|SECURITIES AND EXCHANGE COMMISSION
Washington, 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, 1999

Commission File Number: 333-86873

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

|Delaware
(State or other jurisdiction of
Incorporation or Organization) | 52-2143430
(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 [_] No [x]

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: $11,431

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 24, 2000:
$57,024,094.05. 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 17,705,924 shares of
common stock of the registrant outstanding as of March 28, 2000.

Transitional Small Business
Disclosure Format (check one): Yes [x] No [_]
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|NETWORD, INC.INDEX


PART I
|---------------------------

|        |  | Page                                                         
|------- |  | -------------------------------------------------------------
|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

|i
|-

|PART I
Alternative 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 which offers a simple,
consumer-friendly way to reach any destination on the Internet. Through the
Netword System, individual and business users of the Internet can create simple
and memorable words, phrases, numbers or other sequences of characters, called
Networds, which may be used as Internet keywords. Each Netword is an alias or
nickname for one of the more complex Internet addresses known as universal
resource locators or URLs.

Unlike limited keyword systems
within the infrastructure of a proprietary network, such as America-On-Lines
keyword system, or bookmarks generated by Internet users for use on their own
computers, Networds are universal and may be used from any computer linked to
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 registration of specific Networds by commercial Web resource
owners, payments by these owners for hits on their sites, payments by owners of
e-commerce sites for traffic referred to their sites by Netword users, sales of
banner ads and other advertising on our Web site, and expanded service
offerings to users of FREE Networds.

Our principal offices are located
at 702 Russell Avenue, Third Floor, 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 Developments

Pursuant to NASD authorization,
trading in our common stock moved from the Pink Sheets to the Over the Counter
Bulletin Board on March 2, 2000.

On February 9, 2000, our
registration statement on Form SB-1 was declared effective by the Securities
and Exchange Commission, enabling the resale by certain of our stockholders of
up to (i) 4,701,148 shares of our common stock issuable upon the exercise
of outstanding redeemable warrants,

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|and (ii) 1,650,000 shares of our outstanding
common stock. We will receive no proceeds from the sale of shares by the selling
stockholders, although we may receive up to $5,876,435 from the exercise of the
outstanding warrants before or in connection with the resale of the underlying
shares. Upon effectiveness of the registration statement, we became subject to
the reporting requirements of Section 15(d) of the Securities Exchange Act of
1934.

In the first quarter of 2000, we
entered into strategic business agreements with InfoSpace.com, Inc. and Upside
Media, Inc. See Marketing Strategy on page 5 of this report.

The Netword System

We believe that the growth of the
Internet, resulting in the proliferation of its resources and the increasing
scarcity of user-friendly URLs, has created a business opportunity for Internet
keyword systems. The Netword System has been developed to take advantage of
this opportunity in the broadest possible way. As the Netword System is
conceived and operated, all Internet users are free to use Networds without
charge to reach all Internet resources. Internet users and owners of Internet
resources can create, reserve and register Networds, without charge or for
certain fees, to facilitate direct access to any Internet resource. See Registration
of Networds on page 5 of this report.

To use the Netword System, a user
who has logged on to the Internet merely enters an existing Netword, like The
Yankees or SesameStreet, in any Netword-enabled browser or slot and is promptly
transferred to the Internet address corresponding to the Netword. If the entry
is not an existing Netword, the Netword System offers the user a variety of
default options which may include the use of search engines to seek out URLs
employing the entered term and the opportunity to create a Netword for the
desired site.

A user may enter Networds at the
users own Netword-enabled browser, at our Web site at www.netword.com, at
Netword slots at sites belonging to other entities operating under arrangements
with us, or at a Netword-enabled slot on the users home page. Any user
can Netword-enable a browser or homepage by installing our software agent,
which is available as a free one-minute download from our Web site. As soon as
the download is completed, the user can access any Web site for which a Netword
exists, or for which the user creates a FREE Netword, merely by entering the
Netword in the users own browser.

To date, our promotional and
marketing strategy has focused on establishing teaming agreements with Web
communities, such as affinity groups which offer various Web-related services
to their members. Through these arrangements, Internet users can learn about
Networds and create and use FREE Networds. We believe that as more Internet
users employ our system to help navigate the Web, more commercial Web resource
owners will recognize a need to register Networds to encourage access to their
sites.

An early version of the Netword
System was introduced on the Internet in May, 1997, and we have continued to
improve it since then. Until recently, however, we lacked the resources to
market Networds. We have used the proceeds of recent financings to initiate a
marketing effort, which is


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|described below. Nevertheless, we continue to be a development
stage business. Our ability to generate revenues sufficient to sustain the
Netword System and to achieve profitability will probably depend initially upon
the outcome of our expanded marketing efforts.

Our History

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

Industry Background

According to reports published by
International Data Corporation, commerce conducted over the Web will exceed $1
trillion by 2003 and the number of users who make purchases over the Web will
increase from 31,000,000 in 1998 to more than 183,000,000 in 2003. Forrester
Research, Inc. estimates that online advertising will reach $33 billion by 2004.

The Netword Opportunity And Solution

We expect the increased use of
the Internet to create a heightened demand for quick, easy and direct access to
Web resources. The proliferation of complex URLs is an obstacle to satisfaction
of this demand.

The protocol currently governing
the registration of Internet domain names requires the inclusion of .com or
another suffix in every URL that identifies a top level Internet domain.
Creating a separate top level domain name for every resource is theoretically
possible but is not currently practicable because of constraints resulting from
the way the Internet is administered and the systems through which it operates.
Below the level of the top level domain names, the density and diversity of
information available on many Web sites and the methods of indexing and
accessing information within these sites lead to the denomination of various
levels and sublevels of identification. The layering of resources within any
site can result in extended URLs characterized by multiple words or characters
or combinations of words or characters separated by reverse slashes. As these
URLs become increasingly lengthy and complex, they become increasingly
difficult to remember and, when identified or remembered, are subject to
greater risk of faulty entry.


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



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|We believe Networds offer an
efficient and affordable solution. Using the Netword System, commercial Web
resource owners can identify each of their resources with a Netword which may
be a familiar product or service name or a slogan that is easy to remember. The
entry of the designated Netword will provide direct access to the corresponding
resource.

Creating Networds

A Netword for any URL may be
created or edited at our Web site at any time by following a simple on-line
procedure. FREE Networds may be created without charge. Registered Networds may
be created by opening an account with us and following a registration procedure
described at our Web site. A FREE Netword may, however, be bumped or displaced
by a Registered Netword. Networds can be created for both commercial and
non-commercial purposes.


