion, these financial statements present fairly, in all material
respects, the financial position of the company as at August 31, 1998 and the
results of its operations and the changes in its financial position for the year
then ended in accordance with generally accepted accounting principles in the
United States.

/s/ ALLAN HOGENSON
--------------------------------------
ALLAN HOGENSON

Chartered Accountant

Calgary, Alberta
April 19, 1999

F-48
<PAGE>
SPARTAN MULTIMEDIA INC.

BALANCE SHEET

AUGUST 31, 1998
(IN CANADIAN DOLLARS)

<TABLE>
<S> <C>
ASSETS
CURRENT
Cash............................................................................ $ 53,075
Accounts receivable (Note 2).................................................... 39,042
---------
92,117
CAPITAL (Note 3).................................................................. 10,714
---------
$ 102,831
=========

LIABILITIES
CURRENT
Accounts payable and accrued liabilities (Note 2)............................... $ 30,042
Due to shareholders (Note 2).................................................... 24,030
---------
54,072
---------

SHAREHOLDERS' EQUITY
SHARE CAPITAL (Note 4)............................................................ 147,510
RETAINED EARNINGS (DEFICIT)....................................................... (98,751)
---------
48,759
---------
$ 102,831
=========
</TABLE>

APPROVED ON BEHALF OF THE BOARD:

<TABLE>
<C> <S> <C>
,
/s/ David Rosenval Director
- ---------------------------------
David Rosenval

,
/s/ Jordi MacDonald Director
- ---------------------------------
Jordi MacDonald
</TABLE>

F-49
<PAGE>
SPARTAN MULTIMEDIA INC.

STATEMENT OF EARNINGS AND RETAINED EARNINGS

FOR THE YEAR ENDED AUGUST 31, 1998
(IN CANADIAN DOLLARS)

<TABLE>
<S> <C>
REVENUE........................................................................... $ 13,188
---------

EXPENSES
Advertising and promotion....................................................... 39,547
Depreciation.................................................................... 1,335
Management fees................................................................. 53,674
Office.......................................................................... 4,299
Postage and delivery............................................................ 195
Professional fees............................................................... 2,651
Telephone....................................................................... 4,921
Travel.......................................................................... 5,317
---------
111,939
---------
NET EARNINGS (LOSS) and RETAINED EARNINGS
(DEFICIT), end of year............................................................ $ (98,751)
=========
</TABLE>

F-50
<PAGE>
SPARTAN MULTIMEDIA INC.

STATEMENT OF CHANGES IN FINANCIAL POSITION

FOR THE YEAR ENDED AUGUST 31, 1998
(IN CANADIAN DOLLARS)

<TABLE>
<S> <C>
OPERATING ACTIVITIES
Net earnings.................................................................... $ (98,751)
Item not affecting cash
Depreciation.................................................................. 1,335
---------
(97,416)
Net change in non-cash working capital balances................................. 15,030
---------
(82,386)
---------
FINANCING ACTIVITIES
Issuance of share capital....................................................... 147,510
---------
INVESTMENT ACTIVITIES
Purchase of capital assets...................................................... (12,049)
---------
INCREASE IN CASH.................................................................. 53,075
CASH, beginning of year........................................................... --
---------
CASH, end of year................................................................. $ 53,075
=========
</TABLE>

F-51
<PAGE>
SPARTAN MULTIMEDIA INC.

NOTES TO FINANCIAL STATEMENTS

AUGUST 31, 1998

1. SIGNIFICANT ACCOUNTING POLICIES

CAPITAL ASSETS

Capital assets are recorded at cost and are depreciated using the following
annual rates and methods:

Computer equipment 30% Declining balance

2. RELATED PARTY TRANSACTIONS

During the year, the company had business transactions with its
shareholders. The particulars of these transactions and balances owing from or
to these shareholders for the year ended August 31 were as follows:

<TABLE>
<S> <C>
Transactions during the year:
Management fees.................................................. $ 51,357
Computer equipment............................................... 9,000

Balances at end of year:
Accounts receivable (share subscriptions)........................ $ 37,500
Accounts payable (management fees)............................... 14,000
</TABLE>

Amounts due to shareholders are non-interest bearing and are not subject to
specified terms of repayment.

