|SECURITIES
AND EXCHANGE COMMISSIONWashington,
D.C. 20549


Form 10-KSB


ANNUAL
REPORT UNDER SECTION 13 OR 15(d) OF THESECURITIES
EXCHANGE ACT OF 1934


For The
Fiscal Year Ended December 31, 2001


Commission
File Number: 333-86873


NETWORD, INC.(Exact
name of registrant as specified in its charter)


Delaware52-2143430


(State or other
jurisdiction of Incorporation or Organization)(I.R.S. Employer Identification No.)



285 Tanglewood Crossing 
Lawrence, New York 11559(Address of principal executive offices)




Registrants
telephone number, including area code: 1-516-239-8067


Securities registered
under Section 12(b) of the Exchange Act: NoneSecurities registered under Section 12(g)
of the Exchange Act: None


Check
whether the issuer: (1) filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days: Yes  [x]     
No  [_]



Check
if there is no disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of the 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]


Issuers
revenues for its most recent fiscal year: $5,845


The
aggregate market value of the common stock held by non-affiliates of the
registrant computed by reference to the average bid and asked price of the
common stock on March 25, 2002: $1,360,100. The determination of market value of
the common stock is based on the last reported bid and asked price as reported
by the National Quotation Bureau on the date indicated.


There
were 21,010,289 shares of common stock of the registrant outstanding as of March
25, 2002.


Transitional
Small Business Disclosure Format (check one): Yes   [x]      No  [_]
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|NETWORD, INC.INDEX
|------------------

|PART I               |  |                                                                     |  |     | 
|-------------------- |  | ------------------------------------------------------------------- |  | --- | 
|                     | 
|Item 6               |  | Description of Business                                             |  | 1   | 
|Item 7               |  | Description of Property                                             |  | 4   | 
|Item 8               |  | Directors, Executive Officers and Significant Employees             |  | 5   | 
|Item 9               |  | Remuneration of Directors and Officers                              |  | 6   | 
|Item 10              |  | Security Ownership of Management and Certain Security Holders       |  | 6   | 
|Item 11              |  | Interest of Management and Others in Certain Transactions           |  | 8   | 
|                     | 
|PART II              | 
|                     | 
|Item 1               |  | Market Price of and Dividends on the Registrants Common Equity and | 
|                     |  | Other Shareholder Matters                                           |  | 9   | 
|Item 2               |  | Legal Proceedings                                                   |  | 9   | 
|Item 3               |  | Changes in and Disagreements With Accountants                       |  | 10  | 
|Item 4               |  | Submission of Matters to a Vote of Security Holders                 |  | 10  | 
|Item 5               |  | Compliance with Section 16(a) of the Exchange Act                   |  | 10  | 
|Item 6               |  | Reports on Form 8-K                                                 |  | 10  | 
|                     | 
|PART F/S             | 
|                     | 
|Financial Statements |  |                                                                     |  | F-1 | 
|                     | 
|PART III             | 
|                     | 
|Item 1               |  | Index to Exhibits                                                   |  | 11  | 
|Item 2               |  | Description of Exhibits                                             |  | 11  | 

|ii
|--

|PART IAlternative 2


This
report contains certain forward-looking statements concerning
Networds operations, economic performance and financial condition, which
are subject to inherent uncertainties and risks. Actual results could differ
materially from those anticipated in this report. When used in this report, the
words estimate, plan, project,
anticipate, expect, intend,
believe and similar expressions are intended to identify
forward-looking statements.



Item 6.   Description of
Business


Overview


Netword,
Inc. owns and operates the Netword System, a patented Internet utility that
offers an easy way to reach any Internet destination. With the Netword System,
Internet users can create simple and memorable words, phrases, numbers or other
sequences of characters, called Networds, and use them as Internet keywords.
Networds are aliases or nicknames for Internet addresses known as uniform
resource locators or URLs.


Unlike
limited keyword systems within the infrastructure of a proprietary network, such
as America Onlines AOL Keyword system, or bookmarks generated
by Internet users for use on their own computers, Networds are universal and may
be used from any computer on the Internet.


Operation
of the Netword System has never generated material revenues.


In
February 2001, we commenced development of a custom online digital media player
directed at the entertainment and media industries. Online digital media players
may be downloaded from the Internet to personal computers to play video and/or
audio files from those computers. In August 2001, we formed Rabbit Media, Inc.
as a wholly owned subsidiary to complete the development of the media player,
and it commenced marketing the media player in the fourth quarter of 2001. As of
March 25, 2002, no revenues had been generated by the Rabbit Media Player.


As
described below, in January 2002 we terminated our marketing and sales efforts
for both the Netword System and the Rabbit Media Player and we began to focus
our efforts on the possible acquisition of another business.


During
March, 2002, our principal office was relocated to 285 Tanglewood Crossing,
Lawrence, New York 11559. Our telephone number is 1-516-239-8067.


As
used in this report, the terms we, us, our and Netword refer to Netword, Inc. and
its predecessors and its wholly owned subsidiary, Rabbit Media, Inc., unless the context
otherwise requires.
1
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Recent
Developments


Restructuring
of Operations


On
January 31, 2002, we terminated all of our employees, relocated our Internet
server equipment to our Gaithersburg, Maryland facility, and retained
consultants to maintain the Netword System. These actions resulted in a
significant reduction of overhead and effectively terminated our marketing and
sales efforts for the Netword System and the Rabbit Media Player


In
February 2002, we decided to offer the Netword System for sale because of our
inability to successfully market that system and the lack of sufficient
resources to defend our patented intellectual property related to the Netword
System. We subsequently decided to offer our Rabbit Media Player technology and
related intellectual property for sale as well. As of March 25, 2002, there were
no immediate prospects of a sale of either system.


