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

                                   FORM 10-KSB

[X] Annual  Report under Section 13 or 15(d) of the  Securities  Exchange Act of
1934 For the fiscal year ended  December 31,  1997. [ ] Transition  Report under
Section 13 or 15(d)of the Securities Exchange Act of 1934 For the transition
                        Period from _________to_________

                          Commission File no. 0-23806

                                  I/NET, Inc.
                 (Name of Small Business Issuer in its Charter)

                               DELAWARE 87-0046720
           (State or Other Jurisdiction of (I.R.S. Employer I.D. No.)
                         Incorporation or organization)

                            643 W. Crosstown Parkway
                           Kalamazoo, Michigan 49008
                   (Address of Principal Executive Officers)

                   Issuer's Telephone Number: (616) 344-301

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

          Title of Each Class Name of Each Exchange on Which Registered

                                      None

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

                      $0.001 par value common voting stock
                                (Title of Class)

Check  whether the Issuer (1) filed all reports  required to be filed by Section
13 or 15(d) of the  Exchange  Act during the past 12 months (or for such shorter
period that the Registrant was required to file such reports),  and (2) has been
subject to such filing requirements for the past 90 days.
(1) Yes X No____ (2) Yes X No____

Check if there is no  disclosure of  delinquentfiles  in response to item 405 of
Regulation  S-B is not  contained  in  this  form,  and no  disclosure  will  be
contained,  to the  best of  Registrant's  knowledge,  in  definitive  proxy  or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB.[X


<PAGE>

State Issuer's revenues for its most recent fiscal year:
                                   $1,692,170

State the  aggregate  market  value of the voting  stock held by  non-affiliates
computed by reference  to the price at which the stock was sold,  or the average
bid and asked  prices of such stock,  as of a specified  date within the past 60
days.
                                   $3,345,290

There  are  approximately  17,606,792  shares  of  common  voting  stock  of the
registrant held by non-affiliates.  This valuation is based upon the average bid
price for shares of common  voting stock of the  Registrant  on the  "Electronic
Bulletin Board" of the National Association of Securities Dealers,  Inc.("NASD")
on January 30, 1998

    (ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS

                                Not Applicable

                   (APPLICABLE ONLY TO CORPORATE REGISTRANTS)

State the number of shares outstanding of each of the Issuer's classes of common
equity, as of the latest practicable date:

                               December 31, 1997

                                   31,037,652

                      DOCUMENTS INCORPORATED BY REFERENCE
                      -----------------------------------

     Transitional Small Business Disclosure Format(check one): Yes X NO___






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<PAGE>


                               TABLE OF CONTENTS

Item 1. Description of Business................................................4

Item 2. Description of Property................................................7

Item 3. Legal Proceedings......................................................7

Item 4. Submission of Matters to a Vote of Security Holders....................7

Item 5. Market for Common Equity and Related Stockholder Matters...............7

Item 6. Management's Discussion and Analysis of Financial Condition
        and Results of Operations..............................................8

Item 7. Financial Statements...................................................9

Item 8. Changes in and Disagreement with Accountants on Accounting
        and Financial Disclosure...............................................9

Item 9. Directors, Executive Officers, Promoters and Control Persons;
        Compliance with Section 16(a) of the Exchange Act.....................10

Item 10.Executive Compensation................................................13

Item 11.Security Ownership of Certain Beneficial Owners and Management........15

Item 12.Certain Relationships and Related Transactions........................15

Item 13.Reports on Form 8-K and Exhibits......................................16

Signatures....................................................................17




<PAGE>

                                     PART 1



ITEM 1.  DESCRIPTION OF BUSINESS

I/Net, Inc. (The "Company" or "I/NET") was organized under the laws of the state
of Delaware during 1986 under the name of a predecessor corporation. The Company
had its initial  public  offering with the  Securities  and Exchange  Commission
during 1987.

BUSINESS DEVELOPMENT

I/NET was  incorporated  in 1983 as a contract  research  and  development  firm
specializing in software  development for digital imaging and voice recognition.
Systems created by I/NET are currently in service in real estate, pharmaceutical
research, government, newspapers, and information management.

During prior years, the Company sold and issued  approximately  6,000,000 shares
of its  common  stock  for  cash,  trademark,  and  extinguishment  of debt.  In
connection with the issuances,  the Company issued warrants to the purchasers of
the common  stock to acquire up to  2,039,285  shares of common  stock at prices
ranging from $.25 to $2.40 per share.  The warrants expire through 1999.  During
April 1997, a warrant  exercised its option to purchase 200,000 shares of common
stock  at $.25  per  share  for  cash.  The  remaining  1,839,285  warrants  are
exercisable  at $2.40 per share and are not dilutive.  Also, in connection  with
these sales,  underwriters  were issued warrants for 1,145,714  shares of common
stock at a weighted  average price of $.90 and are  exercisable  for five years,
expiring in 1999. All remaining warrants were exercisable at December 31, 1997.

BUSINESS

I/NET, in prior years,  was engaged in the business of providing a wide range of
contract research systems planning,  development, and implementation services on
a fee basis to public and  private  sector  clients.  It was  founded in 1982 in
response to demand for high-quality  information systems services on the part of
government,  commercial,  and  not-for-profit  organizations,  requiring digital
imaging  as part of their  overall  solution.  Since  its  formation,  I/NET has
delivered and installed microcomputer-based decision support systems for systems
sold  worldwide,   supporting  hundreds  of  users  and  employing   distributed
databases,   sophisticated  telecommunications  networks,  and  state-of-the-art
development tools. Past projects which the Company has undertaken in multi-media
applications have incorporated digital imaging and voice recognition.

The Company has  performed  development  work under  contract  with IBM for many
years,  including  developing  multi-media  software  running  on the IBM system
AS/400, a mid-range  computer system.  I/NET also performs  Websight  Consulting
Services for IBM.

During 1995,  I/NET brought to  the  marketplace its own Web Server/400TM as the
first commercially  available product,  which can  connect  the  nearly  425,000
AS/400  midrange  computers  worldwide to the Internet.  The "Web" lets Internet
users  around the world  exchange  information  in the form of  displayed  text,
images, sound, and video.  Available since July, 1995, I/NET's Web Server/400 is
currently used by businesses around the world, with  installations in Hong Kong,
Germany, England, the Netherlands,  Italy, Korea, Japan, and Israel, in addition
to Canada and the  United  States.  Current  installations  include:  IBM AS/400
Homepage (www.as400.ibm.com),  Software 2000, Inc., Marcam Corporation,  Dynamic
Healthcare   Technologies,   Inc.  (www.dht.com),   Automated  Training  Systems
(www.ibmuser.com),  Mattel Toys,  MCI,  Eli Lilly,  Builders  Square,  Toyota of
America, Caesers Palace, United Technologies Automotive, and Anheuser-Busch.

I/NET's Commerce Server/400 TM was made available in August,  1996. This product
provides AS/400 users with the ability to conduct secured,  encrypted  financial
and  other  transactions  over the  Internet.  Current  customers  include  IBM,
Enterprise  Rent-A-Car,  MCI,  State Bar of  California,  and Dreyfus  Brokerage
Services,  Inc. These companies have installed the product in various  locations
throughout the world. In February, 1997, IBM bestowed
<PAGE>

upon I/NET the  prestigious  Partner in Development  "Product of the Year Award"
for  Commerce  Server/400TM.  Six  thousand  international  attendees to the IBM
Business Partner Executive  Conference were on hand to witness the presentation.
This event  spurred  the  signing of new  distribution  contracts  to  represent
I/NET's products.

IBM AS/400 is the world's most popular  multi-user  business  computing  system,
with nearly 425,000 units installed worldwide  supporting from 1 to 7,000 users,
IBM and its 8,000 Business Partners offer AS/400 customers 25,000  applications,
including 3,000 for the client/server.  Among AS/400 customers are 98 percent of
the Fortune 100 Industrials.

The Company  successfully  negotiated a new  contract  with IBM in March 1997 in
which it will provide Website consulting services for IBM. This contract,  while
cancelable, is for a period of twenty-four months.