3. CAPITAL ASSETS

<TABLE>
<CAPTION>
1998
-------------------------------------
ACCUMULATED NET BOOK
COST AMORTIZATION VALUE
--------- ------------- -----------
<S> <C> <C> <C>
Computer equipment........................................ $ 12,049 $ 1,335 $ 10,714
</TABLE>

4. SHARE CAPITAL

AUTHORIZED

Unlimited number of common shares

ISSUED

<TABLE>
<S> <C>
1,666,668 common shares........................................... $ 147,510
=========
</TABLE>

5. UNCERTAINTY DUE TO THE YEAR 2000 ISSUE

The year 2000 Issue arises because many computerized systems use two digits
rather than four to identify a year. Date-sensitive systems may recognize the
year 2000 as 1900 or some other date,

F-52
<PAGE>
SPARTAN MULTIMEDIA INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

AUGUST 31, 1998

5. UNCERTAINTY DUE TO THE YEAR 2000 ISSUE (CONTINUED)
resulting in errors when information using year 2000 dates is processed. In
addition, similar problems may arise in some systems which use certain dates in
1999 to represent something other than a date. The effects of the Year 2000
Issue may be experienced before, on, or after January 1, 2000, and if not
addressed, the impact on operations and financial reporting may range from minor
errors to significant systems failure which could affect an entity's ability to
conduct normal business operations. It is not possible to be certain that all
aspects of the Year 2000 Issue affecting the entity, including those related to
the efforts of customers, suppliers, or other parties, will be fully resolved.

6. SUBSEQUENT EVENTS

Effective November 1, 1998, an agreement was entered into between the
shareholders of the company, Netgateway, Inc. and its wholly owned subsidiary,
Storesonline.com Ltd. (Storesonline). All of the shares of the company were
transferred to Storesonline on the effective date. The company will be
amalgamated with Storesonline upon closing.

F-53
<PAGE>
SPARTAN MULTIMEDIA INC.
UNAUDITED BALANCE SHEETS
NOVEMBER 30, 1998 AND AUGUST 31, 1998

<TABLE>
<CAPTION>
NOVEMBER 30, AUGUST 31,
1998 1998
------------ ----------
<S> <C> <C>
ASSETS
Current
Cash................................................................................. $ 12,245 53,075
Accounts receivable.................................................................. 695 39,042
---------- ----------
12,940 92,117
Capital................................................................................ 9,910 10,714
---------- ----------
$ 22,850 102,831
========== ==========
LIABILITIES
Current
Accounts payable and accrued liabilities............................................. $ 11,643 30,042
Due to shareholders.................................................................. 24,030 24,030
Due to Netgateway.................................................................... 3,079 --
---------- ----------
38,752 54,072
---------- ----------
SHAREHOLDERS EQUITY
Share Capital.......................................................................... 147,510 147,510
Retained Deficit....................................................................... (163,412) (98,751)
---------- ----------
(15,902) 48,759
---------- ----------
$ 22,850 102,831
========== ==========
</TABLE>

See accompanying notes to unaudited financial statements.

F-54
<PAGE>
SPARTAN MULTIMEDIA INC.
UNAUDITED STATEMENTS OF EARNINGS AND RETAINED EARNINGS
FOR THE THREE MONTHS ENDED NOVEMBER 31, 1998 AND FOR THE
PERIOD SEPTEMBER 19, 1997 (INCEPTION) THROUGH NOVEMBER 30, 1997

<TABLE>
<CAPTION>
1998 1997
---------- ---------
<S> <C> <C>
Revenue...................................................................................... $ 1,808 --
Expenses
Advertising and promotion.................................................................. 16,947 --
Depreciation............................................................................... 804 --
Management Fees............................................................................ 39,067 --
Office..................................................................................... 2,274 --
Postage and Delivery....................................................................... 168 --
Professional Fees.......................................................................... 105 --
Telephone.................................................................................. 1,809 --
Travel..................................................................................... 5,295 --
---------- ---------
66,469 --
---------- ---------
Net Loss and Retained Deficit................................................................ $ (64,661) --
========== =========
</TABLE>

See accompanying notes to unaudited financial statements.

F-55
<PAGE>
SPARTAN MULTIMEDIA INC.
UNAUDITED STATEMENTS OF CHANGES IN FINANCIAL POSITION
FOR THE THREE MONTHS ENDED NOVEMBER 31, 1998 AND FOR THE
PERIOD SEPTEMBER 19, 1997 (INCEPTION) THROUGH NOVEMBER 30, 1997

<TABLE>
<CAPTION>
1998 1997
---------- ---------
<S> <C> <C>
Operating activities
Net loss................................................................................. $ (64,661) --
Item not affecting cash
Depreciation........................................................................... 804 --
---------- ---------
(63,857) --
Net change in non-cash working capital balances.......................................... 23,027 --
---------- ---------
(40,830)

Financing activities....................................................................... -- --

Investment activities...................................................................... -- --
---------- ---------

Decrease in cash......................................................................... (40,830) --

Cash, beginning of period 53,075 --
---------- ---------
Cash, end of period $ 12,245 --
========== =========
</TABLE>

F-56
<PAGE>
SPARTAN MULTIMEDIA, INC.