Investment
in Home Director


In
February 2002, we made a $270,000 investment in Home Director, Inc. with a view
to a possible merger of the two companies. For our investment, we received a
one-year secured promissory note in the principal amount of $270,000 and
warrants to purchase Home Director common stock. The promissory note and
warrants will be canceled if the merger is completed. Home Director is a private
company that develops, markets, installs and services systems that control
delivery and distribution of electronic content in private homes.


Since
the announcement, we have actively negotiated the terms of a proposed merger
agreement which contemplates that Home Director would be merged with a new
Netword subsidiary and the stockholders of Home Director would receive shares of
our common stock in exchange for their shares of Home Director stock. As of
March 25, 2002, certain material terms of the proposed merger agreement remained
under discussion.


If
and when we reach agreement with Home Director on the remaining terms, we expect
that a definitive merger agreement will include a number of material conditions,
including SEC registration, stockholder approvals, restructuring of certain of
Home Directors liabilities, and the obtaining of additional financing by
Home Director. If a merger is completed, the shares owned by our current
stockholders would represent a minority, and probably less than 15%, of our
outstanding stock after the merger, persons designated by Home Director would
represent a majority of our board of directors, and we would continue Home
Directors current business as our primary business activity.


Option
Repricing


On
January 2, 2002, our Board of Directors reduced the exercise price of options to
purchase 2,284,384 shares of Netword common stock from $0.1666 per share to
$0.125 per share, the fair market value of those shares on that date, as
represented by their closing price. Thereafter, options to purchase 1,662,206
shares of Netword common stock subject to the repriced options were exercised,
including options to purchase 1,526,072 shares exercised by our officers and
directors. On February 17, 2002, the remaining repriced options expired
unexercised.
2
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Our History


Netword,
Inc. is a Delaware corporation formed on February 18, 1999. Immediately
following its formation, it merged with Netword LLC, a Delaware limited
liability company that owned and operated the Netword System. The sole purpose
of this merger was to reorganize Netword LLC as a corporation.


Netword
LLC was formed in December 1996, when it acquired the assets of Birdshell
Corporation, L.L.C., comprising various computer programs and systems that were
key elements of the Netword System as it then existed. Birdshell had been formed
in April 1995 to develop and market the concept that became the Netword System.


Revenues,
Expenses, and Research and Development Expenditures


Our
operating revenues for the fiscal years ended December 31, 2001 and 2000 were
$5,845 and $12,405, respectively and were derived primarily from Netword
registrations. In addition, for the 2001 and 2000 fiscal years, we had interest
income of $80,504 and $184,088, respectively.


Our
operating expenses for the fiscal years ended December 31, 2001 and 2000 were
$1,574,016 and $3,395,058, respectively. For the fiscal year ended December 31,
2000, non-cash expenses included amortization of warrants issued in connection
with an agreement to market the Netword System, in the amount of $1,125,000.


Over
the five fiscal years ended December 31, 2001, we spent approximately $1,492,000
for research and development.


Patents and
Other Intellectual Property


On
June 9, 1998, we were issued patent No. 5,764,906, which describes the Netword
System as a Universal Electronic Resource Denotation, Request and Delivery
System that shares information and aliases among owners of Internet Web sites
and other resources and Internet users. On August 8, 2000 we were issued a
second United States patent, No. 6,101,537, which further clarifies and
amplifies the intellectual property of the Netword System.


We
also own various copyrighted software with special purpose components not found
in any existing off-the-shelf software of which we are aware.


Netword
is registered as a trademark with the U.S. Patent and Trademark Office. On April
30, 1996, we acquired the exclusive rights to the common law and registered
trademarks and trade names Netword and Netword, Inc. for
payments of $4,800 per year for seven years, and payments of $3,000 per year
thereafter for the remainder of the life of the individual who sold us these
trademarks.
3
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|To
protect our rights to our proprietary technology, we rely primarily upon our
patents and confidentiality and non-disclosure agreements with our employees and
consultants. Although our patents provide protection against third parties
copying the Netword System, they have not precluded competitors from creating
systems similar to the Netword System. The steps we have taken may not deter
unauthorized use of our proprietary information, and we may not be able to
afford the high cost of enforcing our intellectual property rights through
litigation.


Competition


The
market for Internet services is intensely competitive, quickly evolving and
subject to rapid technological changes. The Netword System faces significant
competition, which is expected to continue in the future and to preclude any
further development of our business. We have limited resources and have been
unable to invest in the enhancement of the Netword System and the expansion and
enhancement of our marketing and customer support services, which we effectively
terminated in January 2002.







Government
Approvals and Regulation


We
are not currently subject to direct federal, state or local government
regulation, other than regulations applicable to businesses generally. There is
only a small body of laws and regulations directly applicable to access to or
commerce on the Internet.


The
creation and use of Networds entails the potential risk of possible infringement
of third party rights, which could subject us to litigation and possible
liability. The law regarding liability for contributory trademark infringement
or facilitation of unfair competition on the Internet is still unsettled. Our
published Terms and Conditions and operating procedures include measures to
protect the rights of owners of registered trademarks. However, these measures
and the scope and extent of our insurance may not be adequate to shield or
indemnify us from liability and costs of litigation in the event of trademark
infringement, dilution or unfair competition by Netword creators.


Employees


After
terminating all full-time employees on January 31, 2002, we continued to retain
four part-time consultants who provide services on an as-needed basis.



Item 7.   Description of
Property.


We
do not own real property. Our facility at 702 Russell Avenue, Gaithersburg,
Maryland 20877 is leased until September 2003 and covers approximately 2,400
square feet of office space at a current monthly rent of approximately $3,500.
We do not consider this leased location to be material to our operations.

4
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Item 8.   
Directors, Executive Officers and Significant Employee.


