|SECURITIES
AND EXCHANGE COMMISSIONWashington,
D.C. 20549


Form 10-KSB


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


For The
Fiscal Year Ended December 31, 2000


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.)


702 Russell Avenue,
Third FloorGaithersburg, MD 20877(Address of principal executive offices)


Registrants telephone
number, including area code: 1-800-NETWORD


Securities registered
under Section 12(b) of the Exchange Act: None Securities 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: $12,405


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 27, 2001: $3,617,300. 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 19,348,083 shares of common stock of the registrant outstanding as of March 27, 2001.


Transitional
Small Business Disclosure Format (check one): Yes _x_  No ___
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

|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.


The
Netword System is currently available and in use, but our business is still in
an early stage. We expect to earn revenues from payments by owners of e-commerce
sites for traffic referred to their sites by Netword users, registration of
specific Networds by commercial Web resource owners, payments by these owners
for hits on their sites, sales of banner ads and other advertising on our Web
site, and expanded service offerings.


Our
principal offices are located at 702 Russell Avenue, Gaithersburg, Maryland
20877. Our telephone number is 1-800-NETWORD.


As
used in this report, the terms we, us and
Netword refer to Netword, Inc. and its predecessors, unless the
context otherwise requires.


Recent
Development


On
March 15, 2001 the United States Court of Appeals for the Federal Circuit upheld
the decision of the U.S. District Court for the Eastern District of Virginia
granting RealNames Corporations motion for summary judgement and holding
that the RealNames System did not infringe upon our first patent. See Part II,
Item 2,  Legal Proceedings on page 19 of this report.
1
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|The Netword
System


We
believe that the continued growth of the Internet, resulting in the
proliferation of its resources and increasing use of complex,
unfriendly URLs, has created a business opportunity for Internet
keyword systems. The Netword System was developed to take advantage of this
opportunity. As the Netword System is conceived and operated, all Internet users
may use Networds without charge to reach any Internet resource. Anyone can
create, reserve and register Networds, without charge in the case of FREE
Networds, or for reasonable fees in the case of Registered Networds, to
facilitate direct access to any Internet resource. See Registration of
Networds at page 6 of this report.


Internet
users merely enter an existing Netword, like Baltimore Ravens or The West Wing, in any
Netword-enabled browser or Netword slot and are promptly transferred to the Internet
address corresponding to that Netword. If the entry is not an existing Netword, the
Netword System offers Internet users a variety of options, including the use of search
engines to seek out URLs employing the entered term and an ability to create a Netword
for the specific Internet address.


Internet
users may enter Networds in Netword-enabled browsers, at www.netword.com, Netword slots
at sites of entities operating under various agreements with us, or in a Netword-enabled
slot at a users home page. Users can Netword-enable their browsers or homepages by
installing our free software, which is available as a one-minute download from our Web
site. After our software is installed, Internet users can access any Web site for which a
Netword exists, or for which they create FREE Networds, by entering the Netword in their
browsers.


An
early version of the Netword System was introduced on the Internet in May 1997,
and we have continued to improve it. Until recently, however, we lacked the
resources to market Networds, and we employed only limited advertising and
promotional activities in 2000.


During 2000, our
promotional strategy focused on: (i) establishing relationships (the
Affiliate Program) with entities that agree to promote Networds from
their Web sites in exchange for a share of our revenues derived from Netword
usage from those sites; (ii) affiliations with e-commerce companies who pay us
for referrals to their Web sites and/or commissions on sales from those
referrals; and (iii) promoting the use of the Netword System through public
relations, trade shows, and targeted advertising featuring Leonard Nimoy of Star
Trek® fame as our spokesman.


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.
2
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|Industry
Background


According
to recent data from the Internet Software Consortium (http://www.isc.org/), the
number of top-level Internet domains names (TLD) has grown in the
last ten years from approximately 350,000 to more than 93 million, with the rate
of growth in domain registrations accelerating exponentially each year. Each of
those TLDs has anywhere from a small number to hundreds or even thousands of
pages of online content. Accordingly, even conservative estimates would show at
least three billion accessible pages online that have a potential to be reached
with Networds.


In
spite of changes in the public market valuation of Internet companies, Forrester
Research, Inc. still estimates that worldwide electronic commerce will reach nearly $7
trillion by 2004, and digital marketing - multifaceted marketing campaigns that integrate
online advertising, promotions, and email strategies - will reach $63 billion annually by
2005. Forrester expects online advertising alone to rise to $42 billion worldwide in the
same time frame.


With
the tremendous growth in volume of available information and money at stake in
the electronic marketplace, we believe that tools for enhancing the ability of
businesses to target consumers and analyze their behaviors should become more
valuable.


The Netword
Opportunity and Solution


We
expect that the increased size and use of the Internet will create a heightened
demand for fast, easy and direct access to Web resources. The proliferation of
complex URLs presents obstacles to satisfaction of this demand.


The
protocol currently governing the registration of TLDs requires inclusion of
.com or another suffix in every URL that identifies them. Creating a
separate TLD for every resource is theoretically possible, but not practical
because of constraints resulting from how the Internet is administered and the
systems under which it operates. In addition, recently, new TLDs have been
authorized, which will only increase the confusion for users and add
difficulties for TLD name registrants.


Below
the level of the TLD names, the volume of information available on many Web
sites, and the methods of indexing and accessing that information, has lead to
the creation of various hierarchies and other means of identifying and
organizing online content. This layering of resources within sites
can result in very long URLs often including, in addition to alphanumeric
characters, slashes, tildes, question marks and ampersands. As these URLs become
increasingly lengthy and complex, they become increasingly difficult to
remember, write and share, and are subject to greater risk of inaccurate
entries.
3
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|It
seems obvious that commercial Web resource owners can benefit from keyword
systems that simplify the names by which customers can identify and access their
resources.


We
believe Networds is a keyword system that offers an efficient and affordable
solution. With the Netword System, commercial Web resource owners can identify
each of their resources with a Netword, which may be a familiar and easy to
remember company, product, brand, slogan or service name. Entry of Networds
provides direct access to the corresponding Web resources.


Creating
Networds


Users
may create or edit Networds for any URL at our Web site by following a simple
online procedure. FREE Networds may be created without charge; however, they are
preceded with an asterisk (*) to distinguish them from Commercial Networds and
Registered Networds. Commercial Networds are created by us and directed to
e-commerce sites based upon our agreements with those sites. Registered Networds
may be created by owners of Internet resources who open an account with us by
following a registration procedure described at our Web site.


