<PAGE>

                            FORM 10-QSB - Quarterly
    Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934
               UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C.  20549

FORM 10-QSB

[X]  Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange
     Act of l934.

For the period ended March 31, 2001.
                     ---------------

[_]  Transition Report Pursuant to Section 13 or 15(d) of the Securities
     Exchange Act of 1934.

For the transition period from __________ to __________.

Commission File Number      0-28462    .
                       ----------------

WEBB INTERACTIVE SERVICES, INC.
-------------------------------
(Exact name of registrant as specified in its charter)

COLORADO                                              84-1293864
----------------------------------------------------------------
(State or other jurisdiction                   I.R.S. Employer
of incorporation or organization             Identification No.)

1899 WYNKOOP, SUITE 600, DENVER, CO     80202
---------------------------------------------
(Address of principal executive offices)    (Zipcode)

(303) 296-9200
--------------
(Registrant's telephone number, including area code)

1800 GLENARM PLACE, SUITE 700, DENVER, CO  80202
------------------------------------------------
Former name, former address and former fiscal year, if changed since last
report.)

Indicate by check mark whether the registrant (1) has 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.

[X]  YES        [_]  NO

APPLICABLE ONLY TO CORPORATE ISSUERS:

     As of May 10, 2001, Registrant had 10,619,303 shares of common stock
outstanding.


<PAGE>

               WEBB INTERACTIVE SERVICES, INC. AND SUBSIDIARIES

                                     Index
                                     -----

<TABLE>
<CAPTION>
                                                                                                              Page
                                                                                                             ------
<S>                                                                                                          <C>
Part I.   Financial Information

          Item 1.  Unaudited Financial Statements

          Consolidated Balance Sheets as of March 31, 2001 and December 31, 2000                                  3

          Consolidated Statements of Operations for the Three Months Ended March 31, 2001 and 2000                4

          Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2001 and 2000              5-6

          Notes to Consolidated Financial Statements                                                           7-15

          Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations      16-30

Part II.  Other Information

          Items 1, 3- 5.  Not Applicable                                                                         30

          Item 2.  Changes in Securities and Use of Proceeds                                                     30

          Item 6.  Exhibits and Reports on Form 8-K                                                           30-32

Signatures                                                                                                       33
</TABLE>

                        ______________________________


This report contains forward-looking statements within the meaning of Section
21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the
Securities Act of 1933, as amended, and is subject to the safe harbors created
by those sections.  These forward-looking statements are subject to significant
risks and uncertainties, including those identified in the section of this Form
10-QSB entitled "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Factors That May Affect Future Operating Results,"
which may cause actual results to differ materially from those discussed in such
forward-looking statements.  The forward-looking statements within this Form 10-
QSB are identified by words such as "believes," "anticipates," "expects,"
"intends," "may," "will" and other similar expressions.  However, these words
are not the exclusive means of identifying such statements.  In addition, any
statements which refer to expectations, projections or other characterizations
of future events or circumstances are forward-looking statements.  The Company
undertakes no obligation to publicly release the results of any revisions to
these forward-looking statements which may be made to reflect events or
circumstances occurring subsequent to the filing of this Form 10-QSB with the
Securities and Exchange Commission ("SEC").  Readers are urged to carefully
review and consider the various disclosures made by the Company in this report
and in the Company's other reports filed with the SEC that attempt to advise
interested parties of the risks and factors that may affect the Company's
business.

                                       2
<PAGE>

                                    PART I

                             FINANCIAL INFORMATION

                         ITEM 1. FINANCIAL STATEMENTS

               WEBB INTERACTIVE SERVICES, INC. AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS

                                  (UNAUDITED)
<TABLE>
<CAPTION>
                                                                                              March 31,       December 31,
                                                                                                 2001             2000
                                                                                            -------------     ------------
<S>                                                                                         <C>               <C>
ASSETS
Current assets:
  Cash and cash equivalents                                                                 $   1,566,250     $  4,856,686
  Restricted cash                                                                                 525,000          525,000
  Accounts receivable, net of allowance for doubtful accounts of $96,000 and
     $151,882, respectively                                                                     1,194,498          469,639
  Prepaid expenses                                                                                658,285          301,657
  Notes receivable from Company officers                                                          171,992          198,444
  Short-term deposits                                                                              35,991          370,522
                                                                                            -------------     ------------
     Total current assets                                                                       4,152,016        6,721,948
Property and equipment, net of accumulated depreciation of $1,284,226 and
     $963,417, respectively                                                                     2,517,912        2,830,132

Intangible assets, net of accumulated amortization of $11,725,457 and
     $10,870,312, respectively                                                                  5,146,522        6,001,667
Deferred financing costs                                                                           89,159          104,893
Other assets                                                                                       46,362           51,689
                                                                                            -------------     ------------
     Total assets                                                                           $  11,951,971     $ 15,710,329
                                                                                            =============     ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Capital leases payable                                                                    $     117,315     $    227,876
  Accounts payable and accrued liabilities                                                      1,484,984        2,142,731
  Accrued salaries and payroll taxes payable                                                    1,038,006        1,232,844
  Accrued interest payable                                                                         69,479           63,014
  Customer deposits and deferred revenue                                                          295,310          174,522
                                                                                            -------------     ------------
     Total current liabilities                                                                  3,005,094        3,840,987
10% convertible note payable, net of discount of $251,236 and
     $295,676, respectively                                                                     2,402,874        2,358,434
Minority interest in subsidiary                                                                   523,700          523,700
Commitments and contingencies
Stockholders' equity
  Preferred stock, no par value, 5,000,000 shares authorized:
     Series C-1 convertible preferred stock, 2,500 and none shares issued and
        outstanding, respectively                                                               2,450,000                -

     Series B-2 convertible preferred stock, 978 shares issued and outstanding                    912,286          912,286

  Common stock, no par value, 60,000,000 shares authorized, 10,354,473 shares
     issued and outstanding                                                                    90,518,089       85,986,641
  Warrants and options                                                                         14,563,662       13,740,819
  Deferred compensation                                                                          (336,725)        (402,137)
  Accumulated other comprehensive income                                                            1,590            1,371
  Accumulated deficit                                                                        (102,088,599)     (91,251,772)
                                                                                            -------------     ------------
     Total stockholders' equity                                                                 6,020,303        8,987,208
                                                                                            -------------     ------------
     Total liabilities and stockholders' equity                                             $  11,951,971     $ 15,710,329
                                                                                            =============     ============
</TABLE>

The accompanying notes to consolidated financial statements are an integral part
                     of these consolidated balance sheets.

                                       3
<PAGE>

               WEBB INTERACTIVE SERVICES, INC. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF OPERATIONS

                                  (UNAUDITED)

<TABLE>
<CAPTION>
                                                                                            Three Months Ended
                                                                                                  March 31,
                                                                                  ---------------------------------------
                                                                                      2001                       2000
                                                                                  ------------               ------------
<S>                                                                               <C>                        <C>
Net revenues                                                                      $    978,754               $    812,553
Cost of revenues                                                                     1,314,974                    645,813
                                                                                  ------------               ------------
  Gross margin                                                                        (336,220)                   166,740
                                                                                  ------------               ------------
Operating expenses:
  Sales and marketing                                                                  604,879                    454,451
  Product development                                                                1,745,479                  1,122,604
  General and administrative                                                         1,776,430                  1,762,321
  Depreciation and amortization                                                      1,064,336                  2,174,012
                                                                                  ------------               ------------
                                                                                     5,191,124                  5,513,388
                                                                                  ------------               ------------
  Loss from operations                                                              (5,527,344)                (5,346,648)
Interest income                                                                        113,640                    161,887
Interest expense                                                                    (2,539,448)                  (174,990)
Loss on foreign currency transactions                                                  (14,632)                         -
Loss on disposition of property and equipment                                          (12,416)                         -
                                                                                  ------------               ------------
Net loss from continuing operations                                                 (7,980,200)                (5,359,751)
Loss from discontinued operations                                                            -                    (34,791)
                                                                                  ------------               ------------

Net loss                                                                            (7,980,200)                (5,394,542)
Preferred stock dividends                                                                    -                   (373,126)
Accretion of preferred stock to stated value                                        (2,856,627)               (12,500,000)
                                                                                  ------------               ------------
Net loss applicable to common stockholders                                        $(10,836,827)              $(18,267,668)
                                                                                  ============               ============
Net loss applicable to common stockholders from continuing operations per
  share, basic and diluted                                                        $      (1.05)              $      (2.11)
                                                                                  ============               ============

Net loss applicable to common stockholders per share from discontinued
  operations, basic and diluted                                                              -                          -
                                                                                  ============               ============

Net loss applicable to common stockholders per share, basic and diluted           $      (1.05)              $      (2.11)
                                                                                  ============               ============
Weighted average shares outstanding, basic and diluted                              10,354,473                  8,667,640
                                                                                  ============               ============
</TABLE>


The accompanying notes to consolidated financial statements are an integral part
                       of these consolidated statements.

                                       4
<PAGE>

               WEBB INTERACTIVE SERVICES, INC. AND SUBSIDIARIESUP

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

                                  (UNAUDITED)

<TABLE>
<CAPTION>
                                                                                               Three Months Ended
                                                                                                     March 31,
                                                                                     ---------------------------------------
                                                                                         2001                       2000
                                                                                     ------------               ------------
<S>                                                                                  <C>                        <C>
Cash flows from operating activities:
  Net loss                                                                           $ (7,980,200)              $ (5,394,542)
  Adjustments to reconcile net loss to net cash used in operating activities:
     Depreciation and amortization                                                      1,178,327                  2,270,898
     Stock and stock options issued for services                                          168,842                    175,170
     Loss on sale and disposal of property and equipment                                   12,416                          -
     Bad debt expense                                                                      14,030                          -
     Accrued interest income on notes receivable                                           (3,548)                         -
     Interest expense on 10% convertible note from beneficial conversion
        feature                                                                         2,394,234                          -
     Amortization of 10% convertible note payable discount                                 44,440                     50,381
     Amortization of 10% convertible note payable financing costs                          15,734                     24,480

  Changes in operating assets and liabilities:
     Increase in restricted cash                                                                -                   (453,624)
     Increase in accounts receivable                                                     (738,889)                  (516,604)
     (Increase) decrease in prepaid expenses                                             (356,628)                   127,003
     Decrease (increase) in short-term deposits and other assets                          339,858                    (25,205)
     (Decrease) increase in accounts payable and accrued liabilities                     (657,746)                   280,669
     Increase in accrued salaries and payroll taxes payable                              (194,838)                  (223,306)
     Increase (decrease) in accrued interest payable                                        6,465                    (30,136)
     Increase (decrease) in customer deposits and deferred revenue                        120,788                    (44,616)
                                                                                     ------------               ------------
     Net cash used in operating activities                                             (5,636,715)                (3,759,432)
                                                                                     ------------               ------------
Cash flows from investing activities:
  Proceeds from the sale of property and equipment                                          8,500                          -
  Purchase of property and equipment                                                      (31,878)                  (598,822)
  Collection of notes receivable from Company officers                                     30,000                          -
                                                                                     ------------               ------------
     Net cash provided by (used in) investing activities                                    6,622                   (598,822)
                                                                                     ------------               ------------
Cash flows from financing activities:
   Payments on capital leases                                                            (110,561)                   (35,679)
   Proceeds from exercise of stock options and warrants                                         -                  6,165,461
   Proceeds from issuance of series C-1 preferred stock and warrant                     2,500,000                          -
   Proceeds from issuance of series B preferred stock and warrants                              -                 12,500,000
   Preferred stock cash offering costs                                                    (50,000)                  (840,000)
                                                                                     ------------               ------------
     Net cash provided by financing activities                                          2,339,439                 17,789,782
                                                                                     ------------               ------------
Net (decrease) increase in cash and cash equivalents                                   (3,290,654)                13,431,528
Effect of foreign currency exchange rate changes on cash                                      218                          -
Cash and cash equivalents, beginning of period                                          4,856,686                  4,164,371
                                                                                     ------------               ------------
Cash and cash equivalents, end of period                                             $  1,566,250               $ 17,595,899
                                                                                     ============               ============
</TABLE>


The accompanying notes to consolidated financial statements are an integral part
                       of these consolidated statements.