Our
directors and officers and biographical information about them are provided
below. Each director will hold office until his successor is duly elected and
qualified, or until his earlier resignation or removal.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Name             | Age | Position
|---------------- | --- | --------
|Michael L. Wise  |     | 58      
|Kent M. Klineman |     | 69      
|Murray M. Rubin  |     | 59      

|Michael
Wise joined Netword LLC in December 1996 as Chairman of the Board of Managers and became
its President and Chief Executive Officer in August 1997. Mr. Wise is a director of
Finelot PLC a UK Company in the art and antique auction business. Since 1988, Mr. Wise
has been a director (Chairman of the Board and officer from 1992-1997) of nStor
Technologies, Inc. (AMEX: NSO) a manufacturer of RAID subsystems and information storage
solutions. He founded IMNET Systems, Inc., an imaging and information solutions systems
provider, and served as a director and officer of that company from 1986-1995. Mr. Wise
has a Ph.D. in Theoretical Physics from Brandeis University.


Kent
M. Klineman joined Netword LLC in December 1996. Since 1994, he has owned and operated
Klineman Holding Corp., a New York venture capital firm. Mr. Klineman is a graduate of
Dartmouth College and Harvard Law School and holds masters in taxation from N.Y.U. Law
Schools graduate tax program.








Murray
M. Rubin became the Chief Financial and Accounting Officer and Treasurer of Netword, Inc.
in September 1999. He is a certified public accountant and has served as the Executive
Vice President and Chief Financial Officer of Klineman Holding Corp. and various related
companies controlled by Mr. Klineman since 1982. He is a member of the American Institute
of Certified Public Accountants and Pennsylvania Institute of Certified Public
Accountants. Mr. Rubin holds a B.S. in Business Administration from the Pennsylvania
State University and a Certificate of International Studies from the University of
Heidelberg.
5
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Item 9.   Remuneration of
Directors and Officers.


The
table below provides the remuneration of our directors and officers for fiscal
year 2001.
|-------------------------------------------------------------------------------------------------------------------------------------------------

|                                       
|---------------------------------------
|
|                                       
|Michael L. Wise                        
|President, Chief Executive Officer,    
|Director                               
|                                       
|Kent M. Klineman                       
|Secretary, Director                    
|                                       
|Murray M. Rubin                        
|Chief Financial and Accounting Officer,
|Treasurer                              
|                                       
|Three highest paid officers and        
|directors as a group                   
|                                       

|(1) |  | Mr.
Klineman is paid a retainer for various administrative non-directorial services at the
monthly rate of $4,000.
|--- |  | ------------------------------------------------------------------------------------------------------------------

|Executive
officers serve at the discretion of our board of directors. None of our officers
has entered into employment agreements. Accordingly, our officers may leave, and
we may terminate them, at any time, with or without cause.



Item 10.   
Security Ownership of Management and Certain Security Holders.


Voting
Securities and Principal Holders Thereof


The
table below provides information as of March 25, 2002 with respect to shares of
our common stock held of record by:
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | the three highest paid persons who are officers;
| | - |  | ------------------------------------------------

| |  |  | all directors;
| | - |  | --------------

| |  |  | all directors and officers as a group; and
| | - |  | ------------------------------------------

| |  |  | each person, other than an officer or director, who we know owns more than 10% of our
outstanding common stock.
| | - |  | ---------------------------------------------------------------------------------------------------------------

|The
address for each stockholder is in our care at our principal offices. All
calculations in the table are based on 21,010,289 shares of common stock
outstanding. The amounts shown for each stockholder include shares underlying
currently exercisable options, warrants and convertible securities held by the
stockholder.
6
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Except
as otherwise indicated in a footnote to this chart, each stockholder has sole
voting and dispositive power with respect to the shares of common stock he
holds. The shares of common stock of each stockholder do not include shares held
by that persons spouse or children.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                         
|-----------------------------------------
|
|                                         
|Kent M. Klineman (1)                     
|                                         
|Michael Wise (2)                         
|                                         
|Murray M. Rubin (3)                      
|                                         
|All officers and directors as a group (4)
|                                         

|(1) |  | Mr.
Klineman is both an officer and a director. His shares include 797,705 shares underlying
currently exercisable options and 704,617 shares underlying currently exercisable
warrants.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Mr.
Wise is both an officer and a director. His shares include 1,119,265 shares underlying
currently exercisable options. Batya Wise, Mr. Wises spouse, beneficially owns 1,849,288
shares of common stock of which Mr. Wise disclaims beneficial ownership.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | Mr.
Rubin is an officer. His shares include 52,650 shares underlying currently exercisable
options and 32,873 shares underlying currently exercisable warrants. Nadine Rubin, Mr.
Rubins spouse, owns 100,195 shares of common stock of which Mr. Rubin disclaims
beneficial ownership.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) |  | Includes
1,969,620 shares underlying currently exercisable options and 737,490 shares underlying
currently exercisable warrants.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------

|Options,
Warrants and Rights.


The
table below provides information as of March 25, 2002 with respect to options,
warrants and rights to purchase shares of common stock which are held of record
by:
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | the three highest paid persons who are officers;
| | - |  | ------------------------------------------------

| |  |  | all directors;
| | - |  | --------------

| |  |  | all directors and officers as a group; and
| | - |  | ------------------------------------------

| |  |  | each person, other than an officer or director, who we know owns more than 10% of our
outstanding common stock.
| | - |  | ---------------------------------------------------------------------------------------------------------------

|All
of the options and warrants are currently exercisable. Shares underlying
warrants and options of each stockholder exclude shares underlying warrants or
options held by the named persons spouse or children. Except for warrants
for 3,200 shares held by Mr. Rubin, our Chief Financial and Accounting Officer,
all of which may be transferred only pursuant to exemption from registration
under the securities laws, none of the other warrants or options are
transferable except by will or the laws of descent and distribution.
7
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|The
expiration dates for the outstanding warrants and options are as follows:
|-----------------------------------------------------------------------------

| |  |  | warrants to purchase 3,200 shares of our common stock which are beneficially held by Mr.
Rubin expire on June 30, 2004
| | - |  | ----------------------------------------------------------------------------------------------------------------------

| |  |  | all other warrants expire on February 17, 2004
| | - |  | ----------------------------------------------

| |  |  | all options to purchase shares of common stock for $1.25 per share expire on February 17,
2004
| | - |  | ----------------------------------------------------------------------------------------------

| |  |  | options to purchase 50,000 shares of common stock for $1.50 per share expire on September
7, 2004
| | - |  | -------------------------------------------------------------------------------------------------

|                          
|--------------------------
|
|                          
|Kent M. Klineman          
|                          
|Michael Wise              
|                          
|Murray M. Rubin           
|                          
|                          
|All executive officers and
|directors as a group      
|                          

|There
are no other classes of common stock and no shares of preferred stock
outstanding. We have no parents. We own all of the shares of Rabbit Media, Inc.,
a Delaware corporation, which is our only subsidiary.