To create a Netword:
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  |  | Users
enter proposed Networds in our database by following simple online instructions at our
Web site.
| |  | - |  | ------------------------------------------------------------------------------------------------------

| |  |  |  | If
a proposed Netword is not available, either because of trademark restrictions or its
prior usage designating another URL, the Netword System immediately reports the conflict
and offers the applicant an option to propose an alternative.
| |  | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  |  | Creation
of new Networds are immediately confirmed to users in their browsers and by e-mail and
the new Netword is available instantly to all Internet users.
| |  | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  |  | Users
who create Networds can visit our Web site at any time and edit them online.
| |  | - |  | ----------------------------------------------------------------------------------

|Our Terms
and Conditions are printed at our Web site and explain, among other things, that
Networds can be registered on a priority basis by countries, government
agencies, established companies, public figures, and registered holders of
trademarks, service marks, and other similar intellectual property rights.
Subject to these and other priorities, Networds can be registered on a
first-come, first-served basis.


To
support our policy of attempting to protect registered trademarks and trade
names, before a Netword is created, we conduct a rapid online search of U.S.
Patent and Trademark Office files to determine if the use of a proposed Netword
conflicts with a federally registered trademark or trade name. However, we do
not conduct any other independent investigation, such as an investigation of
registered corporate or other business names or state trademark or trade name
filings, to seek out potentially conflicting rights to the use of a proposed
Netword. However, our Terms and Conditions provide us with broad rights to
revoke Netword registrations without notice or refund if trademark infringement
or fraud of any kind is discovered.
4
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Registration
of Networds


Owners
of Web resources can register a Netword for any URL at $30 per year; however,
volume discounts are available. Subcategories of Networds (Branch
Networds) can be registered for $10 per Netword per year. For example, the
Branch Netword Netword/Directions is just $10 per year, rather than
$30 for Netword Directions. Registrants also agree to pay us $0.03
per Netword resolution, or hit, in excess of 1,000 hits per month.
Networds are registered on a first-come first-served basis, subject to our Terms
and Conditions.


Revenues,
Expenses, Extent of Netword Usage and Research and Development Expenditures


Our
operating revenues for the fiscal years ended December 31, 2000 and 1999 were
$12,405 and $11,431, respectively and were derived primarily from Netword
registrations. In addition, for the 2000 and 1999 fiscal years, we had interest
income of $184,088 and $110,844, respectively.


Our
operating expenses for the fiscal years ended December 31, 2000 and 1999 were
$3,395,058 and $1,615,439, respectively, and non cash expenses included
amortization of the Net2Phone warrants (see Significant Marketing
Relationships) in the amounts of $1,125,000 and $375,000 for 2000 and 1999,
respectively.


Approximately
two (2) million Networds are available on the Netword System. Specifically:
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | Customers have created about 2,000 Registered Networds in our database.
| | - |  | -----------------------------------------------------------------------

| |  |  | We have created about 1.3 million Commercial Networds in our database on behalf of sites (Referral
Sites) with whom we have commercial arrangements. We receive payment from those
sites when Commercial Networds direct users to them (Pay Per Click), or when
those users make purchases from them (Pay Per Sale).
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | We have created about 100,000 useful Networds (Seed Networds) in our database
that provide links to a number of large U.S. businesses, TV and radio stations and
programs, publications, products, government sites, recent movies, sports teams, and
other well-known names. We receive no payment for the creation or use of Seed Networds,
which are created to make the Netword System more usable.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | Internet users have created about 600,000 FREE Networds. In late 2000, an asterisk (*)
was added to all FREE Networds to distinguish them from other types of Networds. This was
done to enhance the quality of our database and to expand the variety of possible
Networds that can be created.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|5
|-

|Over
the four fiscal years ended December 31, 2000, we spent approximately $1,209,000
for research and development.


Marketing
Strategy


Our
marketing strategy is to promote the convenience of creating and using Networds
for Internet users, while simultaneously developing relationships with other
sites that can expand the awareness of Networds and their use for Internet
navigation or create revenue-generation opportunities for us. As substantial
numbers of Internet users come to understand the benefits of Networds, we also
plan to market that information to owners of commercial Web resources willing to
pay our fees for registering Networds for their resources.


In
addition to engaging in a limited amount of advertising, to implement our
marketing strategy, we have created the following programs:
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | The Affiliate Program (AP)  Members of the AP agree to place a Netword Slot
on their site and to provide links for downloads of our free software and Netword
registrations. AP members are paid fees for the use of Commercial Networds and Registered
Networds from their sites and for Registered Networds created by users they refer to us.
Selected current AP members are: Net2Phone, The New Internet Computer Company, (NIC;
co-founded by Larry Ellison, CEO of Oracle), Keconnect an ISP in the United Kingdom,
Intelliquis, Chilliware, Valadeo and GetMy.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | The Media Affiliate Program (MAP)  Members of MAP enhance navigation of
their sites with a Netword Slot. They point traffic to their sites from their offline
media, including television, radio and magazines. MAP members are eligible for fees
similar to those available to AP members. MAP members also generally receive a limited
number of free Registered Networds and additional payments for offline advertising and
promotion we agree to. Selected current MAP members are: MacWorld, Upside, TechTV
(formerly ZDTV), Mac Design Magazine and Photoshop User Magazine.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | The Referral Program (RP)   RP members are e-commerce sites who pay us for
traffic on a Pay Per Clickor Pay Per Salebasis. Commercial
Networds are pointed at RP sites based upon our assessment of suggestions from the RP
member and other factors. Selected current RP members are: eBay, Amazon.com, CD Now,
OfficeMax, PetSmart, Proflowers, Gamesville, CNET and NetRadio.com.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Apart
from press releases, articles about us in trade publications, and some publicity
generated by Leonard Nimoy, our corporate spokesman, there has not been
significant publicity about the Netword System.
6
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Significant
Marketing Relationships


Net2Phone
Agreement.In connection with our efforts to expand the distribution of
Networds, in September 1999, we entered into an agreement with Net2Phone, Inc.
under which a newly developed version of our free software began shipment in
early 2000 with Net2Phone software. Net2Phone software enables low-cost high
quality calls to be placed from computers, telephones or fax machines to any
telephone or fax machine worldwide.


Under
our agreement, Net2Phone received rights to freely register Networds to
facilitate use of its system. This agreement also provides that Net2Phone is
responsible for maintaining a database of URLs and associated phone numbers and
is entitled to 50% of all revenues attributable to the registration and use of
Networds sourced from the Net2PhoneWeb site. The agreement had an initial
one-year term, which expired in September 2000, and was renewed automatically
for an additional one-year term at that date. The agreement is renewable for
additional one-year terms at successive future expiration dates. Under this
agreement, Net2Phone received warrants to acquire up to 15% of our fully-diluted
common stock for approximately $3 million.


TechTV
Agreement. InSeptember 2000, we entered into a one-year agreement with
ZDTV, LLC (the corporate predecessor to TechTV) that is automatically renewable
for additional one-year terms, unless either party elects not to renew it. Under
this agreement, TechTV promotes the use of Networds in a variety of ways,
including its Web site by displaying a Netword slot, in newsletters to members,
and on its TV programs (both editorially and through broadcasting our
advertisements). Under this agreement, we pay TechTV $20,000 per month plus
commissions for the use of Commercial Networds and Registered Networds from its
site, and the referral of Registered Networds to us.


