<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, 2000.
                     ---------------

[   ]  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 3, 2000, Registrant had 9,104,226 shares of common stock
outstanding.

-----------------------
<PAGE>

               WEBB INTERACTIVE SERVICES, INC. AND SUBSIDIARIES

                                     Index
                                     -----

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

           Item 1.  Unaudited Financial Statements

           Consolidated Balance Sheets as of March 31, 2000 and December 31, 1999                                 3

           Consolidated Statements of Operations for the three months ended March 31, 2000 and 1999               4

           Consolidated Statements of Cash Flows for the three months ended March 31, 2000 and 1999             5-6

           Notes to Consolidated Financial Statements                                                          7-14

           Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations     15-29

Part II.   Other Information

           Item 1, 3 and 5.  Not Applicable                                                                      30

           Item 2.  Changes in Securities and Use of Proceeds                                                    30

           Item 4.  Submission of Matters to a Vote of Security Holders                                          30

           Item 6.  Exhibits and Reports on Form 8-K                                                          31-32

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,
                                                                                                2000             1999
                                                                                            ------------     ------------
<S>                                                                                         <C>              <C>
                                         ASSETS
Current assets:
  Cash and cash equivalents                                                                 $ 17,595,899     $  4,164,371
  Accounts receivable, net of allowance of doubtful accounts of $4,000                           623,736          107,132
  Prepaid expenses                                                                               272,214          399,217
  Short-term deposits                                                                            923,374          444,545
                                                                                            ------------     ------------
              Total current assets                                                            19,415,223        5,115,265
Property and equipment, net of accumulated depreciation of $1,635,800 and $1,402,158,
 respectively                                                                                  2,763,600        2,352,489

Intangible assets, net of accumulated amortization of $4,560,606 and
  $2,523,351, respectively                                                                    20,480,277       12,503,047
Deferred financing costs                                                                         153,115        2,649,517
Other assets                                                                                       4,216            4,216
                                                                                            ------------     ------------
              Total assets                                                                  $ 42,816,431     $ 22,624,534
                                                                                            ============     ============
                           LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Current portion of capital leases payable                                                 $    100,057     $    108,525
  Accounts payable and accrued liabilities                                                     1,187,109          841,440
  Accrued salaries and payroll taxes payable                                                     836,032        1,059,338
  Accrued interest payable                                                                        95,892          126,028
  Customer deposits and deferred revenue                                                         183,266          227,882
                                                                                            ------------     ------------
              Total current liabilities                                                        2,402,356        2,363,213

Capital leases payable                                                                            88,282          115,493
10% convertible note payable, net of discount of $444,039 and
  $947,710, respectively                                                                       2,055,961        4,052,290
Commitments and contingencies
Stockholders' equity
  Preferred stock, no par value, 5,000,000 shares authorized:
     Series B convertible preferred stock, 12,500 and none shares issued and outstanding,
      respectively                                                                            12,500,000                -

     10% redeemable, convertible preferred stock, 10% cumulative return; none and 85,000
      shares issued and outstanding, respectively, including dividends payable of none
      and $170,295, respectively                                                                       -        1,020,295



  Common stock, no par value, 20,000,000 shares authorized, 9,058,539 and 7,830,028
   shares issued and outstanding, respectively                                                73,722,923       49,513,769

  Warrants and options                                                                        13,302,943        8,612,322
  Deferred compensation                                                                         (348,225)        (412,707)
  Accumulated deficit                                                                        (60,907,809)     (42,640,141)
                                                                                            ------------     ------------
              Total stockholders' equity                                                      38,269,832       16,093,538
                                                                                            ------------     ------------
              Total liabilities and stockholders' equity                                    $ 42,816,431     $ 22,624,534
                                                                                            ============     ============
</TABLE>

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

                                       3
<PAGE>

               WEBB INTERACTIVE SERVICES, INC. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF OPERATIONS

                                  (UNAUDITED)

<TABLE>
<CAPTION>
                                                                                            Three Months Ended
                                                                                                March 31,
                                                                                  --------------------------------------
<S>                                                                               <C>                        <C>
                                                                                      2000                       1999
                                                                                  ------------               -----------
Net revenues                                                                      $  1,009,822               $   288,282
Cost of revenues                                                                       762,924                   187,826
                                                                                  ------------               -----------
 Gross margin                                                                          246,898                   100,456
                                                                                  ------------               -----------
Operating expenses:
 Sales and marketing expenses                                                          484,767                   509,859
 Product development expenses                                                        1,144,579                   598,840
 General and administrative expenses                                                 1,791,948                 1,484,545
 Depreciation and amortization                                                       2,207,043                   108,229
                                                                                  ------------               -----------
                                                                                     5,628,337                 2,701,473
                                                                                  ------------               -----------
 Loss from operations                                                               (5,381,439)               (2,601,017)
Interest income                                                                        161,887                    50,301
Equity loss in subsidiary                                                                    -                   (21,949)
Interest expense                                                                      (174,990)                   (4,159)
                                                                                  ------------               -----------
Net loss                                                                            (5,394,542)               (2,576,824)
Preferred stock dividends                                                             (373,126)                  (46,013)
Accretion of preferred stock to redemption value                                   (12,500,000)               (3,000,000)
Accretion of preferred stock for guaranteed return in excess
 of redemption value                                                                         -                (1,158,563)
                                                                                  ------------               -----------
Net loss available to common stockholders                                         $(18,267,668)              $(6,781,400)
                                                                                  ============               ===========
Loss per share, basic and diluted                                                       $(2.11)                   $(1.28)
                                                                                  ============               ===========
Weighted average shares outstanding, basic and diluted                               8,667,640                 5,313,368
                                                                                  ============               ===========
</TABLE>

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

                                       4
<PAGE>

               WEBB INTERACTIVE SERVICES, Inc. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

                                  (UNAUDITED)

<TABLE>
<CAPTION>
                                                                                           Three Months Ended
                                                                                                March 31,
                                                                                   -------------------------------------
                                                                                       2000                      1999
                                                                                   -----------               -----------
<S>                                                                                <C>                       <C>
Cash flows from operating activities:
 Net loss                                                                          $(5,394,542)              $(2,576,824)
 Adjustments to reconcile net loss to net cash used in operating
  activities:
   Depreciation and amortization                                                     2,270,898                   108,229
   Accrued interest income on advances to DCI                                                -                   (22,050)
   Reduction in note receivable for services received from DCI                               -                   272,276
   Stock and stock options issued for services                                         175,170                   140,229
   Equity loss in subsidiary                                                                 -                    21,949
   Amortization of 10% convertible note payable discount                                50,381                         -
   Amortization of 10% convertible note payable financing costs                         24,480                         -
 Changes in operating assets and liabilities:
   Increase in accounts receivable                                                    (516,604)                  (38,638)
   Decrease in inventory                                                                     -                    25,933
   Decrease in prepaid expenses                                                        127,003                    34,260
   Increase in short-term deposits and other assets                                   (478,829)                  (18,072)
   Increase (decrease) in accounts payable and accrued liabilities                     280,669                  (346,738)
   Decrease in accrued salaries and payroll taxes payable                             (223,306)                  (68,516)
   Decrease in accrued interest payable                                                (30,136)                        -
   (Decrease) increase in customer deposits and deferred revenue                       (44,616)                  264,400
                                                                                   -----------               -----------
   Net cash used in operating activities                                            (3,759,432)               (2,203,562)
                                                                                   -----------               -----------
Cash flows from investing activities:
 Purchase of property and equipment                                                   (598,822)                 (224,883)
 Cash advances to DCI                                                                        -                  (349,579)
 Payment of acquisition costs                                                                -                    (1,031)
 Investment in subsidiary                                                                    -                   (27,620)
                                                                                   -----------               -----------
   Net cash used in investing activities                                              (598,822)                 (603,113)
                                                                                   -----------               -----------
Cash flows from financing activities:
  Payments on capital leases                                                           (35,679)                   (8,543)
  Proceeds from exercise of stock options and warrants                               6,165,461                 1,012,633
  Proceeds from issuance of series B preferred stock and warrants                   12,500,000                         -
  Proceeds from issuance of series C preferred stock                                         -                 3,000,000
  Stock offering costs                                                                (840,000)                 (244,500)
                                                                                   -----------               -----------
   Net cash provided by financing activities                                        17,789,782                 3,759,590
                                                                                   -----------               -----------
Net increase in cash and cash equivalents                                           13,431,528                   952,915
Cash and cash equivalents, beginning of period                                       4,164,371                   698,339
                                                                                   -----------               -----------
Cash and cash equivalents, end of period                                           $17,595,899               $ 1,651,254
                                                                                   ===========               ===========
</TABLE>