                                       5
<PAGE>

               WEBB INTERACTIVE SERVICES, INC. AND SUBSIDIARIES

               CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

                                  (UNAUDITED)


<TABLE>
<CAPTION>
                                                                                    Three Months Ended
                                                                                          March 31,
                                                                              --------------------------------
                                                                                  2001                2000
                                                                              ------------        ------------
<S>                                                                           <C>                 <C>
Supplemental disclosure of cash flow information:
   Cash paid for interest                                                     $     78,575        $   130,265
                                                                              ============        ===========
Supplemental schedule of non-cash investing and financing activities:
   Common stock and warrants issued in business combinations                  $    -              $ 9,995,417
   Accretion of preferred stock to stated value                               $2,856,627          $12,500,000
   Preferred stock dividends paid in common stock                             $    -              $   373,126
   Preferred stock and dividends converted to common stock                    $    -              $ 1,023,028
   10% note payable converted to common stock                                 $    -              $ 1,886,263
</TABLE>


The accompanying notes to consolidated financial statements are an integral part
                       of these consolidated statements.

                                       6
<PAGE>

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

               WEBB INTERACTIVE SERVICES, INC. AND SUBSIDIARIES

                     MARCH 31, 2001 AND DECEMBER 31, 2000

                                 (UNAUDITIED)

NOTE 1 - BASIS OF PRESENTATION

     The accompanying unaudited interim consolidated financial statements
include the accounts of Webb Interactive Services, Inc. and  its subsidiaries
(collectively "Webb" or the "Company").  All significant intercompany balances
and transactions have been eliminated in consolidation.  The net loss
attributable to the minority stockholders interests in our Jabber.com
subsidiary, is allocated to Webb in the consolidated statements of operations
until such time as the minority stockholders are obligated to fund Jabber.com
losses.  The consolidated financial statements have been prepared without audit
pursuant to rules and regulations of the Securities and Exchange Commission and
reflect, in the opinion of management, all adjustments, which are of a normal
and recurring nature, necessary for a fair presentation of the financial
position and results of operations for the periods presented.  The preparation
of financial statements in accordance with generally accepted accounting
principles requires management to make estimates and assumptions.  Such
estimates and assumptions affect the reported amounts of assets and liabilities
as well as disclosure of contingent assets and liabilities at the date of the
accompanying financial statements, and the reported amounts of revenue and
expenses during the reporting period.  Actual results could differ from those
estimates.  The results of operations for the interim periods are not
necessarily indicative of the results for the entire year.  The interim
financial statements should be read in connection with the financial statements
included in our Annual Report on Form 10-KSB for the year ended December 31,
2000 filed with the Securities and Exchange Commission.

     The accompanying consolidated financial statements have been prepared
assuming that Webb will continue as a going concern.  Among other factors, we
have incurred significant and recurring losses from operations, and such losses
are expected to continue in the near future, which raises substantial doubt
about the ability of Webb to continue as a going concern.  Management's plans in
regard to these matters are described in Management's Discussion and Analysis of
Financial Condition and Results of Operations.  The accompanying financial
statements do not include any adjustments relating to the recoverability and
classification of asset carrying amounts or the amount and classification of
liabilities that might result should we be unable to continue as a going
concern.  The report of Arthur Andersen LLP, our independent public accountants,
included a paragraph expressing substantial doubt about our ability to continue
as a going concern.

     We have not been profitable since inception.  Our ability to become
profitable depends on our ability to market our products and services and
generate revenues sufficient to exceed our expenses.  The success of our revenue
model will depend upon many factors including the success of our distribution
partners in marketing their products and services; and the extent to which
consumers and businesses use our services and conduct e-commerce transactions
and advertising utilizing our services.  Because of the new and evolving nature
of the Internet, we cannot predict whether our revenue model will prove to be
viable, whether demand for our products and services will materialize at the
prices we expect to charge, or whether current or future pricing levels will be
sustainable.  We are also highly dependent on certain key personnel.

     At March 31, 2001, we had $1,566,250 in cash and cash equivalents and
$1,146,922 in working capital. We have expended significant funds to develop our
current product offerings and we anticipate increased operating expenses and
research and development expenditures in 2001, which we believe are necessary
for us to further develop and market our products as well as to achieve market
acceptance of our products in sufficient quantities to achieve positive cash
flow from operations. Our continued viability depends, in part, on our ability
to obtain additional profitable customer contracts and at some point in the
future to obtain additional capital through debt or equity financing sufficient
to fund our expected operations. We believe that our cash and cash equivalents
and working capital are adequate to fund our AccelX business through May 2001.
In addition, we expect the proceeds from the convertible note issued in May 2001
(See Note 9) to be adequate to sustain our Jabber.com operations through at
least October 2001. In addition to the remaining $2.5 million which may be
raised pursuant to the February 2001 preferred stock financing and the
additional $4.5 million expected to be raised from the sale of

                                       7
<PAGE>

Jabber.com preferred stock, we are in discussions with strategic and
institutional investors for an additional $10 million of financing which we
believe would be sufficient to fund our operations through at least the first
quarter of 2002. However, we have no commitments for the $10 million financing
and the conditions to the private investor's obligation to purchase the
additional $2.5 million worth of our preferred stock may not be satisfied and
the additional sale of $4.5 million worth of Jabber.com's preferred stock may
not occur. Therefore, there can be no assurances that any of these financings
will be completed, or if completed, that the terms of any such financings will
be acceptable to us. If we are not successful in obtaining funding in
appropriate amounts or at appropriate terms, we would consider significant
reductions in our operating activities, particularly those relating to our
AccelX business, and/or the sale of all or a portion of either our AccelX or our
Jabber.com businesses.

NOTE 2 - REVENUE RECOGNITION

     Webb generates revenues from the license of its software products and from
professional service arrangements.  Software license revenue is recognized in
accordance with the American Institute of Certified Public Accountants Statement
of Position 97-2 "Software Revenue Recognition" ("SOP 97-2") and related
interpretations and amendments as well as Technical Practice Aids issued from
time to time by the American Institute of Certified Public Accountants.

     The Securities and Exchange Commission ("SEC") issued Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB 101") in
December 1999.  As amended, SAB 101 provides further interpretive guidance for
publicly traded companies on the recognition, presentation, and disclosure of
revenue in the accompanying financial statements.  In June 2000, the SEC issued
SAB No. 101B, delaying the implementation of SAB 101 until the fourth quarter of
2000.  The provisions of SAB 101 had no material impact on Webb's revenue
recognition policies and presentation as reflected in the accompanying
consolidated financial statements.

     We recognize revenue on software arrangements only when persuasive evidence
of an agreement exists, customer acceptance, if any, has occurred, delivery has
occurred, our fee is fixed or determinable, and collectibility is probable.

     Under certain circumstances, software license revenue is deferred until all
criteria of SOP 97-2 are met.  Certain arrangements contain provisions which
result in the recognition of revenue from software licenses ratably over the
term of the contract.  In instances where we charge monthly license fees,
revenue is recognized on a month-by-month basis as the fees are determined and
become collectable.

     Revenue from professional services billed on a time and materials basis is
recognized as the services are performed and amounts due from customers are
deemed collectible and are contractually non-refundable.  Revenue from fixed
price long-term contracts is recognized on the percentage of completion method
for individual contracts, commencing when progress reaches a point where
experience is sufficient to estimate final results with reasonable accuracy.
Revenues are recognized in the ratio that costs incurred bear to total estimated
contract costs.  The use of the percentage of completion method of revenue
recognition requires estimates of percentage of project completion.  Changes in
job performance, estimated profitability and final contract settlements may
result in revisions to costs and income in the period in which the revisions are
determined.  Provisions for any estimated losses on uncompleted contracts are
made in the period in which such losses are determinable.  In instances when the
work performed on fixed price agreements is of relatively short duration, we use
the completed contract method of accounting whereby revenue is recognized when
the work is completed.  Customer advances and billed amounts due from or
collected from customers in excess of revenue recognized are recorded as
deferred revenue.

     Revenue from maintenance and support agreements is recognized on a
straight-line basis over the term of the related support and maintenance
agreement.

     We follow the provisions of EITF 00-3, "Application of AICPA SOP 97-2,
`Software Revenue Recognition,' to Arrangements That Include the Right to Use
Software Stored on Another Entity's Hardware," for software arrangements that
include provisions for hosting.  Under the EITF consensus, if the customer has
the contractual right to take possession of the software at anytime during the
hosting period without significant penalty and it is feasible for the customer
to either run the software on its own hardware or contract with another party
not

                                       8
<PAGE>

related to Webb to host the software, then the software portion of the
arrangement is accounted for under SOP 97-2. If the customer does not have this
right, then the fee for the entire arrangement is recognized on a straight-line
basis over the life of the related arrangement.

     For software arrangements with multiple elements, we apply the residual
method prescribed by SOP 98-9.  Revenue applicable to undelivered elements,
principally software maintenance, training, hosting and limited implementation
services, is deferred based on vendor specific objective evidence ("VSOE") of
the fair value of those elements.  VSOE is established by the price of the
element when it is sold separately (i.e., the renewal rate for software
maintenance and normal prices charged for training, hosting and professional
services).  Revenue applicable to the delivered elements is deemed equal to the
remainder/residual amount of the fixed arrangement price.  Assuming none of the
undelivered elements are essential to the functionality of any of the delivered
elements, we recognize the residual revenue attributed to the delivered elements
when all other criteria for revenue recognition for those elements have been
met.

     We believe our current revenue recognition policies and practices are
consistent with the provisions of SOP 97-2, as amended by SOP 98-4 and SOP 98-9,
which were issued by the American Institute of Certified Public Accountants, as
well as other related authoritative literature.  Implementation guidelines for
these standards, as well as potential new standards, could lead to unanticipated
changes in our current revenue recognition policies.  Such changes could affect
the timing of our future revenue and results of operations.

     Net revenues from continuing operations are comprised of the following:

                                            Three Months Ended
                                                  March 31,
                                        --------------------------
                                           2001            2000
                                        ----------      ----------
Net revenues:
  License                               $  472,265      $  681,727
  Services                                 506,489         130,826
                                        ----------      ----------
  Total net revenues                    $  978,754      $  812,553
                                        ==========      ==========


NOTE 3 - GOODWILL

     Long-Lived Assets, Intangible Assets and Goodwill

     In accordance with the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of," ("SFAS 121"), we evaluate the
carrying value of our long-lived assets and certain identifiable intangibles for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable.  Impairment of assets to be
held and used is calculated by a comparison of the carrying amount of an asset
to future undiscounted net cash flows expected to be generated by the asset.  If
such assets are considered to be impaired, the impairment to be recognized is
measured by the amount which the carrying amount of the assets exceed the fair
value of the assets.  Assets to be disposed of are reported at the lower of the
carrying amount or fair value less the cost to sell the asset.

     Intangible assets and goodwill are being amortized on a straight-line basis
over their estimated economic lives of three years. We recorded amortization
expense of $855,145 and $2,037,255 for the three months ended March 31, 2001 and
2000, respectively.  As of March 31, 2001, $252,046 of our intangible assets
consisted of goodwill.  Subsequent to acquisitions which result in intangible
assets and goodwill, we continually evaluate whether later events and
circumstances have occurred that indicate the remaining useful life of the
intangible assets and goodwill may warrant revision or that the remaining
balance may not be recoverable.  When factors indicate that intangible assets
and goodwill should be evaluated for possible impairment, we use an estimate of
the undiscounted cash flows over the remaining life of the intangible assets and
goodwill in measuring whether the intangible assets and goodwill are
recoverable.

                                       9
<PAGE>

     At each balance sheet date, we evaluate the carrying value of the remaining
intangible assets for possible impairment.  Such a review may indicate further
impairment that would require us to record impairment losses in future periods
and those losses could be substantial.