Mac
Publishing Agreement. In July 2000, we entered into an agreement with Mac
Publishing LLC, the leading publisher of magazines and online information for
the Apple Macintosh computer. Under this agreement, Mac Publishing promotes the
use of Networds by displaying a Netword slot on the home page of its
macworld.com Web site, and by including our advertising materials in its
magazines and on its Web sites. Mac Publishing has also included our free
software for the Apple Macintosh on several million CDs that have been included
with its magazines and distributed at trade shows. Under this agreement, we paid
Mac Publishing $40,000 over a three-month period, commencing November 1, 2000
(the Start Date) when our advertisements first appeared in MacWorld
Magazine. In addition, for six months after the Start Date, Mac Publishing is
entitled to receive commissions for the use of Commercial Networds and
Registered Networds from their sites.


Netword
Search; the My Networds Program


Our
Netword search facility displays possible Netword matches when users enter in
Netword slots and Netword-enabled browsers words, phrases or other character
sequences that are not in our database. This search facility encourages use of
Commercial Networds by giving them premium placements in search results.
7
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|The
My Networds program is available on our Web site and enables users
to view and edit their FREE Networds from any Internet-connected computer and to
catalog their favorite Networds for easy reference. The My Networds Program is
free to all users.



Netword System
Components


The
Netword System runs on a cluster of company-owned computers installed at the
Sterling, Virginia facility of Exodus Communications, Inc., a tier-1
communications and co-location provider. We also maintain a back-up cluster of
computers at our Maryland offices. Our current services agreement with Exodus
expires on August 23, 2001. The cost of this services agreement was $4,830 per
month through December 2000; however, in mid-January 2001, it was reduced to
approximately $1,800 per month due to a reassessment of our technical
requirements. This services agreement provides us with round-the-clock Internet
connectivity, manned security, fire suppression, uninterruptible power, and
network and server monitoring.


Most
of the non-proprietary components of the hardware and operations software in the
Netword System are generally available from conventional commercial sources. The
custom program software for the Netword System is written by our senior software
engineers and maintained in a version control database that is backed up and
stored in a secure facility. Although we rely on our current senior software
engineers for programming and maintenance of our proprietary software, we
believe we can find comparable additional and/or substitute engineers if and
when we need them.


We
believe that the operation of the Netword System is subject to minimal security
risks. Our computer cluster is accessible only through layered passwords, and is
secured with firewall hardware and software and other protective devices. If a
fire or other major disaster were to destroy our co-location providers
facility, we believe that we could provide an effective substitute service
within 24 to 48 hours through the computers at our offices and could return to
100% capacity with an alternate co-location provider within one to two weeks. If
one of the computers in a cluster fails, the other computers have the capacity
to serve as an immediately effective substitute. We have established a firewall
that limits access to the Netword System and helps to insulate it from viruses;
we also use e-mail products that are not susceptible to many of the recently
publicized e-mail viruses such as I Love You and Anna
Kournikova.
8
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|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. See Part II, Item 2  Legal
Proceedings on page 22 of this report.


On
August 8, 2000 we were issued a second patent, No. 6,101,537, which further
clarifies and amplifies the unique intellectual property of the Netword System.
This second patent could favorably impact our long-term ability to defend our
intellectual property rights, and is discussed further in Part II, Item 2 
Legal Proceedings on page 23 of this report.


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 aggregate payments of
$40,600 over seven years.


The
potential success of the Netword System may depend on our ability to maintain
proprietary rights to our technology. To protect these rights, 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 may not preclude them 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 relatively new, intensely competitive, quickly
evolving and subject to rapid technological changes. The Netword System already
faces significant competition, which may be expected to continue in the future.
We have limited financial, marketing, research and development resources, and
must continue to invest in the development of the Netword System and the
expansion and enhancement of our marketing and customer support services to
compete effectively. There are no assurances that we will have sufficient
resources to make the required investments.


We
classify systems currently offered by competitors in the following categories:
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | Internet keyword systems that operate through browsers, such as the SmartBrowsing feature
in Netscapes Communicator and the RealNames system used in Microsofts
Internet Explorer;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | keyword systems operating within a proprietary network, such as America Onlines AOL
keywords; and
| | - |  | --------------------------------------------------------------------------------------------------

|9
|-

|
|

| |  |  | Internet search engines and directories, such as Yahoo! and Lycos.
| | - |  | ------------------------------------------------------------------

|These
competitive systems are operated or backed by established companies that have
significant presences on the Internet and vastly greater financial, marketing,
research and development resources than ours. Microsoft, AltaVista, Network
Solutions and others have invested in and/or entered into agreements with
RealNames, and RealNames has substantially greater financial resources than we
have. Other established companies may decide to expand their operations to offer
a full range of Internet services that could potentially include a service such
as ours.


Despite
this array of competition, we believe we can compete effectively in our
marketplace based upon our efficient, easy-to use product that is free to
Internet users and reasonably priced to owners of commercial Web resources.
Other than the RealNames system, an Internet keyword system which competes
directly with the Netword System, we are not aware of any service offered
currently that provides the range of functions made available through the
Netword System.


Our
system allows users to employ Networds for navigation across the entire Web. In
contrast, the RealNames system is more narrowly focused on the use of keywords
in the search engines of RealNames partners, and that system offers no
analogous facility to unlimited FREE Networds we offer users.


Services
currently offered by our principal competitors have certain comparative
limitations:
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | America Onlines AOL Keyword system registers keywords that point only to
content on the AOL system. It does not permit Internet users to create any free keywords,
and owners of commercial resources who want AOL Keywords are subject to an expensive
registration process with America Online.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | Netscapes SmartBrowsing Internet keyword system operates through recent
versions of its Communicator browser and does not permit private registration of keywords
or free keywords. Netscape determines the targets for their keywords and directs many of
them to content on their Netcenter portal.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | Microsofts Internet Explorer browser does not permit users or owners of commercial
Web resources to register keywords; it only displays and resolves Internet keywords from
the RealNames system.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | Registration of a RealNames Internet keyword costs more than registration of a Netword
(at least $100 per year), and is a more involved process. RealNames adjudicates Internet
keyword applications and decides if they are appropriate. RealNames does not
offer users the opportunity to create unlimited free Internet keywords pointing to any
resource.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | Search engines and directories provide multiple responses to keyword entries and these
responses may be unrelated to a users query.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------

|10
|--

|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.