Item 11.   
Interest of Management and Others in Certain Transactions.


Certain
of our officers and directors received options to purchase shares of our common
stock and, as set forth in the above tables and footnotes, were paid other fees
through February 28, 2002. See Remuneration of Directors and
Officers in Item 9 on page 6 of this report.

8
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|PART II



Item 1.   Market Price of
and Dividends on the Registrants Common Equity and Other Shareholder Matters.


Our
common stock began trading in the over-the-counter-market on July 29, 1999 under
the symbol NTWD. Quotations were limited to the NQB Pink Sheets
until March 2, 2000, when trading began on the NASD Over the Counter Bulletin
Board. The following approximate high and low bid information for the common
stock is as reported by the National Quotation Bureau; the prices stated
represent inter-dealer quotations which do not include retail mark-ups,
mark-downs or commissions. Such prices do not necessarily represent actual
transactions. As of December 31, 2001, there were approximately 200 holders of
record of our common stock.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|               | Price
|-------------- | -----
|
|2000           |      
|First quarter  |      
|Second quarter |      
|Third quarter  |      
|Fourth quarter |      
|              
|2001           |      
|First quarter  |      
|Second quarter |      
|Third quarter  |      
|Fourth quarter |      

|Dividends


We
have not paid any cash dividends on our common stock to date and do not
anticipate declaring or paying any cash dividends in the foreseeable future. The
holders of common stock are entitled to dividends when declared by our board of
directors from legally available funds.



Item 2.   Legal
Proceedings.


In
June 1998, a former employee instituted an action against our predecessor in the
Circuit Court of Arlington, Virginia, to recover $69,281 by reason of claims
related to his resignation and other alleged items. That action has been
inactive since 1999 and we assume that it has been abandoned. We do not believe
that our financial exposure with respect to this action, or unsettled claims of
three other former employees, is material.
9
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Item 3.   
Changes in and Disagreements with Accountants.


None.



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


None.



Item 5.
   Compliance with Section 16(a) of the Exchange Act.


Netword
is not subject to the requirements of Section 16(a) of the Exchange Act.



Item 6.
   Reports on Form 8-K.


None.



10
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|PART F/S


The
financial statements listed in Part F/S are included in this report beginning on
page F-1.


PART III



Items 1 and 2.
   Index to Exhibits; Description of Exhibits.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Number |  | Exhibit
|------ |  | -------

|2.1(1) |  | Certificate
of Incorporation of Netword, Inc.
|------ |  | ---------------------------------------------

|2.2(1) |  | Bylaws
of Netword, Inc.
|------ |  | -----------------------

|2.3(1) |  | Certificate
of Merger between Netword LLC and Netword, Inc. dated February 18, 1999.
|------ |  | ------------------------------------------------------------------------------------

|2.4(1) |  | Agreement
and Plan of Merger between Netword, LLC and Netword, Inc. dated February 18, 1999.
|------ |  | --------------------------------------------------------------------------------------------

|3.1(1) |  | Form
of Warrant issued to members of Netword LLC in connection with the merger of Netword, LLC
and Netword, Inc.
|------ |  | ----------------------------------------------------------------------------------------------------------------

|3.2(1) |  | Form of Subscription Agreements executed in connection with the Rule 504 sale of
6,000,000 shares of common stock consummated on March 19, 1999.
|------ |  | ------------------------------------------------------------------------------------------------------------------------------------------------

|3.3(1) |  | Form of Subscription Agreement executed in connection with the Regulation S sale of
2,000,000 units consummated on March 19, 1999.
|------ |  | ----------------------------------------------------------------------------------------------------------------------------------

|3.4(1) |  | Form
of Warrant issued to purchasers in the Regulation S offering.
|------ |  | ------------------------------------------------------------------

|3.5(1) |  | Warrant
dated March 19, 1999 issued to Fulbright & Jaworski LLP.
|------ |  | ----------------------------------------------------------------

|3.6(1) |  | Convertible
note dated April 1, 1999 issued to Kronish Lieb Weiner & Hellman LLP.
|------ |  | ---------------------------------------------------------------------------------

|3.7(1) |  | Warrant
dated May 1, 1999 issued to Pryor, Cashman, Sherman & Flynn LLP.
|------ |  | ------------------------------------------------------------------------

|3.8(1) |  | Form of Subscription Agreement executed in connection with the Rule 506 sale of 782,000
units consummated on July 28, 1999 and August 5, 1999.
|------ |  | ----------------------------------------------------------------------------------------------------------------------------------------------

|3.9(1) |  | Form
of warrant issued to purchasers in the Rule 506 offering, to David Segal and to NorthStar
Capital Partners LLC
|------ |  | -------------------------------------------------------------------------------------------------------------------

|3.10(1) |  | Warrant
dated September 29, 1999 issued to Net2Phone, Inc.
|------- |  | ----------------------------------------------------------

|3.11(1) |  | Stock
option plan of Netword, Inc.
|------- |  | ----------------------------------

|3.12(1) |  | Form
of award letter for optionees.
|------- |  | -----------------------------------

|6.1(1) |  | Contract
regarding assignment of trademarks and trade names Netword and Netword, Inc.
|------ |  | -----------------------------------------------------------------------------------------