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

                                       5
<PAGE>

                        WEBB INTERACTIVE SERVICES, INC.
               CONSOLIDATED Statements of Cash Flows (Continued)
                                  (UNAUDITED)
<TABLE>
<CAPTION>
                                                                                           Three Months Ended
                                                                                                March 31,
                                                                                   -------------------------------------
                                                                                       2000                      1999
                                                                                   -----------               -----------
<S>                                                                                <C>                       <C>
Supplemental disclosure of cash flow information:

Cash paid for interest                                                             $   130,265                $    4,519
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 redemption value                                 12,500,000                 3,000,000
   Accretion of preferred stock for guaranteed return in excess of
         redemption value                                                                    -                 1,158,563
   Preferred stock dividends paid or to be paid in common stock                        373,126                   469,013
   Preferred stock and dividends converted to common stock                           1,023,028                 5,686,707
   Common stock warrants issued for offering costs                                   2,311,475
   10% note payable converted to common stock                                        1,886,263                         -
   Capital leases for equipment                                                              -                    35,000
</TABLE>

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

                                       6
<PAGE>

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

               WEBB INTERACTIVE SERVICES, INC. AND SUBSIDIARIES

                     MARCH 31, 2000 AND DECEMBER 31, 1999

                                  (UNAUDITIED)


NOTE 1 - BASIS OF PRESENTATION

     The accompanying unaudited interim consolidated financial statements
include the accounts of Webb Interactive Services, Inc. and its wholly-owned
Subsidiaries (collectively "Webb" or the "Company").  All significant
intercompany balances and transactions have been eliminated in consolidation.
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 the Company's
Annual Report on Form 10-KSB for the year ended December 31, 1999 filed with the
Securities and Exchange Commission.

NOTE 2 - REVENUE RECOGNITION

     The Company recognizes software license revenue in accordance with the
American Institute of Certified Public Accountants Statement of Position 97-2
"Software Revenue Recognition" ("SOP 97-2"), which requires the Company to
recognize revenue on software transactions only when persuasive evidence of an
agreement exists, delivery of the product has occurred, no significant Company
obligations remain, the fee is fixed or determinable, and collectibility is
probable.

     Revenue from software license fees is recognized upon delivery, provided
that no future Company obligation exists.  If obligations do exist, revenue is
deferred until the obligation is satisfied, which may require the Company to
recognize revenue from software licenses over the term of the contract.  In
instances where the Company charges monthly license fees, revenue is recognized
in the month the license is provided. Guaranteed minimum revenue is recognized
on a straight-line basis over the period the minimum applies.

     Revenue from professional services billed on a time and materials basis is
recognized as performed. 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 Company's
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, the Company
uses the completed contract method of accounting whereby revenue is recognized
when the work is completed.  Customer advances and billed amounts due from
customers in excess of revenue recognized are recorded as deferred revenue.

     Revenue from service bureau fees is recognized in the month the service is
provided.

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

                                       7
<PAGE>

     The Company follows the interpretations 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 hosting arrangements.
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 unrelated to the
vendor 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.

     In multiple element arrangements when vendor specific objective evidence
does not exist for the individual elements, all revenue from the arrangement is
deferred until the earlier of the point at which (a) such sufficient vendor-
specific objective evidence does exist or (b) all elements of the arrangement
have been delivered.  In some instances, the Company recognizes all the revenue
from the arrangement on a straight-line basis over the life of the related
agreement.

     In December 1999, the Securities and Exchange Commission staff released
Staff Accounting Bulletin No. 101, "Revenue Recognition" ("SAB 101").  SAB 101
provides interpretive guidance on the recognition, presentation and disclosure
of revenue in financial statements.  The accounting impact of SAB 101 is
required to be determined no later than the Company's second fiscal quarter of
2000.  If the Company determines that its revenue recognition policies must
change to be in compliance with SAB 101, the implementation of SAB 101 will
require the Company to restate its first quarter 2000 results to reflect a
cumulative effect of a change in accounting principle as if SAB 101 had been
implemented on January 1, 2000.  The Company is currently reviewing SAB 101 to
determine what impact, if any, the adoption of SAB 101 will have on its
financial position and results of operations.

     The Company believes its 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 authoritative literature.  Implementation
guidelines for these standards, as well as potential new standards, including
SAB 101, could lead to unanticipated changes in the Company's current revenue
recognition policies.  Such changes could affect the timing of the Company's
future revenue and results of operations.

     Estimates of returns and allowances are recorded in the period of the sale
based on the Company's historical experience and the terms of individual
transactions.

     Net revenues are comprised of the following:

<TABLE>
<CAPTION>
                                                              Three Months Ended
                                                                   March 31,
                                                         ------------------------------
                                                            2000                 1999
                                                         ----------            --------
<S>                                                      <C>                   <C>
Net revenues:
 Licenses                                                $  681,727            $ 48,020
 Service bureau application provider service fees            82,069              58,309
 Services                                                   246,026              64,444
 Hardware and third party software                                -             117,509
                                                         ----------            --------
 Total net revenues                                      $1,009,822            $288,282
                                                         ==========            ========
</TABLE>

NOTE 3 - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

     In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133").  SFAS 133 establishes
accounting and reporting standards for derivative financial instruments and
hedging activities related to those instruments as well as other hedging
activities.  It requires an entity to recognize all derivatives as either assets
or liabilities in the statement of financial position and measures those
instruments at fair value.  In June 1999, the FASB issued Statement of Financial
Accounting Standards No. 137, "Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of FASB Statement No. 133 - An
amendment of FASB Statement No. 133" (SFAS 137).  SFAS 137 delays the effective
date of SFAS 133 to financial quarters and financial years beginning after June
15, 2000.  The Company does not typically enter into arrangements that would
fall under the scope of Statement No. 133 and thus, management believes that
SFAS 133 will not significantly affect the Company's financial condition and
results of operations.

     In March 2000, the FASB issued FASB Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation" ("FIN No. 44").  The
Interpretation clarifies the application of APB No. 25 for certain issues
related to equity based instruments issued to employees.  FIN No. 44 is
effective on July 1, 2000,

                                       8
<PAGE>

except for certain transactions, and will be applied on a prospective basis.
Management believes that FIN No. 44 will not have a significant impact on its
financial statements.

NOTE 4 - BUSINESS ACQUISITION

     On January 7, 2000, the Company acquired assets of Update Systems, Inc.
("Update"), a developer and provider of e-communication solutions for businesses
in the highly competitive world of Internet relationships, by issuing 278,411
shares of the Company's common stock.  In addition, outstanding Update options
to purchase common stock were exchanged into 49,704 options to purchase the
Company's common stock.  The acquisition of the assets was recorded using the
purchase method of accounting whereby the consideration paid of $10,060,417 was
allocated based on the fair values of the assets acquired with the excess
consideration over the fair market value of tangible assets of $10,014,485
recorded as intangible assets.