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

| |  | The
user enters the proposed name, phrase or number into our database by following
simple online instructions at our Web site.
| | - | ------------------------------------------------------------------------------------------------------------------------------

| |  | If
the proposed name, phrase or number is not available, either because of
trademark restrictions or prior use for another URL, the Netword System
immediately reports the conflict and offers the user the option to propose an
alternative.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | The
creation of the new Netword is confirmed to the user in its browser and by
e-mail and becomes instantly available to all other users.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------

| |  | The
user who created a Netword can revisit our Web site to edit or change the
Netword online at any time.
| | - | ---------------------------------------------------------------------------------------------------------

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

To support our policy of
protecting 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 use of the proposed Netword will conflict with a federally
registered trademark or tradename. We do not conduct any other independent
investigation, such as an investigation of registered corporate or other
business names or state trademark or tradename filings, to seek out potentially
conflicting rights to the use of a proposed Netword.

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|Registration of Networds






5
|--------------------------------

|Owners of Web resources can
register a Netword for any of their sites for a fee of $30 per year. Volume
discounts are available. Branch Networds or subcategories of Networds (for
example, a name like cnnfood as opposed to www.cnn.com/food) can be registered
for $10 per Netword per year. Registrants agree to pay us $.03 per
Netword-generated hit on each Web site in excess of 1,000 hits per month.
Networds can be registered on a first-come first-served basis, subject to our
standard terms and conditions.

Revenues, Extent of Netword Use and Expenditures

Our revenues for the fiscal year
ended December 31, 1999 were $11,431 and were derived exclusively from Netword
registrations. In addition, for the 1999 fiscal year, we had interest income of
$110,844.

Approximately 1.5 million
Networds are available on the Netword System. Specifically:
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | We
have placed approximately 1.2 million Networds in our database. These Networds
provide links to a number of U.S. businesses, TV and radio stations, mainstream
publications, manufactured products, government sites, movie and TV programs
and sports teams. We receive no payment for the creation or use of these
Networds.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Internet
users have created approximately 300,000 FREE Networds.
| | - | ----------------------------------------------------------------

Over the three fiscal years ended
December 31, 1999, we spent approximately $936,000 for research and development.

## Marketing Strategy

Our marketing strategy is to
promote the convenience of FREE Networds in order to increase the number of
Internet users who are familiar with Networds. As substantial numbers of users
come to understand the benefits of Networds, we will market that information to
owners of commercial Web resources willing to pay appropriate fees to register
Networds for their resources.

To implement our marketing
strategy, we have begun and intend to continue to expose the Netword System to
consumers through programs that:

| |  | Promote
and give access to the Netword System on Web community sites like Nettaxi,
Tripod, FortuneCity, Angelfire and Homestead. We currently have access
agreements with Nettaxi, InfoSpace and Upside.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Promote
and advertise Networds in online and offline publications, and on television
and radio, including advertising under our agreement with Upside.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Establish
alliances with Internet service providers (ISPs) like Verio. At
present, we have an agreement with KeyConnect Systems, Ltd., an ISP located in
the U.K.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------

|6
|-

---

| |  | Establish
alliances with owners of search engines and directories. We have recently
established such an alliance with InfoSpace, a leading Internet directory.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------

|We have also created and continue
to expand our existing Logo program, an initiative to assist not-for-profit
organizations in promoting their Networds. This program allows members to
display a Netword logo and slot on their sites to enable visitors to download
our software and enter Networds directly in their own browsers. Revenue sharing
is not offered as part of this program. Approximately 25 organizations are
currently participating in this program and have been important factors in
driving traffic to our Web site.

From November, 1998 until June,
1999, we had an active teaming agreement with GeoCities, Inc., a Web community,
under which GeoCities promoted FREE Networds to its members. Under this
agreement we paid GeoCities certain fees and a percentage of related revenues.
This agreement was terminated following Yahoo!, Inc.s acquisition of
GeoCities in June, 1999. The GeoCities relationship resulted in more than
2,000,000 hits to our Web site by GeoCities members, and they created more than
50,000 FREE Networds which are linked to their personal GeoCities Web pages.
More than 3,000 members placed our logo and slot on personal homepages at their
GeoCities Web sites.

Apart from press releases,
several articles about us in local papers and trade publications and publicity
generated by our Web site and under our former teaming agreement with
GeoCities, there has not been significant publicity about the Netword System.

Net2Phone Agreement. In
connection with our efforts to expand the distribution of the Netword System,
on September 29, 1999, we entered into an agreement with Net2Phone, Inc. under
which a newly developed version of our software agent is to be shipped with
Net2Phones software, together with our logo and slot and a direct link to
our Web site. Net2Phones software enables low-cost high quality calls to
be placed from computers, telephones or fax machines to any world wide
telephone or fax machine.

Under this agreement, we granted
Net2Phone rights to freely register Networds to facilitate use of its system.
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
revenues attributable to the registration and use of Networds sourced from
Net2Phones Web site. The agreement has an initial one-year term expiring
September 29, 2000, subject to renewal for successive additional one-year terms
and to early termination by Net2Phone. In connection with the new agreement, we
granted Net2Phone warrants to acquire up to 15% of our fully-diluted common
stock for approximately $3,000,000.

Nettaxi Agreement. As part of our
marketing efforts to promote and give access to the Netword System on Web
community sites, on November 12, 1999, we entered into an agreement with
Nettaxi Online Communities, Inc., a community and portal Web site with over 120
million page views per month. Pursuant to the agreement, Nettaxi is obligated
to promote the Netword System, enable its users to use and create Networds and
place our logo, slot and a direct link to our Web site on its Web site. The
agreement also provides that Nettaxi is entitled to receive 30% of revenues
received for the first year, and 20% of revenues received for the second year,
from customers who open an account at our

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|Web site through a link or button from the Nettaxi Web site. We
have guaranteed to Nettaxi a revenue share amount equal to $5,000 per month for
the first year. The agreement has an initial one-year term expiring November
12, 2000, subject to renewal for successive additional one-year terms and to
early termination by either party.

InfoSpace Agreement. On
January 18, 2000, we entered into an agreement with InfoSpace.com, Inc., a
leading provider of infrastructure services for wireless devices, merchants and
Web sites. As part of the agreement, InfoSpace is entitled to use Networds to
enable users to directly access InfoSpace information, products and services at
any time and through any device and we will integrate InfoSpace services at our
Web site. Furthermore, visitors to InfoSpace affiliate sites will be able to
create FREE Networds, use Networds from a slot on the InfoSpace homepage, and
download the Netword agent software to enable their browsers to use Networds
transparently. The agreement provides that InfoSpace is entitled to receive a
monthly fee of $50,000, as well as 30% of revenues received for the first year,
and 20% of revenues received for the second year, from customers who open an
account at our Web site through a link from a promotional placement created by
InfoSpace. We will receive 35% of revenues from banner advertisements on
certain pages of the InfoSpace Web Site. The agreement has an initial one-year
term, subject to renewal for successive additional one-year terms.