Due
to the increasing popularity and use of the Internet, it is likely that a number
of additional laws and regulations may be adopted at the federal, state and
local levels covering issues such as intellectual property rights, user privacy,
taxation, access charges, characteristics and quality of products and services,
liability for third-party activities, transmission of sexually explicit material
and jurisdiction. The adoption of any such laws or regulations might decrease
the growth of the Internet, which in turn could decrease the demand for Networds
or increase the cost of doing business or in some other manner harm our
business. In addition, applicability to the Internet of existing laws governing
issues such as intellectual property, taxation, obscenity and personal privacy
is uncertain. The vast majority of those laws were adopted before the advent of
the Internet and related technologies and, as a result, do not contemplate or
address the unique issues of the Internet and related technologies.


In
particular, 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


At
January 1, 2001, we had ten (10) full time and five (5)part time
employees and consultants who provide additional services to us on an as-needed
basis. We believe that our success will depend in part on our continued ability
to attract, hire and retain qualified personnel. In spite of recent,
well-publicized layoffs and changes to the markets view of Internet
businesses, competition for qualified personnel remains intense and we may not
be able to readily identify, attract and retain such personnel in the future. We
believe that our relationship with our employees is satisfactory and that we
have an appropriate mix of employee skills for our current business needs. None
of our employees is represented by a labor union or retained under an employment
contract. All of our employees are bound by confidentiality agreements.


Item 7.   Description of
Property.


We
do not own real property. Our principal offices at 702 Russell Avenue,
Gaithersburg, Maryland 20877 are leased until September 2003 and cover
approximately 2,400 square feet of office space at a monthly rent of
approximately $3,500. We do not consider this leased location to be material to
our operations, and believe that equally suitable alternative locations are
available nearby.
11
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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


Our
directors, officers and significant employees(1) and biographical
information about them are provided below. Each director will hold office until
our first annual meeting and until his successor is duly elected and qualified,
or until his earlier resignation or removal.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Name                | Age | Position
|------------------- | --- | --------
|Michael L. Wise     |     | 57      
|                    |    
|Kent M. Klineman    |     | 68      
|                    |    
|W. Edward Scheetz   |     | 35      
|                    |    
|Shepard C. Bostin   |     | 34      
|                    |    
|Murray M. Rubin     |     | 58      
|                    |    
|David Lucas         |     | 33      
|                    |     |         
|                    |    
|Marshall L. Moseley |     | 41      
|                    |     |         
|                    |    
|Crystal Sikora      |     | 36      
|                    |     |         
|                    |    
|Thomas Sweeting     |     | 37      
|                    |     |         
|                    |    
|Simon Janes         |     | 30      
|                    |     |         

|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.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

---

|(1) |  | Significant
Employees means such persons as production managers, sales managers or research
scientists, who are not executive officers, but who make or are expected to make
significant contributions to our businesss.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|12
|--

|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. In 1999, he became the President
and Chief Executive Officer of Hudson Investment Corp. He is also a director and member
of the executive and audit committees of Concord Camera Corp. (NASDAQ:LENS). 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.


W.
Edward Scheetz was appointed as a director of Netword on December 14, 1999. He is a
founder and is currently Co-Chief Executive Officer of NorthStar Capital Investment Corp.
where he has overseen the investment of more than $1 billion in real estate assets and
operating companies. Before joining NorthStar Capital in July 1997, Mr. Scheetz was a
partner of Apollo Real Estate Advisors from 1993 to 1997 and a principal of Trammell Crow
Ventures from 1989 to 1993. Mr. Scheetz has an A.B. in economics from Princeton
University.


Shepard
C. Bostin joined Netword LLC in March 1997 as Director of Marketing and became its Chief
Operating Officer in August 1997. Before working for us, from March 1995 to March 1997,
he was Vice President of Product Marketing for SelectStar, Inc. Previously, he was a
Product Manager at Borland International, Inc. and Intersolv, Inc., and a Systems Analyst
at American Management Systems, Inc. and IBM Corp. Mr. Bostin holds a B.S., with honors,
in Information and Decision Systems from Carnegie Mellon University and is a graduate of
Phillips Academy at Andover.


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.


David
Lucas joined Netword, Inc. in March 2000 as Vice President, Advertising and Marketing.
From December 1998 until March 2000, Mr. Lucas held the position of Vice President of
Business Development at Renaissance Communications, Inc., an advertising and marketing
firm. From April 1997 to November 1998, he was a National Accounts Manager and Marketing
Director for On-Site Sourcing, Inc. From March 1994 to April 1997, he served as a Brand
Manager and Sales Manager for the Davidson Companies. Mr. Lucas holds a B.S. in
International Area Studies, with concentrations in international marketing and economics,
from Drexel University.


Marshall
L. Moseley joined Netword, Inc. in May 2000 as Vice President, Product Management. Before
joining us full time, he was under contract as Networds Director of Public
Relations. Previously, since 1995, he was in Product Planning for Microsoft Corporation.
He was also an employee of Borland International, Inc., Dataquest, a Division of Dun & Bradstreet
(now part of The Gartner Group), and Computer Associates, Inc. Mr. Moseley is the author
of several books about computing technology, and was the Technical Editor for Profiles
Magazine. His work has appeared in CADalyst Magazine and MicroAge Quarterly.
13
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Crystal
Sikora joined Netword, Inc. in June 1999 as Vice President, Business Development. Before
coming to Netword, Ms. Sikora was Director of Business Development for Integrated
Management Services, Inc. She also served as a Regional Vice President of Sales and
Marketing for RTN Business Group. Ms. Sikoras diverse sales and business
development experience includes business-to-business sales, sales management, marketing,
presentations, market research, program development, account development, and customer
service. Ms. Sikora holds a B.S. from Indiana University of Pennsylvania.


Thomas
Sweeting joined Netword LLC in March 1997. He oversees the development of our customer
account management and billing software, and our client software. From March 1994 to
February 1997 he was an employee of Highland Technologies, Inc. From 1992 to February
1994 he was an employee of Intrafed Inc. He received a B.S. in Computer Science from the
University of Maryland.


Simon
Janes was employed as a systems administrator by Netword LLC from January 1997 to August
1997. After an eight-month leave to attend George Mason University, he returned to us in
April 1998 as a systems administrator and software engineer. He manages the development
of our query, registration and Web servers and is responsible for our hardware
installation, configuration and maintenance. From May 1994 to December 1996, he was
employed as a systems administrator for Network and Communications Management. He is a
recognized expert in the Linux operating system and related software, and, in addition to
developing the EQL device driver for Linux, was one of the first Certified Linux
Administrators in the world.


Item 9.   Remuneration
of Directors and Officers.