I/NET has also signed an agreement with Netscape  Communications  Corp., a world
leader in delivering Internet solutions to the marketplace. This agreement gives
I/NET the right to port their  entire  suite of Internet  servers to the AS/400,
and  also  distribute   these  products  for  the  next  three  years.  IBM  was
instrumental  in  arranging  this  agreement,  as they know it will  benefit the
entire AS/400 community.

All I/NET developed software is year 2000 compliant.

DISTRIBUTION METHODS OF THE PRODUCTS OR SERVICES

The Company has signed exclusive worldwide marketing and distribution agreements
with International  Marketing Strategies,  (IMS) for the distribution of its Web
Server/400 products. All marketing services are performed by IMS.

COMPETITIVE BUSINESS  CONDITIONS  AND  THE  SMALL BUSINESS ISSUER'S  COMPETITIVE
POSITIONS IN THE INDUSTRY AND METHODS OF COMPETITION

The Company's contract work performed for IBM has been  competitively  acquired,
and usually the final  selection is between  I/NET and  departments  within IBM.
I/NET and IBM are the only two companies with software  available to connect the
AS/400 to the Internet. Currently, I/NET's products are installed on over 90% of
the AS/400's operating as Internet servers.

SOURCES AND AVAILABILITY OF RAW MATERIALS AND THE NAMES OF PRINCIPAL SUPPLIERS

Developing  software  requires few tangible raw  materials.  The most  important
element in this  process is the  personnel  who plan,  design,  and develops the
software  code.  I/NET has  consistently  hired the best  talent  available.  It
recruits  top-of-the-class  talent from two Kalamazoo-based  colleges as well as
candidates from the Detroit and Chicago metropolitan areas.

DEPENDENCE ON ONE OR A FEW MAJOR CUSTOMERS

The Company provided Internet  products,  facilities  management  services,  and
software  development  services to a few major customers during 1997 and 1996 as
follows:

<PAGE>

Year ended December 31,                               1997         1996
--------------------------------------------------------------------------------

Internet Products
    International Business Machines                $ 200,000     $  -
    International Marketing Strategies (IMS)         405,000      346,000
    SUPPORT NET, INC. (Included with IMS
     for 1997)                                          -         158,000
    LANSA, Inc.                                      300,000        -
--------------------------------------------------------------------------------
                                                    $905,000     $504,000
--------------------------------------------------------------------------------
Facilities Management Services
    Greater Kalamazoo Association of Realtors       $  -         $108,000
--------------------------------------------------------------------------------
Website Consulting Services
    International Business Machines (IBM)           $702,000$       -
--------------------------------------------------------------------------------
IBM is also a minority stockholder in the Company.

PATENTS, TRADEMARKS,  FRANCHISES, CONCESSIONS, ROYALTY AGREEMENTS OR LABOR
CONTRACTS, INCLDUING DURATION

I/NET  has  various  trademarks  for its  products,  including  WEB  SERVER/400,
COMMERCE SERVER/400, and CAREER/NET.

On September 30, 1997,  the Company  entered into a software  license  agreement
with Netscape Communications  Corporation (Netscape) wherein Netscape granted to
the Company the right to port certain of its Internet Server products to the IBM
AS/400  platform.  This  agreement is for a period of three years and allows the
Company to market and distribute the ported products upon their  modification to
the AS/400 platform.

In  exchange  for this  license  agreement,  I/NET  has  agreed  to pay  minimum
royalties to Netscape in the amount of  $3,000,000  according  to the  following
repayment schedule:

                           Paid by IBM on behalf of
                              I/NET in October, 1997          $  250,000
                           September 30, 1998                 $  750,000
                           September 30, 1999                 $1,000,000
                           September 30, 2000                 $1,000,000

International Business Machines Corporation has guaranteed to Netscape the above
listed  royalties  in the event that  product  sales are  insufficient  to repay
amounts due under this agreement.

In  addition,  IBM will  provide  advances  against  royalties  in the amount of
$600,000  as certain  tasks are  completed  during the  porting of the  Netscape
products to the IBM platform.  These advances are treated as if under a research
and development  agreement  whereby I/NET is not obligated to repay any of these
funds advanced by IBM except from royalties of future sales, if any.




<PAGE>

NEED FOR ANY GOVERNMENT APPROVAL OF PRINCIPAL PRODUCTIONS OR SERVICES

The  performance  of services  and the supply of products by the Company are not
subject to governmental approval.

EFFECT OF EXISITING OR PROBABLE GOVERNMENTAL REGULATIONS ON THE BUSINESS

No present  governmental  regulations  have any adverse impact on the present or
contemplated   business  operations  of  the  Company,   and  no  such  probable
governmental regulations are anticipated to have any adverse effect.

ESTIMATE  OF  THE  AMOUNT  SPENT  DURING  EACH  OF  THE LAST TWO FISCAL YEARS ON
RESEARCH AND DEVELOPMENT ACTIVITIES, AND IF APPLICABLE, THE EXTENT TO WHICH  THE
COST OF SUCH ACTIVITIES ARE BORNE DIRECTLY BY CUSTOMERS

There was no research and  development  costs incurred by the Company during the
calendar years ended December 31, 1997 and 1996.

COST  AND  EFFECTS  OF  COMPLIANCE  WITH  ENVIRONMENTAL LAWS(FEDERAL, STATE, AND
LOCAL)

There are no foreseeable adverse effects on the present or contemplated business
operations resulting from environmental laws, rules, or regulations.

NUMBER OF TOTAL EMPLOYEES AND NUMBER OF FULL-TIME EMPLOYEES

As of December 31, 1997, the Company had 14 full time employees.

ITEM 2.  DESCRIPTION OF PROPERTY

The  Company  has its  principal  executive  and  operating  offices at 643 West
Crosstown Parkway, Kalamazoo, Michigan, which is comprised of 5,600 square feet.

ITEM 3.  LEGAL PROCEEDINGS

The  Company is not the subject of any  material  legal  proceeding,  and to the
knowledge of management,  no proceedings are presently  contemplated against the
Company by any federal, state, or local governmental agency.

To the knowledge of management,  no director or executive officer of the Company
is party to any legal  proceeding  which  may have an  interest  adverse  to the
Company.

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

No matter was submitted to a vote of the Company's stockholders during 1997.


                                     PART II

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

MARKET INFORMATION

The Company's  common stock is listed on the "Electronic  Bulletin Board" of the
NASD.  The stock  activity for the calendar years 1997 and 1996 is summarized by
quarter below:

<PAGE>

        1997     1997      1997    1997     1996     1996    1996     1996
       1st qtr  2nd qtr  3rd qtr  4th qtr  1st qtr  2nd qtr  3rd qtr 4th qtr

HIGH    $0.75   $0.50     $0.41   $0.36    $1.13    $0.97    $0.81    $0.81
LOW     $0.50   $0.34     $0.34   $0.21    $0.63    $0.60    $0.41    $0.56

These bid prices are  quotations  of  broker-dealers  that reflect  inter-dealer
prices,  without  retail  mark-up,  markdown or commission and may not represent
actual transactions.

HOLDERS

The number of record  holders of the  Company's  common stock as of December 31,
1997,  were  292.  This  number  does not  include  an  indeterminate  number of
stockholders whose shares are held by brokers in street name.

DIVIDENDS

There are currently present material  restrictions that limit the ability of the
Company  to pay  dividends  on its  common  stock  as it  has a  deficit  in its
stockholders' equity. The company has not paid any dividends with respect to its
common stock nor does it intend to do so in the foreseeable future.

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

CALENDAR YEARS ENDED DECEMBER 31, 1997 AND 1996

RESULTS OF OPERATIONS

Revenues for the year ended  December 31, 1997,  were  $1,692,170 as compared to
$724,032  for the year  ended  December  31,  1996.  When  analyzed  by  product
category, revenues of Website development services to IBM were $702,000 in 1997,
as  compared  to $0 in 1996 as a  contract  with IBM was signed in March 1997 to
provide these services.  Revenues from facilities management services were $0 in
1997 and $120,000 in 1996 as the contract with the Greater Kalamazoo Association
of Realtors expired in October 1996. Internet products accounted for revenues of
$905,000 in 1997 and $504,000 in 1996 as new products  were being  introduced to
the  market.  Revenue  from the  porting  of  Netscape  products  to the  AS/400
operating system produced revenue of $200,000 in 1997 and $ 0 in 1996.