---

|(1) |  | Filed
as an exhibit to Netword, Inc.s registration statement on Form SB-1 (Commission File No.
333-86873) and incorporated herein by reference.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------

|11
|--

|SIGNATURES


In
accordance with the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on March 25, 2002.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | NETWORD,
INC.(Registrant)
| | -------------------------

| | By:
/s/ Michael L. WiseName: Michael L. WiseTitle: President and Chief Executive Officer
| | ----------------------------------------------------------------------------------------

|In
accordance with the requirements of the Securities and Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Signature | Title | Date
|--------- | ----- | ----

|/s/ MICHAEL L. WISE
Michael L. Wise | President and Chief Executive Officer,
                            Director | March 25, 2002
|--------------------------------------------- | --------------------------------------------------------------------------- | --------------

|/s/ MURRAY M. RUBIN
Murray M. Rubin | Chief Financial and Accounting
                            Officer, Treasurer | March 25, 2002
|--------------------------------------------- | ----------------------------------------------------------------------------- | --------------

|/s/ KENT M. KLINEMAN
Kent M. Klineman | Secretary, Director | March 25, 2002
|----------------------------------------------- | ------------------- | --------------

|12
|--

|NETWORD, INC.






Index
|-------------------------

|                                                                    | Page |    
|------------------------------------------------------------------- | ---- | ---
|Independent Auditors Report                                        |      | F-1
|                                                                   
|Consolidated Balance Sheet as of December 31, 2001                  |      | F-2
|                                                                   
|Consolidated Statements of Operations for the Years Ended           |     
|December 31, 2001 and 2000                                          |      | F-3
|                                                                   
|Consolidated Statements of Stockholders Equity for the Years Ended |     
|December 31, 2001 and 2000                                          |      | F-4
|                                                                   
|Consolidated Statements of Cash Flows for the Years Ended           |     
|December 31, 2001 and 2000                                          |      | F-5
|                                                                   
|Notes to Consolidated Financial Statements                          |      | F-6

|INDEPENDENT
AUDITORS REPORT


The Board of Directors and
StockholdersNetword, Inc.


We
have audited the accompanying consolidated balance sheet of Netword, Inc. and
subsidiary as of December 31, 2001, and the related consolidated statements of
operations, stockholders equity and cash flows for the years ended
December 31, 2001 and 2000. These financial statements are the responsibility of
the Companys manage ment. Our responsibility is to express an opinion on
these financial statements based on our audits.


We
conducted our audits in accordance with auditing standards generally accepted in
the United States of America. Those standards require that we plan and perform
the audits 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 consolidated financial position of
Netword, Inc. and subsidiary as of December 31, 2001 and the results of their
operations and their cash flows for the years ended December 31, 2001 and 2000,
in conformity with accounting principles generally accepted in the United States
of America.


/s/ Mahoney Cohen & Company, CPA, P.C.



New York, New YorkJanuary
23, 2002, exceptfor Footnote 12, as to whichthe date is February 12, 2002
F-1
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|NETWORD, INC. AND
SUBSIDIARYConsolidated Balance SheetDecember 31, 2001
|-----------------------------------------------------------------------

|                                                     |  |                  |  
|---------------------------------------------------- |  | ---------------- | -
|ASSETS                                              
|Current assets:                                      | 
|Cash                                                 |  | $   1,407,151    |  
|Prepaid expense                                      |  | 2,329            |  
|                                                     |  |                 
|Total current assets                                 |  | 1,409,480        |  
|Property and equipment, net (Note 3)                 |  | 6,069            |  
|Trademark, net                                       |  | 27,883           |  
|                                                     |  |                 
|                                                     |  | $   1,443,432    |  
|                                                     |  |                 
|LIABILITIES AND STOCKHOLDERS EQUITY                
|Current liabilities:                                 | 
|Current portion of long-term liability (Note 4)      |  | $          4,800 |  
|Convertible note payable (Note 5)                    |  | 23,303           |  
|Loans payable (Note 6)                               |  | 33,027           |  
|Accounts payable                                     |  | 120,521          |  
|Due to shareholders                                  |  | 52,500           |  
|                                                     |  |                 
|Total current liabilities                            |  | 234,151          |  
|                                                    
|Long-term liability, net of current portion (Note 4) |  | 22,334           |  
|                                                    
|Note payable (Note 7)                                |  | 31,532           |  
|                                                    
|Commitments and contingencies (Note 11)              | 
|                                                    
|Stockholders equity:                                | 
|Common stock, $.01 par value:                        | 
|Authorized - 40,000,000 shares                       | 
|Issued and outstanding - 19,348,083 shares           |  | 193,481          |  
|Additional paid-in capital                           |  | 10,206,723       |  
|Accumulated deficit                                  |  | (9,244,789       | )
|                                                     |  |                 
|Total stockholders equity                           |  | 1,155,415        |  
|                                                     |  |                 
|                                                     |  | $   1,443,432    |  
|                                                     |  |                 

|See accompanying notes.



F-2
|------------------------------

|NETWORD, INC. AND
SUBSIDIARYConsolidated Statements of Operations
|-----------------------------------------------------------------

|                                             | Year Ended December 31,
|-------------------------------------------- | -----------------------
|
|Sales                                        |                        
|                                            
|Selling, general and administrative expenses |                        
|                                             |                        
|Operating loss                               |                        
|                                            
|Interest and dividend income                 |                        
|                                             |                        
|Net loss                                     |                        
|                                             |                        
|Basic and diluted loss per common share      |                        
|                                             |                        
|Weighted average number of shares            |                        
|outstanding                                  |                        
|                                             |                        

|See accompanying notes.