The
table below provides the remuneration of our directors and officers for fiscal year 2000.
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Name and Principal Position                          | Fiscal Year | Salary | Other Compensation
|---------------------------------------------------- | ----------- | ------ | ------------------
|Michael L. Wise                                      |             | 2000   |                   
|President, Chief Executive Officer, Director         |            
|                                                    
|Kent M. Klineman                                     |             | 2000   |                   
|Secretary, Director                                  |            
|                                                    
|W. Edward Scheetz, Director                          |             | 2000   |                   
|                                                    
|Shepard C. Bostin                                    |             | 2000   |                   
|Chief Operating Officer                              |            
|                                                    
|Murray M. Rubin                                      |             | 2000   |                   
|Chief Financial and Accounting Officer, Treasurer    |            
|                                                    
|Three highest paid officers and directors as a group |             | 2000   |                   

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

|14
|--

|Executive
officers serve at the discretion of our board of directors. Significant
employees serve at the discretion of our executive officers and board of
directors.None of our officers or significant employees has entered into
employment agreements. Accordingly, such employees may leave, and we may
terminate, their employment 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 28, 2001 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, other than Net2Phone, is in our care at our
principal offices. All calculations in the table are based on 19,348,083 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.


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.



15
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|
|

|Name and address ofStockholder            | Amount of Common Stock Owned | Percentage of Common StockOwned
|----------------------------------------- | ---------------------------- | -------------------------------
|Shepard C. Bostin (1)                     |                              | 492,236                        
|                                         
|Kent M. Klineman (2)                      |                              | 4,575,655                      
|                                         
|W. Edward Scheetz (3)                     |                              | 1,056,000                      
|                                         
|Michael Wise (4)                          |                              | 1,943,822                      
|                                         
|Net2Phone, Inc. (5)                       |                              | 5,050,380                      
|171 Main St. Hackensack, NJ 07601         |                             
|                                         
|All officers and directors as a group (6) |                              | 8,264,856                      
|                                         

|(1) |  | Mr.
Bostin is an officer. His shares include 463,241 shares underlying currently exercisable
options and 6,625 shares underlying currently exercisable warrants.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Mr.
Klineman is both an officer and a director. His shares include 1,491,795 shares
underlying currently exercisable options and 704,617 shares underlying currently
exercisable warrants.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | Mr.
Scheetz is a director. Mr. Scheetzs shares include 656,000 shares underlying
currently exercisable warrants which are held by NorthStar Capital Partners LLC, in which
Mr. Scheetz has 50% of the voting power and economic interest. Mr. Scheetz disclaims
beneficial ownership as to 50% of the shares underlying currently exercisable warrants
owned by NorthStar Capital.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) |  | Mr.
Wise is both an officer and a director. His shares consist of 1,943,822 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.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) |  | Net2Phone
holds currently exercisable warrants to purchase up to 15% of our fully-diluted common
stock. As of March 13, 2001, the warrants entitled Net2Phone to purchase 5,050,380 shares
of our common stock.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(6) |  | Includes
3,958,933 shares underlying currently exercisable options and 1,400,115 shares underlying
currently exercisable warrants.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------

|16
|--

|Options,
Warrants and Rights.


The
table below provides information as of March 28, 2001 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 the
warrants held by NorthStar Capital Partners LLC (in which Mr. Scheetz has 50% of
the voting power and economic interest) and 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.


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

| |  |  | warrants
to purchase 656,000 shares of our common stock which are beneficially held by NorthStar
Capital Partners LLC (in which Mr. Scheetz has 50% of the voting power and economic
interest) and warrants to purchase 3,200 shares of our common stock which are
beneficially held by Mr. Rubin expire on June 30, 2004
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | warrants
to purchase up to 15% of our fully-diluted common stock which are beneficially held by
Net2Phone, Inc. expire on September 29, 2003
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | all
other warrants expire on February 17, 2002
| | - |  | ----------------------------------------------

| |  |  | all options to purchase shares of common stock for $0.1666 per share expire on February
17, 2002
| | - |  | ------------------------------------------------------------------------------------------------

| |  |  | 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, 2001 o options to purchase 90,000 shares of common stock for $1.50 per share expire on
September 30, 2004, subject to earlier expiration in the event the option holders are no
longer our employees
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|17
|--

|
|

|Name of stockholder        | Common stockunderlying warrants | Exercise price | Common stockunderlyingOptions | Exercise price
|-------------------------- | ------------------------------- | -------------- | ----------------------------- | --------------
|Shepard C. Bostin          |                                 | 6,625          |                               | $1.25         
|                           |                                 |                |                               |               
|                           |                                 |                |                               |               
|                          
|Kent M. Klineman           |                                 | 704,617        |                               | $1.25         
|                           |                                 |                |                               |               
|                          
|W. Edward Scheetz (1)      |                                 | 656,000        |                               | $1.50         
|                          
|Michael Wise               |                                 | None           |                               |               
|                           |                                 |                |                               |               
|                          
|Net2Phone, Inc. (2)        |                                 | 5,050,380      |                               | Approximately 
|                           |                                 |                |                               | $3,000,000    
|                          
|All executive officers and |                                 | 740,914        |                               | $1.25         
|directors as a group       |                                 | 659,200        |                               | $1.50         
|                           |                                 |                |                               |               
|                          

|(1) |  | Mr.
Scheetz is a director. All warrants are held by NorthStar Capital Partners LLC, in which
Mr. Scheetz has 50% of the voting power and economic interest. Mr. Scheetz disclaims
beneficial ownership as to 50% of the shares owned by NorthStar Capital.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Net2Phone
holds currently exercisable warrants to purchase up to 15% of our fully-diluted common
stock. As of March 28, 2000, the warrants entitled Net2Phone to purchase 5,050,380 shares
of our common stock.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|There
are no other classes of common stock and no shares of preferred stock
outstanding. We have no parents or subsidiaries.


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 are currently paid
other fees. See Remuneration of Directors and Officers in Item 9 on
page 14 of this report.



18
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|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, 2000, there were approximately 200 holders of
record of our common stock.
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Price                              | High | Low         
|---------------------------------- | ---- | ------------
|1999                               |      |             
|Third quarter (from July 29, 1999) |      | $      1.50 
|Fourth quarter                     |      | $      2.75 
|                                   |     
|2000                               |      |             
|First quarter                      |      | $      4.25 
|Second quarter                     |      | $      3.13 
|Third quarter                      |      | $      1.47 
|Fourth quarter                     |      | $        .44

|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
July 1998, we filed a patent infringement suit against Centraal Corporation, now
known as RealNames Corporation, in the U.S. District Court for the Eastern
District of Virginia. We sought an injunction and damages in an amount to be
determined by the court.


On
January 8, 1999, the court granted RealNamesmotion for summary judgment, holding
that the RealNames system did not infringe our patent, without ruling on the validity of
our patent. We appealed the decision. On March 15, 2001, the United States Court of
Appeals for the Federal Circuit upheld the decision of the District Court.


19
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|In
August 1997, eight of our former employees, including the former chief executive
officer, resigned and made claims against Netword LLC. Claims by four of those
former employees have since been settled. In June, 1998, one of the former
employees instituted an action against Netword LLC and its managers in the
Circuit Court of Arlington, Virginia seeking to recover $69,281 for, among other
things, vacation pay, the dilution of his interest in Netword LLC and the
repayment of the funded portion of his subscription to a loan made by members to
Netword LLC. We are defending that action, which is currently inactive and
assumed to have been abandoned. We do not believe that our financial exposure
with respect to the pending action or claims of these former employees is
material.