NOTE 4 - NET LOSS PER SHARE

     Net loss per share is calculated in accordance with SFAS No. 128, "Earnings
Per Share" ("SFAS 128").  Under the provisions of SFAS 128, basic net loss per
share is computed by dividing net loss applicable to common shareholders for the
period by the weighted average number of common shares outstanding for the
period.  Diluted net loss per share is computed by dividing the net loss for the
period by the weighted average number of common and potential common shares
outstanding during the period if the effect of the potential common shares is
dilutive.  As a result of our net losses, all potentially dilutive securities,
as indicated in the table below, would be anti-dilutive and are excluded from
the computation of diluted loss per share, and there are no differences between
basic and diluted per share amounts for all years presented.

                                                         March 31,
                                                --------------------------
                                                   2001            2000
                                                ----------      ----------
Stock options                                    3,966,525       3,365,691
10% convertible note payable                     1,061,644         248,262
Warrants and underwriter options                 1,231,845         785,682
Series C-1 preferred stock                       1,000,000         -
Series B-2 preferred stock                         391,200         -
Series B preferred stock                           -               625,000
                                                ----------      ----------
Total                                            7,651,214       5,024,635
                                                ==========      ==========

     The number of shares excluded from the earnings per share calculation
because they are anti-dilutive, using the treasury stock method, were 504,503
and 4,103,561 for the three months ended March 31, 2001 and 2000, respectively.

NOTE 5 - SERIES C-1 PREFERRED STOCK

     On February 28, 2001, pursuant to a securities purchase agreement, we
completed a private placement that resulted in gross proceeds of $2,500,000.  We
sold 2,500 shares of our series C-1 convertible preferred stock (the "series C-1
preferred stock"), including warrants to purchase 500,000 shares of our common
stock.  We received net proceeds totalling approximately $2,450,000 after
deducting approximately $50,000 in offering costs.

     The series C-1 preferred stock is convertible into shares of our common
stock at $2.50 per share.  The conversion price is subject to anti-dilution
protection in the event we issue common stock at prices less than the current
conversion price for the preferred stock or the then current price for our
common stock and for stock splits, stock dividends and other similar
transactions.  If the conversion price is reduced, we may be required to record
additional charges against income and such charges may be significant.

     In addition, subject to certain conditions, including the Securities and
Exchange Commission declaring the associated Registration Statement effective
and the market capitalization for our common stock being at least $32.3 million
, we have the right to sell 2,500 shares of our series C-2 convertible preferred
stock (the "series C-2 preferred sock") to the investor for gross proceeds of
$2,500,000. The initial conversion price of the series C-2 preferred stock will
be equal to the lesser of 80% of the average closing bid price of our common
stock for three trading days immediately preceding the issuance of the series C-
2 preferred stock, 80% of the closing bid price of our common stock on the
trading day immediately preceding such issuance or $7.50 per share. If we
consummate the sale of our series C-2 preferred stock, we will also issue a
common stock purchase warrant to the investor. The number of shares issuable
upon exercise of the warrant will be determined by the aggregate value of the
series C-2 preferred stock divided by the initial conversion price multiplied by
20%. The exercise price of the warrant will be computed as the greater of 150%
of the initial conversion price of the series C-2 preferred stock and the
closing bid price on the trading day immediately preceding the issuance date.
The issuance of the series C-2 preferred stock may result in significant charges
to be recorded against net losses

                                       10
<PAGE>

applicable to common stockholders.

     We also issued a three-year warrant to purchase 500,000 shares of our
common stock in connection with the series C-1 preferred stock.  The warrant
entitles the holder to purchase our common stock for a purchase price of $3.75
per share.  The exercise price of the warrant is subject to anti-dilution
protection should certain events transpire such as subdivision or combination of
our common stock, distributions to holders of our common stock, or
consolidations or mergers with another corporation.  If the exercise price is
reduced, we may be required to record additional charges against income and such
charges may be significant.

     The warrant was valued at $735,279 determined based on the relative fair
value of the warrant utilizing the Black-Scholes option pricing model using the
following assumptions:

Exercise price                                                             $3.75
Fair market value of common stock on measurement date                      $3.00
Option life                                                              3 years
Volatility rate                                                             120%
Risk free rate of return                                                    6.0%
Dividend rate                                                                 0%

     Due to the conversion feature associated with the series C-1 preferred
stock, we recognized the beneficial conversion feature as an additional
preferred stock dividend.  The computed value of the beneficial conversion
feature of $1,235,279 was initially recorded as a reduction of the series C-1
preferred stock and an increase to additional paid-in capital.  The beneficial
conversion feature reduction to the series C-1 preferred stock and the relative
fair value of the warrant was accreted as a charge to income applicable to
common stockholders on the date of issuance (the date on which the series C-1
preferred stock was first convertible) as follows:

Beneficial conversion feature                                      $1,235,279
Relative fair value of common stock purchase warrant                  735,279
                                                                   ----------
Total accretion expense                                            $1,970,558
                                                                   ==========

     As a result of the issuance of the series C-1 preferred stock, in
accordance with terms of the original agreements, the conversion prices for the
10% note payable and our series B-2 preferred stock as well as the exercise
prices for the 10% note payable and series B preferred stock warrants were reset
as indicated below:

<TABLE>
<CAPTION>
                                                   Conversion or
                                                  Exercise Price            Conversion or
                                                    Immediately             Exercise Price
                                                Preceding Series C-1      Immediately After
                                                  Preferred Stock       Series C-1 Preferred
                                                     Issuance              Stock Issuance
--------------------------------------------------------------------    --------------------
<S>                                             <C>                     <C>
10% convertible note payable                               $   10.07                $   2.50
Series B-2 preferred stock                                 $10.20408                $   2.50
Series B common stock purchase warrants                    $   3.875                $3.75374
10% note payable common stock purchase
  warrant                                                  $  10.264                $9.33431
</TABLE>

     As a result of the reset provisions, we recorded additional non-cash
expenses in February 2001, totalling $3,314,499 as summarized below:

10% convertible note payable                                       $2,394,234
Series B-2 preferred stock                                            886,069
Series B common stock purchase warrants                                 2,264
10% note payable common stock purchase warrant                         31,932
                                                                   ----------
Total expense                                                      $3,314,499
                                                                   ==========

                                       11
<PAGE>

NOTE 6 -  STOCK BASED COMPENSATION EXPENSE

  During the three months ended March 31, 2001, we issued options to purchase
our common stock as described below and recorded expense as set forth in the
following table:

                                        Number of
                                        Shares or                 Deferred
                                        Warrants                Compensation
                                         Issued      Expense      Expense
----------------------------------      ---------   ---------   -----------
Stock options issued to consulting
  company                                 120,000   $   4,340   $   151,905

Amortization of previous years
  deferred compensation                   -           164,502       184,820
                                        ---------   ---------   -----------
                                          120,000   $ 168,842   $   336,725
                                        =========   =========   ===========

     In March 2001, we issued a three-year option to purchase 120,000 shares of
our common stock at an exercise price of $2.813 per share to a consulting
company in connection with investor relation services to be rendered to Webb.
The options vest one third on the grant date and one third on each of the next
two anniversary dates of the agreement.  The option agreement provides for
accelerated vesting dates for the unvested options provided the consulting
company meets certain specified objectives.  We valued the options, and applied
variable plan accounting pursuant to SFAS 123 and related interpretation EITF-
96-18 to the 80,000 unvested options, at $156,245 utilizing the Black-Scholes
option pricing model using the following assumptions:

<TABLE>
<CAPTION>
                                                        40,000 Options     80,000 Options
                                                        --------------     --------------
<S>                                                     <C>                <C>
Exercise price                                                  $2.813             $2.813
Fair market value of common stock on valuation date             $2.813             $1.500
Option life                                                    3 years            3 years
Volatility rate                                                   121%               119%
Risk-free rate of return                                          6.0%               6.0%
Dividend rate                                                       0%                 0%
</TABLE>

     Because variable plan accounting requires us to revalue the unvested
options at each balance sheet date, the value of the option and related expense
in future periods may increase significantly as our stock price increases.

NOTE 7 - DISCONTINUED OPERATIONS

     In September 2000, our e-banking segment was sold to a privately held
company.  The sale of this segment is reflected as a sale of discontinued
operation in the accompanying consolidated financial statements.  Accordingly,
revenues, costs and expenses of this discontinued operation have been excluded
from the respective captions in the Consolidated Statement of Operations and
have been reported as "Loss from discontinued operations" for all periods
presented.

     Summarized financial information for the discontinued operation is as
follows:

                                          Three Months Ended
                                                March 31,
                                        ------------------------
                                          2001            2000
                                        --------        --------
Net revenues                            $     -         $197,269
Loss from operations                    $     -         $(34,791)

NOTE 8 - BUSINESS SEGMENT INFORMATION

                                       12
<PAGE>

     Webb develops and supports products and services for local markets by
providing an interactive framework of local commerce and community-based
services comprised of publishing, content management, community-building and
communications.  In addition, our subsidiary, Jabber.com, is engaged in the
early stages of several projects that are implementing the Jabber.org XML-based
open-source instant messaging platform for portal services, enterprise
messaging, financial services applications and enhanced mobile and telephony
integration.  We have two reportable business segments: AccelX and Jabber.com.

     AccelX consists of XML-based online commerce and communication solutions
for small business, with a particular emphasis on local commerce interaction.

     Jabber.com consists of XML-based open-source Internet application products
which incorporates instant messaging as a key application for commerce-oriented
dialogs between businesses and consumers.

<TABLE>
<CAPTION>
                                                         March 31,      December 31,
                                                            2001            2000
                                                        ------------    ------------
<S>                                                     <C>             <C>
Assets
------------------------------------------------
AccelX                                                  $ 11,203,561    $ 14,749,962
Jabber.com                                                 3,714,737       4,016,533
Eliminations                                              (2,966,327)     (3,056,166)
                                                        ------------    ------------
Total assets                                            $ 11,951,971    $ 15,710,329
                                                        ============    ============

Property and equipment, net
------------------------------------------------
AccelX                                                  $  2,270,675    $  2,566,359
Jabber.com                                                   247,237         263,773
                                                        ------------    ------------
Total                                                   $  2,517,912    $  2,830,132
                                                        ============    ============


                                                             Three Months Ended
                                                                   March 31,
                                                        ----------------------------
                                                            2001            2000
                                                        ------------    ------------
Net revenues from continuing operations
------------------------------------------------
AccelX                                                  $    878,929    $    812,553
Jabber.com                                                    99,825         -
                                                        ------------    ------------
Total net revenues from continuing operations           $    978,754    $    812,553
                                                        ============    ============

Net loss from continuing operations
------------------------------------------------
AccelX                                                  $ (8,063,901)   $ (5,359,751)
Jabber.com                                                (1,999,970)        -
Eliminations                                               2,083,671         -
                                                        ------------    ------------
Total net loss from continuing operations               $ (7,980,200)   $ (5,359,751)
                                                        ============    ============

Depreciation and amortization
------------------------------------------------
AccelX                                                  $  1,040,170    $  2,174,011
Jabber.com                                                   385,809         -
Eliminations                                                (361,643)        -
                                                        ------------    ------------
Total depreciation and amortization expense             $  1,064,336    $  2,174,011
                                                        ============    ============

Property and equipment additions
------------------------------------------------
AccelX                                                  $     24,248    $    598,822
Jabber.com                                                     7,630         -
                                                        ------------    ------------
Total                                                   $     31,878    $    598,822
                                                        ============    ============
</TABLE>

                                       13
<PAGE>

NOTE 9 - SUBSEQUENT EVENTS

     Investment in Jabber.com-

     On May 2, 2001, Webb, Jabber.com, Inc., a subsidiary of Webb
("Jabber.com"), France Telecom and France Telecom Technologies, a wholly-owned
subsidiary of France Telecom ("FTT"), entered into a nonbinding series B
convertible preferred stock Summary of Terms (the "Letter of Intent"). The
Letter of Intent provides for the purchase by FTT (or an affiliated entity) of
up to $7 million of series B preferred stock of Jabber.com, which would
represent approximately 23% of the issued and outstanding capital stock of
Jabber.com. A definitive agreement is expected to be completed by July 2, 2001

     As contemplated by the Letter of Intent, FTT loaned Jabber.com $2.5 million
pursuant to a convertible promissory note. This amount, together with interest
which accrues at an annual rate of 9.5%, is convertible into series B preferred
stock of Jabber.com: (i) at the time FTT enters into a binding stock purchase
agreement pursuant to which it agrees to acquire equity securities of Jabber.com
with a purchase price of at least $5 million including the loan amount converted
(or such lesser amount as is agreed in writing to by Jabber.com and FTT); or
(ii) at the option of FTT prior to the maturity date of the loan. Unless earlier
converted, the loan is due on demand any time after May 2, 2002. The obligations
of Jabber.com are secured by: (i) a security interest in substantially all of
the assets of Jabber.com; (ii) a guaranty given by Webb; and (iii) a pledge by
Webb of the stock it holds in Jabber.com. In the event that the loan is not
converted into preferred stock as contemplated in the letter of intent and we or
Jabber.com are not able to repay the loan in accordance with the terms, France
Telecom Technologies could sell all or a portion of this stock, or take other
actions to satisfy the interest and principal due on the note. The loss of all
or a portion of this stock could have a material adverse effect on our
consolidated results of operations or financial condition.