F-3
|------------------------------

|NETWORD, INC. AND
SUBSIDIARYConsolidated Statements of Stockholders Equity
|---------------------------------------------------------------------------

|                                       | Common Stock | AdditionalPaid-In | Accumulated | Subscrip-tions Re- | TotalStock-holders
|-------------------------------------- | ------------ | ----------------- | ----------- | ------------------ | -------------------
|
|Balance, January 1, 2000               |              | 16,923,924        |             | $169,239           |                    
|                                      
|Exercise of warrants                   |              | 1,642,159         |             | 16,422             |                    
|                                      
|Redemption of warrants                 |              |                  |             |                   |                    
|                                      
|Issuance of stock options and warrants |             
|for consulting, legal and marketing    |             
|services                               |              |                  |             |                   |                    
|                                      
|Reclassification of redeemable         |             
|common stock and common                |             
|stock warrants to stockholders        |             
|equity, net of offering costs          |              | 782,000           |             | 7,820              |                    
|                                      
|Net loss                               |              |                  |             |                   |                    
|                                       |              |                   |             |                    |                    
|Balance, December 31, 2000             |              | 19,348,083        |             | 193,481            |                    
|                                      
|Write-off subscription receivable      |              |                  |             |                   |                    
|                                      
|Net loss                               |              |                  |             |                   |                    
|                                       |              |                   |             |                    |                    
|Balance, December 31, 2001             |              | 19,348,083        |             | $193,481           |                    
|                                       |              |                   |             |                    |                    

|See accompanying notes.



F-4
|------------------------------

|NETWORD, INC. AND
SUBSIDIARYConsolidated Statements of Cash Flows
|-----------------------------------------------------------------

|                                                                            | Year Ended December 31,
|--------------------------------------------------------------------------- | -----------------------
|
|Net loss                                                                    |                        
|Adjustments to reconcile net loss to net cash used in operating activities: |                        
|Issuance of stock options and warrants for consulting,                      |                        
|legal and marketing services                                                |                        
|Depreciation and amortization                                               |                        
|Amortization of prepaid expense                                             |                        
|Interest on convertible note payable                                        |                        
|Interest on note payable for legal services                                 |                        
|Change in assets and liabilities:                                           |                        
|Prepaid expenses                                                            |                        
|Accounts payable                                                            |                        
|Due to shareholders                                                         |                        
|                                                                            |                        
|Net cash used in operating activities                                       |                        
|                                                                            |                        
|Cash flows used in investing activities:                                    |                        
|Acquisition of property and equipment                                       |                        
|                                                                            |                        
|Cash flows from financing activities:                                       |                        
|Redemption of warrants                                                      |                        
|Exercise of warrants                                                        |                        
|Principal payments of long-term liability                                   |                        
|                                                                            |                        
|Net cash provided by (used in) financing activities                         |                        
|                                                                            |                        
|Net decrease in cash                                                        |                        
|Cash, beginning of year                                                     |                        
|                                                                            |                        
|Cash, end of year                                                           |                        
|                                                                            |                        
|Supplemental Schedule of Non-Cash Investing and Financing Activities        |                        
|                                                                           
|Exchange of note payable for accounts payable                               |                        
|                                                                            |                        
|Reclassification of redeemable common stock and                             |                        
|common stock warrants, net of offering cost                                 |                        
|                                                                            |                        
|Write-off subscription receivable against                                   |                        
|Additional paid-in capital                                                  |                        
|                                                                            |                        
|Increase in trademark for long-term liability                               |                        
|                                                                            |                        

|See accompanying notes.



F-5
|------------------------------

|NETWORD, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements


Note 1  Basis of
Presentation and Summary of Significant Accounting Policies


Principles
of Consolidation


The
accompanying consolidated financial statements include the accounts of Netword, Inc. (Netword)
and its wholly-owned subsidiary, Rabbit Media, Inc. (Rab bit), incorporated
on August 21, 2001, (collectively, the Company). All significant intercompany
balances and transactions have been eliminated in consolidation.


Nature
of Business


The
Company owns and operates an Internet utility known as the Netword System, which it
believes, offers a comprehensive solution to problems created by a lack of
consumer-friendly addresses, or URLs, for Internet resources (see Note 12).


In
February 2001, the Company commenced development of a custom online digital media player
directed at the entertainment and media industries. Online digital media players may be
downloaded from the Internet to personal computers to play video and/or audio files from
those computers. The Company commenced marketing its media player in the fourth quarter
of 2001; however, to date, no revenues have been generated from it (see Note 12).


Use
of Estimates


The
preparation of financial statements in conformity with accounting princi ples generally
accepted in the United States of America 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 revenue and expenses during the reporting period. Actual results
could differ from those estimates.


Property
and Equipment


Property
and equipment is recorded at cost. Furniture and fixtures and computer equipment are
depreciated using an accelerated method over the estimated useful lives of the related
assets, ranging from three to five years. Major additions and betterments are capitalized
and repairs and maintenance are charged to operations in the period incurred.
F-6
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|NETWORD, INC. AND SUBSIDIARYNotes to
Consolidated Financial Statements


Note 1  Basis of
Presentation and Summary of Significant Accounting Policies (Continued)


Trademark


The
trademark is stated at cost and is amortized using the straight-line method over ten
years. The trademark is reported net of accumulated amortization of $27,883 at December
31, 2001.


Income
Taxes


The
Company accounts for deferred income taxes using the liability method. Deferred income
taxes are measured by applying enacted statutory rates to net operating loss
carryforwards. Deferred tax assets are reduced, if necessary, by a valuation allowance
for any tax benefits which are not expected to be realized.


Basic
and Diluted Loss Per Share


The
Company calculates net income (loss) per share, as required by State ment of Financial
Accounting Standards No. 128, Earnings Per Share (SFAS 128). SFAS
128 replaced the calculation of primary and fully diluted EPS with a presentation of
basic EPS and, if applicable, diluted EPS. Basic EPS excludes dilution and is computed by
dividing income available to common shareholders by the weighted average number of common
shares outstanding for the period. Diluted EPS reflects the potential dilution that could
occur if securities or other contracts to issue common stock were exercised or converted
and the resulting additional shares are dilutive because their inclusion decreases the
amount of EPS. The effects on loss per share of the Companys outstanding options
are antidilutive and therefore not included in the calculation of the weighted average
number of common shares outstanding.