Cost of revenues increased by $10,000 as compared to 1997. The primary cause for
this  increase was the hiring of  additional  personnel for the Netscape and IBM
projects.

General and  administrative  expenses decreased by $487,000 as compared to 1996.
The primary cause for this decrease was a reduction in administrative personnel,
negotiation  of a new lease  agreement  for its  facilities  and a reduction  of
commission expense of $250,000 in 1997 as compared to 1996.

Interest  expenses  increased by $34,000 due to the  increased  borrowing in the
first quarter of 1997.

During March 1997,  the Company  entered into an agreement with a note holder to
form a  joint  venture.  I/NET  contributed  previously  written-off  technology
together  with a trademark and web presence in exchange for the  forgiveness  of
$97,946 of  indebtedness.  The  noteholder  is required to  contribute  cash and
marketing  expertise  in this newly  formed  joint  venture.  There have been no
operating  activities  on this joint  venture  to date.  This  $97,946  has been
treated as an extraordinary item for financial statement purposes.

FINANCIAL CONDITION AND LIQUIDITY

The Company's primary need for capital has  been to  invest in computer software
development. As of December 31,
<PAGE>

1997, the Company's  working capital  deficit was  $1,106,000,  as compared to a
deficit of  $1,765,000 at December 31, 1996.  The resulting  decrease in working
capital  deficit is earnings  in 1997 of $378,000  compared to a loss in 1996 of
$1,132,000.

The Company  believes that the additional  sales provided by the above mentioned
agreements,  the  continued  development  of new  products,  together  with  the
renegotiations of its defaulted debt, should provide the Company with sufficient
working capital to fund its needs for 1998.  However,  there can be no assurance
these activities will be successful.

In June 1997,  SFAS No. 130 "Reporting  Comprehensive  Income" and SFAS No. 131,
"Disclosure  about  Segments  of an  Enterprise  and Related  Information"  were
issued.   SFAS  No.  130  addressed  standards  for  reporting  and  display  of
comprehensive  income and its components and SFAS NO. 131 requires disclosure of
reportable operating segments. In October 1997, Statement of Position (SOP) 97-2
"Software  Revenue  Recognition"  was issued by the AICPA  Accounting  Standards
Executive  Committee.  This SOP  provides  guidance  on when  revenue  should be
recognized  and in what  amounts for  licensing,  selling,  leasing or otherwise
marketing  computer  software.  All statements are effective for the Company for
the  year  ended  December  31,  1998.  The  Company  will  be  reviewing  these
pronouncements to determine their applicability to the Company, if any.

All I/NET developed software is year 2000 compliant.

The Company's financial statements have been presented on the basis that it is a
going concern, which contemplates the realization of assets and the satisfaction
of  liabilities  in the normal  course of  business.  The Company  has  suffered
recurring  losses from  operations  in prior years,  has a  significant  working
capital  deficit,  and  requires  additional  capital to  continue  its  product
development.  Management  believes the Company will  continue as a going concern
and is actively  marketing  its new  products  which would enable the Company to
meet its current  obligations  and provide  additional  funds for  continued new
product development.  In addition,  management is currently  negotiating several
additional  contracts  for its services and products.  However,  there can be no
assurance these activities will be successful.

ITEM 7.  FINANCIAL STATEMENTS

SECTION                                                              PAGE NUMBER

Report of Independent Certified Public Accountants............................20

Consolidated Balance Sheets as of December 31, 1997 and 1996..................21

Consolidated Statements of Operations for the years ended 
  December 31, 1997 and 1996..................................................22

Consolidated Statements of Stockholders' Equity (Capital Deficit)
  for the years ended December 31, 1997 and 1996..............................23

Consolidated Statements of Cash Flows for the years ended 
  December 31, 1997 and l996..................................................24

Summary of Accounting Policies.............................................25-26

Notes to Consolidated Financial Statements.................................27-33


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

None










<PAGE>


                                    PART III

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

IDENTIFICATION OF DIRECTORS AND EXECUTIVE OFFICER

The following table sets forth the names,  nature of all positions,  and offices
held by all  directors  and  executive  officers of the Company for the calendar
year ended December 31, 1997, and to the date hereof,  and the period or periods
during  which  each such  director  or  executive  officer  has  served in their
respective positions.

     Name                  Position Held        Date of Election or Designation
    ------                ---------------      ---------------------------------

James C. Knapp*       Chairman of the Board of Directors         1986

Stephen J. Markee*    President and CEO,                         1985
                      Director,                                  1986
                      and CFO                                    1995

Paul A. Bertoldi*     Vice President Systems Development         1989

*These  individuals  presently serve in the capacities  indicated opposite their
respective names.

TERM OF OFFICE

The terms of office of the current  directors  shall  continue  until the annual
meeting of  stockholders,  which has been scheduled by the Board of Directors to
be held on the third Friday in May of each year; the annual meeting of the Board
of Directors  immediately  follows the annual meeting of stockholders,  at which
executive officers for the coming year are elected.








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<PAGE>


BUSINESS EXPERIENCE

JAMES C, KNAPP,  CHAIRMAN:  Mr. Knapp, one of I/NET's initial  founders,  is 47
years of age, and received a BBA Degree from the University of Maryland in 1972.
He began his computer  education at the age of 15 in a special program sponsored
by IBM,  and served in the  United  States  Air Force as a teacher  for  missile
computer  guidance  systems.  He has been  listed  in the ACR  Directory  of Top
Computer  Executives  since 1981,  and was  inducted  into the "Who's Who in the
Computer Industry" in 1990. His efforts in digital imaging and voice recognition
have been recognized  internationally.  Mr. Knapp has been a featured speaker at
the Massachusetts Institute of Technology and the Harvard Business School. He is
also an international speaker on Internet security.

STEPHEN J. MARKEE,  PRESIDENT,  CEO AND CFO:  Mr.  Markee is 52 years of age. He
received  a BS  Degree  from  Ferris  State  University  in 1970 and an MBA from
Western Michigan  University  ("WMU") in 1971. He is a licensed certified public
accountant in the state of Michigan.  Mr. Markee served in the United State Army
during the Viet Nam conflict,  and was decorated and medically  retired in 1968.
After completing his education,  he served as assistant  Auditor General for the
State of Michigan  before joining WMU as Director of Internal  Auditing in 1976.
While at WMU,  he also taught  accounting  classes in the MBA  program.  He then
changed directions, from public to private sector, as Vice President of Planning
and Control for a division of Standex  International  Corporation,  where he was
responsible for information systems,  accounting, and human resources. He joined
I/NET in 1986 as President  and CEO. He has guided I/NET to a successful  equity
partnership with IBM, and engineered the sale of intellectual property rights to
IBM in 1989,  Mr.  Markee has served on the Board of Directors of the  Kalamazoo
County  Chamber of Commerce,  Chairman of the Kalamazoo  County  Convention  and
Visitors  Bureau,  Past  President  of the local  chapter  of the  Institute  of
Management Accountants, and President of the Parchment Schools Foundation. He is
a  frequent  speaker  to civic and  business  groups,  and has  appeared  on the
Financial News Network ("FNN").

PAUL A. BERTOLDI, VICE PRESIDENT,  SYSTEMS DEVELOPMENT: Mr. Bertoldi is 35 years
of age. He received a BBA Degree from  Western  Michigan  University  ("WMU") in
1984,  and a MBA Degree from WMU in 1992.  He graduated  magna cum laude and was
named a  Presidential  Scholar as one of the top  undergraduates  of WMU.  Since
becoming one of I/NET's  first  employees,  Mr.  Bertoldi has helped  design the
architecture of  state-of-the-art  imaging and voice recognition  systems in the
field of real estate,  medical imaging,  and document  imaging.  Mr. Bertoldi is
currently  involved in the  development of  application  in multi-media  and pen
computing.  He is an  active  member  in both  the  Data  Processing  Management
Association  (`DPMA') and Association of Computer Machinery ("ACM"). In 1988, he
was  recognized  as  a  Certified  Data   Processor  by  the   Association   for
Certification for Computer Professionals.

FAMILY RELATIONSHIPS

With the exception that Mr. Knapp and Mr.  Bertoldi are  brothers-in-law,  there
are no family  relationships  between any directors or executive officers of the
Company, either by blood or by happenstance of marriage.

INDEMNIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS

Under the Delaware Corporation Law, a corporation has the power to indemnify any
person  who  is  made  a  party  to  any  civil,  criminal,   administrative  or
investigative proceeding,  other than action by or any right of the corporation,
by reason of the fact that such  person was a  director,  officer,  employee  or
agent of the corporation,  against  expenses,  including  reasonable  attorney's
fees,  judgments,  fines and amounts  paid in  settlement  of any such  actions;
provided however, in any criminal proceeding,  the indemnified person shall have
had no reason to believe the conduct committed was unlawful.  Regardless,  it is
the position of the  Securities  and Exchange  Commission  that  indemnification
against  liabilities for violation of the federal  securities  law,  rules,  and
regulations is against public policy.

INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS

To the knowledge of management, during the past five years, no present or former
director,  executive  officer or person  nominated  to become a  director  or an
executive officer of the Company:
<PAGE>

-    Filed a petition under the federal  bankruptcy laws or any state insolvency
     law, nor had a receiver, fiscal agent or any partnership in which he or she
     was  a  general  partner  at  or  within  two years before the time of such
     filing,  or  any corporation  or  association  of  which  he or  she was an
     executive  officer at or within two years before the time of such filing;

-    Was  convicted  in a  criminal  proceeding  or named  subject  of a pending
     criminal   proceeding   (excluding   traffic  violations  and  other  minor
     offenses);

-    Was  the  subject  of any  order,  judgment  or  decree,  not  subsequently
     reversed,  suspended or vacated,  of any court of  competent  jurisdiction,
     permanently or temporarily  enjoining him from or otherwise  limiting,  the
     following activities:

          Acting as a futures commission merchant, introducing broker, commodity
          trading  advisor,  commodity  pool operator,  floor  broker,  leverage
          transaction merchant, associated person of any of the foregoing, or as
          an investment advisor, underwriter, broker or dealer in securities, or
          as an  affiliated  person,  director or  employee  of  any  investment
          company,  bank, savings and loan association or insurance company,  or
          engaging in or continuing  any conduct or practice in connection  with
          such activity;

-    Engaging  in any  activity in  connection  with the purchase or sale of any
     security or commodity  or in  connection  with any  violation of federal or
     state securities laws or federal commodities laws;

-    Was the  subject  of  any  order,  judgment  or  decree,  not  subsequently
     reversed,  suspended or vacated, of any federal or state authority barring,
     suspending  or  otherwise  limiting for more than 60 days the right of such
     person to engage in any activity  described above under this Item, or to be
     associated with person engaged in any such activity;

-    Was found  by a court of  competent  jurisdiction  a civil action or by the
     Securities  and Exchange  Commission  to have violated any federal or state
     securities  law,  and the  judgment in such civil  action or finding by the
     Securities  and Exchange  Commission  has not been  subsequently  reversed,
     suspended or vacated.

-    Was found  by a court of competent jurisdiction in a civil action or by the
     Commodity   Futures  Trading   Commission  to  have  violated  any  federal
     commodities  law,  and the  judgment in such civil action or finding by the
     Commodity Futures Trading  Commission has not been  subsequently  reversed,
     suspended or vacated.


                      -THIS SPACE INTENTIONALLY LEFT BLANK-


<PAGE>

Item 10.    Executive Compensation

Cash Compensation

The following  table sets forth the aggregate  compensation  paid by the Company
for Services rendered during the periods indicated.

--------------------------------------------------------------------------------
SUMMARY COMPENSATION TABLE------------------------------------------------------
--------------------------------------------------------------------------------
                               Annual Compensation
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
       (a)                   (b)               (c)         (d)          (e)
---------------------- ----------------- ------------ ------------- ------------
---------------------- ----------------- ------------ ------------- ------------
Name and                  Year Ended       $ Salary     $ Bonus     Other Annual
Principal Position         Dec. 31                                  Compensation
                                                                         $
---------------------- ----------------- ------------ ------------- ------------
James C. Knapp              1997           $125,000
    Chairman                1996           $130,208       -0-          -0-      
---------------------- ----------------- ------------ ------------- ------------
---------------------- ----------------- ------------ ------------- ------------
Stephen J. Markee           1997           $125,000                             
 President, CEO,            1996           $130,208       -0-          -0-      
CFO and Director
---------------------- ----------------- ------------ ------------- ------------
---------------------- ----------------- ------------ ------------- ------------
Paul A. Bertoldi            1997           $ 77,703
 Vice President,            1996           $ 72,917       -0-          -0-
 Systems Development
---------------------- ----------------- ------------ ------------- ------------
--------------------------------------------------------------------------------



--------------------------------------------------------------------------------
                             Long Term Compensation
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
                                       Awards                 Payouts
--------------------------------------------------- ----------------------------
---------------- --------------- --------------- --------------- ---------------
                                 (f)*         (g)         (h)         (i)**
----------------- ---------- ------------ ------------ ---------- --------------
----------------- ---------- ------------ ------------ ---------- --------------
Name and          Year Ended  Restricted  Option/SAR's   LTIP      All Other
Principal          Dec. 31    Stock Award  (#)          Payouts   Compensation
Position                         ($)                     ($)         ($)
----------------- ---------- ------------ ------------ ----------- -------------
----------------- ---------- ------------ ------------ ----------- -------------
James C. Knapp       1997                                            $7,876
    Chairman         1996        -0-          -0-         -0-        $8,104
------------------ --------- ------------ ------------ ------------ ------------
------------------ --------- ------------ ------------ ------------ ------------
Stephen J. Markee    1997                                            $4,932
 President, CEO,     1996        -0-          -0-         -0-        $6,420
CFO and Director
------------------ --------- ------------ ------------ ------------ ------------
------------------ --------- ------------ ------------ ------------ ------------
Paul A. Bertoldi      1997                                           $4,745
 Vice President,      1996       -0-           -0-         -0-       $5,564
     Systems
   Development
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
              *See the caption "All Other Compensation" herein for
              restricted stock award **Approximate value of health,
                  dental and life insurance paid by the Company
--------------------------------------------------------------------------------


BONUSES AND DEFERRED COMPENSATION

None

COMPENSATION PURSUANT TO PLANS

The Company  maintains  an  incentive  stock  option plan that  provides for the
granting of options to officers and other key employees at an exercise price not
less than 100% of the fair market value on the date of the grant. Twenty percent
of the  options  become  exercisable  each  year  following  the date  they were
granted, and can remain outstanding for five years following the day they become
fully vested. Changes in options outstanding are summarized as follows:
<PAGE>
                                                                   Weighted
                                              Option Price       Average Price  
                             Shares             Per Share          Per Share

January 1, 1996             139,436             $.18-2.50           $1.72
    Lapsed                 ( 96,936)             .18-2.50            1.39
--------------------------------------------------------------------------------
December 31, 1996            42,500                2.50              2.50
    Granted June 1997       100,000                 .37               .37
    Lapsed                  (27,500)               2.50              2.50
--------------------------------------------------------------------------------
December 31, 1997           115,000             $.37-2.50           $ .65
-------------------------------------------------------------------------------

Of the 139,936  options  outstanding  at January 1, 1996,  all but 77,634 had an
exercise  price of $2.50.  The 77,634 had been granted to one  employee,  had an
exercise price of $.18 and lapsed in 1996.

At December  31,  1997,  582,255  shares of common  stock are  reserved  for the
incentive stock option plan and 9,000 options were vested and  exercisable.  The
remaining contractual life of the 106,000 shares outstanding in ten years.

PENSION TABLE

The Company has a profit sharing and defined  contribution pension plan covering
substantially  all  employees.  Under the plan,  employees may make tax deferred
voluntary  contributions  which,  at the  discretion of the  Company's  Board of
Directors, may be matched within certain limits by the Company. In addition, the
Company may make additional  discretionary  contributions  to the plan as profit
sharing  contributions.  All contributions to the plan are limited by applicable
Internal Revenue Code regulations.  There were no Company  contributions charged
against operations in 1997 or 1996.

COMPENSATION OF DIRECTORS

See Cash Compensation of this Item.

EMPLOYMENT CONTRACTS

There are no  employment  contracts for any employees or officers as of December
31, 1997.