     The Letter of Intent contemplates that FTT's $2.5 million loan, plus
accrued interest, will be converted to series B preferred stock of Jabber.com on
or before July 2, 2001, at the time the parties enter into a definitive stock
purchase agreement. The stock purchase agreement will provide that FTT will
purchase $2.5 million of series B preferred stock on or about September 1, 2001,
at the price determined in the stock purchase agreement. On or prior to January
31, 2002, FTT will be required to purchase additional shares of Jabber.com
series B preferred stock, depending upon Jabber.com's 2001 net revenues. If
Jabber.com's 2001 net revenues are equal or greater than $3,962,000, then: (i)
Jabber.com will have the option to require FTT to purchase an additional $2
million worth of series B preferred stock at the price determined in the stock
purchase agreement; and (ii) FTT will have the option to purchase an additional
$2 million of series B preferred stock at the price determined in the stock
purchase agreement. If Jabber.com's 2001 net revenues are either less than
$3,962,000 or greater than $6,603,000, then Jabber.com and FTT may mutually
decide whether FTT will purchase $2 million of series B preferred stock at a
price to be determined by the parties. Notwithstanding the foregoing, if
Jabber.com's 2001 revenues are less than $3,962,000, then FTT will have the
option to purchase $2 million of series B preferred stock at the price
determined in the stock purchase agreement, and if Jabber.com's 2001 net
revenues are greater than $6,603,000, then Jabber.com will have the option to
require FTT to purchase $2 million of series B preferred stock at the price
determined in the stock purchase agreement.

     Conversion of Series B-2 Preferred Stock-

     During April and May, 2001, the holder of our series B-2 preferred stock
converted 528 shares of the series B-2 preferred stock into 211,200 shares of
our common stock at conversion prices of $2.50 per share as summarized in the
following table:

                                               Number of Shares
                                        ----------------------------
                                        Series B-2
                                        Preferred
       Conversion Date                    Stock         Common Stock
-----------------------------           ----------      ------------
April 26, 2001                                 250           100,000
May 7, 2001                                    160            64,000
May 8, 2001                                     80            32,000
May 10, 2001                                    38            15,200
                                        ----------      ------------
Total                                          528           211,200
                                        ==========      ============

                                       14
<PAGE>

     Conversion of 10% Convertible Note Payable-

     During May, 2001, the holder of our 10% convertible note payable converted
$125,000 of the outstanding 10% convertible note payable, including $9,075 of
principal-in-kind notes, into 53,630 shares of or common stock at a conversion
price of $2.50 per share.

     Issuance of Common Stock and Options for Services-

     In April 2001, we entered into a six-month agreement with a consulting
company to provide Webb with investor relation services.  In connection with the
agreement, the consulting company will receive 2,500 restricted shares of our
common stock at the end of each month commencing April 2001.  In addition, we
also issued three-year stock options to purchase 100,000 shares of our common
stock at exercise prices ranging from $2.50 to $5.00 per share.  The options
vest ratably over the term of the agreement.

                                       15
<PAGE>

     Item 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
            RESULTS OF OPERATIONS

General

     Webb provides innovative advanced online commerce and communication
solutions for businesses.  Our AccelX product line of XML-based commerce and
buyer-seller interaction products and services provides businesses with powerful
web-site development and communication tools to attract customers, generate
leads, increase buyer-seller interaction and strengthen customer relationship
management.  Our Jabber.com, Inc. subsidiary is building a business around
commercializing Jabber.org open-source technologies for real time XML-based
communications.  Jabber.com is currently focused on developing and marketing
commercial-grade instant messaging software, solutions and hosting for large
enterprises, service providers and independent software vendors.

     We distribute our AccelX products and services on a private-label basis to
high-volume distribution partners such as yellow page directory publishers,
newspapers, city guides, vertical market portals and other aggregators of local
businesses.  Our AccelX products may be either licensed or delivered on an
application service provider business model whereby we would host the software
on our servers and expect to deliver and manage the service on behalf of our
distribution partners.  Generally, these services are provided on a revenue-
share basis providing us with recurring revenues as our distribution partners
sell these services to their small business customers.  This distribution model
is designed to provide us with a growing base of businesses using one or more of
our services who are ideal customers for additional AccelX services.

     Prior to January 2000, we were organized around our primary market focus on
local commerce services, with an additional business unit dedicated to e-banking
services.  During the third quarter of 2000, we discontinued our e-banking
business.  In January 2000, we formed a new subsidiary in order to commercialize
separately the Jabber.org instant messaging system from our AccelX business.  We
intend to seek participation from external partners, such as France Telecom
Technologies, to help us maximize the value of our instant messaging business.

     During July 2000, we completed a business plan for our Jabber.com
subsidiary. The plan focuses Jabber.com's business development efforts on three
areas:

     .  Providing professional services to help companies implement, customize
        and host instant messaging applications;

     .  Developing instant messaging services for businesses, which may be
        either licensed or delivered on an application service provider business
        model; and

     .  Developing open gateway services through strategic relationships with
        companies in the areas of Internet protocol telephony, mobile services,
        customer services and exchange services.

     On March 1, 2001, Jabber.com introduced the Jabber Commercial Server 2.0, a
highly scaleable Jabber server that provides the foundation for current and
future server products.  Jabber Commercial Server 2.0 provides enterprises and
service providers with enhanced performance, scalability, reliability and
security compared to the Jabber open-source software.  To date, Jabber.com's
activities have focused primarily on promoting the wide-spread use of the Jabber
open-source instant messaging protocol (XMPP), providing professional services
to businesses desiring to test the Jabber open-source platform and developing
the Jabber Commercial Server 2.0 software.


                                      16
<PAGE>

     We have incurred losses from operations since inception.  At March 31,
2001, we had an accumulated deficit of approximately $102 million.  The
accumulated deficit at March 31, 2001, included approximately $57.5 million of
non-cash expenses related to the following:

     .  Beneficial conversion features related to the 10% convertible note
        payable, preferred stock and preferred stock dividends;
     .  Reset of warrant exercise prices;
     .  Stock and stock options issued for services;
     .  Warrants issued to customers;
     .  Interest expense on the 10% convertible note paid by the issuance of
        similar notes;
     .  Amortization of intangible assets acquired in consideration for the
        issuance of our securities;
     .  Impairment loss on acquired intangible assets and goodwill; and
     .  Write-off of securities received for our e-banking business.

     As a result of the $2.5 million preferred stock private placement we
completed in February 2001, we recorded an additional non-cash expense totalling
approximately $2 million associated with issuance of our series C-1 preferred
stock.  In addition, we recorded additional non-cash expenses totalling
approximately $3.3 million associated with the reset of conversion prices for
our series B-2 preferred stock and 10% convertible note payable as well as the
reset of exercise price for certain warrants issued in connection with our
series B preferred stock private placement.  If we issue shares of our series C-
2 preferred stock and warrants, we will record substantial additional non-cash
charges.

     The accompanying consolidated financial statements have been prepared
assuming that Webb will continue as a going concern. Among other factors, we
have incurred significant and recurring losses from operations, and such losses
are expected to continue in the near future, which raises substantial doubt
about our ability to continue as a going concern. The accompanying financial
statements do not include any adjustments relating to the recoverability and
classification of asset carrying amounts or the amount and classification of
liabilities that might result should we be unable to continue as a going
concern. The report of Arthur Andersen LLP, our independent public accountants,
issued with regard to our financial statements for the year ended December 31,
2000, included a paragraph expressing substantial doubt about our ability to
continue as a going concern.

     We have not been profitable since inception.  Our ability to become
profitable depends on our ability to market our products and services and
generate revenues sufficient to exceed our expenses.  The success of our revenue
model will depend upon many factors including the success of our distribution
partners in marketing their products and services; and the extent to which
consumers and businesses use our services and conduct e-commerce transactions
and advertising utilizing our services.  Because of the new and evolving nature
of the Internet, we cannot predict whether our revenue model will prove to be
viable, whether demand for our products and services will materialize at the
prices we expect to charge, or whether current or future pricing levels will be
sustainable.

                                      17
<PAGE>

RESULTS OF OPERATIONS

Revenues:

     Components of net revenues from continuing operations and cost of revenues
are as follows:

                                           Three Months Ended
                                                 March 31,
                                        --------------------------
                                           2001            2000
                                        ----------      ----------
Net revenues:
  Licenses                              $  472,265      $  681,727
  Services                                 506,489         130,826
                                        ----------      ----------
     Total net revenues                    978,754         812,553
                                        ----------      ----------
Cost of revenues:
  Cost of licenses                         182,046         199,226
  Cost of services                       1,132,928         446,587
                                        ----------      ----------
     Total cost of revenues              1,314,974         645,813
                                        ----------      ----------
Gross margin                            $ (336,220)     $  166,740
                                        ==========      ==========

     License revenues represent fees earned for granting customers licenses to
use our software products.  While our basic distribution model is to provide
services to aggregators of small business who agree to pay us a portion of their
future revenues, thereby providing us with the expectation of future revenues as
our distribution partners sell our services to their small business customers,
late in 1999 we began offering perpetual software licenses.  In addition, during
2000, we began to license our AccelX software products under a hybrid model
whereby our customers purchase a fixed number of licenses under a perpetual
license arrangement and purchase additional licenses on a recurring revenue
share basis.  Software license fees may continue to represent a significant
portion of license revenue for at least the next several quarters as these fees
are generally significantly larger than are the initial fees paid by those
distribution partners who agree to pay us a portion of their future revenues.
We estimate that it will take those distribution partners up to one year or more
after they commence distribution of our AccelX services to develop a significant
base of small businesses using these services for the recurring revenues to
become significant.  Additionally, our license fee revenue may vary
significantly from quarter to quarter due to the relative significance of
individual contracts to our total revenue.

     During the three months ended March 31, 2001, we recognized $426,117 from
the sale of initial software licenses compared with $438,900 for the similar
2000 period. The software license revenues in 2001 were primarily from a sale to
SwissOnline AG, a European yellow page publisher. In addition to the initial
license fee, we will earn recurring monthly license revenues for each small
business subscriber in excess of 5,000 subscribers. The software license
revenues in 2000 were primarily from a sale to Vetconnect, Inc., a vertical
portal that provides Internet services for veterinarians. This contract
contained up-front license fees without a recurring revenue component.

     We recognized $46,148 in recurring license fees for the three months ended
March 31, 2001, compared with $242,827 for the similar 2000 period. The decrease
between periods is a result of $200,000 in fees we earned in the 2000 period,
net of $50,000 allocated to support and maintenance, from Switchboard, Inc. in
the form of quarterly guaranteed minimum payments required to maintain limited
exclusivity for our Site Builder product for a segment of the United States
market. Switchboard's exclusivity rights terminated on June 30, 2000, and
Switchboard will not, therefore, pay quarterly guaranteed minimum payments in
the future.