NOTES TO FINANCIAL STATEMENTS

NOVEMBER 30, 1998 AND 1997

(UNAUDITED)

1. INCORPORATION

The Company was incorporated under the Alberta Business Corporation Act on
September 19, 1997 and commenced operations in December of 1997.

2. SIGNIFICANT ACCOUNTING POLICIES

CAPITAL ASSETS

Capital assets are recorded at cost and are depreciated using the following
annual rates and methods:

<TABLE>
<S> <C> <C>
Declining
Computer Equipment.......................... 30% Balance
</TABLE>

3. RELATED PARTY TRANSACTIONS

During the three months ended November 30,1998, the Company had business
transactions with its shareholders. The particulars of these transactions and
balances owing from or to these shareholders were as follows:

Transactions during the period:

<TABLE>
<S> <C>
Management Fees........................................... $31,026
</TABLE>

4. CAPITAL ASSETS

<TABLE>
<CAPTION>
COST AMORTIZATION NET BOOK VALUE
--------- ------------- ---------------
<S> <C> <C> <C>
Computer equipment...................................................... $ 12,049 $ 2,139 $ 9,910
</TABLE>

5. SHARE CAPITAL

<TABLE>
<S> <C>
Authorized........................................................

Unlimited number of no par value common shares....................

Issued............................................................

1,666,668 common shares........................................... $ 147,510
---------
</TABLE>

6. UNCERTAINTY DUE TO THE YEAR 2000 ISSUE

The year 2000 Issue arises because many computerized systems use two digits
rather than four to identify a year. Date-sensitive systems may recognize the
year 2000 as 1900 or some other date, resulting in errors when information using
year 2000 dates is processed. In addition, similar problems may arise in some
systems which use certain dates in 1999 to represent something other than a
date. The effects of the Year 2000 Issue may be experienced before, on, or after
January 1, 2000, and if not addressed, the impact on operations and financial
reporting may range from minor errors to significant systems failure which could
affect an entity's ability to conduct normal business operations. It is not
possible to be certain that all aspects of the Year 2000 Issue affecting the
entity, including those related to the efforts of customers, suppliers, or other
third parties, will be fully resolved.

F-57
<PAGE>
SPARTAN MULTIMEDIA, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

NOVEMBER 30, 1998 AND 1997

(UNAUDITED)

7. COMMITMENTS

Effective November 1, 1998, an agreement was entered into between the
shareholders of the company, Netgateway, Inc. and its wholly owned subsidiary,
Storesonline.com Ltd (Storesonline). All of the shares of the company were
transferred to Storesonline on the effective date. The company will be
amalgamated with Storesonline upon closing.

F-58
<PAGE>
INDEPENDENT ACCOUNTANT'S REPORT

To the Board of Directors
Video Calling Card, Inc.

We have audited the accompanying balance sheet of Video Calling Card, Inc.
(a development stage company) as of December 31, 1997 and 1996 and the related
statements of operations, stockholders' equity and cash flows for the period
from inception (April 13, 1995) through December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Video Calling Card, Inc. (a
development stage company) at December 31, 1997 and 1996 and the results of its
operations and its cash flows for the period from inception (April 13, 1995)
through December 31, 1997 in conformity with generally accepted accounting
principles.

Ted A. Madsen, CPA
January 21, 1998
Salt Lake City, Utah

F-59
<PAGE>
VIDEO CALLING CARD, INC.

(A DEVELOPMENT STAGE COMPANY)

BALANCE SHEET

DECEMBER 31, 1997 AND 1996

<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
ASSETS
Current Assets
Cash.................................................................................. $ 1,227 $ 783
Prepaid expenses...................................................................... -- 400
Loan receivable....................................................................... -- 2,500
---------- ----------
Total Current Assets................................................................ 1,227 3,883
Property & Equipment, less accumulated depreciation of $352 in 1996..................... -- 3,031
Other Assets
Organization costs, less accumulated amortization of $220 in 1997 and $140 in 1998.... 180 260
---------- ----------
Total Other Assets.................................................................. 180 260
---------- ----------
TOTAL ASSETS.............................................................................. $ 1,407 $ 8,974
========== ==========

LIABILITIES & STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable...................................................................... $ 2,500 $ --
---------- ----------
Total Current Liabilities........................................................... 2,500 --

Stockholders' Equity (Deficit)
Common stock, authorized 25,000,000 shares at $.001 par value, issued and outstanding
500,000 shares...................................................................... 900 900
Additional paid in capital............................................................ 27,450 27,450
(Deficit) Accumulated during development stage........................................ (29,443) (21,376)
---------- ----------
Total Stockholders' Equity (Deficit)................................................ (1,093) 6,974
---------- ----------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY.................................................. $ 1,407 $ 6,974
========== ==========
</TABLE>

See accountant's report and notes to financial statements.