Total consideration for the merger is as follows:

<TABLE>
<S>                                                      <C>
Value of common stock issued                             $ 8,630,741
Value of options issued                                    1,364,676  (a)
Acquisition expenses                                          65,000
                                                         -----------
Total purchase price                                     $10,060,417
                                                         ===========
</TABLE>

(a)  49,704 options issued, valued using the Black-Scholes option pricing model
     using the following assumptions:

<TABLE>
<S>                                                           <C>
Exercise prices                                               $ 4.33
Fair market value of common stock on measurement date         $29.50
Option lives                                                 5 years
Volatility rate                                                 104%
Risk-free rate of return                                        5.0%
Dividend rate                                                     0%
</TABLE>

The purchase price was allocated to the assets acquired based on their fair
market values as follows:

<TABLE>
<S>                                                      <C>
Acquired property and equipment                          $    45,932
Developed technologies, goodwill and other intangibles    10,014,485
                                                         -----------
Total assets acquired                                    $10,060,417
                                                         ===========
</TABLE>

     The transaction with Update resulted in $10,014,485 of intangible assets
(primarily developed technologies, workforce and goodwill).  These intangible
assets will be amortized over their estimated economic lives of three years.
The purchase price allocation is subject to adjustment based on the final
determination of the fair value of the assets acquired, which could take as long
as one year from January 7, 2000.

NOTE 5 - GOODWILL

     Goodwill is being amortized on a straight-line basis over three years.
Subsequent to acquisitions which result in goodwill, the Company continually
evaluates whether later events and circumstances have occurred that indicate the
remaining useful life of goodwill may warrant revision or that the remaining
balance of goodwill may not be recoverable.  When factors indicate that goodwill
should be evaluated for possible impairment, the Company uses an estimate of the
undiscounted net income or cash flows, as appropriate, over the remaining life
of the goodwill in measuring whether the goodwill is recoverable.  The Company
recorded $2,037,255 and none of goodwill amortization expense for the three
months ended March 31, 2000 and 1999, respectively.  As of March 31, 2000,
$7,365,415 of the Company's intangible assets consisted of goodwill.

     None of the businesses acquired by the Company were profitable prior to
their acquisition. Accordingly, and due to other risks and uncertainties
discusses herein, it is possible that an analysis of these long-lived assets in
future periods could result in a conclusion they are impaired, and the amount of
impairment could be substantial.

                                       9
<PAGE>

NOTE 6 - NET LOSS PER SHARE

     Net loss per share is calculated in accordance with SFAS No. 128, "Earnings
Per Share" ("SFAS 128"), and Securities and Exchange Commission Staff Accounting
Bulletin No. 98 ("SAB 98").  Under the provisions of SFAS 128 and SAB 98, basic
net loss per share is computed by dividing net loss available 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 the Company's 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.

<TABLE>
<CAPTION>
                                                                March 31,
                                                      ------------------------------
                                                         2000                1999
                                                      ---------            ---------
<S>                                                   <C>                  <C>
Stock options                                         3,365,691            1,755,015
10% convertible note payable                            248,262                    -
Warrants and underwriter options                        785,682            1,190,612
Series B preferred stock                                625,000                    -
10% preferred stock                                      -                    95,596
Series C preferred stock                                 -                    40,651
                                                      ---------            ---------
Total                                                 5,024,635            3,081,874
                                                      =========            =========
</TABLE>

     The number of shares excluded from the earning per share calculation
because they are anti-dilutive, using the treasury stock method, were 3,899,383
and 1,817,248 for the three months ended March 31, 2000 and 1999, respectively.

NOTE 7 - SERIES B PREFERRED STOCK

     On February 18, 2000, the Company completed a private placement which
resulted in gross proceeds of $12,500,000. The placement was made pursuant to a
securities purchase agreement entered into on December 31, 1999. The Company
sold 12,500 shares of its series B convertible preferred stock (the "series B
preferred stock"), including warrants to purchase 343,750 shares of the
Company's common stock. Net proceeds to the Company were approximately
$11,660,000 after deducting approximately $840,000 in offering costs.

     The series B preferred stock is convertible into shares of the Company's
common stock, initially at $20.00. The conversion rate for the series B
preferred stock is subject to a potential reset. The conversion price will be
reset  on November 11, 2000 at which time the conversion price is fixed at the
lower of $20.00 or the average closing bid price of the Company's common stock
for 10 days ending on November 10, 2000 or the closing bid price of the
Company's common stock on November 10, 2000.

     The terms of the10% convertible note payable agreement, issued on August
25, 1999, were amended on December 18, 1999 whereby the Company issued the note
holder a five-year warrant to purchase 136,519 shares of the Company's common
stock at an exercise price of $18.51 per share in consideration for the note
holder's agreement to exchange the note for an amended note with terms more
favorable for the Company.  As this transaction was consummated to facilitate
the sale of the Company's series B preferred stock, the Company recorded the
fair value of the warrant totalling $2,311,475 as offering costs related to the
series B preferred stock.

     The Company also issued 343,750 common stock purchase warrants with the
series B preferred stock, valued at $6,913,568 based on the relative fair value
of the warrants using the Black-Scholes option pricing model compared to the net
proceeds received by the Company, entitles the holder to purchase one share of
the Company's common stock for a purchase price initially set at $20.20, equal
to 101% of the initial conversion price of the preferred stock at any time
during the five-year period commencing on February 18, 2000. The exercise price
for the warrants is subject to being reset based upon future market prices for
the Company's common stock every 90 days commencing May 15, 2000 until January
20, 2003.  If the current exercise price is higher than the current market price
(the lower of the average closing bid prices for the 10-day period ending on
such date or the closing bid price on such date), the exercise price will be
reset to the market price.

                                       10
<PAGE>

     The warrant was valued utilizing the Black-Scholes option pricing model
using the following assumptions:

<TABLE>
<S>                                                           <C>
Exercise price                                                $20.20
Fair market value of common stock on grant date               $66.88
Option life                                                  5 years
Volatility rate                                                 120%
Risk-free rate of return                                        6.7%
Discount rate                                                     0%
</TABLE>

     Due to the conversion feature associated with the series B preferred stock,
the Company accounted for a beneficial conversion feature (a "Guaranteed
Return") as an additional preferred stock dividend. The computed value of the
Guaranteed Return of $2,434,957 is limited to the relative fair value of the
series B preferred stock, which totalled $2,434,957, and was initially recorded
as a reduction of the series B preferred stock and an increase to additional
paid-in capital.  The Guaranteed Return reduction to the series B preferred
stock was accreted on the date of issuance, as additional dividends, by
recording a charge to income available to common stockholders from the date of
issuance to the earliest date of conversion.

     The difference between the stated redemption value of $1,000 per share and
the recorded value on February 18, 2000, totalling $12,500,000, was accreted as
a charge to income available to common stockholders on the date of issuance (the
date on which the series B preferred stock is first convertible) and was
comprised of the following:

<TABLE>
<S>                                                                 <C>
Guaranteed return                                                   $ 2,434,957
Value of common stock warrants                                        6,913,568
Value of common stock warrant issued to holder of 10% note payable    2,311,475
Series B preferred stock offering costs                                 840,000
                                                                    -----------
Total accretion recorded                                            $12,500,000
                                                                    ===========
</TABLE>

NOTE 8. - CONVERSION OF 10% CONVERTIBLE NOTE PAYABLE

     On February 18, 2000, the holder converted $2,500,000 of the outstanding
Note Payable into 248,262 shares of the Company's common stock at an exercise
price of $10.07 per share.

NOTE 9. - ISSUANCE OF COMMON STOCK

     On March 16, 2000, the Company executed a two-month consulting agreement
with a financial consulting firm to enhance Company activities in corporate
finance, mergers and acquisitions, and public and investor relations.  In
addition, if the consulting firm introduces the Company to a lender or equity
purchaser, the Company is required to pay the consultant a cash fee at the time
of closing.  To date, the Company has not paid a cash fee for this service.  In
connection with the agreement, the Company issued 3,000 restricted shares of its
common stock for services provided and recorded expense totalling $110,688
valued at the fair market value on the day the services were provided.  The
Company also issued an additional 12,000 restricted shares of its common stock
during April 2000 related to this agreement (See Note 13 for services rendered
subsequent to March 31, 2000).