     Services revenues consist principally of revenue derived from professional
services for the customization of our software to customer specifications,
assisting our customers in configuring and integrating our software
applications, hosting fees and fees for ongoing maintenance and support. Our net
revenues from services were $506,489 for the three months ended March 31, 2001,
which represents an increase of 287% when compared with the similar 2000 period.
The increase is primarily due to professional service revenue we earned in
connection with the integration of our software products with our customers;
increases in revenue recognized from support and

                                      18
<PAGE>

maintenance agreements for our AccelX software; and service revenues during 2001
totalling $89,825 for our Jabber.com subsidiary.

     During the fourth quarter of 2000, it became apparent that most large
aggregators of small businesses were delaying software and technology purchase
decisions due to uncertainties with regard to the domestic economy, a reluctance
to make significant investments in new Internet-related products and services
and management changes or reorganizations at many of these companies.  These
factors appear to be continuing to cause a slow down in purchase decisions by
many of our potential domestic customers and may continue to do so for much of
2001.  This could result in lower domestic sales of our products and services,
particularly for our AccelX products and services, than contemplated in our
business plan for the year.  In addition, to the extent that purchase decisions
are made, they may be for lower up-front license fees and professional services
in order to reduce our customers' financial commitments and to put a greater
emphasis on revenue sharing arrangements.  This also could result in lower
revenues in 2001 than contemplated in our business plan.

Cost of Revenues:

     Cost of revenues as a percentage of net revenues from continuing operations
was 134% for the three months ended March 31, 2001, compared to   79% for the
similar 2000 period.

        Cost of license revenues - Cost of license revenues consists of
     compensation costs associated with personnel who assist our customers in
     delivering services to end users, third party content software license
     fees, and third party transaction fees. Cost of license revenues were
     $182,046 for the three months ended March 31, 2001, or 39% of net license
     revenues, compared with $199,226, or 29% of net license revenues for the
     similar 2000 period. The absolute dollar decrease was primarily
     attributable to (i) incurring $25,726 less in costs associated with
     delivering software enhancements for which we earn monthly license fees;
     and (ii) incurring $62,500 in the 2000 period for the amortization of a
     one-year third-party software license we purchased in 1999 to integrate
     directory functionality into our AccelX products. These decreases were
     partially off-set by an increase of $71,589 in costs , primarily for
     compensation and contractor expenses, associated with our client services
     organization, which commenced operating activities during the second half
     of 2000 to assist our distribution partners in the sell-through of our
     products and services to small business. Since our business plan is heavily
     dependent on recurring revenue from our distribution partners, we will
     continue to incur costs in assisting our distribution partners in obtaining
     market penetration and sell-through of our products and services and these
     costs may be significant.

        Cost of service revenues - Cost of service revenues consists of
     compensation costs and consulting fees associated with performing custom
     programming, installation and integration services for our customers and
     support services as well as costs for hosting services which consist of
     costs to operate our network operating center and other direct and indirect
     costs. Cost of service revenues was $1,132,928 for the three months ended
     March 31, 2001, or 224% of net service revenues, compared with $446,587, or
     341% of net service revenues for the similar 2000 period. During the third
     quarter of 2000, we established separate professional services and customer
     support organizations to better service our customers. Consequently, with
     the formation of these two organizations, we incurred $360,535 more in
     costs in the 2001 period for professional services infrastructure expenses,
     including $71,799 for our Jabber.com subsidiary; and $177,245 more in costs
     in the 2001 period for customer support infrastructure costs, including
     $88,222 for our Jabber.com subsidiary. Infrastructure costs for these two
     organizations include employee compensation and other employee related
     costs. We expect these infrastructure expenses to increase only to the
     extent that revenue from professional services and support services
     increase in future periods. In addition, the absolute dollar increase was
     attributable to providing a higher volume of professional services to our
     customers. These increases were partially off-set by a reduction of $96,256
     in costs associated with our network operating center, from $377,715 in the
     2000 period to $281,459 in the 2001 period, primarily as a result of
     decreases in rent, third-party support costs and other lease expenses. Our
     network operating center has

                                       19
<PAGE>

     been built to accommodate our current customer base as well as significant
     additional projected growth. Consequently, the current cost to operate the
     network operating center is high compared to current revenues and will
     remain relatively high for at least the next several quarters as we
     continue to execute on our business plan. We also anticipate that cost of
     service revenues will increase in absolute dollars as well as a percentage
     of service revenues for at least the next several quarters as we build the
     support infrastructure for our Jabber.com subsidiary.

Operating Expenses:

     Sales and marketing expenses consist primarily of employee compensation,
cost of travel, advertising and public relations, trade show expenses, and costs
of marketing materials.  Sales and marketing expenses were $604,879 for the
three months ended March 31, 2001, or 62% of net revenues compared with
$454,451, or 56% of net revenues for the similar 2000 period.  These expenses
included $212,101 in 2001, for our Jabber.com subsidiary.  The increase in
absolute dollars was primarily attributable to (i) $222,899 more in employee
compensation costs including sales commissions; and (ii) a $54,093 increase in
travel costs primarily associated with opening European markets.  These
increases were partially off-set by (i) a $43,417 decrease in fees paid to
marketing and research consultants; and (ii) a $47,000 decrease in employee
recruiting expenses as we did not incur such expense in the 2001 period.  We
expect sales and marketing expenses to increase on an absolute dollar basis in
future periods but decrease as a percentage of net revenues as our revenues
increase from current levels as we continue to market our products and services.

     Product development expenses consist primarily of employee compensation and
programming fees relating to the development and enhancement of the features and
functionality of our software products and services.  During the 2001 and 2000
periods, all product development costs were expensed as incurred.  Product
development expenses were $1,745,479 for the three months ended March 31, 2001,
or 178% of net revenues compared with $1,122,604 or 138% of net revenues for the
similar 2000 period.  Product development expenses in 2001 include the
development of our AccelX software products and our Jabber.com instant messaging
products, which we began developing in the second quarter of 2000.  During the
three months ended March 31, 2001, we incurred expenses totalling $1,090,500
developing our AccelX products and $654,979 developing our Jabber products.  The
increase in absolute dollars was due primarily to (i) $449,896 more in employee
compensation costs primarily as a result of 25 employees in our Jabber.com
subsidiary which were hired during the third and forth quarters of 2000; (ii)
incurring $100,000 for the purchase of source code for an ad generator software
product which we expect to take to market in the second quarter of 2001; and
(iii) an increase of $32,538 in contract labor costs we incurred to augment our
employee-base development teams.  These increases were partially off-set by a
$72,412 reduction in employee recruiting expenses as we paid less fees to third-
party recruiting firms as the result of hiring a part-time recruiter.  We
believe that significant investments in product development are critical to
attaining our strategic objectives and, as a result, we expect product
development expenses to increase in future periods.

     General and administrative expenses consist primarily of employee
compensation, consulting expenses, fees for professional services, and non-cash
expense related to stock and warrants issued for services.  General and
administrative expenses were $1,776,430 for the three months ended March 31,
2001, or 181% of net revenues compared with $1,762,322, or 216% of net revenues
for the similar 2000 period.  These expenses include $612,914 for 2001, for our
Jabber.com subsidiary.  The increase in absolute dollars was primarily
attributable to (i) $143,301 more in office rent expense as we moved to a new
office in May 2000 at a higher monthly rent, including office rent for our
Jabber.com subsidiary; and (ii) $54,407 more in travel costs related to
international travel.  We expect general and administrative expenses to decrease
as a percentage of revenues as our revenues increase.

     Depreciation and amortization was $1,064,336 for the three months ended
March 31, 2001, compared to $2,174,011 for the similar 2000 period.  We recorded
$1,182,110 less in amortization expense, from $2,037,255 in the 2000 period to
$855,145 in the 2001 period, related to the intangible assets and goodwill we
acquired in the Durand Communications, NetIgnite, and Update Systems
acquisitions as we reduced the basis of these assets during the forth quarter of
2000 as a result of recording an impairment loss.  Because our business has
never been profitable, and due to the other risks and uncertainties discussed
herein, it is possible that an analysis of these long-lived assets in future
periods could result in a conclusion that they are impaired, and the amount of
the impairment

                                      20
<PAGE>

could be substantial. If we determine that these long-lived assets are impaired,
we would record a charge to earnings, which could be as much as the remaining
net book value of the assets.

Other Income and Expenses:

     Interest income was $113,640 for the three months ended March 31, 2001,
compared to $161,887 for the similar 2000 period.  We earn interest by investing
surplus cash in highly liquid investment funds or AAA or similarly rated
commercial paper.

     Interest expense was $2,539,448 for the three months ended March 31, 2001,
compared to $174,990 for the similar 2000 period.  We recorded the following
interest expense related to the 10% convertible note payable:

                                                Three months ended March 31,
                                                ----------------------------
                                                   2001              2000
                                                ----------        ----------
Amortization of discount                        $   44,440        $   50,381
Amortization of financing costs                     15,734            24,480
Beneficial conversion feature                    2,394,234           -
                                                ----------        ----------
   Total non-cash interest expense               2,454,408            74,861
Interest expense payable in cash                    69,479            95,890
                                                ----------        ----------
   Total 10% note payable interest expense      $2,523,887        $  170,751
                                                ==========        ==========

     The 10% convertible note payable was initially convertible into shares of
our common stock at a conversion price of $10.07 per share. The conversion price
is subject to anti-dilution protection in the event we issue common stock at
prices less than the conversion price for the 10% convertible note payable or
the then current price for our common stock and for stock splits, stock
dividends and other similar transactions. As a result of the private placement
of preferred stock we completed in February 2001, the conversion price was reset
to $2.50 per share. As a result, we recorded non-cash interest expense totalling
$2,394,234 in the first quarter of 2001. If the conversion price is further
reduced, we may be required to record additional charges against income and such
charges may be significant.

     As a result of the $2.5 million note payable agreement executed on May 2,
2001, between our subsidiary Jabber.com and France Telecom (See Note 9 to Notes
to Consolidated Financial Statements for information regarding the issuance of
this note), we will record additional interest expense in future periods at a
rate of 9.5% per annum until the note is paid in full or converted into
preferred stock.

Discontinued Operations:

     On September 12, 2000, we sold our e-banking segment to a privately held
company.  The sale of this segment is reflected as a sale of discontinued
operation in our consolidated financial statements.  Accordingly, the revenues,
costs and expenses of these discontinued operations have been excluded from the
respective captions in the Consolidated Statement of Operations and have been
reported as "Loss from discontinued operations" for all years presented.

     Summarized financial information for the discontinued operations is as
follows:

                                                   Three Months Ended
                                                         March 31,
                                                --------------------------
                                                   2001            2000
                                                ----------      ----------
Net revenues                                    $   -           $  197,269
Cost of revenues and operating expenses         $   -           $  117,112
Loss from operations                            $   -           $   34,791

                                       21
<PAGE>

Preferred Stock Accretion Expense and Dividends:

     The terms of our  preferred stock grant the holders the right to convert
the preferred stock into shares of our common stock at specified conversion
prices.  In each issuance of preferred stock, the conversion price has included
a beneficial conversion feature because the value of the common stock resulting
from a theoretical conversion of the preferred stock on the issuance date is
greater than the allocated value of the preferred stock.  In addition, if the
conversion price of the preferred stock is reduced in future periods, accounting
principles generally accepted in the United States require us to re-compute the
beneficial conversion feature on the then outstanding shares of preferred stock.

     Accounting principles generally accepted in the United States require us to
record the beneficial conversion feature, the value of warrants and, in most
instances, the cash offering costs as additional preferred stock dividends.
This non-cash charge to net loss applicable to common stockholders is labeled
"Accretion of preferred stock to stated value".