Upside Agreement. As part
of our marketing efforts to promote and give access to the Netword System, we
entered into an agreement on January 18, 2000 with Upside Media, Inc., an
Internet provider of news and analysis with respect to the information
technology industry. Pursuant to the agreement, Upside is obligated to promote
the Netword System, enable its users to use and create Networds and place our
logo, slot and a direct link to our Web site on the Upside Web site. The
agreement also provides that Upside will be paid (i) $10,000 per month during
its term; and (ii) 30% of revenues received for the first year, and 20% of
revenues received for the second year from customers who open an account at our
Web site through a link or button from the Upside Web site. The agreement has
an initial one-year term, subject to renewal for successive additional one-year
terms and to early termination by either party.

Netword Directory; My Networds Program

The Netword Directory (an on-line
facility which organized Networds by subject categories) has been removed from
our Web site. We now have a search facility at our Web site which provides
users with lists of similar or related Networds when they enter words, phrases,
sequences of characters, etc. that are not currently Networds.

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




Netword System Components

The Netword System currently runs
on our own cluster of five PCs installed at the McLean Virginia facility of
Exodus Communications, Inc., a tier-1 communications and co-location provider.


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|We also maintain a back-up cluster of PCs at our Maryland
offices. Our current services agreement with Exodus is for a one-year period,
expiring August 23, 2000, subject to successive one year renewals. The cost of
this services agreement is $4,830 per month. This services agreement provides
us with round the clock Internet access, manned security and technical
monitoring.

In June, 1999, we purchased
additional equipment to facilitate installation of additional network access
points for Internet connections in North America and Europe to provide
additional redundancy and assure effective administration of traffic.

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, which is backed up and stored in a
secure facility. Although we rely for programming on our current senior
software engineers, we believe we can find comparable substitute engineers if
and when we need them.

We believe that the operation of
the Netword System is subject to minimal security risks. Our PC cluster is
accessible only by layered passwords. If a fire or other major disaster were to
destroy our co-location providers facility, we believe that we could
provide effective substitute service within 24 to 48 hours through the PC
cluster at our offices and could return to 100% capacity with an alternate co-
location provider within one to two weeks. If one of the five PCs in a cluster
fails, any of the other four has capacity to serve as an immediately effective
substitute. We have established a firewall which limits access to the Netword
System and helps to insulate it from viruses.

Impact of Year 2000

We have not experienced any
year-2000 related problems. We believe that our existing software and hardware
are year-2000 capable; however, there can be no assurance that we will not
experience year-2000 problems in the future.

Patent and Other Intellectual Property

On June 9, 1998, we were issued
patent No. 5764906 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. A recent court decision which we have appealed could impair the patents
protective scope. See Part II, Item 2 - Legal Proceedings on page
20 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.


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|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 patent and
employee and third party confidentiality and non-disclosure agreements.
Although our patent provides some protection against third parties copying the
Netword System, it may not preclude third parties 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 and intensify in the future. We have limited
financial, marketing, research and development resources, but we need to
continue to invest in the development of the Netword System and the expansion
and enhancement of our marketing and customer support services in order to
compete effectively. There are no assurances that we will have sufficient
resources to make the required investments.

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

| |  | keyword
systems which operate through browsers, such as Netscapes Communicator
versions 4.5 and higher and Microsofts Internet Explorer 5.0, and
RealNames Corporations keyword system which operates in a manner similar
to the Netword System;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | keyword
systems within a proprietary network, such as America-On-Lines keyword
system; and
| | - | -------------------------------------------------------------------------------------------

| |  | Internet search engines and directories, such as Yahoo, AltaVista
and Hotbot.
| | - | -----------------------------------------------------------------------------

|These competitive systems are
operated or backed by established companies which have significant presences on
the Internet and vastly greater financial, marketing, research and development
resources than ours. Microsoft, AltaVista and Network Solutions have invested
in and/or entered into agreements with RealNames, and RealNames has
substantially greater financial resources than ours. Additionally, we believe
that RealNames has allied itself and intends to pursue additional relationships
with third party Internet browser providers and providers of search, directory,
e-commerce, portal and content services as a means of distributing its service.
Other established companies may decide to expand their operations to offer a
full range of Internet services which 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 quick, efficient, easy-to use product that is free to Internet users
and reasonably priced to owners of commercial Web resources. Other than
RealNames system, which is an Internet keyword system that directly
competes with the Netword System, we are not aware of any service currently
offered by our competitors which provides the range of functions made available
through the Netword System.


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|In practice, our system is
broadly aimed to allow users to employ Networds across the entire Web. By
contrast, we believe that the RealNames system is more narrowly focused
on the use of keywords in the search engines of RealNames search
partners. We believe the RealNames system materially infringes our patent
rights. See, however, Part II, Item 2 - Legal Proceedings on page
20 of this report for a description of pending litigation involving RealNames
which may impair the protective scope of our patent.

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

| |  | America-On-Lines
keyword system registers keywords which point only to content on the
America-On-Line network. This system does not permit Internet users to create
their own free America-On-Line keywords, and owners of commercial content who
desire to create keywords for use within America-On- Lines network are
subject to a limited and expensive registration process.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Netscapes
keyword system which operates through certain recent versions of its
Communicator does not permit private registration of keywords. The keywords are
created by Netscape and point to NetCenter portal content and other Web
resources.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Microsofts
Internet Explorer 5.0 browser does not permit Internet users or owners of
commercial Web resources to register keywords.
| | - | ------------------------------------------------------------------------------------------------------------------------------------

| |  | The
registration of a keyword on RealNames system can be a lengthy process
and costs more than registration of a Netword. RealNames keyword system
offers a facility for Internet users to create one free Internet keyword for
their homepage on a selected list of Internet communities. It does not offer
them the opportunity to create unlimited numbers of free Internet keywords that
can point to any resource.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Search
engines provide multiple responses to a keyword entry and many of the responses
may be unrelated to a users query.
| | - | --------------------------------------------------------------------------------------------------------------------------

|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 with respect
to the Internet, 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

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|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 such 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. These measures and the scope and extent of
our insurance however, 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 the creator of a Netword.

Employees

As of January 1, 2000, we had 10
full time employees and six consultants who provided services 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. The competition for such
personnel is 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. We believe 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 located at 702 Russell Avenue, Third Floor,
Gaithersburg, Maryland 20877 are leased until September 2003 and cover
approximately 2000 square feet of office space at a monthly rent of
approximately $3,300. We do not consider this leased location to be
material to our operations, and we believe that equally suitable
alternative locations are available.