NOTE 10 - EXERCISE OF COMMON STOCK WARRANTS

     During the three months ended March 31, 2000, holders of warrants exercised
their right to purchase 492,217 shares of the Company's common stock resulting
in net proceeds to the Company totalling $5,374,416, after deducting $93,707 in
commissions, as summarized in the following table:

                                       11
<PAGE>

<TABLE>
<CAPTION>
                                         Common
                                          Stock              Exercise               Common              Proceeds
                                         Warrant               Price                Stock                to the
       Warrant Exercised                Exercised            Per Share              Issued               Company
-------------------------------       -------------       ---------------       --------------       ---------------
<S>                                   <C>                 <C>                   <C>                  <C>
10% preferred stock warrants                 35,000                $15.00               35,000            $  525,000
IPO representative warrants                 101,870                  8.10               99,870               736,047
Warrants issued in connection
 with the DCI merger                        111,828         6.61 to 10.16              110,166               944,049

Warrant issued in connection
 with 5% Preferred Stock                    100,000                 16.33              100,000             1,633,000

Warrant issued to customer                    7,000                  9.75                7,000                68,250
Warrant issued to 10%
 convertible note holder                    136,519                 11.44              136,519             1,468,070
                                      -------------                             --------------       ---------------
                                            492,217                                    488,555            $5,374,416
                                      =============                             ==============       ===============
</TABLE>

     Included in the common stock issued in connection with the exercise of the
IPO representative warrants and the warrants issued in connection with the DCI
merger are 9,000 and 6,865 shares, respectively, issued to the holders as a
result of utilizing the cashless exercise provision of the Agreements for the
exercise of 11,000 and 8,527 warrants, respectively.

NOTE 11 - CONVERSION OF 10% PREFERRED STOCK

     During the three months ended March 31, 2000, 85,000 shares of the 10%
preferred stock, including accrued dividends payable of $173,028, were converted
into 102,302 shares of the Company's common stock at conversion prices of $10.00
as summarized in the following table:

<TABLE>
<CAPTION>
                                           Number of Shares
                             --------------------------------------------            Common Stock
                               10% Preferred                Common                    Conversion
   Conversion Date                 Stock                     Stock                  Price per Share
----------------------       ------------------       -------------------       ---------------------
<S>                          <C>                        <C>                       <C>
January 11, 2000                         80,000                    96,240                      $10.00
February 14, 2000                         5,000                     6,062                       10.00
                             ------------------       -------------------
                                         85,000                   102,302
                             ==================       ===================
</TABLE>

NOTE 12 - BUSINESS SEGMENT INFORMATION

     The Company supports products and services that simplify and support e-
commerce transactions in 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, the Company
supports products and services for electronic banking applications, targeting
credit unions, community banks, and savings and loan institutions with a full
line of e-banking transaction processing and account management services.  The
Company has three reportable business segments: Local Commerce, e-Banking and
Jabber.com.

     Local Commerce consists of XML based Internet application solutions which
provide merchants options for reaching their target customers through simple
tools that publicize their company, product and service offerings; buyers to
quickly find rich information about merchants and their offerings; and buyers
and sellers a more effective and efficient transaction.

     e-Banking consists of an online banking solution, marketed generally to
financial institutions having less than $500 million in assets, using a service
bureau approach to e-banking, which enables institutions to provide many of the
capabilities and services available to the larger financial institutions without
the cost associated with the development of institution-specific systems.

                                       12
<PAGE>

     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.  At March 31, 2000, the Company had
not earned any revenues in connection with this business segment.

     Corporate Activities consists of general corporate expenses, including
capitalized costs that are not allocated to specific business segments.  Assets
of corporate activities include unallocated cash, receivables, prepaid expenses,
note receivable, deferred acquisition costs, deposits, intangible assets
acquired in mergers, and corporate use of property and equipment.

<TABLE>
<CAPTION>
                                                                       March 31, 2000           December 31, 1999
                                                                      -----------------         -----------------
<S>                                                                   <C>                       <C>
Assets
--------------------------------------------------------------------
Local commerce                                                              $ 2,187,785               $ 1,651,481
e-Banking                                                                       743,301                   714,216
Jabber.com                                                                       16,290                         -
Corporate activities                                                         39,869,055                20,258,837
                                                                     ------------------         -----------------
Total                                                                       $42,816,431               $22,624,534
                                                                      =================         =================
Property and Equipment, net
-------------------------------------------------------------------
Local commerce                                                               $1,646,759                $1,378,408
e-Banking                                                                       643,357                   683,890
Jabber.com                                                                       16,289                         -
Corporate activities                                                            457,195                   290,191
                                                                     ------------------         -----------------
Total                                                                        $2,763,600                $2,352,489
                                                                     ==================         =================
</TABLE>

<TABLE>
<CAPTION>
                                                                                  Three Months Ended
                                                                                       March 31,
                                                                      -------------------------------------------
                                                                             2000                      1999
                                                                      -----------------         -----------------
<S>                                                                   <C>                       <C>
Net Revenues
--------------------------------------------------------------------
Local commerce                                                               $  812,553                  $215,835
e-Banking                                                                       197,269                    72,447
                                                                     ------------------         -----------------
Total net sales                                                              $1,009,822                  $288,282
                                                                      =================         =================
                                                                                                      $(1,235,720)
Net Loss
--------------------------------------------------------------------
Local commerce                                                              $(1,648,086)               $(1,235,720)
e-Banking                                                                       (40,589)                  (107,645)
Jabber.com                                                                      (63,249)                         -
Corporate activities                                                         (3,642,618)                (1,233,459)
                                                                     ------------------         ------------------
Net loss                                                                    $(5,394,542)               $(2,576,824)
                                                                      =================          =================
Depreciation and Amortization
--------------------------------------------------------------------
Local commerce                                                               $   62,259                  $  44,073
e-Banking                                                                        41,014                     35,247
Jabber.com                                                                          276                          -
Corporate activities                                                          2,103,494                     28,909
                                                                     ------------------         ------------------
Total                                                                        $2,207,043                   $108,229
                                                                      =================         ==================
</TABLE>

                                       13
<PAGE>

<TABLE>
<CAPTION>
                                                                                  Three Months Ended
                                                                                       March 31,
                                                                      -------------------------------------------
                                                                                   2000                      1999
                                                                      -----------------         -----------------
<S>                                                                   <C>                       <C>
Property and Equipment Additions
--------------------------------------------------------------------
Local commerce                                                                 $346,343         $          80,945
e-Banking                                                                             -                   114,754
Jabber.com                                                                       16,565                         -
Corporate activities                                                            235,914                    29,184
                                                                     ------------------         -----------------
Total                                                                          $598,822                  $224,883
                                                                     ==================         =================
</TABLE>

NOTE 13 - SUBSEQUENT EVENTS

     On April 17, 2000, the Company loaned an officer $100,000 and issued a
demand promissory note with stated interest of 8% per annum.  Monthly interest
only payments commence July 1, 2000 until the note is paid in full.

     During April, 2000, the Company granted 12,000 restricted shares of its
common stock to a financial consulting firm representing  the remainder of its
commencement bonus related to the two-month consulting agreement the Company
entered into on March 16, 2000.  The Company will record $136,203 of expense in
April, 2000 for the issuance of the common stock, which was valued at the fair
market value on the day the agreement was completed.

                                       14
<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 small businesses, with a particular emphasis on local commerce
interaction.  Our AccelX product line of XML-based commerce and buyer-seller
interaction services provide businesses with powerful web site development and
communication tools to attract customers, generate leads, increase buyer-seller
interaction and strengthen customer relationship management.  The AccelX
services are divided into two categories: Customer Relationship Management
Services and Marketplace Services.

     We license our 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
products are designed to be delivered on an application service provider
business model whereby we host the software on our servers and 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.

     To date, we have generated revenues through the sale of design and
consulting services for web site development and network engineering services,
resale of software licenses, mark-ups on computer hardware and software sold to
customers, maintenance fees charged to customers to maintain computer hardware
and web sites, license fees based on a portion of revenues from our products and
services, training course fees, and monthly fees paid by customers for Internet
access which we have provided

     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.  In the local commerce segment, we target small and medium sized
businesses with our AccelX application services supporting XML-based commerce
and buyer-seller interaction.  The electronic banking unit targets credit
unions, community banks, and savings and loan institutions with a full line of
e-banking transaction processing and account management services.  In January
2000, we formed a new subsidiary in order to commercialize separately from our
AccelX application services business, the Jabber.org instant messaging system.
We intend to seek significant participation from external partners to help us
maximize the value of the e-banking and instant messaging businesses.