     During the 2001 period, we recorded accretion expense totalling $2,856,627,
including $1,970,558 related to the issuance of our series C-1 preferred stock
and $886,069 related to the reset of the conversion price of our series B-2
preferred stock on February 28, 2001.

     The series B-2 and series C-1 preferred stock are currently convertible
into shares of our common stock at $2.50 per share.  The conversion prices are
subject to anti-dilution protection in the event we issue common stock at prices
less than the current conversion price for the preferred stock or the then
current price for our common stock and for stock splits, stock dividends and
other similar transactions.  If the conversion prices are reduced, we may be
required to record additional charges against income and such charges may be
significant.

     We may also incur additional preferred stock accretion expense in future
periods as a result of the convertible preferred stock we issue in connection
with the investment contemplated by France Telecom Technologies in our
Jabber.com subsidiary. We will also record preferred stock dividends at the rate
of 8% per annum on such preferred stock. We may also record additional preferred
stock accretion expense if we issue our series C-2 preferred stock as
contemplated in the securities purchase agreement we entered into on February
28, 2001. The accretion expense in future periods as a result of these two
transactions, if any, maybe significant.

     Net Loss Applicable to Common Stockholders:

     Net loss allocable to common stockholders was $10,836,827 for the three
months ended March 31, 2001, compared to $18,267,668 for the similar 2000
period.  We recorded non-cash expenses for the following items:

<TABLE>
<CAPTION>
                                                                            Three months ended
                                                                                  March 31,
                                                                        ----------------------------
                                                                            2001            2000
                                                                        ------------    ------------
<S>                                                                     <C>             <C>
Amortization of intangible assets and goodwill                          $    855,145    $  2,037,255
Stock and warrants issued for services                                       168,842         175,170
Beneficial conversion feature, amortization of discount and
  placement fees to interest expense and non-cash interest
  related to the 10% convertible note payable                              2,454,408          74,861
Preferred stock dividends                                                     -              373,126
Accretion of preferred stock                                               2,856,627      12,500,000
                                                                        ------------    ------------
Total                                                                   $  6,335,022    $ 15,160,412
                                                                        ============    ============
</TABLE>

     The increase in losses reflect losses from Jabber.com totalling $1,999,970
for the three months ended March 31, 2001, and expenses in the sales and
marketing, product development, and general and administrative areas that have
increased at a faster rate than revenues.  This is due to the time-lag
associated with product development and market introduction as well as the long
sales cycle for most of our products and services.  We expect to continue to
experience increased operating expenses during 2001, from Jabber.com and as we
continue to

                                       22
<PAGE>

develop new product offerings and the infrastructure required to support our
anticipated growth. We expect to report operating and net losses for 2001 and
for one or more years thereafter.

LIQUIDITY AND CAPITAL RESOURCES

     As of March 31, 2001, we had cash and cash equivalents of $1,566,250 and
working capital of $1,146,922.  We financed our operations and capital
expenditures and other investing activities during 2001 primarily through the
sale of securities (See Note 5 to Notes to Consolidated Financial Statements for
information regarding these sales of securities).

     We used $5,636,715 in cash to fund our operations for the three months
ended March 31, 2001, compared to $3,759,432 for the similar 2000 period.  The
increase in net cash used in 2001 resulted primarily from cash used by the
operations of Jabber.com which totalled approximately $1.8 million.

     We received $6,622 in cash from investing activities, including $30,000
from the collection of notes receivable from Company officers.  The cash
received was partially offset by purchases of property and equipment totalling
$31,878 during the three months ended March 31, 2001, compared to $598,822 for
the similar 2000 period.  We plan to purchase an additional $1.8 million of
property and equipment during the balance of 2001.

     In order to maintain operations and business and product development
efforts at planned levels for our AccelX business, we will need to raise
additional capital by June 2001. The timing of the need for this capital has
been accelerated due to our continuing to internally fund the development of our
Jabber.com business through April 2001. As an alternative to the remaining $2.5
million which may be raised pursuant to the preferred stock financing, we have a
non-binding commitment from an institutional investor to provide from $1.25 to
$2.5 million in the event that we are not able to satisfy the conditions
required to be met to obtain the balance of the preferred stock financing. We
expect to finalize this commitment within the next ten days. An additional $2.5
million would fund our AccelX business to at least September 2001. In addition
to the foregoing financing alternatives, we are continuing our discussions with
strategic and institutional investors for additional financing for our AccelX
business.

     We believe that the initial $2.5 million investment by France Telecom
Technologies in our Jabber.com subsidiary will be sufficient to fund
Jabber.com's activities through October 2001. In addition, the $4.5 million
additional investment in Jabber.com which is contemplated that France Telecom
Technologies will make will be adequate to fund our Jabber.com operations
through at least the first quarter of 2002. In addition to the funds that France
Telecom Technologies is expected to provide, we intend to seek up to an
additional $3 million to fund Jabber.com's business from other investors on
terms similar to those for France Telecom Technologies.

     In the event that we are not able to obtain additional operating capital
for our AccelX business, we will be required to (i) substantially reduce or to
cease operations relating to this business, (ii) sell all or a portion of this
business, or (iii) sell all or a portion of our interest in Jabber.com to raise
additional working capital for our AccelX business. In addition, in the event
that we are not able to complete the Jabber.com-France Telecom Technologies
transaction as contemplated in the letter of intent, we could be required to
substantially reduce operations relating to this business or to sell all or a
portion of our interest in Jabber.com to raise the additional capital required
to fund this business. The sale of all or a portion of our interest in
Jabber.com should the France Telecom Technologies transaction not be completed
could be difficult due to the pledge of our Jabber.com securities to secure the
payment of the France Telecom Technologies note. A reduction in any of our
operations or a sale of any of our assets could have a material adverse effect
on our operating results and financial condition. In its report accompanying the
audited financial statements for fiscal 2000, Arthur Andersen LLP expressed
substantial doubt about our ability to continue as a going concern.

     EXPOSURE TO FOREIGN CURRENCY RISK

     During 2000, we expanded our operations to include customers located in
Europe and we opened an office in Amsterdam.  As a result, we are subject to
exposure resulting from changes in the Euro (our subsidiary's functional
currency) and other currencies related to the United States dollar.  Further,
from time to time, we may agree to accept a receivable denominated in currencies
other than our functional currencies (i.e., the United States Dollar and the
Euro).  During 2001, we recorded $14,632 of transaction loss related to exchange
rate changes between the Euro and the U.S. Dollar on receivables from customers
denominated in the Euro.

                                      23
<PAGE>

FACTORS THAT MAY AFFECT FUTURE RESULTS

     Factors that may affect our future results include, but are not limited to,
the following items as well as the information in "Item 1 - Financial Statements
- Notes to the Consolidated Financial Statements" and "Item 2 - Management's
Discussion and Analysis of Financial Condition and Results of Operations."

Our limited operating history could affect our business.  We were founded in
March 1994 and commenced sales in February 1995.  Subsequently, our business
model has changed periodically to reflect changes in technology and markets.
Accordingly, we have a limited operating history for our current business model
upon which you may evaluate us.  Our business is subject to the risks, exposures
and difficulties frequently encountered by companies with a limited operating
history including:

     .  Limited ability to respond to competitive developments;
     .  Exaggerated effect of unfavorable changes in general economic and market
        conditions;
     .  Difficulty in attracting and retaining qualified personnel;
     .  Limited ability to develop and introduce new product and service
        offerings;
     .  Limited ability to adjust the business plan to address marketplace and
        technological changes; and
     .  Difficulty in obtaining operating capital.

There is no assurance we will be successful in addressing these risks.  If we
are unable to successfully address these risks our business could be
significantly adversely affected.

     We have accumulated losses since inception and we anticipate that we will
continue to accumulate losses for the foreseeable future.  We have incurred net
losses since inception totalling approximately $102 million through March 31,
2001.  In addition, we expect to incur additional substantial operating and net
losses in 2001 and for one or more years thereafter.  We expect to incur these
additional losses because:

     .  We currently intend to increase our capital expenditures and operating
        expenses to cover the increasing activities of our Jabber.com, Inc.
        subsidiary; and
     .  We recorded goodwill and other intangible assets totalling approximately
        $885,000 in the first quarter of 2001in connection with the acquisitions
        of three businesses and we will record amortization expense of
        approximately $2.5 million during the remainder of 2001 and $2.6 million
        in 2002. A review of these assets in future periods may indicate that
        the assets are impaired which would require us to record a charge to
        earnings and that charge may be significant.

           The accumulated deficit at March 31, 2001, included approximately
     $57.5 million of non-cash expenses related to the issuance of preferred
     stock and warrants in financing transactions, stock and stock options
     issued for services, warrants issued to four customers, interest expense on
     10% convertible notes payable and amortization of assets acquired through
     the issuance of our securities.  The current competitive business and
     capital environments likely will result in our issuance of similar
     securities in future financing transactions or to other companies as an
     inducement for them to enter into a business relationship with us.  While
     these transactions represent non-cash charges, they will increase our
     expenses and net loss and our net loss applicable to common stockholders.

     If we are unable to raise additional working capital funds, we may not be
able to sustain our operations.  We believe that our present cash and cash
equivalents, working capital available for our AccelX business is adequate to
sustain this business only until June 2001. The funds raised in May 2001 from
the investment by France Telecom Technologies in our Jabber.com subsidiary will
be adequate to sustain Jabber.com's current level of operations only until
November 2001. We will, therefore, need to obtain additional capital to fund our
businesses. There is no assurance that we will be able to raise additional funds
in amounts required or upon acceptable terms. If we cannot raise additional
funds when needed, we may be required to curtail or scale back our operations or
sell some of our assets. These actions could have a material adverse effect on
our business, financial condition or results of operations.

     The pledge of our shares of Jabber.com, Inc. stock could result in our loss
of all or a portion of this stock. We have pledged all of our shares of
Jabber.com stock to secure a $2.5 million loan to Jabber.com by France Telecom
Technologies. In the event that the loan is not converted into preferred stock
as contemplated in the letter of intent and we or Jabber.com are not able to
repay the loan in accordance with the terms, France Telecom Technologies could
sell all or a portion of this stock, or take other actions to satisfy the to
pay the interest and principal due on the note. The loss of all or a portion of
this stock could have a material adverse effect on our consolidated results of
operations or financial condition.

                                      24
<PAGE>

     We may never become or remain profitable.  Our ability to become profitable
depends on the ability of our products and services to generate revenues in
excess of our expenses. The success of our revenue model will depend upon many
factors including:

     .  The success of our distribution partners in marketing their products and
        services; and
     .  The extent to which consumers and businesses use our products and
        services.

     Because of the new and evolving nature of the Internet, we cannot predict
whether our revenue model will prove to be viable, whether demand for our
products and services will materialize at the prices we expect to charge, or
whether current or future pricing levels will be sustainable.  Additionally, our
customer contracts may result in significant license or development revenue in
one quarter, which will not recur in the next quarter for that customer.  As a
result, it is likely that components of our revenue will be volatile, which may
cause our stock price to be volatile as well.

     Our business depends on the growth of the Internet and its acceptance as a
platform for business commerce and communication.  Our business plan assumes
that the Internet will develop into a significant source of business-related
communication and communication interactivity.  However, the Internet market is
new and rapidly evolving and there is no assurance that the Internet will
develop in this manner.  If the Internet does not develop in this manner, our
business, operating results and financial condition would be materially
adversely affected.  Numerous factors could prevent or inhibit the development
of the Internet in this manner, including:

     .  The failure of the Internet's infrastructure to support Internet usage
        or electronic commerce;
     .  The failure of businesses developing and promoting Internet commerce to
        adequately secure the confidential information, such as credit card
        numbers, needed to carry out Internet commerce; and
     .  Regulation of Internet activity.

     Use of many of our products and services will be dependent on distribution
partners.  Because we have elected to partner with other companies for the
distribution of many of our products and services, many users of our products
and services are expected to obtain or utilize them through our distribution
partners.  As a result, our distribution partners, and not us, will
substantially control the customer relationship with these users.  If the
business of the companies with whom we partner is adversely affected in any
manner, our business, operating results and financial condition could be
materially adversely affected.