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

__________
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

|12
|--

|duly elected and qualified, or until his earlier resignation or
removal.
|------------------------------------------------------------------------

|Name              | Age | Position
|----------------- | --- | --------
|Michael L. Wise   |     | 56      
|Kent M. Klineman  |     | 67      
|W. Edward Scheetz |     | 34      
|Shepard C. Bostin |     | 33      
|Murray M. Rubin   |     | 56      
|David Lucas       |     | 32      
|                  |    
|Thomas Sweeting   |     | 36      
|                  |    
|Simon Janes       |     | 28      
|                  |    

|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. Additionally, he is Vice- Chairman
of nStor Technologies, Inc. (AMEX: NSO), a manufacturer of RAID subsystems and
information storage solutions for PC-LAN and Unix. Since 1988, Mr. Wise has
been a director (Chairman of the Board from 1992-1997) and officer of nStor. He
founded IMNET Systems, Inc. (NASDAQ: IMNT), an imaging and information
solutions systems provider, and served as a director and officer of that
company from 1986-1995. Mr. Wise has a Ph.D. in Theoretical Physics from
Brandeis University.

Kent M. Klineman joined
Netword LLC in December 1996 and acts as our in-house counsel. 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 founder, director and the secretary of EIS
International, Inc. (NASDAQ: EISI), a manufacturer of computerized
telemarketing systems, and a director and a 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 a 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.


13
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|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. From June 1994
to March 1995 he was an employee of Intersolv, Inc. Mr. Bostin holds a B.S.,
with honors, in Information and Decision Systems from Carnegie Mellon
University.

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.

Thomas Sweeting joined Netword
LLC in March 1997. He oversees the development of our customer account
management and billing software, and our download agent 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, is among fewer than 100 Certified Linux Administrators in the
world.

Directors do not receive a salary
for their services as directors or a fee for attendance in person at meetings
of the board of directors. Directors are reimbursed for travel expenses and
other out-of-pocket expenses incurred in connection with their attendance at
meetings.

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 have entered into employment agreements.
Accordingly, such employees may leave, and we



14
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|may terminate, their employment at any time, with or without
cause.



Limitations on liability and indemnification
matters.

The Delaware General Corporation
Law provides that a company may indemnify its directors and officers against
certain liabilities. Our certificate of incorporation and bylaws provide for
the indemnification of our directors and officers to the fullest extent
permitted by law. The effect of such provisions is to indemnify our directors
and officers against all costs, expenses and liabilities incurred by them in
connection with actions, suits or proceedings in which they are involved
because of their affiliation with us.


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

|Item 9.  Remuneration of Directors and Officers.

The table below provides the
remuneration of our directors and officers for fiscal year 1999.
|-----------------------------------------------------------------------------------------------------------------------------------------------

|Name and Principal Position                                  | Fiscal Year | Salary | Other Compensation
|------------------------------------------------------------ | ----------- | ------ | ------------------
|                                                            
|Michael L. Wise
President, Chief Executive Officer,
Director |             | 1999   |                   

|                                     
|-------------------------------------
|Kent M. Klineman 
Secretary, Director

|                           
|---------------------------
|W. Edward Scheetz, Director

|                                         
|-----------------------------------------
|Shepard C. Bostin
Chief Operating Officer

|                                                                  
|------------------------------------------------------------------
|Murray M. Rubin
Chief Financial and Accounting  Officer,
Treasurer

|                                                     
|-----------------------------------------------------
|Three highest paid officers and directors as
a group.

| | (1) |  | From May 1, 1999 through August 31, 1999, we paid Mr. Wise a business consulting
fee of $8,000 per month. As of August 31, 1999, he began receiving a salary at
the same rate. On March 15, 1999, Mr. Wise was granted options to purchase
825,000 shares of our common stock at an exercise price of $1.25 per share.
These options will expire on February 17, 2004. He received all of these options
in his capacity as a manager, director or officer.
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|16
|--

---

|(2) |  | As
of May 1, 1999, we commenced payment to Mr. Klineman of a retainer for legal
services at the monthly rate of $4,000. This retainer is applied against
charges for Mr. Klinemans services at the rate of $250 per hour. On March
15, 1999, Mr. Klineman was granted options to purchase 550,000 shares of our
common stock at an exercise price of $1.25 per share. These options will expire
on February 17, 2004. He received all of these options in his capacity as a
manager or director.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | In
December 1999, we issued immediately exercisable warrants, expiring on June 30,
2004, to purchase 336,000 shares of our common stock at an exercise price of
$1.50 per share to NorthStar Capital Partners LLC. Mr. Scheetz holds a 50%
interest in NorthStar Capital and disclaims beneficial ownership as to 50% of
the shares owned by NorthStar Capital.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) |  | On
September 7, 1999, Mr. Bostin was granted options to purchase 90,000 shares of
our common stock at an exercise price of $1.50 per share. He received all of
these options in his capacity as an officer.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) |  | On
September 7, 1999, Mr. Rubin was granted options to purchase 50,000 shares of
our common stock at an exercise price of $1.50 per share. These options will
expire on September 7, 2001. He received all of these options in his capacity
as a consultant or officer.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|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, 2000 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 17,705,924 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 other than Batya Wise do not include shares held by that
persons spouse or children.


17
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|
|

|Name and address ofstockholder | Amount of CommonStock Owned | Percentage of CommonStock Owned
|------------------------------ | --------------------------- | -------------------------------
|                              
|Shepard C. Bostin(1)           |                             | 492,236                        
|                              
|Kent M. Klineman(2)            |                             | 2,581,802                      
|                              
|W. Edward Scheetz(3)           |                             | 1,056,000                      
|                              
|Michael Wise(4)                |                             | 1,943,822                      
|                              
|Batya Wise(5)                  |                             | 1,849,288                      
|                              
|Net2Phone, Inc.(6)             |                            
|171 Main St                    |                            
|Hackensack, NJ 07601           |                             | 5,050,380                      
|                              
|All officers and               |                             | 6,271,003                      
|directors as a group (7)       |                            
|                              

| |  | 
| |  | 

|(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 249,050 shares underlying
currently exercisable warrants.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | 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.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------

|(5) |  | Ms.
Wise owns more than 10% of the outstanding common stock. Her shares include
89,639 shares which she holds as custodian for her son David Wise, and an
aggregate of 422,534 shares underlying currently exercisable warrants which she
holds either individually or as custodian for David Wise. She does not hold any
options. Ms. Wise is the wife of Michael Wise, who disclaims beneficial
ownership of shares held by his wife.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(6) |  | 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.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(7) |  | Includes
3,958,933 shares underlying currently exercisable options and 944,548 shares
underlying
|--- |  | ------------------------------------------------------------------------------------------------

|18
|--

---

| | currently
exercisable warrants.
| | -------------------------------

|Options, Warrants and Rights.