TERMINATION OF EMPLOYMENT AND CHANGES OF CONTROL ARRANGEMENT

There  are no  compensatory  plans or  arrangements,  including  payments  to be
received  from the  Company,  with  respect to any person  named in the  Summary
Compensation  Table set out above  which  would in any way result in payments to
any  such  person  because  of his  or  her  resignation,  retirement  or  other
termination of such person's employment with the Company or its subsidiaries, or
any change in control of the Company.







                      -THIS SPACE INTENTIONALLY LEFT BLANK-







<PAGE>
ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth the share holdings of the Company's directors and
executive  officers  and those  persons or entities  who own more than 5% of the
Company's common stock.


                                        Amount and Nature of
     Name              Address          Beneficial Ownership    Percent of Class

EXECUTIVE OFFICERS AND DIRECTORS

Paul A. Bertoldi     Kalamazoo, MI              410,699              1.32%

James C. Knapp       Kalamazoo, MI            5,417,719             17.45%

Stephen J. Markee    Richland, MI             6,196,743             19.97%
                                        ---------------------    ---------------
Total                                        12,025,161             38.74%
                                        =====================    ===============
OWNERS OF 5%

Steven Wallace       Beverly Hills, CA        2,244,000              7.23%
                                        =====================    ===============

CHANGES IN CONTROL

To the knowledge of management,  there are no present arrangements or pledges of
securities  of the  Company  which  may  result in a change  in  control  of the
Company.


Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

TRANSACTIONS WITH MANAGEMENT AND OTHERS

Except as stated below,  during the last two calendar  years ended  December 31,
1997 and 1996,  there were no material  transactions  or any currently  proposed
transaction,  or series of similar transactions,  to which the Company or any of
its subsidiaries was or is to be a party, in which the amount involved  exceeded
$60,000 and in which any director or executive  officer,  or any security holder
who is known to the  Company to own of record  beneficially  more than 5% of any
class of the Company's  common stock,  or any member of the immediate  family of
any of the foregoing persons, had an interest.














<PAGE>
CERTAIN BUSINESS RELATIONSHIPS

Except as stated below,  during the last two calendar  years ended  December 31,
1997 and 1996,  there were no material  transactions  or any currently  proposed
transactions,  or series of similar transactions, to which the Company or any of
its subsidiaries was or is to be a party, in which the amount involved  exceeded
$60,000 and in which any director  officer,  or any security holder who is known
to the Company to own of record of beneficially more than 5% of any class of the
Company's  common  stock,  or any member of the  immediate  family of any of the
foregoing persons, had an interest.

INDEBTEDNESS OF MANAGEMENT AND STOCKHOLDERS

James  C.  Knapp,  Chairman  of the  Board  of  Directors,  Stephen  J.  Markee,
President,  CEO and CFO,  and Steven  Wallace,  a  stockholder,  have loaned the
Company funds for working capital.  These funds are provided at an interest rate
of prime plus 2%. The balance outstanding at December 31, 1997 was $455,500.  At
December 31,  1996,  the Company owed  $390,500 to Mr.  Markee.  These loans are
secured by all of the Company's assets.  With the exception of this transaction,
there  were  no  material  transactions  to  which  the  Company  or  any of its
subsidiaries  was or is to be a party,  in which the  amount  involved  exceeded
$60,000 and in which any director or executive  officer,  or any security holder
who is known to the Company to own or record of beneficially more than 5% of any
class of the Company's  common stock,  or any member of the immediate  family of
any of the foregoing persons, had an interest during the last two calendar years
ended December 31, 1997 and 1996.

TRANSACTIONS WITH PROMOTERS

During the last two calendar years ended December 31, 1997 and 1996,  there were
no material  transactions or any currently proposed  transactions,  or series of
similar transactions,  to which the Company or any of its subsidiaries was or is
to be a party,  in which the amount involved  exceeded  $60,000 and in which any
promoter,  founder,  or member of their immediate family of any of the foregoing
persons, had an interest.

Item 13. REPORTS ON FORM 8-K AND EXHIBITS

REPORTS ON FORM 8-K:

None

EXHIBITS:

None







                      -THIS SPACE INTENTIONALLY LEFT BLANK-

<PAGE>
SIGNATURES

Pursuant to the  requirements of Section 13 or 15(d) of the Securities  Exchange
Act of 1934,  the  Registrant  has duly  caused  this Report to be signed on its
behalf by the undersigned, thereto duly authorized.


I/NET, Inc.


Date:  March 18, 1998                   By: /s/   Stephen J. Markee
                                        Stephen J. Markee, Director
                                        President, CEO, and CFO


Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
this  Report has been  signed  below by the  following  persons on behalf of the
Registrant and in the capacities and on the dates indicated:


Date:  March 18, 1998                   By:  /s/  Stephen J. Markee
                                        Stephen J. Markee, Director
                                        President, CEO and CFO


Date:  March 18, 1998                   By:  /s/  James C. Knapp
                                        James C. Knapp, Chairman
                                        of the Board of Directors


Date:  March 18, 1998                   By:  /s/ Paul A. Bertoldi
                                        Paul A. Bertoldi, Vice President
                                        Systems Development


























<PAGE>



                                   I/NET, Inc.

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

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


                        Consolidated Financial Statements
                     Years ended December 31, 1997 and 1996






























<PAGE>

                                                                     I/NET, Inc.




                                    Contents

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

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


     Report of Independent Certified Public Accountants            20


     Financial Statements:

           Consolidated Balance Sheets                      21 and 22

           Consolidated Statements of Operations                   23

           Consolidated Statements of Capital Deficit              24

           Consolidated Statements of Cash Flows                   25

           Summary of Accounting Policies                     26 & 27


           Notes to Consolidated Financial Statements         28 - 34























<PAGE>

Report of Independent Certified Public Accountants


Board of Directors
I/NET, Inc.
Kalamazoo, Michigan

         We have audited the  accompanying   consolidated   balance   sheets  of
I/NET, Inc. as of  December, 31,  1997 and 1996,  and the  related  consolidated
statements  of  operations,  capital  deficit  and cash flows for the years then
ended.  These  financial  statements  are the  responsibility  of the  Company's
management.  Our  responsibility  is to express  an  opinion on these  financial
statements based on our audits.

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

         In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects,  the financial position of I/NET, Inc.
at December 31, 1997,  and 1996,  and the results of its operations and its cash
flows for the years then ended 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 12 to the
financial statements,  the Company has suffered recurring losses from operations
in  prior  years,  has  a  significant  working  capital  deficit  and  requires
additional  capital to continue its product  development.  These  factors  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 12. The  financial
statements do not include any adjustments  that might result from the outcome of
this uncertainty.




Kalamazoo, Michigan                          /s/BDO SEIDMAN, LLP
January 14, 1998                             Certified Public Accountants














<PAGE>

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

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

--------------------------------------------------------------------------------
December 31,                                1997                   1996


ASSETS ( NOTE 3)


CURRENT:

         Cash and cash equivalents      $  135,939               $ 20,517


         Trade Receivables                  79,756                 28,982

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




TOTAL CURRENT ASSETS                      215,695                  49,499



OFFICE FURNITURE AND EQUIPMENT,
         less accumulated depreciation
         of $162,091 and $482,553          36,295                  62,392


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

                                      $   251,990                $111,891

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












<PAGE>

                                                                     I/NET, Inc.

                                                     Consolidated Balance Sheets
--------------------------------------------------------------------------------

--------------------------------------------------------------------------------
December 31,                                            1997            1996
--------------------------------------------------------------------------------

LIABILITIES AND CAPITAL DEFICITS

CURRENT LIABILITIES:
         Accounts payable                              $141,145  $  142,605
         Accruals:
              Commissions (Note 1)                      250,000     250,000
              Other                                     146,699     179,698
         Advances from stockholders (Note 2)            134,778     119,778
         Current maturities of long-term debt (Note 3)  649,000   1,122,000
--------------------------------------------------------------------------------

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

TOTAL CURRENT LIABILITIES                             1,321,622   1,814,081

LONG-TERM DEBT,  less current maturities (Note 3)       699,479     494,642

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

TOTAL LIABILITIES                                     2,021,101   2,308,723

--------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (NOTES 1, 8 AND 11)

CAPITAL DEFICIT (NOTES 4 AND 9):
     Common stock,  $.001 par value - shares  
     authorized  50,000,000  issued and
     outstanding 31,037,652 in 1997
     and 30,837,652 in 1996                              31,038      30,838
     Additional paid-in capital                      11,886,674  11,836,874
     Deficit                                        (13,686,823)(14,064,544)
--------------------------------------------------------------------------------
TOTAL CAPITAL DEFICIT                              (  1,769,111)  2,196,832)
--------------------------------------------------------------------------------
                                                   $    251,990 $   111,891
--------------------------------------------------------------------------------
See  accompanying   summary  of  accounting   policies  and  notes  to 
consolidated financial statements.