F-60
<PAGE>
VIDEO CALLING CARD, INC.

(A DEVELOPMENT STAGE COMPANY)

STATEMENT OF OPERATIONS

FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996

<TABLE>
<CAPTION>
1997 1996
--------- ----------
<S> <C> <C>
SALES
Expenses
Advertising............................................................................. $ -- $ 5,875
Amortization............................................................................ 80 80
Bank charges............................................................................ 119 89
Depreciation............................................................................ -- 352
Production expenses..................................................................... -- 8,348
Professional fees....................................................................... 4,350 1,663
Rent and office expenses................................................................ 1,200 3,596
Taxes and licenses...................................................................... 100 100
--------- ----------
Total Expenses........................................................................ 5,849 19,903
--------- ----------
(LOSS) FROM OPERATIONS...................................................................... (5,849) (19,903)

OTHER INCOME (EXPENSE)
Interest income........................................................................... 413 --
Loss on sale of furniture & equipment..................................................... (2,631) --
--------- ----------
Total Other Income (Expense).......................................................... (2,218) --
--------- ----------
NET (LOSS).................................................................................. $ (8,067) $ (19,903)
========= ==========
</TABLE>

See accountant's report and notes to financial statements.

F-61
<PAGE>
VIDEO CALLING CARD, INC.

(A DEVELOPMENT STAGE COMPANY)

STATEMENT OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998

<TABLE>
<CAPTION>
1997 1998
--------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss.................................................................................. $ (8,067) $ (19,803)
--------- ----------
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization........................................................... 80 432
Loss on sale of furniture and equipment................................................. 2,631 --
(Decrease) in prepaid expenses.......................................................... 400 (400)
(Decrease) in loan receivable........................................................... 2,500 (2,500)
Increase (Decrease) in accounts payable................................................. 2,500 (2,000)
--------- ----------
Total Adjustments......................................................................... 8,111 (4,465)
--------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES................................................... 44 (24,371)
--------- ----------
CASH FLOW FROM FINANCING ACTIVITIES
Purchase of equipment & furniture......................................................... -- (3,383)
Proceeds from the sale of equipment....................................................... 400 --
--------- ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES................................................... 400 (3,383)
--------- ----------
Net increase (Decrease) in Cash and Equivalents........................................... 444 (27,754)
Cash and Equivalents, beginning of year................................................... 783 28,537
--------- ----------
Cash and Equivalents, end of year......................................................... $ 1,227 $ 783
========= ==========
</TABLE>

See accountant's report and notes to financial statements

F-62
<PAGE>
VIDEO CALLING CARD, INC.

(A DEVELOPMENT STAGE COMPANY)

STATEMENT OF STOCKHOLDERS' EQUITY

FROM DATE OF INCEPTION (APRIL 13, 1995) TO

DECEMBER 31, 1997

<TABLE>
<CAPTION>
COMMON STOCK
---------------------- PAID IN
SHARES AMOUNT CAPITAL (DEFICIT)
--------- ----------- --------- ----------
<S> <C> <C> <C> <C>
Original shares issued for cash....................................... 800,000 $ 600 $ 5,400 --
Proceeds from stock offering.......................................... 300,000 $ 300 30,000 --
Stock offering costs.................................................. -- $ -- 7,950 --
Net (Loss) From the Period of Inception (April 13, 1995) Through
December 31, 1995................................................... -- $ -- -- $ (1,473)
--------- --------- --------- ----------
Balance December 31, 1995............................................. 900,000 $ 900 $ 27,450 $ (1,473)

Net (Loss) for the Year Ended December 31, 1996....................... -- -- -- $ (19,803)
--------- --------- --------- ----------
Balance December 31, 1996............................................. 900,000 $ 900 $ 27,450 $ (21,378)
Net (Loss) for the Year Ended December 31, 1997....................... -- $ -- $ -- $ (8,087)
--------- --------- --------- ----------
Balance December 31, 1997............................................. 900,000 $ 900 $ 27,450 $ (29,443)
========= ========= ========= ==========
</TABLE>

See accountant's report and notes to financial statements

F-63
<PAGE>
VIDEO CALLING CARD, INC.