The table below provides
information as of March 28, 2000 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 other than Batya Wise 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
| | - | -------------------------------------------------------------------------------------------------

| |  | 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
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|18
|--

---

|Name of stockholder    | Common stockunderlyingwarrants | Exercise price | Common stockunderlyingoptions | Exercise price
|---------------------- | ------------------------------ | -------------- | ----------------------------- | --------------
|                      
|Shepard C. Bostin      |                                | 6,625          |                               | $1.25         
|                       |                                |                |                               |               
|                       |                                |                |                               |               
|Kent M. Klineman       |                                | 249,050        |                               | $1.25         
|                       |                                |                |                               |               
|W. Edward Scheetz(1)   |                                | 656,000        |                               | $1.50         
|Michael Wise           |                                | None           |                               |               
|                       |                                |                |                               |               
|Batya Wise(2)          |                                | 422,534        |                               | $1.25         
|Net2Phone, Inc. (3)    |                                | 5,050,380      |                               | Approximately 
|                       |                                |                |                               | $3,000,000    
|All executive officers |                                | 285,348        |                               | $1.25         
|and 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) |  | Batya
Wise is the wife of Michael Wise, who disclaims beneficial ownership of all
warrants and shares beneficially owned by his wife. Shares underlying warrants
held by Batya Wise include shares underlying warrants which she holds as
custodian for her son, David Wise.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | 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.



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

|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 are currently paid
consulting fees. See Remuneration of Directors and Officers in Item
9 on page 15 of this report.

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, 1999, there were
approximately 150 holders of record of our common stock.

Bid Price
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                   | Low | High 
|---------------------------------- | --- | -----
|Third quarter (from July 29, 1999) |     | $1.50
|Fourth quarter                     |     | $2.75

|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.

The substance of our claim is that
our patent covers the methodology used by the RealNames system. The patent
claims a universal electronic resource denotation, request and delivery computer
system that allows a computer or Internet user to locate a URL by entering an
alias without knowing the related URL. The alias must be registered in a
database in order to reach the URL through a computer system or
network. The claimed system generally operates by having a local
server computer that is linked to a central registry computer, maintains aliases
and is linked to one or more client computers.

The RealNames systems operates
like the system claimed in our patent. The Real Names system


21
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|allows an Internet user, for a fee, to obtain an alias which is associated with a particular URL so
that the user can locate the URL without having to remember a complex address.
We believe the Real Names system infringes our patent, since it has a Resolver
(a local server computer) which is linked to a central registry computer,
maintains aliases and is linked to a customer/user computer (i.e., a client
computer).

After discovery in our patent
infringement case, each party moved for summary judgement. 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. On February 11, 1999, we filed notice of appeal of the decision, and
on April 30, 1999, we filed our appellate brief with the United States Court of
Appeals for the Federal Circuit. The appeal was argued on November 2, 1999. If
the decision of the District Court is upheld on appeal, the protective scope of
our patent would be impaired.

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. We do not believe that our financial
exposure with respect to the pending action or claims of these former employees
is material.

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.


PART F/S

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

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

---

|PART III

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

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

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

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

|2.3(1) |  | Certificate
of Merger between Netword LLC and Netword, Inc. dated February 18, 1999. 2.4(1)
Agreement and Plan of Merger between Netword, LLC and Netword, Inc. dated
February 18, 1999.
|------ |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

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

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

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

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

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

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

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

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

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

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

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

|23
|--

---

|6.2(1) |  | Internet Data Center Services Agreement between Netword, Inc. and Exodus
Communications, Inc.
|------ |  | ---------------------------------------------------------------------------------------------

|6.3(1) |  | Agreement dated September 29, 1999 between Netword, Inc. and Net2Phone, Inc.
|------ |  | ----------------------------------------------------------------------------

|6.4(1) |  | Agreement dated as of November 12, 1999 between Netword, Inc. and Nettaxi
Online Communities, Inc.
|------ |  | --------------------------------------------------------------------------------------------------

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

|24
|--

---

|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 30, 2000.
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | NETWORD, INC.(Registrant)By: /s/ Michael L. WiseName: Michael L. WiseTitle: President and Chief Executive Officer
| |  | -----------------------------------------------------------------------------------------------------------------

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

|                                    
|------------------------------------
|Signature                           
|/s/ MICHAEL L. WISEMichael L. Wise  
|                                    
|/s/ MURRAY M. RUBINMurray M. Rubin  
|                                    
|/s/ KENT M. KLINEMANKent M. Klineman
|                                    
|W. Edward Scheetz                   

|25
|--

---

|NETWORD, INC.(Formerly Netword, LLC)(A
Development Stage Company)


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

|                                                       | Page
|------------------------------------------------------ | ----
|Independent Auditors Report                           |     
|Balance Sheet as of December 31, 1999                  |     
|Statements of Operations for the Years Ended           |     
|December 31, 1999 and 1998 and for the Period from     |     
|December 2, 1996 (Inception) to December 31, 1999      |     
|Statements of Stockholders Equity for the Years Ended |     
|December 31, 1999 and 1998 and for the Period from     |     
|December 2, 1996 (Inception) to December 31, 1999      |     
|Statements of Cash Flows for the Years Ended           |     
|December 31, 1999 and 1998 and for the Period          |     
|from December 2, 1996 (Inception) to December 31,      |     
|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. (formerly Netword, LLC) (A Development Stage
Company) as of December 31, 1999, and the related statements of operations,
stockholders equity and cash flows for the years ended December 31, 1999 and
1998 and for the period from December 2, 1996 (inception) to December 31, 1999.
These financial statements are the responsibility of the Companys management.
Our responsibility is to express an opinion on these financial statements based
on our 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. (formerly Netword, LLC) as of December 31,
1999 and the results of its operations and its cash flows for the years ended
December 31, 1999 and 1998 and for the period from December 2, 1996 (inception)
to December 31, 1999, in conformity with generally accepted accounting
principles.



/s/ Mahoney Cohen & Cohen, CPI, P.C.