<PAGE>
                                                                     I/NET, Inc.

                                           Consolidated Statements of Operations
--------------------------------------------------------------------------------

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

Year ended December 31,                               1997              1996
--------------------------------------------------------------------------------
REVENUES  (NOTE 5)                                $1,692,170       $  724,032

COST OF REVENUES                                     739,093          729,070
--------------------------------------------------------------------------------
    Gross Profits                                    953,077           (5,038)
SELLING, GENERAL, and ADMINISTRATIVE EXPENSES        573,003        1,060,402
--------------------------------------------------------------------------------
Earnings (Loss) from operations                      380,074      ( 1,065,440)

INTEREST EXPENSE- net of interest income $1,843
 in 1997 and $12,088 in 1996                         100,299           66,612
--------------------------------------------------------------------------------
EARNINGS (LOSS) BEFORE EXTRAORDINARY ITEM            279,775       (1,132,052)

EXTRSORDINARY ITEM: GAIN ON EXTINGUISHMENT
 of debt (Note 3)                                     97,946             -
--------------------------------------------------------------------------------
NET EARNINGS (LOSS)                                  377,721      $ (1,132,052)
--------------------------------------------------------------------------------
NET EARNINGS (LOSS) PER SHARE
    Basic and Diluted
       Earnings (loss) before extraordinary item     $ .01         $   (.04)
       Extraordinary item                               -                -
                                                   ----------       ------------
       Net Earnings (loss) per share                   .01             (.04)
                                                   ==========       ============
BASIC AND DILUTED WEIGHTED AVERAGE
NUMBER OF  COMMON SHARES OUTSTANDING               30,987,652       30,837,652
--------------------------------------------------------------------------------



See accompanying summary of accounting policies and notes to consolidated 
financial statements.








<PAGE>
                                                                     I/NET, Inc.

                                      Consolidated Statements of Capital Deficit
--------------------------------------------------------------------------------

--------------------------------------------------------------------------------
                         Common Stock       Additional
                                               Paid
                       Shares     Amount     Capital    Deficit       Total

BALANCE, January 1,
 1996                 30,837,652 $30,838 $11,836,874 $(12,932,492)$(1,064,780)

NET LOSS FOR THE YEAR   -          -          -      (  1,132,052) (1,132,052)
--------------------------------------------------------------------------------

BALANCE, December 31,
 1996                 30,837,652 $30,838 $11,836,874 $(14,064,544)$(2,196,832)

     Issuance of 
     stock for cash      200,000     200      49,800        -          50,000

     Net earnings 
     for the year                                         377,721     377,721
--------------------------------------------------------------------------------
BALANCE, December 31,
 1997                 31,037,652 $31,038 $11,886,674 $(13,686,823)$(1,769,111)
--------------------------------------------------------------------------------

See  accompanying  summary  of  accounting  policies and  notes  to consolidated
 financial statements.






















<PAGE>
                                                                     I/NET, Inc.

                                           Consolidated Statements of Cash Flows
--------------------------------------------------------------------------------

--------------------------------------------------------------------------------
Year ended December 31,                                   1997          1996
--------------------------------------------------------------------------------
OPERATING ACTIVITIES (NOTE 10):
         Earnings (Loss)                               $ 377,721    $(1,132,052)
                  Depreciation and amortization           26,097         36,458
                  Extraordinary Item: Gain on 
                    extinquishment of debt(Note 3)     (  97,946)          -
                  Changes in assets and liabilities:
                  Receivables                           ( 50,774)        23,318
                  Accounts payable                      (  1,460)         7,140 
                  Accruals                              (  8,214)       207,220
--------------------------------------------------------------------------------
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES          245,424       (857,916)
--------------------------------------------------------------------------------
 INVESTING ACTIVITIES (NOTE 10):
         Proceeds from note receivable                     -             30,000
         Capital expenditures                              -            (13,708)
--------------------------------------------------------------------------------
CASH PROVIDED BY INVESTING ACTIVITIES                      -             16,292
--------------------------------------------------------------------------------
FINANCING ACTIVITIES (NOTE 10):
         Proceeds from issuance of notes 
         to stockholders                                100,000         300,000
         Proceeds from issuance of common stock          50,000            -
         Principal payments on long-term debt          (245,002)       (120,687)
         Principal payments on notes to stockholders   ( 35,000)           -
--------------------------------------------------------------------------------
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES        (130,002)        179,313
--------------------------------------------------------------------------------
Increase (Decrease) in Cash and Cash Equivalents        115,422        (662,311)
Cash & Cash Equivalents, beginning of year               20,517         682,828
--------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR                $ 135,939         $20,517
--------------------------------------------------------------------------------

See  accompanying   summary  of  accounting   policies and notes to consolidated
 financial statements.
<PAGE>
                                                                     I/NET, Inc.

                                                  Summary of Accounting Policies
--------------------------------------------------------------------------------

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

BASIS OF PRESENTATION

The consolidated   financial  statements  include  the  accounts of the Company,
I/NET, Inc., (a Delaware  Corporation)and its wholly-owned subsidiary I/NET,Inc.
a Michigan  Corporation).  Only the  subsidiary  remains an active  Company  and
therefore the consolidated  financial  statements  presented within are those of
the subsidiary.

DESCRIPTION OF THE BUSINESS

The Company is engaged in the  business of providing Website consulting services
on a  contract basis to private sector clients. In addition, the Company  during
1996 further  developed and began to market Internet computer software products.
Its   major  customers  were   International   Marketing   Strategies (IMS)  and
International Business Machines (IBM) in 1997 and IMS in 1996. (See Note 5)

USE OF ESTIMATES             

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

CASH AND CASH EQUIVALENTS

For purposes of the statement of cash flows,  the Company considers  all  highly
liquid investments with maturity  of  three  months or less when purchased to be
cash equivalents.

OFFICE FURNITURE, EQUIPMENT, AND DEPRECIATION

Office furniture and  equipment are stated at cost. Depreciation is computed and
Depreciation principally by  the  straight-line  method  for financial reporting
purposes  over the  estimated  useful  lives of the  assets  and by  accelerated
methods for tax purposes.

TAXES ON INCOME

Deferred  income  taxes  are recorded to reflect the future tax  consequences of
temporary differences between the tax bases of assets and liabilities  and their
financial reporting amounts at year-end.

STOCK BASED COMPENSATION

Effective  January 1, 1996,   the  Company   adopted   Statement   of  Financial
Accounting Standard:  (SFAS) No. 123, "Accounting For Stock Based Compensation."
The Company chose to apply Accounting  Pronouncement  Board (APB) Opinion 25 and
related  interpretations in accounting for its stock options.  As a result, this
statement  did not have an  effect  on the  financial  position  or  results  of
operations of the Company.

DEVEOLPED COMPUTER SOFTWARE 

Software  development   costs   are   accounted   for  in  accordance  with  the
provisions  of  Statement  of  Financial  Accounting  Standards  (SFAS)  No. 86,
"Accounting  for the Cost of Computer  Software To Be Sold,  Leased or Otherwise
Marketed."  Software  development costs and certain product  enhancements,  when
significant,  are capitalized  subsequent to the  establishment of technological
feasibility  for the  product  and  prior to the  products  general  release  to
customers.

          See accompanying notes to consolidated financial statements.
<PAGE>
                                                                     I/NET, Inc.