Fair
Value of Financial Instruments


The
Company applies the provisions of Statement of Financial Accounting Standards No. 107,
Disclosures about Fair Value of Financial Instruments (SFAS 107).
SFAS 107 requires entities to disclose the fair value of financial instruments, both
assets and liabilities recognized and not recognized on the balance sheet, for which it
is practicable to estimate fair value. SFAS 107 defines fair value of a financial
instrument as the amount at which the instrument could be exchanged in a current
transaction between willing parties. At December 31, 2001, management believes the fair
value of all financial instruments approximated carrying value.
F-7
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|NETWORD, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements


Note 1  Basis of
Presentation and Summary of Significant Accounting Policies (Continued)


Stock-Based
Compensation


The
Company applies the provisions of Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation, (SFAS No. 123) which
requires entities to recognize as expense over the vesting period the fair value as of
the date of grant of all stock awards. Alternatively, SFAS No. 123 allows entities to
apply the provisions of Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations, and to
provide pro forma net income and pro forma net income per share disclosures for employee
stock option grants as if the fair-value-based method defined in SFAS No. 123 had been
applied. The Company has elected to apply the provisions of APB Opinion No. 25, under
which compensation expense would be recorded on the date of grant only if the current
market price of the underlying stock exceeded the exercise price, and provide the pro
forma disclosure provisions of SFAS No. 123 in its financial statements (see Note 8).


Impairment
of Long-Lived Assets


In
accordance with Statement of Financial Accounting Standards No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, (SFAS
No. 121), long-lived assets are evaluated for possible impair ment through a review
of undiscounted expected future cash flows. The carrying value of a long-lived asset is
considered impaired if the sum of the undiscounted expected future cash flows is less
than the carrying amount of that asset. In that event, a loss is recognized based on the
amount by which the carrying value exceeds the fair market value of the long-lived
assets.


New
Accounting Pronouncement


In
July 2001, the Financial Accounting Standards Board (FASB) issued SFAS no.
144, Impairment or Disposal of Long-Lived Assets which is effective for fiscal
years beginning after December 31, 2001. The provisions of this statement provide a
single accounting model for impairment of long-lived assets. The Company is currently
assessing the impact of this new standard.


Advertising
and Marketing Expenses


Advertising
and marketing expenses are charged to operations in the period in which the advertising
first takes place. Advertising expenses amounted to approximately $323,800 and $401,000
for the years ended December 31, 2001 and 2000, respectively.

F-8
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|NETWORD, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements


Note 1  Basis of
Presentation and Summary of Significant Accounting Policies (Continued)



Research
and Development


Research
and development costs amounted to approximately $283,000 and $273,000 for the years ended
December 31, 2001 and 2000, respectively.


Reclassification


Certain
amounts reported in the 2000 financial statements have been reclassified to conform with
the 2001 presentation.


Note 2  Concentration
of Credit Risk


The
Company maintains cash balances at several banks and one stock brokerage firm.
Accounts at each bank are insured by the Federal Deposit Insurance Corporation
up to $100,000. Balances at the stock brokerage firm are insured up to $500,000
(with a limit of $100,000 for cash) by the Securities Investor Protection
Corporation.


Note 3  Property and
Equipment


At
December 31, 2001, property and equipment consists of:
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Furniture and fixtures          |  | $  29,725  | 
|------------------------------- |  | ---------- | 
|Computer equipment              |  | 137,229    | 
|                                |  |           
|                                |  | 166,954    | 
|Less:  Accumulated depreciation |  | 160,885    | 
|                                |  |           
|                                |  | $    6,069 | 
|                                |  |           

|Note 4  Long-Term
Liability


The
Company assumed a long-term liability related to the purchase of the Netword
trademark that is payable in annual installments of $4,800 until April 30, 2003.
Thereafter, the Company is obligated to pay the seller annual installments of
$3,000 during her lifetime and has recorded that obligation based upon actuarial
table assump tions of sellers life expectancy discounted to present value
at the time the trademark was purchased.
F-9
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|NETWORD, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements


Note 5  Convertible
Note Payable


In
April 1999, the Company issued a $20,000, 6% Convertible Note, due March 31,
2002 in exchange for legal services. Such note is convertible into common stock
at $1 per share at the option of the holder of the note at any time. At December
31, 2001, the note included $3,303 in accrued interest.


Note 6  Loans Payable


At
December 31, 2001, the Company had $33,027 of loans payable to individuals who
did not fully fund their subscriptions to a 1997 commitment.


Note 7 
Note Payable


On
March 1, 2001, Netword issued a $30,000, 6% Promissory Note due March 31, 2003
in exchange for a trade account payable. At December 31, 2001, the note included
$1,532 in accrued interest.


Note 8  Options


The
weighted average Black-Scholes value of options granted under the stock option
plans during 2000 was $.80. Value was estimated using a weighted average
expected life of five years, volatility of .84, expected dividend 0 and
risk-free interest rate of 5%. No options were granted during 2001.


The
Black-Scholes model was developed for use in estimating the fair value of traded
options which have no vesting restrictions and are fully transferable. In
addition, option valuation models require the input of highly subjective
assumptions, including the expected stock price volatility. Because the
Companys options have characteristics significantly different from those
of traded options and because changes in the subjective input assumptions can
materially affect the fair value estimate, in managements opinion, the
existing models do not necessarily provide a reliable single measure of the fair
value of its managers and key employee options.