New York, New York January 27, 2000


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

---

|NETWORD, INC.(Formerly Netword, LLC)(A
Development Stage Company)Balance Sheet December 31, 1999
|------------------------------------------------------------------------------------------------

|                                                             | 
|------------------------------------------------------------ | 
|ASSETS                                                       | 
|Current assets:                                              | 
|Cash                                                         | 
|Prepaid expense (Note 4)                                     | 
|                                                            
|Total current assets                                         | 
|Property and equipment, net (Note 5)                         | 
|Intangible assets:                                           | 
|Trademark, net                                               | 
|Intellectual property, net (Note 6)                          | 
|Deferred offering costs (Note 12)                            | 
|                                                            
|Total intangible assets                                      | 
|                                                            
|                                                             | 
|                                                            
|LIABILITIES AND STOCKHOLDERS EQUITY                         | 
|Current liabilities:                                         | 
|Current portion of long-term liability (Note 8)              | 
|Accounts payable                                             | 
|Loans payable (Note 7)                                       | 
|                                                            
|Total current liabilities                                    | 
|Long-term liability, net of current portion (Note 8)         | 
|Convertible note payable (Note 9)                            | 
|Commitments and contingencies (Note 13)                      | 
|Redeemable common stock and common stock warrants (Notes 12) | 
|Stockholders equity (Note 12):                              | 
|Common stock, $.01 par value;                                | 
|Authorized - 40,000,000 shares                               | 
|Issued and outstanding - 16,923,924 shares                   | 
|Additional paid-in capital                                   | 
|Deficit accumulated in the development stage                 | 
|Subscriptions receivable                                     | 
|                                                            
|Total stockholders equity                                   | 
|                                                            
|                                                             | 
|                                                            

|See accompanying notes.


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

---

|NETWORD, INC.(Formerly Netword, LLC)(A
Development Stage Company)Statements of Operations
|-----------------------------------------------------------------------------------------

|                                        | Year Ended December 31, | Period FromDecember2, 1996(Inception) toDecember 31,
|--------------------------------------- | ----------------------- | ----------------------------------------------------
|
|Sales                                   |                         | $        11,431                                     
|General and administrative expenses     |                         | 1,615,439                                           
|                                       
|Operating loss                          |                         | (1,604,008                                          
|Other income (expense):                 |                        
|Interest income                         |                         | 110,844                                             
|Loss on disposition of property and     |                        
|equipment                               |                         |                                                    
|Loss on impairment of assets (Note 6)   |                         |                                                    
|                                       
|Net other income (expense)              |                         | 110,844                                             
|                                       
|Net loss                                |                         | $(1,493,164                                         
|                                       
|Basic and diluted loss per common share |                         | $           (.10                                    
|                                       
|Weighted average number of shares       |                        
|outstanding                             |                         | 15,572,094                                          
|                                       

|See accompanying notes.


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

---

|NETWORD, INC.(Formerly Netword, LLC)(A
Development Stage Company)Statements of Stockholders Equity
|---------------------------------------------------------------------------------------------------

|                                   | Number of | Common Stock | Additional | DeficitAccumu-latedin theDevelop | Subscrip- | TotalStock-holders
|---------------------------------- | --------- | ------------ | ---------- | -------------------------------- | --------- | -------------------
|
|December 2, 1996 (inception)       |           |             |            |                                 |           |                   
|Cash contribution by Netword       |          
|Partners in December 1996          |          
|(Note 1)                           |           | 5,100.00     |            |                                 |           |                   
|Assets acquired from Birdshell     |          
|Corporation LLC in exchange        |          
|for equity units (Note 1)          |           | 2,125.59     |            | 54.21                            |           |                   
|Net loss                           |           |             |            |                                 |           |                   
|                                  
|Balance, December 31, 1996         |           | 7,225.59     |            | 54.21                            |           |                   
|Cash contributions by Netword      |          
|Partners from January              |          
|through April 1997                 |           |             |            |                                 |           |                   
|Class A Units issued in May 1997   |           | 8,560.50     |            |                                 |           |                   
|Class A Units issued in September  |          
|1997                               |           | 4,806.94     |            |                                 |           |                   
|Subscriptions receivable           |           |             |            |                                 |           |                   
|Net loss                           |           |             |            |                                 |           |                   
|                                  
|Balance, December 31, 1997         |           | 20,593.03    |            | 54.21                            |           |                   
|Class A Units issued from February |          
|through December 1998              |           | 15,406.45    |            |                                 |           |                   
|Subscriptions receivable           |           |             |            |                                 |           |                   
|Net loss                           |           |             |            |                                 |           |                   
|                                  
|Balance, December 31, 1998         |          
|(carried forward)                  |           | 35,999.48    |            | 54.21                            |           |                   
|                                  

|See accompanying notes.


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

---

|NETWORD, INC.(Formerly Netword, LLC)(A
Development Stage Company)Statements of Stockholders Equity (Concluded)
|---------------------------------------------------------------------------------------------------------------

|                                              | Number of | Common Stock | Additional | DeficitAccumu-latedin theDevelop | Subscrip- | TotalStock-holders
|--------------------------------------------- | --------- | ------------ | ---------- | -------------------------------- | --------- | -------------------
|
|Balance, December 31, 1998                    |           |              |            |                                  |           |                    
|(brought forward)                             |           | 35,999.48    |            | 54.21                            |           |                   
|Exchange of Class A and Class C               |          
|Units for common stock in                     |          
|February 1999                                 |           | (35,999.48   | )          | (54.21                           | )         | 8,923,924          
|Conversion of accounts payable to             |          
|warrants in February 1999                     |           |             |            |                                 |           |                   
|Issuance of common stock in                   |          
|March 1999                                    |           |             |            |                                 |           | 6,000,000          
|Issuance of common stock and                  |          
|warrants in March 1999                        |           |             |            |                                 |           | 2,000,000          
|Offering costs for issuance                   |          
|of common stock and warrants    in March 1999 |           |             |            |                                 |           |                   
|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         
|                                             

|See accompanying notes.


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

---

|NETWORD, INC.(Formerly Netword, LLC)(A
Development Stage Company)Statements of Cash Flows
|-----------------------------------------------------------------------------------------