                                                  Summary of Accounting Policies
--------------------------------------------------------------------------------

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

Costs  incurred   prior  to   technological   feasibility  or  subsequent to the
product's  general  release  to  customers,  as well as  selling,  general,  and
administrative costs associated with the products, are expensed as incurred.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company's  financial  instruments  consist  of  cash,   receivables,   notes
payable,  accounts  payable and long-term debt. Due to the short-term  nature of
the items,  other  than  long-term  debt and the  variable  interest  rates on a
substantial  portion of the long-term debt,  management  estimates that carrying
amounts of the Company's financial instruments  approximate their fair values at
December 31, 1997.

REVENUE RECOGNITION

Revenues for the sale of the  Company's  Internet  products are  recognized when
the product has been accepted by the customer.  The  Company records revenue for
its long-term  contracts  on  the  percentage-of-completion  basis.  Under  this
method,  revenues  are  determined  by comparing  costs  incurred to date to the
estimated total costs for the contract.  The  proportionate  amounts of contract
revenue are then recorded based on this percentage of completion of costs.

ADVERTISING COSTS

The Company  expenses the  cost  of   advertising  as  incurred.  There  were no
advertising  expenses  in 1997,  and  advertising  expenses  were  approximately
$12,000 in 1996.

EARNINGS (LOSS) PER SHARE

Earnings (Loss)  per share  amounts    have been  calculated  using the weighted
average  number  of  common  shares  outstanding,  for the  respective  periods.
Effective  December 31, 1997,  the Company  adopted SFAS No. 128,  "Earnings per
Share".  This  pronouncement  requires  dual  presentation  of basic and diluted
earning per share.  All outstanding  warrants and options are  anti-dilutive  at
December 31, 1997.

NEW  ACCOUNTING  PRONOUNCEMENTS  

In June 1997, SFAS No.130,  "Reporting  Comprehensive  Income" and SFAS No. 131,
"Disclosure  about  Segments  of  an  Enterprise  and Related  Information" were
issued.   SFAS  No.  130  addressed  standards  for  reporting  and  display  of
comprehensive  income and its components and SFAS No. 131 requires disclosure of
reportable operating segments. In October 1997, Statement of Position (SOP) 97-2
"Software  Revenue  Recognition"  was issued by the AICPA  Accounting  Standards
Executive  Committee.  This SOP  provides  guidance  on when  revenue  should be
recognized  and in what  amounts for  licensing,  selling,  leasing or otherwise
marketing  computer  software.  All statements are effective for the Company for
the  year  ended  December  31,  1998.  The  Company  will  be  reviewing  these
pronouncements to determine their applicability to the Company if any.



                See accompanying notes to consolidated financial statements.

<PAGE>
                                                                     I/NET, Inc.

                                      Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

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

1. COMMISSIONS

During 1996, the Company agreed  to  release  a  distributor  from its exclusive
contract to  distribute  certain  I/NET  products.  In exchange for this release
I/NET agreed to pay a 7.5%  commission  to the  distributor  of I/NET's sales of
certain  products  sold through  September 30, 1999 but at a minimum of $250,000
and a maximum amount of $500,000.

2. SHORT-TERM ADVANCES FROM STOCKHOLDERS
Advances from stockholders consist  of:  

December 31,                                  1997            1996
Non-interest bearing notes payable to
stockholders, due on demand                $  29,278        $ 29,278

Secured stockholder's advances bearing
interest at 8%, and are due on demand        105,500          90,500

                                          $  134,778        $119,778

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

3. LONG-TERM DEBT CONSISTS OF:
December 31,                                  1997            1996

Notes payable to vendors (see below)     $ 998,479        $1,134,304

Notes payable to bank, paid during 1997       -               50,375

Notes payable for a trademark,
paid during 1997                              -              131,963

Notes payable to stockholders
bearing interest at 8% and due in
December, 2001, secured by all
the company's assets                       350,000           300,000
--------------------------------------------------------------------------------
                                         1,348,479         1,616,642
 Less current maturities                   649,000         1,122,000
--------------------------------------------------------------------------------

TOTAL LONG-TERM DEBT                    $  699,479        $  494,642
--------------------------------------------------------------------------------


<PAGE>

                                                                     I/NET, Inc.

                                      Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

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

NOTES PAYABLE TO VENDORS

Unsecured  notes payable  to  various   vendors  totaling  $998,479  are  due in
various installments and at varying interest rates.

Two notes totaling $440,655 are due on demand. These notes bear interest  at the
prime rate plus 2% (effectively 10.5% at December 31, 1997).

Another  note in the amount of $129,108 is due in monthly  installments  at  the
rate of 5% of the  previous  months  cash   receipts  (as  defined)   but  at  a
minimum  of $2,000  bi-monthly.  The  principle  balance of this note was due in
September,  1996.  The  Company  is in  default  on  repayment  on this note but
continues to make  repayments as required by the original note.  This note bears
interest at 8% and is classified as current.

During  March  1997,   the   Company   reached   agreement   with a vendor  on a
previously  defaulted  note in the  amount of  $279,158  together  with  accrued
interest  in the amount of  $24,784.  The new  agreement  in the then  amount of
$303,942  calls for  monthly  installments  of 5% of the  previous  months  cash
receipts  (as defined)  but at a minimum  rate of $10,000  bi-monthly  and bears
interest  at the prime  rate plus 2%.  This note has an  outstanding  balance of
$274,000 as of December 31 1997. Final payment,  assuming minimum payments only,
is January 2004.

Another  vendor   note   in   the   amount   of  $26,  616  is  due  in  monthly
installments  of 5% of the previous  month's cash receipts (as defined) but at a
minimum rate of $2,000  bi-monthly and bears interest at the prime rate plus 2%.
Final payment, assuming minimum payments only, is July 2000.

Another vendor note in the amount  of $9,143 is  due in monthly  installments of
$2,998 including interest at 11%. Final payment is March 1998.

During March 1997, the Company entered into an agreement with a note  holder  to
form a joint venture.  I/NET  contributed  previously   written-off   technology
together  with a trademark and web presence in exchange for the  forgiveness  of
$97,946 of  indebtedness.  The  noteholder  is required to  contribute  cash and
marketing  expertise  to this newly  formed  joint  venture.  There have been no
operating  activities  on this joint  venture  to date.  This  $97,946  has been
treated as an extraordinary item for financial statement purposes.

Another   vendor  note  in  the   amount   of   $118,957   is   due  in  monthly
installments  of 5% of the previous  month's cash receipts (as defined) but at a
minimum  rate of  $3,000  monthly  and bears  interest  at 10%.  Final  payment,
assuming minimum payments only, is January 2002.




<PAGE>
                                                                     I/NET, Inc.

                                      Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

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

Aggregate  maturities of  long-term   debt  over  the  next five years  assuming
repayment of stockholders' advances (Note 2) and notes are as follows:

                                  1998    $ 784,000
                                  1999    $  76,000
                                  2000    $  78,000
                                  2001    $ 430,000
                          Subsequent to 2001 $ 116,000

4. STOCK WARRANTS

During prior  years,  the  Company   sold  and  issued  approximately  6,000,000
shares of its common stock for cash,  trademark,  and extinguishment of debt. In
connection with the issuances,  the Company issued warrants to the purchasers of
the common  stock to acquire up to  2,039,285  shares of common  stock at prices
ranging from $.25 to $2.40 per share.  The warrants expire through 1999.  During
April 1997, a warrant holder  exercised its option to purchase 200,000 shares of
common stock at $.25 per share for cash.  The remaining  1,839,285  warrants are
exercisable  at $2.40 per share and are not dilutive.  Also, in connection  with
these sales,  underwriters  were issued warrants for 1,145,714  shares of common
stock at a weighted  average price of $.90 and are  exercisable  for five years,
expiring in 1999. All remaining warrants were exercisable at December 31, 1997.

5. RELATED PARTY TRANSACTIONS/MAJOR CUSTOMERS

The Company  provided  Internet  products,  facilities  management  services and
websight consulting services to a few majorcustomers as follows:

Year ended December 31,                     1997                   1996
--------------------------------------------------------------------------------

Internet Products:
  International Business Machines      $  200,000            $     -

  International Marketing 
  Strategies(IMS)                         405,000                346,000

  SUPPORT NET, INC. 
    (included with IMS for 1997)             -                   158,000

  LANSA, INC.                             300,000                   -
--------------------------------------------------------------------------------
                                         $905,000               $504,000

--------------------------------------------------------------------------------
Facilities Management Services:
  Greater Kalamazoo Association 
  of Realtors                            $  -                   $108,000

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

Websight Consulting Services:
 International Business Machines (IBM)  $702,000                   -

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

IBM is also a  minority  stockholder  in the Company.