     During the first quarter of 2000, we acquired the assets of privately held
Update Systems, Inc.  See Note 4 to Consolidated Financial Statements.

     On February 18, 2000, we completed a private placement of 12,500 shares of
our series B preferred stock and two five-year warrants representing the right
to acquire 343,750 cumulative shares of our common stock at an exercise price of
$20.20 per share in consideration for which we received $12,500,000 in gross
proceeds. The series B preferred stock is convertible at any time from the date
of issuance at $20.00, subject to certain reset provisions. The conversion price
will be reset on November 11, 2000 at which time the conversion price is fixed
at the lower of $20.00 or the average closing bid price of the Company's common
stock for 10 days ending on November 10, 2000 or the closing bid price of the
Company's common stock on November 10, 2000. The common stock purchase warrants
are exercisable initially at $20.20 per share and are also subject to reset
provisions. The exercise price for the warrants is subject to being reset based
upon future market prices for the Company's common stock every 90 days
commencing May 15, 2000 until January 20, 2003. If the current exercise price is
higher that the current market price (the lower of the average closing bid
prices for the 10-day period ending on such date or the closing bid price on
such date), the exercise price will be reset to the market price.

     We have incurred losses from operations since inception.  At March 31,
2000, we had an accumulated deficit of approximately $60.9 million.  The
accumulated deficit at March 31, 2000,  included approximately $35.1 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 the 10% convertible

                                       15
<PAGE>

note payable and amortization of assets acquired in consideration for the
issuance of our securities. Based on applicable current accounting standards, we
estimate that we will be required to record a non-operating expense of
approximately $189,000 in the remainder of 2000, $251,000 in 2001 and $158,000
in 2002 in connection with the issuance of our 10% convertible note, unless it
is converted to common stock prior to its maturity date. We also recorded
additional non-cash charges of $12.5 million in the first quarter of 2000 in
connection with the issuance of series B convertible preferred stock. While
these charges do not affect our operating losses or working capital, they do
result in a decrease in our net income available to common stockholders.
Additionally, during the first quarter of 2000, we recorded a non-cash charge
for preferred stock dividends of approximately $373,000 and non-cash interest
expense of approximately $75,000 in connection with the sale of our 10%
convertible note payable.

     Loss from operations, net loss, net loss available to common stockholders
and loss per share, were overstated in our press release for the first quarter
due to an overstatement by approximately $511,000 in our general and
administrative expenses for the quarter.  The preliminary results and the actual
results for these items are as follows:

<TABLE>
<CAPTION>
                                                 Preliminary
                                                   Reported
                                                    Numbers                    Actual
                                                -------------               ------------
<S>                                              <C>                        <C>
Loss from operations                             $ (5,893,251)              $ (5,381,439)
Net loss                                           (5,906,354)                (5,394,542)
Net loss available to common stock holders        (18,779,480)               (18,267,668)
Loss per share, basic and diluted                $      (2.17)              $      (2.11)
</TABLE>

     In December 1999, the Securities and Exchange Commission staff released
Staff Accounting Bulletin No. 101, "Revenue Recognition" ("SAB 101").  SAB 101
provides interpretive guidance on the recognition, presentation and disclosure
of revenue in financial statements.  The accounting impact of SAB 101 is
required to be determined no later than the second fiscal quarter of 2000.  If
we determine that our revenue recognition policies must change to be in
compliance with SAB 101, the implementation of SAB 101 will require us to
restate our first quarter 2000 results to reflect a cumulative effect of a
change in accounting principle as if SAB 101 had been implemented on January 1,
2000. We are currently reviewing SAB 101 to determine what impact, if any, the
adoption of SAB 101 will have on our financial position and results of
operations.

                                      16
<PAGE>

Results of Operations

     The following table sets forth for the periods indicated the percentage of
net revenues by items contained in the Statements of Operations.  All
percentages are calculated as a percentage of total net revenues, with the
exception of cost of revenues which are calculated based on the respective net
revenue amounts.

<TABLE>
<CAPTION>
                                                                         For the Three Months Ended March 31,
                                                                     ---------------------------------------------
                                                                            2000                       1999
                                                                     ------------------         ------------------
<S>                                                                   <C>                        <C>
Net revenues:
 Licenses                                                                          67.5%                      17.8%
 Service bureau fees                                                                8.1%                      20.2%
 Services                                                                          24.4%                      21.2%
 Hardware and software sales                                                          -                       40.8%
   Total net sales                                                                100.0%                     100.0%
                                                                     ------------------         ------------------
Cost of revenues:
 Cost of licenses                                                                  29.2%                     115.9%
 Cost of service bureau revenues                                                   54.3%                      20.8%
 Cost of services                                                                 208.4%                      40.1%
 Cost of hardware and software                                                        -                       80.1%
   Total cost of revenues                                                          75.6%                      65.2%
                                                                    -------------------        -------------------
Gross margin                                                                       24.4%                      34.8%
                                                                    -------------------        -------------------
Operating expenses:
 Sales and marketing expenses                                                      48.0%                     176.9%
 Product development expenses                                                     113.3%                     207.7%
 General and administrative expenses                                              177.5%                     515.0%
 Depreciation and amortization expenses                                           218.6%                      37.5%
                                                                    -------------------        -------------------
       Total operating expenses                                                   557.4%                     937.1%
Loss from operations                                                            (533.0)%                   (902.3)%
                                                                    -------------------        -------------------
Net loss                                                                        (534.2)%                   (893.9)%
Preferred stock dividends                                                        (37.0)%                    (16.0)%
Accretion of preferred stock to redemption value                               (1237.8)%                  (1040.6)%
Accretion of preferred stock for guaranteed return in excess of
 redemption value                                                                     -                    (401.9)%

                                                                    -------------------        -------------------
Net loss available to common stockholders                                      (1809.0)%                  (2352.3)%
                                                                    ===================        ===================
</TABLE>

                                       17
<PAGE>

REVENUES:

     Local Commerce:

     Components of net revenues and cost of revenues from Local Commerce are as
follows:

<TABLE>
<CAPTION>
                                                 For the Three Months Ended
                                                          March 31,
                                                 --------------------------
                                                   2000              1999
                                                 --------          --------
<S>                                              <C>               <C>
Net revenues:
 Licenses                                        $681,727          $ 48,020
 Services                                         130,826            50,306
 Hardware and third party software                      -           117,509
                                                 --------          --------
 Total net revenues                               812,553           215,835
                                                 --------          --------
Cost of revenues:
  Cost of licenses                                199,226            55,664
  Cost of services                                446,586            13,326
  Cost of hardware and third party software             -            94,155
                                                 --------          --------
 Total cost of revenues                           645,812           163,145
                                                 --------          --------
 Gross margin                                    $166,741          $ 52,690
                                                 ========          ========
</TABLE>

     License revenues represent fees earned for granting customers licenses to
use our AccelX software products and services which we began to sell in the
second half of 1999.  During the three months ended March 31, 2000 we recognized
$438,900 from the sale of software licenses and $242,827 from recurring license
fees.  The software sale revenues were primarily from a sale to Vetconnect,
Inc., a vertical portal that provides Internet services for veterinarians.
While our basic distribution model is to provide services to aggregators of
small business on a revenue share basis, thereby providing us with recurring
revenues as our distribution partners sell our services to their small business
customers, late in 1999 we began offering to sell perpetual software licenses to
those business that desire to acquire our software for integration into the
services they provide to their customers.  Sales of software licenses may
continue to represent a significant portion of license revenue for at least the
next several quarters as these sales are generally for significantly larger fees
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 services to develop a significant enough base of small businesses using our
services for these recurring revenues to become significant. Recurring license
revenues for the first quarter of 2000 are primarily a result of fees earned
from Switchboard, Inc. in the form of quarterly guaranteed minimum payments
required to maintain limited exclusivity for our Site Builder services in a
segment of the United States market.