(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 1997 AND 1996

1. NATURE OF BUSINESS

Video Calling Card, Inc. is a development stage company that was incorporated on
April 13, 1995 under the laws of the State of Nevada. A development stage
company is one in which most of the activities of the business are devoted to
raising capital, developing markets, and starting production. The original
business purpose of the Company was to engage in the marketing of a unique
promotional video to businesses in use for marketing their products or services
to select prospects. In 1997 the Company sold its assets associated with the
video operation. The Company is now searching for new opportunities with
potential for profit.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The following significant accounting policies are used by the Company in
preparing and presenting its financial statements:

A. INCOME TAXES

Although the Company recognizes the proper accounting for deferred income
taxes pursuant to SFAS 109, the Company has determined that the tax loss
generated in the years ended December 31, 1997 and 1996 is available for
carry forward to future years. However, a deferred tax benefit has not
been included in the financial statements because there is uncertainty
regarding the realization of this tax benefit in the future.

B. ORGANIZATION COSTS AND AMORTIZATION

At the time of incorporation the Company incurred organization costs of
$400, in accordance with generally accepted accounting principles these
costs are being amortized over sixty (60) months beginning April 13, 1995

C. STOCK OFFERING

In order to raise capital in the State of Nevada of $30,000 the Company
completed a securities offering on December 20, 1995 in which 300,000
shares of common stock were sold at $.10 per share. The net proceeds will
be used for the purpose of marketing a unique new promotional video to
businesses to use for marketing their products or services to select
prospects.

The offering costs, including selling costs, filing fees, and legal fees
have been treated as a reduction in the paid in capital amounts of the
corporation.

F-64
<PAGE>
INDEPENDENT ACCOUNTANT'S REPORT

To the Board of Directors

Video Calling Card, Inc.

We have audited the accompanying balance sheet of Video Calling Card, Inc.
(a development stage company) as of December 31, 1996 and 1995 and the related
statements of operations, stockholders' equity and cash flows for the period
from inception (April 13, 1995) through December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Video Calling Card, Inc. (a
development stage company) at December 31, 1996 and 1995 and the results of of
its operations and its cash flows for the period from inception (April 13, 1995)
through December 31, 1996 in conformity with generally accepted accounting
principles.

Ted A. Madsen, CPA
September 12, 1997
Salt Lake City, Utah

F-65
<PAGE>
VIDEO CALLING CARD, INC.

(A DEVELOPMENT STAGE COMPANY)

BALANCE SHEET

DECEMBER 31, 1996 AND 1995

<TABLE>
<CAPTION>
1996 1995
---------- ---------
<S> <C> <C>
ASSETS
Current Assets
Cash................................................................................... $ 783 $ 28,537
Prepaid expenses....................................................................... 400 --
Loan receivable........................................................................ 2,500 --
---------- ---------
Total Current Assets................................................................. 3,683 28,537
Property & Equipment, less accumulated depreciation of $352 in 1996...................... 3,031 --
Other Assets
Organization costs, less accumulated amortization of $140 in 1996 and $60 in 1995...... 260 340
---------- ---------
Total Other Assets................................................................... 260 340
---------- ---------
TOTAL ASSETS............................................................................... $ 6,974 $ 28,877
========== =========

LIABILITIES & STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable....................................................................... $ -- $ 2,000
---------- ---------
Total Current Liabilities............................................................ -- 2,000

Stockholders' Equity
Common stock, authorized 25,000,000 shares at $.001 par value, issued and outstanding
900,000 shares....................................................................... 900 900
Additional paid in capital............................................................. 27,450 27,450
(Deficit) accumulated during development stage......................................... (21,376) (1,473)
---------- ---------
Total Stockholders' Equity (Deficit)................................................. 6,974 26,877
---------- ---------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY................................................... $ 6,974 $ 28,877
========== =========
</TABLE>

See accountant's report and notes to financial statements.

F-66
<PAGE>
VIDEO CALLING CARD, INC.