<PAGE>
                                                                     I/NET, Inc.

                                      Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

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

6. TAXES ON INCOME

Income  taxes  are  calculated   using  the  liability   method   specified   by
Statement of Financial  Accounting  Standards  (SFAS) No. 109,  "Accounting  for
Income Taxes."

Deferred  income  taxes  reflect  the  net  effects  of   temporary  differences
between the carrying amounts of assets and  liabilities  for financial reporting
purposes and the amounts used for income tax purposes.

Significant   components  of  the  Company's deferred tax assets are as follows:

--------------------------------------------------------------------------------
December 31,                                        1997              1996
Deferred Tax Assets:
     Accruals                                 $   97,000       $     99,000
     Depreciation and amortization                  -                12,000
     Trademark                                    61,000             66,000
     Net operating loss carryforward           3,594,000          3,624,000
     Tax credit carryforwards                     42,000             42,000
     Capital loss carryforwards                   24,000             24,000
     Deferred Revenue                             17,000             17,000
--------------------------------------------------------------------------------
Total Deferred Tax Assets                      3,835,000          3,884,000

Valuation Allowance                           (3,835,000)        (3,884,000)
--------------------------------------------------------------------------------
                                             $     -           $      -

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

As of  December 31, 1997,  the  Compan   had a  net operating loss  carryforward
approximately   $10,257,000   and   investment  tax  credit   carryforwards   of
approximately  $42,000  available  to reduce  future  taxable  income and taxes,
respectively. These carryforwards expire from 1998 through 2011.

7. EMPLOYEE BENEFIT PLAN

The  Company  has  a profit   sharing and   defined  contribution  pension  plan
covering  substantially  all employees.  Under the plan,  employees may make tax
deferred voluntary  contributions  which, at the discretion of the Company Board
of Directors,  may be matched within certain limits by the Company.  Inaddition,
the  Company  may make  additional  discretionary  contributions  to the plan as
profit  sharing  contributions.  All  contributions  to the plan are  limited by
applicable   Internal   Revenue   Code   regulations.   There  were  no  Company
contributions charged against operations in 1997 or 1996.





<PAGE>
                                                                      I/NET Inc.

                                      Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

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

8.  OPERATING LEASE

The Company leases its facilities and  certain  equipment  under  non-cancelable
operating leases.Rental expense under these leases was approximately $80,000 and
$138,000 for  the  year  ended  December  31, 1997 and 1997 respectively. Future
 minimum  annual lease  payments subsequent to December 31, 1997 are as follows:

                               1998              $106,000
                               1999              $104,000
                               2000              $ 90,000
                               2001              $ 60,000

9.  INCENTIVE STOCK OPTION PLAN

     The Company  maintains an incentive stock option plan that provides for the
granting of options to officers and other key employees at an exercise price not
less than 100% of the fair market value on the date of the grant. Twenty percent
of the  options  become  exercisable  each  year  following  the date  they were
granted, and can remain outstanding for five years following the day they become
fully vested.  Changes in options outstanding are summarized as follows:  
                                Option Price           Weighted Average 
                            Shares       PerShare      Price Per Share
--------------------------------------------------------------------------------
January  1,  1996           139,436     $.18-2.50          $1.72
    Lapsed                (  96,936)     .18-2.50           1.39
--------------------------------------------------------------------------------
December 31, 1996            42,500         2.50            2.50 
    Granted  June 1997      100,000          .37             .37 
    Lapsed                  (27,500)        2.50            2.50
--------------------------------------------------------------------------------
December 31, 1997           115,000     $.37-2.50       $    .65
--------------------------------------------------------------------------------

Of the 139,936  options  outstanding  at January 1, 1996,  all but 77,634 had an
exercise  price of $2.50.  The 77,634 had been granted to one  employee,  had an
exercise price of $.18 and lapsed in 1996.

At  December 31, 1997,  582,255  shares  of  common  stock  are reserved for the
incentive stock option plan and 9,000 options were vested and  exercisable.  The
remaining  contractual  life on these  options  is seven  years.  The  remaining
contractual life of the 106,000 shares outstanding is ten years.

Under SFAS No. 123, "Accounting for Stock Based  Compensation",  the  Company is
required  to  provide  pro forma  information  regarding net income and earnings
per share as if  compensation  cost for the Company's stock option plan had been
determined in accordance with the fair value based method prescribed in SFAS No.
123. The Company estimates the fair value of each stock option at the grant date

<PAGE>
                                                                     I/NET, Inc.

                                      Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

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

by  using  the   Black-Scholes   option-pricing   model   with   the   following
assumptions  used for the  grant in 1997:  expected  volatility  of 93  percent;
risk-free interest rate of 6.4 percent; and an expected option life at 10 years.

Under the accounting  provisions of SFAS #123, the Company's net income for 1997
would have been  reduced from  $377,721  to  the pro  forma  amount of $344,721.
Earnings per share were not affected.

10.   SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

Noncash   investing  and  financing   activities   are   summarized  as follow

Year ended December 31,                          1997             1996

Extinquishment of indebtedness                $ 98,000             -
--------------------------------------------------------------------------------
Conversion of accounts payable into
  vendor notes payable                        $   -              $223,000
--------------------------------------------------------------------------------


Conversion of accrued interest payable
  into vendor notes payable                   $ 25,000           $ 36,000
--------------------------------------------------------------------------------

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

Interest paid for the years ended  December 31, 1997  and 1996,  was $57,000 and
$78,000,  respectively.  The Company  paid no income taxes during 1997 and 1996.

11. CONTINGENCIES
      Royalties
On September 30,1997, the Company entered into a software license agreement with
Netscape Communications Corporation (Netscape)wherein  Netscape  granted  to the
Company  the  right to port  certain  of its Internet Server products to the IBM
AS/400  platform.  This agreement is for a period  of three years and allows the
Company to market and distribute the ported products  upon their modification to
the AS/400 platform.

In exchange  for this  license  agreement,  I/NET  has  agreed  to  pay  minimum
royalties to Netscape in the amount of  $3,000,000  according  to the  following
repayment schedule.

                        Paid by IBM on behalf
                         of I/NET in October, 1997   $  250,000
                        September 30, 1998           $  750,000
                        September 30, 1999           $1,000,000
                        September 30, 2000           $1,000,000
<PAGE>
                                                                     I/NET, Inc.

                                      Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

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

In addition, I/NET has agreed to pay to Netscape annual development support fees
in  the   amount   of  $250,000   for  a period  of three  years.  International
Business  Machines  Corporation  has  guaranteed  to Netscape  the above  listed
royalties in the event that product sales are  insufficient to repay amounts due
under this agreement.

In  addition, IBM  will  provide  advances  against  royalties  in the amount of
$600,000  as certain  tasks are  completed  during the  porting of the  Netscape
products to the IBM  platform.  These  amounts will be  reimbursed  to IBM after
deduction of Netscape royalties,  in the amount of 10% of total revenue received
from the sale of the ported products with the first  reimbursement  due in March
1998. The Company recognized  $200,000 of revenue from these advances in 1997 as
certain  milestone  events were met.  These  advances  are treated as if under a
research and development  agreement  whereby I/NET is not obligated to repay any
of these funds advanced by IBM except from royalties of future sales, if any. It
anticipates  recording the remaining $400,000 as revenue as other milestones are
met in 1998.

        LITIGATION
The  Company is involved in various legal actions arising from the normal course
of business. Management  does not  anticipate any material losses as a result of
these proceedings.

12.  CONINUED EXISTENCE

The Company's financial statements have been presented on the basis that it is a
going   concern,   which   contemplates   the   realization  of  assets  and the
satisfaction  of liabilities  in the normal course of business.  The Company has
suffered  recurring  losses from  operations  in prior years,  has a significant
working capital deficit, and requires additional capital to continue its product
development.  Management  believes the Company will  continue as a going concern
and is actively  marketing  its products  which would enable the Company to meet
its current  obligations and provide  additional funds for continued new product
development. In addition, management is currently negotiating several additional
contracts  for its services  and  products.  However,  there can be no assurance
these activities will be successful.