|                                          | Year Ended December 31, | Period FromDecember2, 1996(Inception) toDecember 31,
|----------------------------------------- | ----------------------- | ----------------------------------------------------
|
|Net loss                                  |                         | $(1,493,164                                         
|Adjustments to reconcile net loss to cash |                        
|used in operating activities:             |                        
|Issuance of stock options and warrants    |                        
|for consulting and legal services         |                         | 33,308                                              
|Depreciation and amortization             |                         | 65,022                                              
|Amortization of prepaid expense           |                         | 375,000                                             
|Issuance of convertible note payable for  |                        
|legal services                            |                         | 20,903                                              
|Loss on disposition of property and       |                        
|equipment                                 |                         |                                                    
|Loss on impairment of assets              |                         |                                                    
|Change in assets and liabilities:         |                        
|Other current assets                      |                         | 877                                                 
|Deposits                                  |                         |                                                    
|Accounts payable                          |                         | (20,926                                             
|                                         
|Net cash used in operating                |                        
|activities                                |                         | (1,018,980                                          
|                                         
|Cash flows from investing activities:     |                        
|Proceeds from sale of property and        |                        
|equipment                                 |                         |                                                    
|Acquisition of property and equipment     |                         | (36,468                                             
|Acquisition of trademark                  |                         |                                                    
|                                         
|Net cash provided by (used in)            |                        
|investing activities                      |                         | (36,468                                             
|                                         
|Cash flows from financing activities:     |                        
|Proceeds from long-term liability         |                         |                                                    
|Principal payments of long-term liability |                         | (4,800                                              
|Proceeds from loans                       |                         |                                                    
|Redeemable common stock and common        |                        
|stock warrants                            |                         | 977,500                                             
|Deferred offering costs                   |                         | (50,000                                             
|Issuance of common stock and units, net   |                        
|of offering and registration costs        |                         | 2,815,679                                           
|                                         
|Net cash provided by financing            |                        
|activities                                |                         | 3,738,379                                           
|                                         
|Net increase in cash (carried forward)    |                         | $ 2,682,931                                         
|                                         

|See accompanying notes.


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

---

|NETWORD, INC.(Formerly Netword, LLC)(A
Development Stage Company)Statements of Cash Flows (Concluded)
|-----------------------------------------------------------------------------------------------------

|                                                                     | Year Ended December 31, | Period FromDecember2, 1996(Inception) toDecember 31,
|-------------------------------------------------------------------- | ----------------------- | ----------------------------------------------------
|
|Net increase in cash (brought forward)                               |                         | $2,682,931                                          
|Cash, beginning of period                                            |                         | 59,110                                              
|                                                                    
|Cash, end of period                                                  |                         | $2,742,041                                          
|                                                                    
|                                                                     |                        
|Supplemental Schedule of Non-Cash Investing and Financing Activities |                        
|Subscriptions receivable                                             |                         | $                                                  
|                                                                    
|Issuance of Class A Units and Class C                                |                        
|Units in exchange for:                                               |                        
|Intellectual property                                                |                         | $                                                  
|Net assets acquired                                                  |                         |                                                    
|                                                                    
|                                                                     |                         | $            --                                     
|                                                                    
|Conversion of loans to Class A Units                                 |                         | $            --                                     
|                                                                    
|Conversion of accounts payable to                                    |                        
|warrants                                                             |                         | $   114,000                                         
|                                                                    
|Issuance of stock options and warrants                               |                        
|for consulting and legal services                                    |                         | $     33,308                                        
|                                                                    
|Issuance of warrants for future services                             |                         | $1,500,000                                          
|                                                                    
|Issuance of convertible note payable for                             |                        
|legal services                                                       |                         | $     20,903                                        
|                                                                    

|See accompanying notes.


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

---

|NETWORD, INC.(Formerly Netword, LLC)(A
Development Stage Company)Notes to Financial Statements

Note 1 - The Company

Netword, Inc. (formerly Netword,
LLC) (collectively the Company) owns and operates an Internet utility known
as the Netword System which the Company believes offers a comprehen sive
solution to problems created by a lack of consumer-friendly addresses or URLs
for Internet resources. The Company was formed as a limited liability company
under the laws of the State of Delaware, to acquire the business and assets of
Birdshell Corporation, L.L.C. (Birdshell). The Company has been in the
development stage since its organization on December 2, 1996.

The Company was organized by
Netword Partners, to acquire certain assets and assume certain liabilities of
Birdshell, as provided in a Limited Liability Company Agreement dated as of
December 2, 1996 (the Agreement). Birdshell was formed in April 1995 to
develop the Netword System. The Birdshell acquisition was accounted for using
the purchase method of accounting. The acquired assets consisted primarily of
proprietary rights to intellectual property, including U.S. and foreign patent
applications, trademarks and Internet domain registrations called the IP, and
certain other property and equipment having an aggregate original estimated
value of $960,000. The liabilities assumed consisted of various computer and
telephone leases, obligations under a trademark purchase agreement and certain
accrued expenses. In exchange for the acquired assets, the Birdshell investors
received membership interests (Units) in the Company consisting of 4,900
Class A Units, representing 49% of the Companys equity, subject to reduction
to 268.42 Class C Units if the Company did not achieve certain milestones at
various dates specified in the Agreement. As a result of the Companys failure
to achieve these milestones, in July 1997, the 4,900 Class A Units were
converted into 268.42 Class C Units. In September 1997, an amendment to the
Agreement was proposed by Netword Partners that was accepted by 214.21 of the
Class C Unit holders which resulted in the conversion of their Class C Units
into 2,125.59 Class A Units, representing 29.42% of the Companys equity; the
holders of the remaining 54.21 Class C Units did not convert their Class C
Units into Class A Units. The reduction of the Units held by the Class A
Birdshell investors required a $532,213 reduction in the intellectual property
and members equity. Pursuant to the Agreement, Netword Partners loaned the
Company $1,000,000 (the Loan) and also received 5,100 Class B-2 Units. In
1997, pursuant to the Agreement, the Loan was converted into 5,100 Class A
Units and the 5,100 Class B-2 Units were cancelled. The above transactions are
reflected in the statements of stockholders equity as if the transactions
occurred in December 1996.

On February 18, 1999, the Company
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

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

---

|NETWORD, INC.(Formerly Netword, LLC)(A
Development Stage Company)Notes to Financial Statements


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. Amortization of the computer software
is computed using the straight-line method over three 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 $14,156 at December 31, 1999.

Intellectual Property

The IP is stated at appraised
value, which is below cost, net of accumulated amortization, 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.

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

---

|NETWORD, INC.(Formerly Netword, LLC)(A
Development Stage Company)Notes to Financial Statements


Note 2 - Summary of Significant Accounting Policies (Continued)

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 antidultive 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, 1999, management
believes the fair value of all financial instruments approximated carrying
value.

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 10).

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

---

|NETWORD, INC.(Formerly Netword, LLC)(A
Development Stage Company)Notes to Financial Statements


Note 2 - Summary of Significant Accounting Policies (Continued)

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 expenses are charged
to operations in the period in which they are incurred. Advertising expenses
for the years ended December 31, 1999 and 1998 were approximately $163,700 and
$63,200, respectively.

Research and Development

Research and development costs
amounted to approximately $190,000 and $210,000 for the years ended December
31, 1999 and 1998, respectively.

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 - Prepaid Expense

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 has an initial one-year term (expiring September 29, 2000), subject
to renewal for successive additional one-year terms and to early termination by Net2Phone.  In connection with the
agreement, the Company granted Net2Phone four-year warrants (expiring September 29, 2003)

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

---

|NETWORD, INC.(Formerly Netword, LLC)(A
Development Stage Company)Notes to Financial Statements

Note 4 - Prepaid Expense (Continued)

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. The value of such
warrants is recorded as a prepaid expense at December 31, 1999 with a
corresponding credit to additional paid-in capital and is being amortized over
the initial term of the agreement.