     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 as well as fees for ongoing maintenance, which
consists of unspecified product upgrades and enhancements on a when-and-if-
available basis.  Our net revenues from services were $130,826 for the three
months ended March 31, 2000, which represents an increase of 160.1% when
compared with the similar 1999 period.  The increase is primarily due to
software support and maintenance fees we earned in connection with the services
being provided to Switchboard, Inc. and Remax International, Inc.

     Revenues from hardware and software include the resale of computer hardware
and third party software to customers generally in connection with implementing
our local directory products and services. During the three months ended March
31, 1999, we sold equipment totalling $117,509 to customers with whom we have
existing contracts to provide equipment.  We do not anticipate significant
revenues from hardware and equipment sales in future periods.

                                       18
<PAGE>

     As of March 31, 2000, we have revenue backlog from closed contracts
totalling approximately $692,000 which we expect to recognize as revenue during
2000.

     E-Banking:

     Components of net revenues and cost of revenues from e-banking are as
follows:

<TABLE>
<CAPTION>
                                                   For the Three Months Ended
                                                           March 31,
                                                   --------------------------
                                                     2000              1999
                                                   --------           -------
<S>                                                <C>                <C>
Net revenues:
 Service bureau and hosting fees                   $ 82,069           $58,309
 Services                                           115,200            14,138
                                                   --------           -------
 Total net revenues                                 197,269            72,447
                                                   --------           -------
Cost of revenues:
  Cost of service bureau and hosting fees            49,766            12,141
  Cost of services                                   67,346            12,540
                                                   --------           -------
 Total cost of revenues                             117,112            24,681
                                                   --------           -------
 Gross margin                                      $ 80,157           $47,766
                                                   ========           =======
</TABLE>

     Service bureau and hosting revenues represent fees earned for providing
online banking application services to our e-banking customers.  The 40.7%
increase in these fees in the first quarter of 2000 compared to the first
quarter of 1999 is due to revenue from a new credit union customer that went
online during the fourth quarter of 1999.

     Services revenues consist of revenue derived from professional services for
the customization of our software to customer specifications. The 714.8%
increase in these fees in the first quarter of 2000 compared to the first
quarter of 1999 is primarily due to fees we earned from the CU Cooperative
Systems, Inc. which we are recognizing on a percentage of completion basis.

     As of March 31, 2000, we have revenue backlog from closed contracts
totalling approximately $488,000 which we expect to recognize as revenue during
2000.

COST OF REVENUES:

     Local Commerce:

     Cost of revenues as a percentage of net revenues was 79.5% for the three
months ended March 31, 2000 compared to 75.6% for the similar 1999 period.

          Cost of license revenues - Cost of license revenues consists of
     compensation costs associated with assisting our customers in delivering
     our services to end users, third party content software license fees, and
     third party transaction fees.  Cost of license revenues were $199,226 or
     29.2% of net license revenues for the three months ended March 31, 2000, as
     compared to $55,664 or 115.9% of 1999 net license revenues for the similar
     1999 period.  The absolute dollar increase was primarily attributable to
     the amortization of a one-year third party software license we purchased to
     integrate directory functionality into our products as well as costs
     associated with delivering software enhancements for which we earn monthly
     license fees.

          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

                                       19
<PAGE>

     of costs to operate our network operating center. Cost of service revenues
     were $446,586 or 341.4% of net service revenues for the three months ended
     March 31, 2000, as compared to $13,326 or 26.5% of 1999 net service
     revenues for the similar 1999 period. The increase in costs was primarily
     due to costs incurred to operate our network operating center, which we
     began operating during the second quarter of 1999, and costs associated
     with delivering Internet access and content to the customers of our
     distribution partners. Our network operating center has been built to
     accommodate our current customer base and our contract backlog as well as
     our 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
     build this business.

          Cost of Hardware and third party software revenues - Cost of hardware
     and software revenues consists of computer and third party software
     purchased for resale to cable operators. Due to the change in our business
     model whereby we offer services to our customers, equipment sales are not
     expected to be significant in future periods.

     E-Banking:

     Cost of revenues as a percentage of net revenues was 59.4% for the three
months ended March 31, 2000 compared to 34.1% for the similar 1999 period.

          Cost of service bureau and hosting fees - Cost of service bureau fees
     consists of compensation costs for customer service, help desk fees, third
     party software support agreements and Internet connectivity costs. Cost of
     service bureau fees was $49,766 or 60.6% of net service bureau fees for the
     three months ended March 31, 2000, as compared to $12,141 or 20.8% of 1999
     net license revenues for the similar 1999 period. The absolute dollar
     increase was primarily attributable to an increase in the number of credit
     union members using the services, including costs associated with a second
     credit union which began using our services during the fourth quarter of
     1999.

          Cost of service revenues - Cost of service revenues consists of
     compensation costs associated with performing custom programming and design
     and integration services for our customers. Cost of service revenues was
     $67,346 or 58.5% of net service revenues for the three months ended March
     31, 2000, as compared to $12,540 or 88.7% of 1999 net service revenues for
     the similar 1999 period. The increase in costs were primarily due to
     continued implementation of our e-banking solution for the CU Cooperative
     Systems, Inc. for which we earned slightly higher margins than for our
     professional services to customers already online.

OPERATING EXPENSES:

     Sales and marketing expenses consist primarily of employee compensation,
advertising, trade show expenses, and costs of marketing materials.  Sales and
marketing expenses were $484,767 or 48.0% of net revenues for the three months
ended March 31, 2000, as compared to $509,859 or 176.9% of net revenues for the
similar 1999 period.  The decrease in absolute dollars was primarily
attributable to (i) lower employee compensation costs in the 2000 period due to
three fewer employees and higher compensation costs incurred during the 1999
period related to costs paid to Durand Communications, Inc. prior to the
consummation of the merger; and (ii) decrease in travel and entertainment
expenses as a result of incurring more travel in the 1999 period related to
servicing our cable distribution partners. These decreases were partially offset
by increased costs associated with marketing consultants and recruiting
expenses. 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.  Product

                                       20
<PAGE>

development expenses were $1,144,579 or 113.3% of net revenues for the three
months ended March 31, 2000 as compared to $598,840 or 207.7% of net revenues
for the similar 1999 period. During the 2000 and 1999 three-month periods, all
product development costs have been expensed as incurred. The increase in
absolute dollars was due primarily to (i) an increase in employee compensation
costs as a result of head count increasing from 27 to 50 technology personnel
and an increase in contract labor to support the continued development of our
products; and (ii) an increase in recruiting costs. 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 the non-
cash expense of stock and warrants issued for services. General and
administrative expenses were $1,791,948 or 177.5% of net revenues for the three
months ended March 31, 2000, as compared to $1,484,545 or 515.0% of net revenues
for the similar 1999 period. The increase in absolute dollars was primarily
attributable to (i) an increase in employee compensation costs; (ii) increase in
non-cash expense for stock and warrants issued for investor relation and
consulting services; (iii) increases in regulatory filing fees and other costs
associated with securities filings; and (iv) increases in investor relation
expenses. In April, 2000, we entered into an agreement with Diamond Technology
Partners Inc. to assist with the development of the business plan for our
Jabber.com subsidiary. As a result, we expect to incur approximately $800,000 in
fees for these services, to be paid in a combination of cash and capital stock
in Jabber.com. We expect general and administrative expenses to decrease as a
percentage of revenues as our revenues increase.

     Depreciation and amortization was $2,207,043 for the three months ended
March 31, 2000, compared to $108,229 for the similar 1999 period. We recorded
more depreciation expense in 2000 as a result of an increase in fixed assets
primarily from construction of our network operating center and computer
hardware and third party software to support the launch of our AccelX services,
two new e-banking customers, and computer equipment to support our product
development team. We also amortized the intangible assets and goodwill we
acquired in the Durand Communications, NetIgnite, and Update Systems
acquisitions and recorded $2,037,255 of amortization expense in the 2000 three-
month period. As a result of these acquisitions, we expect to record
approximately $6.1 million of such expenses in the remainder of 2000 and
approximately $8.3 million of such expenses in 2001 and approximately $5.8
million in 2002. Because our business has never been profitable, and due to the
other risk 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 could be substantial.