     We may be unable to develop desirable products.  Our products are subject
to rapid obsolescence and our future success will depend upon our ability to
develop new features, products and services that meet changing customer and
marketplace requirements. There is no assurance that we will be able to
successfully:

     .  Identify new product and service opportunities; or
     .  Develop and introduce new products and services to market in a timely
        manner.

     In addition, even if we are able to identify new opportunities, our working
capital constraints may not permit us to pursue them.  If we are unable to
identify and develop and introduce new products and services on a timely basis,
our business, operating results and financial condition could be materially
adversely affected.

     Our products and services may not be successful.  A suitable market for our
products and services may not develop or, if it does develop, it may take years
for the market to become large enough to support significant business
opportunities.  Even if we are able to successfully identify, develop, and
introduce new products and services there is no assurance that a market for
these products and services will materialize to the size and extent that we
anticipate.  If a market does not materialize as we anticipate, our business,
operating results, and financial condition could be materially adversely
affected.  The following factors could affect the success of our products and
services and our ability to address sustainable markets:

     .  The failure of our business plan to accurately predict the rate at which
        the market for Internet products and services will grow;

                                      25
<PAGE>

     .  The failure of our business plan to accurately predict the types of
        products and services the future Internet marketplace will demand;
     .  Our limited experience in marketing our products and services;
     .  Our limited working capital may not allow us to commit the resources
        required to adequately support the introduction of new products and
        services.
     .  The failure of our business plan to accurately predict our future
        participation in the Internet marketplace;
     .  The failure of our business plan to accurately predict the estimated
        sales cycle, price and acceptance of our products and services;
     .  The development by others of products and services that renders our
        products and services noncompetitive or obsolete; or
     .  Our failure to keep pace with the rapidly changing technology, evolving
        industry standards and frequent new product and service introductions
        that characterize the Internet marketplace.

     The intense competition that is prevalent in the Internet market could have
a material adverse effect on our business.  Our current and prospective
competitors include many companies whose financial, technical, marketing and
other resources are substantially greater than ours. There is no assurance that
we will have the financial resources, technical expertise or marketing, sales
and support capabilities to compete successfully. The presence of these
competitors in the Internet marketplace could have a material adverse effect on
our business, operating results or financial condition by causing us to:

     .  Reduce the average selling price of our products and services; or
     .  Increase our spending on marketing, sales and product development.

     There is no assurance that we would be able to offset the effects of any
such price reductions or increases in spending through an increase in the number
of our customers, higher sales from premium services, cost reductions or
otherwise. Further, our financial condition may put us at a competitive
disadvantage relative to our competitors. If we fail to, or cannot, meet
competitive challenges, our business, operating results and financial condition
could be materially adversely affected.

     A limited number of our customers generate a significant portion of our
revenues.  We had four customers representing 82% of revenues for the three
months ended March, 2001, and four customers representing 97% of revenues from
continuing operations for the three months ended March 31, 2000.  There is no
assurance that we will be able to attract or retain major customers.  The loss
of, or reduction in demand for products or services from major customers could
have a material adverse effect on our business, operating results, cashflow and
financial condition.

     The sales cycle for our products and services is lengthy and unpredictable.
While our sales cycle varies from customer to customer, it typically has ranged
from two to nine months or more.  Our pursuit of sales leads typically involves
an analysis of our prospective customer's needs, preparation of a written
proposal, one or more presentations and contract negotiations.  We often provide
significant education to prospective customers regarding the use and benefits of
our Internet technologies and services.  Our sales cycle may also be affected by
a prospective customer's budgetary constraints and internal acceptance reviews,
over which we have little or no control.  In order to quickly respond to, or
anticipate, customer requirements, we may begin development work prior to having
a signed contract, which exposes us to the risk that the development work will
not be recovered from revenue from that customer.

     It may take one or more years for our business model to generate
significant revenues which could increase our requirement for investment capital
and could have an adverse effect on our ability to become profitable.  Many of
our products and services, particularly our AccelX products and services, are
offered on a revenue-share basis. Once we have sold our products and services,
it may take three or more months for them to be integrated into our customers'
businesses and product offerings. Further, even after our customers have begun
to market our products and services to their customers, our limited operating
history does not enable us to predict how

                                      26
<PAGE>

long it generally will take before their customers will begin to use our
products and services in sufficient quantity to provide us with significant
recurring revenues. As a result, even if significant business for our products
and services does develop, we may not recognize meaningful revenues from this
business for many months or possibly even for one or more years. This could
require that we raise significant additional investment capital to sustain our
operations and could have a materially adverse effect on our ability to become
profitable within the next one or more years.

     We may not be able to offer proprietary products based on the Jabber.org
open-source movement without jeopardizing our relationship with the Jabber.org
or other open-source communities.  An important element of the business model
for our Jabber.com, Inc. subsidiary is based upon Jabber.com's ability to offer
proprietary products compatible with the Jabber.org open-source instant
messaging systems. A key element of open-source software development movements
is that the software and its code be offered to other developers and users free,
provided that any one who makes an improvement or modification to the software
and who intends to commercialize the improvement or modification, makes them
available for free to the community and other users. In the event that the
Jabber.org open-source community or other open-source communities withdraw their
support for either Jabber.com or Jabber instant messaging products due to
Jabber.com's sale of proprietary products or for any other reason, our and
Jabber.com's business, financial condition or results of operations could be
materially adversely affected, and may limit our ability to raise capital around
this product.

     We may be unable to adjust our spending to account for potential
fluctuations in our quarterly results. As a result of our limited operating
history, we do not have historical financial data for a sufficient number of
periods on which to base planned operating expenses. Therefore, our expense
levels are based in part on our expectations as to future sales and to a large
extent are fixed. We typically operate with little backlog and the sales cycles
for our products and services may vary significantly. As a result, our quarterly
sales and operating results generally depend on the volume and timing of and the
ability to close customer contracts within the quarter, which are difficult to
forecast. In addition, individual customers may account for a large portion of
our revenues during one or more quarters which could result in a high degree of
volatility in our revenues from one fiscal period to another. We may be unable
to adjust spending in a timely manner to compensate for any unexpected sales
shortfalls. If we were unable to so adjust, any significant shortfall of demand
for our products and services in relation to our expectations would have an
immediate adverse effect on our business, operating results and financial
condition. Further, we currently intend to increase our capital expenditures and
operating expenses to fund the operations of our Jabber.com, Inc. subsidiary. To
the extent that such expenses precede or are not subsequently followed by
increased sales, our business, operating results and financial condition will be
materially adversely affected.

     We may be unable to retain our key executives and research and development
personnel.  Our future success also depends in part on our ability to identify,
hire and retain additional personnel, including key product development, sales,
marketing, financial and executive personnel.  Competition for such personnel is
intense and there is no assurance that we can identify or hire additional
qualified personnel.

     Executives and research and development personnel who leave us may compete
against us in the future.  We generally enter into written nondisclosure and
nonsolicitation agreements with our officers and employees which restrict the
use and disclosure of proprietary information and the solicitation of customers
for the purpose of selling competing products or services.  However, we
generally do not require our employees to enter into non-competition agreements.
Thus, if any of these officers or key employees left, they could compete with
us, so long as they did not solicit our customers.  Any such competition could
have a material adverse effect on our business.

     We may be unable to manage our expected growth.  If we are able to
implement our growth strategy, we will experience significant growth in the
number of our employees, the scope of our operating and financial systems and
the geographic area of our operations. There is no assurance that we will be
able to implement in whole or in part our growth strategy or that our management
or other resources will be able to successfully manage any future growth in our
business. Any failure to do so could have a material adverse effect on our
operating results and financial condition.

     We may be unable to protect our intellectual property rights.  Intellectual
property rights are important to our success and our competitive position.
There is no assurance that the steps we take to protect our intellectual
property rights will be adequate to prevent the imitation or unauthorized use of
our intellectual property rights.

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<PAGE>

Policing unauthorized use of proprietary systems and products is difficult and,
while we are unable to determine the extent to which piracy of our software
exists, we expect software piracy to be a persistent problem. In addition, the
laws of some foreign countries do not protect software to the same extent as do
the laws of the United States. Even if the steps we take to protect our
proprietary rights prove to be adequate, our competitors may develop services or
technologies that are both non-infringing and substantially equivalent or
superior to our services or technologies.

     Computer viruses and similar disruptive problems could have a material
adverse effect on our business.  Our software and equipment may be vulnerable to
computer viruses or similar disruptive problems caused by our customers or other
Internet users. Our business, financial condition or operating results could be
materially adversely affected by:

     .  Losses caused by the presence of a computer virus that causes us or
        third parties with whom we do business to interrupt, delay or cease
        service to our customers;
     .  Losses caused by the misappropriation of secured or confidential
        information by a third party who, in spite of our security measures,
        obtains illegal access to this information;
     .  Costs associated with efforts to protect against and remedy security
        breaches; or
     .  Lost potential revenue caused by the refusal of consumers to use our
        products and services due to concerns about the security of transactions
        and commerce that they conduct on the Internet.

     Future government regulation could materially adversely affect our
business.  There are currently few laws or regulations directly applicable to
access to, communications on, or commerce on the Internet. Therefore, we are not
currently subject to direct regulation of our business operations by any
government agency, other than regulations applicable to businesses generally.
Due to the increasing popularity and use of the Internet, however, federal,
state, local, and foreign governmental organizations have, from time to time,
considered a number of legislative and regulatory proposals related to the
Internet. The adoption of any of these laws or regulations may decrease the
growth in the use of the Internet, which could, in turn:

     .  Decrease the demand for our products and services;
     .  Increase our cost of doing business; or
     .  Otherwise have a material adverse effect on our business, results of
        operations and financial condition.

     Moreover, the applicability to the Internet of existing laws governing
issues such as property ownership, copyright, trademark, trade secret,
obscenity, libel and personal privacy is uncertain and developing. Our business,
results of operations and financial condition could be materially adversely
affected by the application or interpretation of these existing laws to the
Internet.

     Our articles of incorporation and bylaws may discourage lawsuits and other
claims against our directors.  Our articles of incorporation provide, to the
fullest extent permitted by Colorado law, that our directors shall have no
personal liability for breaches of their fiduciary duties to us.  In addition,
our bylaws provide for mandatory indemnification of directors and officers to
the fullest extent permitted by Colorado law.  These provisions may reduce the
likelihood of derivative litigation against directors and may discourage
shareholders from bringing a lawsuit against directors for a breach of their
duty.

     The price of our common stock has been highly volatile due to factors that
will continue to affect the price of our stock.  Our common stock closed as high
as $6.25 per share and as low as $1.00 per share between January 1, 2001 and May
7, 2001.  Historically, the over-the-counter markets for securities such as our
common stock have experienced extreme price and volume fluctuations.  Some of
the factors leading to this volatility include:

     .  Price and volume fluctuations in the stock market at large that do not
        relate to our operating performance;
     .  Fluctuations in our quarterly revenue and operating results;
     .  Announcements of product releases by us or our competitors;
     .  Announcements of acquisitions and/or partnerships by us or our
        competitors; and

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<PAGE>

     .  Increases in outstanding shares of common stock upon exercise or
        conversion of derivative securities.

     These factors may continue to affect the price of our common stock in the
future.

     We have issued numerous options, warrants, and convertible securities to
acquire our common stock that could have a dilutive effect on our shareholders.
As of May 7, 2001, we had issued warrants and options to acquire 5,468,687
shares of our common stock, exercisable at prices ranging from $1.875 to $58.25
per share, with a weighted average exercise price of approximately $9.19 per
share.  In addition to these warrants and options, we have reserved 2,640,852
shares of common stock for issuance upon conversion of our 10% convertible notes
and series B-2 and C-1 convertible preferred stock.  We have also reserved up to
1,200,000 shares for issuance upon conversion of the series C-2 convertible
preferred stock and exercise of the series C-2 warrant which may be purchased by
the holder of the Series C-1 preferred stock and warrants.  During the terms of
these derivative securities, the holders will have the opportunity to profit
from an increase in the market price of our common stock with resulting dilution
to the holders of shares who purchased shares for a price higher than the
respective exercise or conversion price.  In addition, the increase in the
outstanding shares of our common stock as a result of the exercise or conversion
of these derivative securities could result in a significant decrease in the
percentage ownership of our common stock by current and future holders of our
common stock.