Note 5 - Property and Equipment

At December 31, 1999, property
and equipment consists of:
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

|Note 6 - Intellectual Property


In connection with the
acquisition of the Birdshell assets, the Company acquired the IP having an
initial value of $939,788. Subsequently, in September 1997, as discussed in
Note 1, the holdings of the former Birdshell investors were reduced from 49% to
29.42%, which resulted in a reduction of the IP and members equity by $532,213.

In connection with the adoption
of Statement of Financial Accounting Standards No. 121, Accounting for the
Impairment of Long-Lived Assets to be Disposed Of, based upon an appraisal,
the intellectual property was considered to be impaired. Accordingly, a loss of
$382,575 was recognized during the year ended December 31, 1997.

Note 7 - 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.
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-13

---

|NETWORD, INC.(Formerly Netword, LLC)(A
Development Stage Company)Notes to Financial Statements


Note 7 - Loans Payable (Continued)

At December 31, 1999, the Company had $33,027 of loans payable
to subscribers to the 97 loan who did not fully fund their subscriptions.

Note 8 - Long-Term Liability

In connection with the
acquisition of the Birdshell assets, 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 9 - 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, 1999, the note
included $903 in accrued interest.

Note 10 - Options

The Company previously granted
options to purchase Class A Units to managers and key employees responsible for
the direction and management of the Company. At December 31, 1999, after giving
effect to the recapitalization described in Note 1, there were 4,898,765 shares
of common stock reserved for issuance pursuant to these options.

Pro forma information regarding
net loss and net loss per share is required by SFAS No. 123 and has been
determined as if the Company had accounted for its applicable options under the
fair value method of the statement.

The fair value of these options
was estimated at the date of grant using a Black-Scholes option pricing model
with the weighted-average assumptions for 1999 and 1998, including a risk free
interest rate of 5%, a volatility factor of the expected market price of the
Companys common stock of .84 and a weighted-average remaining contractual life
of the option of 60 months.

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


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

---

|NETWORD, INC.(Formerly Netword, LLC)(A
Development Stage Company)Notes to Financial Statements

Note 10 - Options (Continued)

For purposes of pro forma
disclosures, the estimated fair value of these options is amortized to expense
over the option vesting period. The effects of applying SFAS No. 123 for pro
forma disclosures are not likely to be representative of the effects on
reported net income or losses for future years. The Companys pro forma
information follows:
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                             | Years EndedDecember 31,
|---------------------------- | -----------------------
|
|Pro forma net loss           |                        
|Pro forma net loss per share |                        

|A summary of applicable option
activity and related information for the years ended December 31, 1999 and
1998, after giving effect to the recapitalization described in Note 1, is as
follows:
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                               | 1999 | 1998     
|------------------------------ | ---- | ---------
|
|Outstanding, beginning of year |      | 3,099,613
|Granted                        |      | 1,874,023
|Exercised                      |      |         
|Forfeited                      |      | 74,871   
|                              
|Outstanding, end of year       |      | 4,898,765
|                              
|Exercisable, end of year       |      | 4,898,765
|                              

The weighted-average fair value
of options granted during 1999 and 1998 was $.17 and $.26, respectively.
Exercise prices for options outstanding ranged as of December 31, 1999 from
$.17 to $1.50. These options expire at various times through October 2004.

Note 11 - Income Taxes

At December 31, 1999, the Company
has a federal net operating loss carryforward to reduce future taxable income
of approximately $1,423,000. The net operating loss carryforward expires in
2019.

|F-15
|----

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|NETWORD, INC.(Formerly Netword, LLC)(A
Development Stage Company)Notes to Financial Statements


Note 11 - Income Taxes (Continued)

At December 31, 1999, the Company
has a deferred tax asset of approximately $484,000 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 12 - Equity Transactions

Pursuant to the Agreement, during
1997 the Loan was converted into 5,100 Class A Units and the Class B-2 Units
were cancelled. $250,000 of the Loan was funded in December 1996; the $750,000
balance was funded during the period from January 1, 1997 through April 15,
1997.

In May 1997, the Company sold
8,560.50 Class A Units at $50.00 per Unit resulting in proceeds of $428,027. In
September 1997, the Company sold 4,806.94 Class A Units at $62.41 per Unit,
resulting in proceeds of $300,001.

In February 1998, the Company
offered its members rights to subscribe to their pro rata share of a $600,000
offering, consisting of 15,483.87 Class A Units at $38.75 per Unit. In
addition, to protect option holders from dilution resulting from the $600,000
offering, the Company also granted option holders their pro rata share of
2,313.93 new options to purchase Class A Units at an exercise price of $38.75.
The members subscribed to 15,406.45 Class A Units for total proceeds of
$597,000.

In February 1999, the Company
settled fees of $655,000 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.

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.

F-16
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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|NETWORD, INC.(Formerly Netword, LLC)(A
Development Stage Company)Notes to Financial Statements


Note 12 - Equity Transactions (Continued)

The staff of the Securities and
Exchange Commission has 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. While
the Company will not make a rescission offer, it 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. Accordingly, such proceeds are
classified as redeemable common stock and common stock warrants in the
accompanying balance sheet. Offering costs were approximately $50,000 and are
included in deferred offering costs.

Note 13 - 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, | 
|----------------------- | 
|2000                    | 
|2001                    | 
|2002                    | 
|2003                    | 
|                       
|                        | 
|                       

|Total rent charged to operations
for the years ended December 31, 1999 and 1998 was approximately $33,000 and
$66,000, respectively.



F-17
|--------------------------------------------------------------------------------------------------------------------------------------------

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|NETWORD, INC.(Formerly Netword, LLC)(A
Development Stage Company)Notes to Financial Statements


Note 13 - Commitments and Contingencies (Continued)

Promotional Agreements

The Company has entered into
agreements with several Internet companies to promote the Netword System
permitting users who visit these companies Web sites 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 these companies. These agreements, expiring
through December 2001, entitle these companies to various revenue sharing
arrangements with the Company, with guaranteed future minimum payments required
as follows:
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|2000 |  | $720,000 | 
|---- |  | -------- | 
|2001 |  | 50,000   | 
|    
|     |  | $770,000 | 
|    

|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, the dilution of his
interest in the Company and the repayment of the funded portion of his
subscription to the 97 loan (see Note 7). The Company is defending that action
which is currently inactive. The Company does not believe that its financial
exposures with respect to the pending action or unsettled claims of the other
former employees is material.


F-18
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