OTHER INCOME AND EXPENSE:

     Interest income was $161,887 for the three months ended March 31,
2000, compared to $50,301 for the similar 1999 period.  We earn interest by
investing surplus cash in highly liquid investment funds or AAA or similarly
rated commercial paper.

     Interest expense was $174,990 for the three months ended March 31,
2000, compared to $4,159 for the similar 1999 period.  During the 2000 three-
month period, we recorded $170,751 of interest expense related to the 10%
convertible note payable we issued in August 1999, including $95,890 of cash
interest expense and non-cash charges of $50,381 and $24,480 related to
amortization of the discount recorded for the issuance of a common stock
purchase warrant and the amortization of financing fees, respectively.

                                       21
<PAGE>

NET LOSSES ALLOCABLE TO COMMON STOCKHOLDERS:

     Net loss allocable to common stockholders was $18,267,668 for the three
months ended March 31, 2000, compared to $6,781,400 for the similar 1999 period.
We recorded non-cash expenses for the following items:

<TABLE>
<CAPTION>
                                                                                Three Months Ended March 31,
                                                                            -------------------------------------
                                                                               2000                      1999
                                                                            -----------                ----------
<S>                                                                         <C>                        <C>
Amortization of intangible assets and goodwill                              $ 2,037,255                $        -
Amortization of discount and placement fees to interest expense
 related to the 10% convertible note payable                                     74,861                         -

Stock and warrants issued for services                                          175,170                   140,229
Preferred stock dividends                                                       373,126                    21,949
Accretion of preferred stock                                                 12,500,000                 4,158,563
                                                                            -----------                ----------
Total                                                                       $15,160,412                $4,320,741
                                                                            ===========                ==========
</TABLE>

     The increase in losses reflect expenses in 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 and investments during 2000, as we continue to develop new
product offerings and the infrastructure required to support our anticipated
growth.  We expect to report operating and net losses for 2000 and for one or
more years thereafter.

LIQUIDITY AND CAPITAL RESOURCES:

     As of March 31, 2000, we had cash and cash equivalents of $17,595,899 and
working capital of $17,012,867. We financed our operations and capital
expenditures and other investing activities during 2000 primarily through the
sale of securities (See Notes 7 and 9 of Notes to Consolidated Financial
Statements for information regarding these sales of securities).

     We used $3,759,432 in cash to fund our operations for the three months
ended March 31, 2000, compared to $2,203,562 for the similar 1999 period.  The
increase in net cash used resulted primarily from the following: (i) an increase
in costs paid for continued development of our XML-based AccelX products and
services and e-banking applications; (ii) higher compensation costs paid to
employees; (iii) increased direct costs and support costs associated with
increased head count; and (iv) payment of 1999 bonuses in the first quarter of
2000.

     We used an additional $598,822 in cash for capital expenditures during the
three months ended March 31, 2000, compared to $603,113 during the similar 1999
period.  We purchased $598,822 of property and equipment and plan to purchase an
additional $1.7 million during the balance of 2000, including computer
equipment, software and leasehold improvements for our new corporate offices.

     We received $17,789,782 in operating capital from financing activities for
the three months ended March 31, 2000, compared to $3,759,590 for the similar
1999 period.  During the first quarter of 2000, we received funds from the
following financing transactions:

     .    On February 18, 2000, we sold 12,500 shares of our series B preferred
          stock with stated value of $1,000 per share, which resulted in net
          proceeds of $11,660,000; and

     .    We received $6,165,461 in cash from the issuance of our common stock
          as a result of the exercise of common stock options and warrants.

     We believe that based on our cash and cash equivalents and working capital
at March 31, 2000 and anticipated revenues and expenses, we have sufficient
working capital to fund operations throughout fiscal 2001.

                                       22
<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. Accordingly, we have a limited
operating history upon which you may evaluate us. Our business is subject to the
risks, expenses 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;

     .    Ability to attract qualified personnel;

     .    Ability to develop and introduce new product and service offerings;
          and

     .    Ability to adjust the business plan to address marketplace and
          technological changes.

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 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 $60.9 million through March 31,
2000.  In addition, we expect to incur additional substantial operating and net
losses in 2000 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 expand the functionality and performance of our products
          and services; and

     .    We recorded goodwill and other intangible assets totalling
          approximately $24 million in connection with the acquisitions of three
          businesses which will be amortized over their estimated useful lives
          of approximately three years.

     The accumulated deficit at March 31, 2000, included approximately $35.1
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 a 10% convertible note
payable and amortization of assets acquired through the issuance of our
securities.  The current competitive business environment may 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 available to common shareholders.

     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 and commitments for additional equity investments
will be adequate to sustain our current level of operations throughout fiscal
2001. However, we may discover that we have underestimated our working capital
needs, and we may need to obtain additional funds prior to 2002. There is no
assurance that we will be able to raise additional funds if required 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. These
actions could have a material adverse effect on our business, financial
condition or results of operations.

     We may never become or remain profitable. Our ability to become profitable
depends on the ability of our products and services to generate revenues. 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

                                       23
<PAGE>

     .    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 charged, or
whether current or future pricing levels will be sustainable.  Additionally, our
customer contracts may result in significant 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. Our business plan
assumes that the Internet will develop into a significant source of
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 utilize our services 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 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.

     If we are unable to accomplish these items, our business, operating results
and financial condition could be materially adversely affected.

     Our products and services may not be successful.  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:

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

     .    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;

     .    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;

                                       24
<PAGE>

     .    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 three customers representing 72% of revenues for the three
months ended March 31, 2000, and four customers representing 93% of revenues for
the similar 1999 period.  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 one to six months.  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.

     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. 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 product development and
increase sales and marketing efforts. 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

                                       25
<PAGE>

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.  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 are currently considering 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,

                                       26
<PAGE>

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 $67.75 per share and as low as $9.96 per share between January 1, 2000 and
May 3, 2000.  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

     .    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 3, 2000, we had issued warrants and options to acquire 4,363,662
shares of our common stock, exercisable at prices ranging from $1.63 to $58.75
per share, with a weighted average exercise price of approximately $15.00 per
share.  In addition to these warrants and options, we have reserved 1,875,000
shares of common stock for issuance upon conversion of our 10% convertible note
and series B convertible preferred stock.  During the terms of these derivative
securities, the holders will have the opportunity to profit from either an
increase or, in the case of the preferred stock and note, decrease 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 the purchasers of our common stock.

     The potentially significant number of shares issuable upon conversion of
our 10% convertible note and series B 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 note and series B 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 10%
convertible note or series B convertible preferred stock.  If we are required to
provide similar terms to obtain required financing in the future, the potential
adverse effect of these existing 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 3, 2000,
these shares consist of:

     .    Approximately 310,000 shares owned by our executive officers and
          directors of our outstanding common stock ("Affiliate Shares");

                                       27
<PAGE>

     .    Up to 1,875,000 shares issuable upon conversion of the 10% convertible
          note and series B preferred stock; and

     .    Approximately 4,363,662 shares issuable to warrant and option holders.

     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 common stock issuable upon conversion of our convertible note and
preferred stock may increase as the price of our common stock decreases, which
may adversely affect the price of our common stock.  On May 3, 2000, we had
issued and outstanding $2,500,000 principal amount of a 10% convertible note and
12,500 shares of series B convertible preferred stock.  The number of shares of
common stock that may ultimately be issued upon conversion of these securities
is presently indeterminable and could fluctuate significantly.  Purchasers of
common stock could therefore experience substantial dilution upon conversion of
the convertible note and preferred stock.  In addition, the significant downward
pressure on the market price of our common stock could develop as the holders
convert and sell material amounts of common stock which could encourage short
sales by the holders or others, placing further downward pressure on the market
price of our common stock.