(A DEVELOPMENT STAGE COMPANY)

STATEMENT OF OPERATIONS

FOR THE PERIOD FROM INCEPTION
(APRIL 13, 1995) THROUGH DECEMBER 31, 1995
AND FOR THE YEAR ENDED DECEMBER 31, 1996

<TABLE>
<CAPTION>
1996 1995
---------- ---------
<S> <C> <C>
SALES
Expenses
Advertising............................................................................. $ 5,675 $ --
Amortization............................................................................ 80 60
Bank charges............................................................................ 89 72
Depreciation............................................................................ 352 --
Production expenses..................................................................... 8,348 --
Professional fees....................................................................... 1,663 1,200
Rent and office expenses................................................................ 3,596 56
Taxes and licenses...................................................................... 100 85
---------- ---------
Total Expenses........................................................................ 19,903 1,473
---------- ---------
NET (LOSS) FROM OPERATIONS.................................................................. $ (19,903) $ (1,473)
========== =========
</TABLE>

See accountant's report and notes to financial statements.

F-67
<PAGE>
VIDEO CALLING CARD, INC.

(A DEVELOPMENT STAGE COMPANY)

STATEMENT OF CASH FLOWS

FOR THE PERIOD FROM INCEPTION
(APRIL 13, 1995) THROUGH DECEMBER 31, 1995
AND FOR THE YEAR ENDED DECEMBER 31, 1996

<TABLE>
<CAPTION>
1996 1995
---------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss................................................................................. $ (19,903) $ (1,473)
---------- ---------
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization.......................................................... 432 60
(Increase) in prepaid expenses......................................................... (400) --
(Increase) in loan receivable.......................................................... (2,500) --
(Increase) in other assets............................................................. -- (400)
Increase (decrease) in accounts payable................................................ (2,000) 2,000
---------- ---------
Total Adjustments........................................................................ (4,468) 1,660
---------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES.................................................. (24,371) 187
---------- ---------
CASH FLOW FROM FINANCING ACTIVITIES
Purchase of equipment & furniture........................................................ (3,383) --
Net proceeds from issuance of common stock............................................... -- 28,350
---------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES.................................................. (3,383) 28,350
---------- ---------
Net increase (decrease) in cash and equivalents.......................................... (27,754) 28,537
Cash and equivalents, beginning of year.................................................. 28,537 --
---------- ---------
Cash and equivalents, end of year........................................................ $ 783 $ 28,537
========== =========
</TABLE>

See accountant's report and notes to financial statements

F-68
<PAGE>
VIDEO CALLING CARD, INC.

(A DEVELOPMENT STAGE COMPANY)

STATEMENT OF STOCKHOLDERS' EQUITY

DECEMBER 31, 1996 AND 1995

<TABLE>
<CAPTION>
COMMON STOCK
---------------------- PAID IN ACCUMULATED
SHARES AMOUNT CAPITAL (DEFICIT)
--------- ----------- --------- ------------
<S> <C> <C> <C> <C>
Original shares issued for cash..................................... 600,000 $ 600 $ 5,400 --
Proceeds from stock offering........................................ 300,000 $ 300 30,000 --
Stock offering costs................................................ -- $ -- 7,950 --
Net (loss) from the period of inception (April 13, 1995) through
December 31, 1995................................................. -- $ -- -- $ (1,473)
--------- --------- --------- ----------
Balance December 31, 1995........................................... 900,00 $ 900 $ 27,450 $ (1,473)
========= ========= ========= ==========

Net (Loss) for the Year Ended December 31, 1996..................... -- -- -- $ (19,903)
--------- --------- --------- ----------
Balance December 31, 1996........................................... 900,000 $ 900 $ 27,450 $ (21,376)
========= ========= ========= ==========
</TABLE>

See accountant's report and notes to financial statements

F-69
<PAGE>
VIDEO CALLING CARD, INC.

(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 1996 AND 1995

1. NATURE OF BUSINESS

Video Calling Card, Inc. is a development stage company that was
incorporated on April 13, 1995 under the laws of the State of Nevada. A
development stage company is one in which most of the activities of the business
are devoted to raising capital, developing markets, and starting production. The
business purpose of the Company is to engage in the marketing of a unique new
promotional video to businesses to use for marketing their products or services
to select prospects.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The following significant accounting policies are used by the Company in
preparing and presenting its financial statements:

A. INCOME TAXES

Although the Company recognizes the proper accounting for deferred income
taxes pursuant to SFAS 109, the Company has determined that the tax loss
generated in the years ended December 31, 1996 and 1995 is available for
carry forward to future years. However, a deferred tax benefit has not
been included in the financial statements because there is uncertainty
regarding the realization of this tax benefit in the future.

B. ORGANIZATION COSTS AND AMORTIZATION

At the time of Incorporation the Company incurred organization costs of
$400. In accordance with generally accepted accounting principles these
costs are being amortized over sixty (60) months beginning April 13,
1995.