In
October 2000, Rennaisance Communications, Inc., an advertising firm, filed a
lawsuit in the Circuit Court of Montgomery County, Maryland, alleging breach of
contract, theft of services and shareholders derivative
action. The advertising firm claims it is owed money for services rendered
under an advertising agreement, that the Company misappropriated creative
material under the agreement and that the Company disclosed insider information
to unnamed third parties. The Company denies all substantive allegations of the
complaint.


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.


20
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|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    |        
|      
|2.2    |        
|      
|2.3    |        
|      
|2.4    |        
|       |        
|      
|3.1    |        
|       |        
|      
|3.2    |        
|       |        
|      
|3.3    |        
|       |        
|      
|3.4    |        
|      
|3.5    |        
|      
|3.6    |        
|      
|3.7    |        
|      
|3.8    |        
|       |        
|      
|3.9    |        
|       |        
|      
|3.10   |        
|      
|3.11   |        
|      
|3.12   |        
|      
|6.1    |        
|      
|6.2    |        
|       |        
|      
|6.3    |        
|      
|6.4    |        
|       |        
|      
|6.5    |        
|      
|6.6    |        
|      

|21
|--

|
|

|(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.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Filed
as an exhibit to Netword, Inc.s Form 10-KSB for the fiscal year ended December 31, 1999.
|--- |  | -----------------------------------------------------------------------------------------------

|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 28, 2001.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | NETWORD, INC.(Registrant)By: /s/ Michael L. Wise
Name: 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.


22
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|
|

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

|/s/ | MICHAEL L. WISE
Michael L. Wise | President and Chief Executive Officer, Director | March 28, 2001.
|--- | ------------------------------- | ----------------------------------------------- | ---------------

|/s/ | MURRAY M. RUBIN
Murray M. Rubin | Chief Financial and Accounting Officer, Treasurer | March 28, 2001.
|--- | ------------------------------- | ------------------------------------------------- | ---------------

|/s/ | KENT M. KLINEMAN
Kent M. Klineman | Secretary, Director | March 28, 2001.
|--- | --------------------------------- | ------------------- | ---------------

| | W. Edward Scheetz | Director | March 28, 2001.
| | ----------------- | -------- | ---------------

|23
|--

|NETWORD, INC.


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

|                                                       | Page
|------------------------------------------------------ | ----
|Independent Auditors Report                           |     
|                                                       |     
|Balance Sheet as of December 31, 2000                  |     
|                                                       |     
|Statements of Operations for the Years Ended           |     
|December 31, 2000 and 1999                             |     
|                                                       |     
|Statements of Stockholders Equity for the Years Ended |     
|December 31, 2000 and 1999                             |     
|                                                       |     
|Statements of Cash Flows for the Years Ended           |     
|December 31, 2000 and 1999                             |     
|                                                       |     
|Notes to Financial Statements                          |     

|INDEPENDENT AUDITORS
REPORT



The Board of Directors and
Stockholders Netword, Inc.


We
have audited the accompanying balance sheet of Netword, Inc. as of December 31, 2000, and
the related statements of operations, stockholdersequity and cash flows for the
years ended December 31, 2000 and 1999. These financial statements are the responsibility
of the Companys management. Our responsibility is to express an opinion on these
financial statements based on our audits.


We
conducted our audits in accordance with generally accepted auditing standards. 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 financial statements referred to above present fairly, in all material
respects, the financial position of Netword, Inc. as of December 31, 2000 and the results
of its operations and its cash flows for the years ended December 31, 2000 and 1999, in
conformity with generally accepted accounting principles.
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 
| | 
| | 

|New York, New YorkJanuary 30, 2001



F-1
|-----------------------------------------

|NETWORD, INC. Balance
Sheet December 31, 2000
|---------------------------------------------

|                                                     | 
|---------------------------------------------------- | 
|ASSETS                                               | 
|Current assets:                                      | 
|Cash                                                 | 
|Prepaid expense                                      | 
|                                                    
|Total current assets                                 | 
|                                                     | 
|Property and equipment, net (Note 4)                 | 
|                                                     | 
|Intangible assets:                                   | 
|Trademark, net                                       | 
|Intellectual property, net                           | 
|                                                    
|Total intangible assets                              | 
|                                                    
|                                                     | 
|                                                    
|                                                     | 
|LIABILITIES AND STOCKHOLDERS EQUITY                 | 
|Current liabilities:                                 | 
|Current portion of long-term liability (Note 6)      | 
|Accounts payable                                     | 
|Loans payable (Note 5)                               | 
|                                                    
|Total current liabilities                            | 
|                                                     | 
|Long-term liability, net of current portion (Note 6) | 
|                                                     | 
|Convertible note payable (Note 7)                    | 
|                                                     | 
|Commitments and contingencies (Note 11)              | 
|                                                     | 
|Stockholders equity (Note 10):                      | 
|Common stock, $.01 par value:                        | 
|Authorized - 40,000,000 shares                       | 
|Issued and outstanding - 19,348,083 shares           | 
|Additional paid-in capital                           | 
|Accumulated deficit                                  | 
|Subscriptions receivable                             | 
|                                                    
|Total stockholders equity                           | 
|                                                    
|                                                     | 
|                                                    

|See accompanying notes.



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

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

|                                        | Year Ended December 31,
|--------------------------------------- | -----------------------
|
|Sales                                   |                        
|Operating expenses:                     |                        
|Sales and marketing expenses            |                        
|General and administrative expenses     |                        
|                                       
|Total operating 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.
Statements of Stockholders Equity
|------------------------------------------------