     To illustrate the potential dilution that may occur upon conversion of the
convertible note and preferred stock, the following table sets forth the number
of shares of common stock that would be issued upon conversion of the principal
of the convertible note and the shares of preferred stock if the market price
for our common stock on the dates that the conversion prices of these securities
are subject to adjustment is $14.00, the closing sale price for our common stock
on May 3, 2000, and at assumed market prices of 75% and 50% of the market price
on May 3, 2000, assuming that the conversion price for the 10% note is adjusted
after September 29, 2000.  At May 3, 2000, the lowest potential conversion price
was $8.00 per share.

<TABLE>
<CAPTION>
                                                 Shares Issued Upon Conversion
                                        -----------------------------------------------            Total
                                           10% Notes           Series B Preferred Stock       (Percentage of
           Market Price                 Conversion Price)         (Conversion Price)           Outstanding)
---------------------------------       -----------------      ------------------------      -----------------
<S>                                     <C>                    <C>                           <C>
$14.00 (actual price at 05/03/00)        248,262 ($10.07)            625,000 ($20.00)          873,262 (8.8%)
$10.50 (75% of 05/03/00 price)           248,262 ($10.07)          1,190,476 ($10.50)        1,438,738 (13.6)
$7.00   (50% of 05/03/00 price)          312,500 ($8.00)           1,562,500 ($8.00)         1,875,000 (17.1%)
</TABLE>

     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 note payable and series B convertible
preferred stock required us to record non-cash expenses which will, in turn,
increase our net loss available to common shareholders. Based on current
accounting standards, we recorded a non-cash expense of approximately $75,000 as
additional interest expense and $12.5 million of accretion expense for the three
months ended March 31, 2000, as a result of the

                                       28
<PAGE>

issuance of our 10% convertible note and the issuance of our series B preferred
stock, respectively. We will record additional non-cash expenses of
approximately $189,000 during the remainder of 2000 and $409,000 during the two
years ending December 31, 2002 related to the issuance of the note unless it is
converted to common stock prior to its maturity date, in which case it will be
less.

     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 therefor, and other factors. We
anticipate that we will devote profits, if any, to our future operations.

                                       29
<PAGE>

                                    PART II

                               OTHER INFORMATION

Items 1, 3 and 5.  Not Applicable

Item 2.  Changes in Securities and Use of Proceeds

     On February 18, 2000, we sold 12,500 shares of our series B preferred
stock, $1,000 stated value, to two investors for $12.5 million.  In connection
with this investment, the investors were granted warrants to purchase 343,750
shares of our common stock at an initial exercise price of $20.20 per share.
PaineWebber served as the placement agent for the offering and received a
$750,000 commission.  See Note 7 of the Notes to Consolidated Financial
Statements for a description of the terms of the securities.  The securities
were registered under the Securities Act of 1933, as amended.

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

     The Company's 2000 Annual Meeting of Shareholders was held on April 27,
2000.  At the meeting the following five persons were elected to serve as
directors of the Company: Perry R. Evans; William R. Cullen; Robert J. Lewis;
Richard C. Jennewine; and Lindley S. Branson

     Shareholders also approved the following items: (i) an increase from
25,000,000 to 65,000,000 in the number of authorized shares of capital stock and
an increase from 20,000,000 to 60,000,000 shares of common stock, no par value--
8,862,313 shares voting For such amendment, 107,005 shares voting Against and
13,528 shares Abstaining; (ii) approval of issuance of securities pursuant to
the issuance of preferred stock and warrants--2,130,835 shares voting For,
103,904 shares voting Against and 18,553 shares Abstaining (a total of 6,729,554
shares represented at the meeting were not voted with respect to this item);
(iii) an increase from 3,500,000 shares to 4,500,000 shares in the number of
shares of common stock reserved for issuance pursuant to the Company's Stock
Option Plan of 1995--2,088,811 shares voting For approval, 141,650 shares voting
Against and 22,831 shares Abstaining (a total of 6,729,554 shares represented at
the meeting were not voted with respect to this item); and (iv) the approval of
Arthur Andersen LLP as the independent auditors of the Company for the fiscal
year ending December 31, 2000--8,936,046 shares voting For, 37,340 voting
Against and 9,460 shares Abstaining.

                                       30
<PAGE>

Item 6.  Exhibits and Reports on Form 8-K

     (a)  Listing of Exhibits:

     3.1   Agreement and Plan of Merger dated March 19, 1998 among Webb, Durand
           Acquisition Corporation and Durand Communications, Inc. (1)
     2.2   Asset Purchase Agreement, including exhibits thereto, dated December
           27, 1999, between Webb Interactive Services, Inc., Update Systems,
           Inc. and Kevin Schaff. (2)
     2.3   Agreement and Plan of Merger between Webb and NetIgnite, Inc., dated
           June 1, 1999 (3)
     3.1   Articles of Incorporation, as amended, of Webb (4)
     3.2   Bylaws of Webb (5)
     4.1   Specimen form of Webb's Common Stock certificate (6)
     4.2   Stock Option Plan of 1995 (5)
     4.3   Form of Incentive Stock Option Agreement for Stock Option Plan of
           1995 (5)
     4.4   Form of Nonstatutory Stock Option Agreement for Stock Option Plan of
           1995 (5)
     4.5   Form of Warrant issued in 1996 to private investors (5)
     4.6   Form of Warrant Agreement issued in 1997 and 1998 to private
           investors (1)
     10.1  Form of Nondisclosure and Nonsolicitation Agreement between Webb and
           its employees (4)
     10.2  Office Lease for Webb's principal offices commencing May 2000 (13)
     10.3  Form of Change of Control Agreement between Webb and certain
           employees (7)
     10.4  Employment Agreement dated March 10, 1999, among Webb, NetIgnite2,
           LLC and Perry Evans (7)
     10.5  Electronic Banking Service Contract dated May 28, 1997 between Webb
           and Rockwell Federal Credit Union (7)
     10.6  Online Banking Service Agreement dated February 10, 1999 between Webb
           and CU Cooperative Systems, Inc. (7)
     10.7  Internet/Business Site Development & Host Agreement dated November
           12, 1997, as amended January, 2000, between Webb and ReMax
           International, Inc. (13)
     10.8  Securities Purchase Agreement dated August 25, 1999 between Webb and
           Castle Creek (8)
     10.9  Promissory Note dated August 25, 1999 issued by Webb to Castle Creek
           (8)
     10.10 Amendment dated December 18, 1999 to Securities Purchase Agreement
           dated August 25, 1999 between Webb and Castle Creek (9)
     10.11 First Amendment dated December 18, 1999 to Promissory Note dated
           August 25, 1999 issued by Webb to Castle Creek (9)
     10.12 Stock Purchase Warrant dated December 18, 1999 issued by Webb to
           Castle Creek (9)
     10.13 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 (10)
     10.14 Articles of Amendment setting forth the terms of the Series B
           Convertible Preferred Stock (11)
     10.15 Development, Access and License Agreement, as amended, effective
           June 30, 1999 between Webb and Switchboard, Inc. (12)
     10.16 Engineering Services Agreement, effective June 30, 1999, between Webb
           and Switchboard, Inc. (12)
     10.17 Master Software License Agreement, Web Site Hosting Agreement,
           Maintenance and Support Agreement and Professional Services
           Agreement, effective March 31, 2000, between Webb and Vetconnect,
           Inc. *
     10.18 Consulting Agreement, effective April 24, 2000, between Webb and
           Diamond Technology Partners, Inc. *
     21    Subsidiaries of Webb Interactive Services, Inc. (13)
     27    Financial Data Schedule *
-----------------------------
*    Filed herewith.
(1)  Filed with the Form 10-KSB Annual Report for the year ended December 31,
     1997, Commission File No. 0-28462.

                                       31
<PAGE>

(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.
(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.


     (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 January 5, 2000; (ii) filed under Item 2 of Form 8-K on
          January 14, 2000; and amended on March 28, 2000; (iii) filed under
          Item 5 of Form 8-k on February 25, 2000.

                                       32
<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 12, 2000              By  /s/ William R. Cullen
                                    ---------------------
                                    Chief Financial Officer



                                    /s/ Stuart J. Lucko
                                    -------------------
                                    Controller

                                       33