F-10
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|NETWORD, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements


Note 8  Options
(Continued)


The
Company follows Accounting Principles Board Opinion 25, Accounting for Stock Issued to
Employees, to account for stock option and employee stock purchase plans. An alternative
method of accounting for stock options is SFAS 123, Accounting for Stock-Based
Compensation. Under SFAS 123, employee stock options are valued at grant date using the
Black-Scholes valuation model, and this compensation cost is recognized ratably over the
vesting period. Had compensation cost for the Companys stock option and employee
stock purchase plans been determined as prescribed by SFAS 123, pro forma income
statements for 2001 and 2000 would have been as follows:
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                             | 2001 | 2000               
|---------------------------- | ---- | -------------------
|Pro forma net loss           |      | $   (1,589,510     
|Pro forma net loss per share |      | $              (.08

|A
summary of applicable option activity and related information for the years
ended December 31, 2001 and 2000 is as follows:
|-----------------------------------------------------------------------------------------------------------------------------

|                               | 2001 | 2000     
|------------------------------ | ---- | ---------
|
|Outstanding, beginning of year |      | 5,121,222
|Granted                        |      |         
|Exercised                      |      |         
|Forfeited                      |      | (75,000  
|                               |      |          
|Outstanding, end of year       |      | 5,046,222
|                               |      |          
|Exercisable, end of year       |      | 5,046,222
|                               |      |          

|The
weighted-average fair value of options granted during 2000 was $2.42. Exercise
prices for options outstanding as of December 31, 2001 ranged from $.17 to
$5.00. These options expire at various times through August 2005.


Note 9  Income Taxes


At
December 31, 2001, the Company has a federal net operating loss carryforward to
reduce future taxable income of approximately $4,655,000. The net operating loss
carryforward expires through 2021.


At
December 31, 2001, the Company has a deferred tax asset of approxi mately
$1,908,550 representing the benefits of its net operating loss carryforward. The
Company has not recorded a benefit from its net operating loss carryforward
because realization of the benefit
is uncertain and therefore a valuation allowance has been fully provided against
the deferred tax asset.


F-11
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|NETWORD, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements



Note 10 
Equity Transactions


In
March 2000, the Company issued warrants and options to an individual to purchase
300,000 shares of the Companys common stock at a price of $2.00 per share
and $.79 per warrant. At the date of the agreement using the Black-Scholes
option pricing method, such warrants and options were valued at $236,000. In
addition, the Company paid $250,000 to this individual for services rendered
which has been amortized over the term of the contract.


In
2000, the Company issued warrants to purchase 18,590 shares of the
Companys common stock at prices ranging from $.57 to $1.25 per share.
Using the Black-Scholes option pricing method, such warrants were valued at
$18,397.


Note 11  Commitments
and Contingencies


Operating
Lease


The
Company leases an office under a non-cancellable operating lease expiring in
2003. Future minimum lease payments are as follows:
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Year EndingDecember 31, |  |        
|----------------------- |  | -------
|2002                    |  | 43,000 
|2003                    |  | 33,000 
|                        |  |        
|                        |  | $76,000
|                        |  |        

|Rent
charged to operations for the years ended December 31, 2001 and 2000 was
approximately $43,000 and $40,000, respectively.


Litigation


In
June 1998, a former employee brought an action against the Company in the
Circuit Court of Arlington, Virginia, seeking approximately $70,000 for issues
related to his resignation from the Company. That action is currently inactive
and the Company assumes that it has been abandoned. The Company does not believe
that its financial exposure with respect to the said action, or unsettled claims
of three other former employees, is material.
F-12
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|NETWORD, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements


Note 12 
Subsequent Events


Option
Repricing


On
January 2, 2002, the Companys Board of Directors reduced the exercise
price of options to purchase 2,284,384 shares of Netword common stock from
$0.1666 per share to $0.125 per share, the fair market value of those shares on
that date, as represented by their closing price. Thereafter, options to
purchase 1,662,206 shares of Netword common stock subject to the repriced
options were exercised, including options to purchase 1,526,072 shares exercised
by officers and directors of the Company. On February 17, 2002, the remaining
repriced options expired unexercised.


Restructuring
of Operations


On
January 31, 2002, the Company terminated all of its employees, relocated its
Internet server equipment to its Gaithersburg, Maryland facility, and retained
consultants to maintain the Netword System. These actions resulted in a
significant reduction of overhead and effectively terminated marketing and sales
efforts for the Netword System and the Rabbit Media Player.


On
February 12, 2002, the Company announced that is had decided to offer its
Netword System for sale because of its inability to successfully market that
system and the lack of sufficient resources to defend its patented intellectual
property. The Company subsequently decided to offer its Rabbit Media Player
technology and related intellectual property for sale as well. To date there are
no immediate prospects of a sale of either system.


Investment
in Home Director


On
February 12, 2002, the Company announced that it had made a $270,000 investment
in Home Director, Inc. (Home Director) with a view to a possible
merger of the two companies. The Company received a $270,000 one-year secured
promissory note and warrants to purchase Home Director common stock. The
promissory note and warrants would be cancelled if a merger were completed. Home
Director is a private company that develops, markets, installs and services
systems that control delivery and distribution of electronic content in private
homes.


Since
the announcement, the parties have actively negotiated the terms of a proposed
merger agreement which contemplates that Home Director would be merged with a
newly-formed subsidiary of the Company and the stockholders of Home Director
would receive shares of the Companys common stock in exchange for their
shares of Home Director stock. Certain material terms of the proposed merger
agreement remained under discussion.



If
and when the parties agree on the remaining terms, a definitive merger agreement
is expected to include a number of material conditions, including SEC
registration, stockholder approvals, restructuring of certain of Home
Directors liabili ties, and the obtaining of additional financing by Home
Director. If a merger is com pleted, the shares owned by Networds current
stockholders would represent a minority, and probably less than 15%, of
Networds outstanding stock after the merger, persons designated by Home
Director would represent a majority of Networds board of directors, and
Netword would continue Home Directors current business as its primary
business activity.



F-13
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------