     The potentially significant number of shares issuable upon conversion of
our 10% convertible notes and convertible preferred stock could make it
difficult to obtain additional financing.  Due to the significant number of
shares of our common stock which could result from a conversion of our 10%
convertible notes and series B-2, C-1 and, if issued, C-2 convertible preferred
stock, new investors may either decline to make an investment in Webb due to the
potential negative effect this additional dilution could have on their
investment or require that their investment be on terms at least as favorable as
the terms of the notes or convertible preferred stock.  If we are required to
provide similar terms to obtain required financing in the future, the potential
adverse effect of these financings could be perpetuated and significantly
increased.

     Future sales of our common stock in the public market could adversely
affect the price of our common stock.  Sales of substantial amounts of common
stock in the public market that is not currently freely tradable, or even the
potential for such sales, could have an adverse affect on the market price for
shares of our common stock and could impair the ability of purchasers of our
common stock to recoup their investment or make a profit.  As of May 7, 2001,
these shares consist of:

     .  Approximately 384,884 shares owned by our executive officers and
        directors of our outstanding common stock ("Affiliate Shares");
     .  Up to 2,640,852 shares issuable upon conversion of the 10% convertible
        notes and series B-2 and C-1 preferred stock;
     .  Approximately 5,468,687 shares issuable to warrant and option holders;
        and
     .  Up to 1,200,000 shares issuable upon conversion of the series C-2
        convertible preferred stock and exercise of the series C-2 warrant which
        may be issued to the holder of the Series C-1 preferred stock.

     Unless the Affiliate Shares are further registered under the securities
laws, they may not be resold except in compliance with Rule 144 promulgated by
the SEC, or some other exemption from registration.  Rule 144 does not prohibit
the sale of these shares but does place conditions on their resale which must be
complied with before they can be resold.

     The trading volume of our common stock may diminish significantly if our
common stock is delisted from the Nasdaq National Market.  Although our shares
are currently traded on the Nasdaq National Market, there is no assurance that
we will remain eligible to be included on Nasdaq.  If our common stock was no
longer eligible for quotation on Nasdaq, it could become subject to rules
adopted by the Securities and Exchange Commission, regulating broker/dealer
practices in connection with transactions in "penny stocks."  If our common
stock became subject to the penny stock rules, many brokers may be unwilling to
engage in transactions in our common stock because of the added regulation,
thereby making it more difficult for purchases of our common stock to dispose of
their shares.

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<PAGE>

     Future sales of our common stock in the public market could limit our
ability to raise capital.  Sales of substantial amounts of our common stock in
the public market pursuant to Rule 144, upon exercise or conversion of
derivative securities or otherwise, or even the potential for such sales, could
affect our ability to raise capital through the sale of equity securities.

     Provisions in our articles of incorporation allow us to issue shares of
stock that could make a third party acquisition of us difficult.  Our Articles
of Incorporation authorize our Board of Directors to issue up to 60,000,000
shares of common stock and 5,000,000 shares of preferred stock in one or more
series, the terms of which may be determined at the time of issuance by the
Board of Directors, without further action by our shareholders. Preferred stock
authorized by the Board of Directors may include voting rights, preferences as
to dividends and liquidation, conversion and redemptive rights and sinking fund
provisions. If the Board of Directors authorizes the issuance of preferred stock
in the future, this authorization could affect the rights of the holders of
common stock, thereby reducing the value of the common stock, and could make it
more difficult for a third party to acquire us, even if a majority of the
holders of our common stock approved of an acquisition.

     The issuance of our 10% convertible notes payable and convertible preferred
stock has required us to record non-cash expenses which, in turn, increased our
net loss applicable to common shareholders.   Based on generally accepted
accounting principles, we recorded a non-cash expense of approximately $2.5
million as additional interest expense and $2.9 million of accretion expense for
the three months ended March 31, 2001, as a result of the issuance of our 10%
convertible notes and the issuance of our series C-1 and B-2 preferred stock,
respectively.  In addition, we may incur significant additional non-cash
expenses if we issue the series C-2 convertible preferred stock and accompanying
warrant to the holder of the Series C-1 preferred stock or if the conversion
prices of our convertible securities or the exercise price of certain warrants
are reset.

     We do not anticipate paying dividends on our common stock for the
foreseeable future.  We have never paid dividends on our common stock and do not
intend to pay any dividends on our common stock in the foreseeable future. Any
decision by us to pay dividends on our common stock will depend upon our
profitability at the time, cash available therefore, and other factors. We
anticipate that we will devote profits, if any, to our future operations.



                                    PART II

                               OTHER INFORMATION

Items 1, 3 to 5.  Not Applicable

Item 2.  Changes in Securities and Use of Proceeds

     On February 28, 2001, we sold 2,500 shares of our series C-1 preferred
stock, $1,000 stated value, an investor for $2.5 million. In connection with
this investment, the investor was granted a warrant to purchase 500,000 shares
of our common stock at an initial exercise price of $3.75 per share. See Note 5
of the Notes to Consolidated Financial Statements for a description of the terms
of the securities. The securities were not registered under the Securities Act
of 1933, as amended, in reliance upon Regulation D promulgated by the Securities
and Exchange Commission.

     On May 2, 2001, our Jabber.com subsidiary executed a convertible note
payable with an investor for $2.5 million. See Note 9 of the Notes to
Consolidated Financial Statements for a description of this transaction. The
securities were not registered under the Securities Act of 1933 in reliance upon
Section 4(2) of this act.

Item 6.  Exhibits and Reports on Form 8-K

     (a)  Listing of Exhibits:

     3.1     Articles of Incorporation, as amended, of Webb (1)

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<PAGE>

     3.2     Bylaws of Webb (2)
     4.1     Specimen form of Webb's Common Stock certificate (3)
     4.2     Stock Option Plan of 1995 (2)
     4.3     Form of Incentive Stock Option Agreement for Stock Option Plan of
             1995 (2)
     4.4     Form of Nonstatutory Stock Option Agreement for Stock Option Plan
             of 1995 (2)
     4.5     Stock Option Plan of 2000, including forms of Incentive and
             Nonstatutory Stock Option Agreements (14)
     4.6     Jabber.com, Inc. Stock Option Plan of 2000, including forms of
             Incentive and Nonstatutory Stock Option Agreements (14)
     10.1    Form of Nondisclosure and Nonsolicitation Agreement between Webb
             and its employees (1)
     10.2    Office Lease for Webb's principal offices commencing May 2000 (5)
     10.3    Form of Change of Control Agreement between Webb and certain
             employees (4)
     10.4    Employment Agreement dated March 10, 1999, among Webb, NetIgnite2,
             LLC and Perry Evans (4)
     10.5    Securities Purchase Agreement dated August 25, 1999 between Webb
             and Castle Creek (6)
     10.6    Promissory Note dated August 25, 1999 issued by Webb to Castle
             Creek (6)
     10.7    Amendment dated December 18, 1999 to Securities Purchase Agreement
             dated August 25, 1999 between Webb and Castle Creek (7)
     10.8    First Amendment dated December 18, 1999 to Promissory Note dated
             August 25, 1999 issued by Webb to Castle Creek (7)
     10.9    Stock Purchase Warrant dated December 18, 1999 issued by Webb to
             Castle Creek (2)
     10.10   Securities Purchase Agreement dated December 31, 1999, between
             Webb, Marshall Capital Management and Castle Creek. Included as
             exhibits to the Securities Purchase Agreement are the proposed form
             of Warrant and the Registration Rights Agreement (8)
     10.11   Letter Agreement dated as of September 14, 2000 between Webb and
             Castle Creek.  (9)
     10.12   Articles of Amendment setting forth the terms of the series B-2
             convertible preferred stock (9)
     10.13   Exchange Agreement dated as of September 14, 2000, between Webb and
             Castle Creek (9)
     10.14   Securities Purchase Agreement dated as of February 28, 2001,
             between Webb and Castle Creek Technology Partners LLC. Included as
             exhibits thereto are the Articles of Amendment setting forth the
             terms of the Series C-1 Convertible Preferred Stock, the form of
             Articles of Amendment for the Series C-2 Convertible Preferred
             Stock, the forms of Series C-1 and C-2 Warrants and the
             Registration Rights Agreement (15)
     10.15   Articles of Amendment setting forth the terms of the Series C-1
             Convertible Preferred Stock (15)
     10.16   Note Purchase Agreement, Series B Convertible Preferred Stock
             Agreement, effective May 2, 2001, between Jabber.com. Inc, a
             majority-owned subsidiary of Webb, and France Telecom Technologies
             (16)
     10.17   Articles of Amendment for Webb's subsidiary, Jabber.com. Inc.,
             setting forth the terms of its series B and series C convertible
             preferred stock (16)
     10.18   Master Software License Agreement, Maintenance and Support
             Agreement and Professional Services Agreement, effective February
             28, 2001, between Webb and SwissOnline AG (*)
     13      The registrant intends to deliver to its shareholders a copy of
             2000 Annual Report on form 10-KSB (without exhibits), in lieu of a
             separate Annual Report to Shareholders
     21      Subsidiaries of Webb Interactive Services, Inc. (14)
-----------------------------
*    Filed herewith.
(1)  Filed with the Form 10-KSB Annual Report for the year ended December 31,
     1997, Commission File No. 0-28462.
(2)  Filed with the Form 8-K Current Report, filed January 14, 2000, Commission
     File No. 0-28642.
(3)  Filed with the Form 10-QSB for the quarter ended June 30, 1999, Commission
     File No. 0-28642.
(4)  Filed with the Registration Statement on Form S-3, filed January 29, 1999,
     Commission File No. 333-71503.
(5)  Filed with the initial Registration Statement on Form SB-2, filed April 5,
     1996, Commission File No. 333-3282-D.
(6)  Filed with the Registration Statement on Form S-3, filed September 24,
     1999, Commission File No. 333-86465.

                                      31
<PAGE>

(7)  Filed with the Form 10-KSB Annual Report for the year ended December 31,
     1998, Commission File No. 0-28462.
(8)  Filed with the Form 8-K Current Report, filed September 2, 1999, Commission
     File No. 0-28642.
(9)  Filed with Amendment No. 2 to Webb's Registration Statement on Form S-3,
     filed January 3, 2000, Commission File No. 333-87887
(10) Filed with the Form 8-K Current Report, filed January 5, 2000, Commission
     File No. 0-28642.
(11) Filed with the Form 8-K Current Report, filed February 25, 2000, Commission
     File No. 0-28642.
(12) Filed with the Registration Statement on Form S-3, filed September 2, 1999,
     Commission File No. 333-86465.
(13) File with the Form 10-KSB Annual Report for the year ended December 31,
     1999, Commission File No. 0-28462.
(14) File with the Form 10-KSB Annual Report for the year ended December 31,
     2000, Commission File No. 0-28462.
(15) Filed with the Form 8-K Current Report, filed March 1, 2001, Commission
     File No. 0-28642.
(16) Filed with the Form 8-K Current Report, filed May 10, 2001, Commission File
     No. 0-28642.


     (b)  Reports on Form 8-K. The Company filed reports on Form 8-K during the
          quarter ended March 31, 2000 as follows: (i) filed under Item 5 of
          Form 8-K on March 1, 2001; (ii) filed under Item 5 of Form 8-k on May
          10, 2001.

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<PAGE>

                                  Signatures


In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.



                                        WEBB INTERACTIVE SERVICES, INC.



Date:  May 16, 2001                     By  /s/ William R. Cullen
                                            ---------------------------
                                            Chief Financial Officer



                                            /s/ Stuart Lucko
                                            ---------------------------
                                            Controller

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