|                                        | Number ofClass A       
 Class C | Common Stock | AdditionalPaid-In | Accumulated | Subscrip- tions Re- | TotalStock-holdersEquity
|--------------------------------------- | -------------------------------- | ------------ | ----------------- | ----------- | ------------------- | -------------------------
|
|Balance, January 1, 1999                |                                  | 35,999.4     | 8                 | 54.2        | 1                   |                         
|                                        |                                 
|Exchange of Class A and Class C         |                                 
|Units for common stock                  |                                  | (35,999.4    | 8)                | (54.2       | 1)                  | 8,923,924                
|                                        |                                 
|Conversion of accounts payable to       |                                 
|warrants                                |                                  |             |                   |            |                     |                         
|                                        |                                 
|Issuance of common stock                |                                  |             |                   |            |                     | 6,000,000                
|                                        |                                 
|Issuance of common stock and            |                                 
|warrants                                |                                  |             |                   |            |                     | 2,000,000                
|                                        |                                 
|Offering costs for issuance of common   |                                 
|stock and warrants                      |                                  |             |                   |            |                     |                         
|                                        |                                 
|Issuance of warrants for legal services |                                  |             |                   |            |                     |                         
|                                        |                                 
|Subscriptions receivable                |                                  |             |                   |            |                     |                         
|                                        |                                 
|Issuance of stock options for           |                                 
|consulting services                     |                                  |             |                   |            |                     |                         
|                                        |                                 
|Issuance of warrant to Net2Phone        |                                  |             |                   |            |                     |                         
|                                        |                                 
|Registration costs                      |                                  |             |                   |            |                     |                         
|                                        |                                 
|Net loss                                |                                  |             |                   |            |                     |                         
|                                       
|                                        |                                 
|Balance, December 31, 1999              |                                  |             |                   |            |                     | 16,923,924               
|                                       
|                                        |                                 
|Exercise of warrants                    |                                  |             |                   |            |                     | 1,642,159                
|                                        |                                 
|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                  
|                                        |                                 
|Net loss                                |                                  |             |                   |            |                     |                         
|                                       
|                                        |                                 
|Balance, December 31, 2000              |                                  |             |                   |            |                     | 19,348,083               
|                                       

|See accompanying notes.



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

|NETWORD, INC.
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                                 |                        
|Issuance of convertible note payable for legal services              |                        
|Change in assets and liabilities:                                    |                        
|Other current assets                                                 |                        
|Prepaid expense                                                      |                        
|Accounts payable                                                     |                        
|                                                                    
|Net cash used in operating activities                                |                        
|                                                                    
|Cash flows used in investing activities:                             |                        
|Acquisition of property and equipment                                |                        
|                                                                    
|Cash flows from financing activities:                                |                        
|Principal payments of long-term liability                            |                        
|Redeemable common stock and common stock warrants                    |                        
|Deferred offering costs                                              |                        
|Redemption of warrants                                               |                        
|Exercise of warrants                                                 |                        
|Issuance of common stock and units, net of offering                  |                        
|and registration costs                                               |                        
|                                                                    
|Net cash provided by financing activities                            |                        
|                                                                    
|Net increase (decrease) in cash                                      |                        
|Cash, beginning of year                                              |                        
|                                                                    
|Cash, end of year                                                    |                        
|                                                                    
|                                                                     |                        
|Supplemental Schedule of Non-Cash Investing and Financing Activities |                        
|                                                                     |                        
|Conversion of accounts payable to warrants                           |                        
|                                                                    
|Issuance of stock options and warrants for consulting,               |                        
|legal and marketing services                                         |                        
|                                                                    
|Issuance of warrants for future services                             |                        
|                                                                    
|Issuance of convertible note payable for legal services              |                        
|                                                                    
|Reclassification of redeemable common stock and                      |                        
|common stock warrants, net of offering cost                          |                        
|                                                                    

|See accompanying notes.



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

|NETWORD, INC. Notes to
Financial Statements


Note 1  The Company


Netword,
Inc. (the Company) owns and operates an Internet utility known as the Netword System
which the Company believes offers a comprehensive solution to problems created by a lack
of consumer-friendly addresses or URLs for Internet resources. The Company was formed on
December 2, 1996 and was in the development stage through December 31, 1999. The year
ended December 31, 2000 is the first year during which it is considered an operating
company.


On
February 18, 1999, Netword, LLC was merged into Netword, Inc., a Delaware corporation
(the Merger). The Merger was accounted for as a reverse acquisition under the pooling
of interest method and gave effect to the issuance by the Company to members of Netword,
LLC of 8,923,924 shares of common stock and 3,184,733 warrants to purchase common stock
at $1.25 per share, in exchange for 35,999.48 Class A Units and 54.21 Class C Units.
Options on 2,284,374 shares of common stock at $.167 per share and 815,239 shares of
common stock at $1.25 per share were issued by the Company to replace outstanding options
to purchase units previously granted by the Company. In addition, options on 1,456,250
shares of common stock at $1.25 were issued by the Company to certain Company directors,
officers and employees.


Note 2  Summary of Significant
Accounting Policies


Use of
Estimates


The
preparation of financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of 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.


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 $15,611 at December
31, 2000.




F-6
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|NETWORD, INC. Notes to
Financial Statements


Note 2  Summary of Significant
Accounting Policies (Continued)



Intellectual
Property


The
intellectual property is stated at appraised value, which is below cost, net of
accumulated amortization of $20,000, and is amortized using the straight-line method over
five years.


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 has elected to disclose loss per share, as if it had adopted Statement of
Financial Accounting Standards No. 128, Earnings Per Share (SFAS 128") giving effect
to the Merger discussed in Note 1. Under SFAS 128, companies that are publicly held or
have complex capital structures are required to present basic and diluted earnings per
share (EPS) on the face of the income statement. SFAS 128 replaces the presentation of
primary 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
all 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, 2000, management believes the fair value of all
financial instruments approximated carrying value.



F-7
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|NETWORD, INC. Notes to
Financial Statements



Note 2  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 annual 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 impairment 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.


Advertising
and Marketing Expenses


Advertising
and marketing expenses are charged to operations in the period in which the advertising
first takes place. Advertising costs include the costs under an executory contract, which
expires in March 2001. Advertising expenses amounted to approximately $401,000 and
$39,000 for the years ended December 31, 2000 and 1999, respectively.


Research
and Development


Research
and development costs amounted to approximately $273,000 and $190,000 for the years ended
December 31, 2000 and 1999, respectively.




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

|NETWORD, INC. Notes to
Financial Statements



Note 2  Summary of Significant
Accounting Policies (Continued)


Reclassification


Certain
amounts reported in the 1999 financial statements have been reclassified to conform with
the 2000 presentation.


Note 3  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 4  Property and Equipment


At
December 31, 2000, property and equipment consists of:
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                | 
|------------------------------- | 
|Furniture and fixtures          | 
|Computer equipment              | 
|                               
|                                | 
|Less:  Accumulated depreciation | 
|                               
|                                | 
|                               

|Note 5  Loans Payable


In May
1997, the Company offered its members rights to subscribe to their pro rata share of a
$500,000 loan (the 97 loan), together with five year warrants to purchase 10,000 Class
A Units at $50 per unit. The exercise price of a warrant was payable in cash or by the
forgiveness of all or a portion of the 97 loan. The 97 loan was fully subscribed;
however, certain subscribers did not fully fund their subscriptions to that loan and,
accordingly, did not qualify for conversion of their shares of the 97 loan into Class A
Units. The members who funded all installments of their subscriptions to the 97 loan
subsequently converted their interests in that loan into Class A Units.


At
December 31, 2000, the Company had $33,027 of loans payable to subscribers of the 97 loan
who did not fully fund their subscriptions.




F-9
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|NETWORD, INC. Notes to
Financial Statements


Note 6  Long-Term Liability


The
Company assumed a long-term liability related to the purchase of the Netword trademark.
This liability is payable in equal installments of $4,800 per year, concluding on April
30, 2003.