C. STOCK OFFERING

In order to raise capital in the State of Nevada of $30,000 the Company
completed a securities offering on December 20, 1995 in which
300,000 shares of common stock were sold at $.10 per share. The net
proceeds will be used for the purpose of marketing a unique new
promotional video to businesses to use for marketing their products or
services to select prospects.

The offering costs, including selling costs, filing fees, and legal fees
have been treated as a reduction in the paid in capital amounts of the
corporation.

F-70
<PAGE>
VIDEO CALLING CARD, INC.

(A DEVELOPMENT STAGE COMPANY)

UNAUDITED BALANCE SHEET

MARCH 31, 1998 AND DECEMBER 31, 1997

<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
ASSETS

Current Assets

Cash......................................................................................... $ 294 $ 1,227
--------- ---------
Total Current Assets....................................................................... $ 294 $ 1,227

Other Assets

Organization costs, less accumulated amortization of $240 in 1998
and $220 in 1997........................................................................... 160 180
--------- ---------
Total Other Assets......................................................................... 160 180
--------- ---------
TOTAL ASSETS..................................................................................... $ 454 $ 1,407
========= =========
</TABLE>

F-71
<PAGE>
VIDEO CALLING CARD, INC.

(A DEVELOPMENT STAGE COMPANY)

UNAUDITED BALANCE SHEET

MARCH 31, 1998 AND DECEMBER 31, 1997

<TABLE>
<CAPTION>
1998 1997
--------- ----------
<S> <C> <C>
LIABILITIES & STOCKHOLDERS DEFICIT

Current Liabilities

Accounts payable....................................................................... $ 2,500 $ 2,500
--------- ----------
Total Current Liabilities............................................................ 2,500 2,500

Stockholders' Equity (Deficit)

Common stock, authorized 25,000,000 shares at $.001 par value, issued and outstanding
900,000 shares....................................................................... 900 900
Additional paid in capital............................................................. 27,450 27,450
(Deficit) Accumulated during development stage......................................... (30,396) (29,443)
--------- ----------
Total Stockholders Deficit........................................................... (2,046) (1,093)
--------- ----------
TOTAL LIABILITIES & STOCKHOLDERS' DEFICIT.................................................. $ 454 $ 1,407
========= ==========
</TABLE>

F-72
<PAGE>
VIDEO CALLING CARD, INC.

(A DEVELOPMENT STAGE COMPANY)

UNAUDITED STATEMENT OF OPERATIONS

FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997

<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
SALES

Expenses
Amortization............................................................................... 20 20
Bank Charges............................................................................... 30 30
Professional Fees.......................................................................... 903 --
Real and office expense.................................................................... -- 400
--------- ---------
Total Expenses........................................................................... 953 450
--------- ---------
(LOSS) FROM OPERATIONS....................................................................... (953) (450)

OTHER INCOME (EXPENSE)
Loss on sale of furniture & equipment...................................................... -- (2,631)
--------- ---------
Total Other Income (Expense)............................................................. -- (2,631)
--------- ---------
NET (LOSS)................................................................................... $ (953) (3,081)
========= =========
</TABLE>

F-73
<PAGE>
VIDEO CALLING CARD, INC.

(A DEVELOPMENT STAGE COMPANY)

UNAUDITED STATEMENT OF CASH FLOWS

FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997

<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss..................................................................................... $ (953) $ (3,081)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization............................................................ 20 20
Loss on sale of furniture and equipment.................................................. -- 2,631
(Decrease) in prepaid expenses........................................................... -- 400
--------- ---------
Total Adjustments............................................................................ 20 3,051
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES...................................................... (933) (30)
--------- ---------
CASH FLOW FROM FINANCING ACTIVITIES............................................................
Proceeds from the sale of equipment.......................................................... -- 400
--------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES...................................................... -- 400
--------- ---------
Net Increase (Decrease) in Cash and Equivalents.............................................. (933) 370
Cash and Equivalents, beginning of year...................................................... 1,227 783
--------- ---------
Cash and Equivalents, March 31st............................................................. $ 294 $ 1,153
========= =========
</TABLE>

F-74
<PAGE>
VIDEO CALLING CARD, INC.
(A DEVELOPMENT STAGE COMPANY)
UNAUDITED STATEMENT OF STOCKHOLDERS' EQUITY
FROM DATE OF INCEPTION (APRIL 13, 1995) TO
MARCH 31, 1996