Note 7  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, 2000, the note
included $2,103 in accrued interest.


Note 8  Options


The
weighted average Black-Scholes value of options granted under the stock option plans
during 2000 and 1999 was .80 and .17, respectively. Value was estimated for both 2000 and
1999 using a weighted average expected life of five years, volatility of .84 and
risk-free interest rate of 5%.


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.


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
2000 and 1999 would have been as follows:
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                             | 2000 | 1999          
|---------------------------- | ---- | --------------
|Pro forma net loss           |      | $   (3,299,312
|Pro forma net loss per share |      | (.18          

|F-10
|----

|NETWORD, INC. Notes to
Financial Statements


Note 8  Options (Continued)


A
summary of applicable option activity and related information for the years ended
December 31, 2000 and 1999, after giving effect to the recapitalization described in Note
1, is as follows:
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                               | 2000 | 1999     
|------------------------------ | ---- | ---------
|
|Outstanding, beginning of year |      | 4,898,765
|Granted                        |      | 423,000  
|Exercised                      |      |         
|Forfeited                      |      | (215,543 
|                              
|Outstanding, end of year       |      | 5,106,222
|                              
|Exercisable, end of year       |      | 5,106,222
|                              

|The
weighted-average fair value of options granted during 2000 and 1999 was $2.43 and $1.27,
respectively. Exercise prices for options outstanding as of December 31, 2000 ranged from
$.17 to $5.00. These options expire at various times through March 2005.


Note 9  Income Taxes


At
December 31, 2000, the Company has a federal net operating loss carryforward to reduce
future taxable income of approximately $3,001,000. The net operating loss carryforward
expires through 2020.


At
December 31, 2000, the Company has a deferred tax asset of approximately $1,024,000
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.


Note 10  Equity Transactions


In
February 1999, the Company settled fees for legal services by payment of $200,000 and an
agreement to deliver warrants to purchase 150,000 shares of the Companys common stock at
$.1667 per share. The fair value for the warrants was estimated to be $.76 per warrant at
the date of the agreement, using the Black-Scholes option pricing model.



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

|NETWORD, INC. Notes to
Financial Statements



Note 10  Equity Transactions
(Continued)


On
March 19, 1999, the Company privately placed 6,000,000 shares of common stock at $.1666
per share or a total of $1,000,000. On the same date, in an offering to non- U.S.
residents, the Company sold units consisting of 2,000,000 shares of common stock and
warrants to purchase an additional 1,600,000 shares of common stock (at $1.25 per share)
for total consideration of $2,000,000. Offering costs for the two offerings aggregated
$75,000.


On
July 28, 1999 and August 5, 1999, the Company privately placed units consisting of
782,000 shares of common stock and warrants to purchase an additional 625,600 shares of
common stock (at $1.50 per share) for total consideration of $977,500. Offering costs
were approximately $50,000. In connection with this placement, the Company issued
warrants to an individual to purchase an additional 85,293 shares of common stock at
$1.50 per share as a finders fee. The staff of the Securities and Exchange Commission
had advised the Company that the individual who received the said 85,293 warrants may
have acted as an unregistered broker-dealer in violation of Section 15 of the Securities
Exchange Act by introducing the Company to the investors and receiving a finders fee. If
such individual acted as an unregistered broker-dealer in violation of the Securities
Exchange Act, then under Section 29 of the Securities Exchange Act (1) the warrants
issued to him as a finders fee would be voidable by the Company and (2) each investor
introduced to the Company would have the right to rescind his purchase. The Company has
notified each of the investors introduced to the Company by the said individual of the
position of the Securities Exchange Commission and the investors potential rights under
Section 29 of the Securities Exchange Act. No investors have exercised their recission
rights. Accordingly, such proceeds were classified as redeemable common stock and common
stock warrants on the balance sheet at December 31, 1999. The redeemable common stock and
common stock warrants, net of offering costs have been reclassified to stockholders
equity during the year ended December 31, 2000.


On
September 29, 1999, the Company entered into an agreement with Net2Phone, Inc.
(Net2Phone) under which a newly developed version of the Companys software agent will
be shipped with Net2Phones software, which will include the Companys logo and slot and
a direct link to the Companys Web site. The agreement also provides that Net2Phone is
responsible for maintaining a database of URLs and associated phone numbers and is
entitled to 50% of all revenue attributable to the registration and use of Networds
sourced from Net2Phones Web site. The agreement had an initial one-year term (which
expired on September 29, 2000), subject to early termination by Net2Phone. Such agreement
was renewed for an additional one-year term. In connection with the agreement, the
Company granted Net2Phone four-year warrants (expiring September 29, 2003) to acquire up
to 15% of the Companys fully diluted common stock for approximately $3,000,000. The
fair value of such warrants was $1,500,000, based upon a Black-Scholes option pricing
model.




F-12
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|NETWORD, INC. Notes to
Financial Statements




Note 10  Equity Transactions
(Continued)


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 $237,000. In addition, the Company paid $250,000 to this
individual for services rendered which is being 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, | 
|----------------------- | 
|2001                    | 
|2002                    | 
|2003                    | 
|                       
|                        | 
|                       

|Total
rent charged to operations for the years ended December 31, 2000 and 1999 was
approximately $40,000 and $33,000, respectively.




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

|NETWORD, INC. Notes to
Financial Statements


Note 11  Commitments and
Contingencies (Continued)



Promotional
Agreements


The
Company has entered into agreements with an Internet company to promote the Netword
System permitting users who visit this companys Web site to use and create Networds and
place the Companys logo, slot and a direct link to the Companys Web site on the Web
sites of the company. These agreements, expiring through December 2001, entitle the
Internet company to various revenue sharing arrangements with the Company, with
guaranteed future minimum payments required as follows:
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|     | 
|---- | 
|2001 | 
|    

|Litigation


In
August 1997, eight employees, including the former chief executive officer, resigned and
made claims against the Company. Claims by four of those former employees have since been
settled. One of the former employees instituted an action against the Company and its
managers in June 1998, in the Circuit Court of Arlington, Virginia, seeking to recover
approximately $70,000 for, among other things, vacation pay, the dilution of his interest
in the Company and the repayment of the funded portion of his subscription to the 97 loan
(see Note 5). The Company is defending that action which is currently inactive and
assumed to have been abandoned. The Company does not believe that its financial exposure
with respect to the pending action or unsettled claims of the other former employees is
material.


In
October 2000, an advertising firm filed a lawsuit in the Circuit Court of Montgomery
County, Maryland, alleging breach of contract, theft of services and shareholders
derivative action. The advertising firm claims it is owed money for services rendered
under an advertising agreement, that the Company misappropriated creative material under
the agreement and that the Company disclosed insider information to unnamed third
parties. The Company denies all substantive allegations of the complaint.



F-14
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------