<TABLE>
<CAPTION>
COMMON STOCK
---------------------- PAID IN
SHARES AMOUNT CAPITAL (DEFICIT)
--------- ----------- --------- ----------
<S> <C> <C> <C> <C>

Original shares issued for cash....................................... 600,000 $ 600 $ 5,400 $ --

Proceeds from stock offering.......................................... 300,000 $ 300 $ 30,000 $ --

Stock offering costs.................................................. -- $ -- $ 7,950 $ --

Net (Loss) From the Period of Inception (April 13, 1995) Through
December 31, 1995................................................... -- $ -- $ -- $ (1,473)
--------- --------- --------- ----------

Balance December 31, 1995............................................. 900,000 $ 900 $ 27,450 $ (1,473)

Net (Loss) for the Year ended December 31, 1996....................... -- $ -- $ -- $ (19,903)
--------- --------- --------- ----------

Balance December 31, 1996............................................. 900,000 $ 900 $ 27,450 $ (21,376)

Net (Loss) for the Three Months ended March 31, 1997.................. -- $ -- $ -- $ (3,081)
--------- --------- --------- ----------

Balance March 31, 1997................................................ 900,000 $ 900 $ 27,450 $ (24,457)

Net (Loss) for the Nine Months ended December 31, 1997................ -- $ -- $ -- $ (4,986)
--------- --------- --------- ----------

Balance December 31, 1997............................................. 900,000 $ 900 $ 27,450 $ (29,443)

Net (Loss) for the Three Months ended March 31, 1995.................. -- $ -- $ -- $ (953)
--------- --------- --------- ----------

Balance March 31, 1996................................................ 900 $ 900 $ 27,450 $ (30,396)
========= ========= ========= ==========
</TABLE>

F-75
<PAGE>
VIDEO CALLING CARD, INC.

(A DEVELOPMENT STAGE COMPANY)

NOTES TO UNAUDITED FINANCIAL STATEMENTS

DECEMBER 31, 1998 AND 1997

1. NATURE OF BUSINESS

Video Calling Card, Inc. is a development stage company that was incorporated on
April 13, 1995 under the laws of the State of Nevada. A development stage
company is one in which most of the activities of the business are devoted to
raising capital, developing markets, and starting production. The original
business purpose of the Company was to engage in the marketing of a unique
promotional video to businesses to use for marketing their products or services
to select prospects. In 1997 the Company sold its assets associated with the
video operation. The Company is now searching for new opportunities with
potential for profit.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The following significant accounting policies are used by the Company in
preparing and presenting its financial statements:

A. INCOME TAXES

B. ORGANIZATION COSTS AND AMORTIZATION

At the time of incorporation the Company incurred organization costs of
$400. In accordance with generally accepted accounting principles these
costs are being amortized over sixty (60) months beginning April 13,
1995.

C. STOCK OFFERING

The offering costs, including selling costs, filing fees, and legal fees
have been treated as a reduction in the paid in capital amounts of the
corporation.

F-76
<PAGE>
INSIDE BACK COVER

Graphical depictions of the present business of customers of Netgateway, the
ICC Framework, supplies and customer interfaces, functional components offered
by Netgateway, and customers and suppliers. Text reads as follows:

"The Internet Commerce Center-TM-. Plug into the proven system that has
been refined through countless applications.

"Every business is now challenged by the immense opportunity of
eCommerce. But what is the best way to extend an enterprise to this new way
of doing business?

"Every eCommerce transaction requires user interfaces. Netgateway-TM-
customizes its existing software to the company's specifications.

"The existing business is now electronically wrapped within the ICC-TM-.
It acts as the "hub" of the system.

"Now Netgateway introduces and further customizes components of the
ICC-TM- that give the enterprise its unique eCommerce capability.

The enterprise with the ICC-TM- can now establish links, or "spokes" to
suppliers and customers with special protocols that enable entities to do
business electronically."
<PAGE>
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- --------------------------------------------------------------------------------

YOU MAY RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE
NOT AUTHORIZED ANYONE TO PROVIDE INFORMATION DIFFERENT FROM THAT CONTAINED IN
THIS PROSPECTUS. THIS PROSPECTUS IS NOT AN OFFER TO SELL OR SOLICITATION OF AN
OFFER TO BUY THESE SHARES IN ANY CIRCUMSTANCES UNDER WHICH THE OFFER OR
SOLICITATION IS UNLAWFUL.

NETGATEWAY, INC.

[LOGO]

UNTIL DECEMBER 15, 1999 ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON
STOCK WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO
DELIVER A PROSPECTUS. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION
OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT
TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.

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