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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





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FORM 10-QSB


|
|

xQuarterly Report pursuant to Section 13 or 15(d) of the


Securities Exchange Act of l934.





For the period ended March 31, 2002.





 ̈ 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 (State or other jurisdiction of incorporation or organization)

84-1293864 (I.R.S. Employer Identification No.)





1899 WYNKOOP, SUITE 600, DENVER, CO 80202


(Address of principal executive offices)
              (Zipcode)





(303) 308-3108


(Registrants telephone number, including area code)





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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 8, 2002, Registrant had 20,943,167 shares of common stock outstanding.


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WEBB INTERACTIVE SERVICES, INC.


Index


PagePart I.

Financial InformationItem 1. Unaudited Financial StatementsCondensed Consolidated Balance Sheets as of March 31, 2002 and December 31, 2001

3Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2002 and 2001

4Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2002 and 2001

5Notes to Condensed Consolidated Financial Statements

7-18Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations

19-33Part II.

Other InformationItems 1, 35. Not Applicable

34Item 2. Changes in Securities and Use of Proceeds

34Item 4. Submission of Matter to a Vote of Security Holders

34Item 6. Exhibits and Reports on Form 8-K

34-36Signatures

37





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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.




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##### Table of Contents

PART I FINANCIAL INFORMATION





ITEM 1. FINANCIAL
STATEMENTS





WEBB INTERACTIVE SERVICES, INC.





CONDENSED CONSOLIDATED BALANCE SHEETS





(UNAUDITED)





March 31,2002


December 31, 2001ASSETSCurrent assets:Cash and cash equivalents

$
5,384,124


$
919,198Accounts receivable, net of allowance for doubtful accounts of $27,005


902,909



414,991Prepaid expenses


179,959



33,377Note receivable from Company officer


157,486



160,822Short-term deposits and other current assets


30,868



68,862Total current assets


6,655,346



1,597,250Property and equipment, net of accumulated depreciation of $930,163 and $924,856, respectively


1,403,039



1,541,045Intangible assets, net of accumulated amortization of $2,751,886 and $2,370,495, respectively


345,910



727,301Deferred financing assets






233,451Total assets

$
8,404,295


$
4,099,047LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)Current liabilities:Convertible note and accrued interest payable

$
106,793


$
104,607Accounts payable and accrued liabilities


616,244



741,923Accrued salaries and payroll taxes payable


818,827



344,31610% convertible note payable, net of discount of $84,776






1,847,416Capital leases payable






63,930Short-term note payable






175,000Accrued interest payable






58,964Deferred revenue and customer deposits


274,018



192,592Net current liabilities of discontinued operations


17,980



306,846Total current liabilities


1,833,862



3,835,594Commitments and contingenciesMinority interest in subsidiary


5,690,793



5,674,496Stockholders equity (deficit):Preferred stock, no par value, 5,000,000 shares authorized:Series D junior convertible preferred stock, 3,784 and none shares issued and outstanding, respectively


2,842,497



Series C-1 convertible preferred stock, none and 2,500 shares issued and outstanding, respectively






2,450,000Common stock, no par value, 60,000,000 shares authorized, 19,531,522 and 11,331,522 shares issued and outstanding,
respectively


97,657,101



93,155,341Warrants and options


20,859,415



15,010,930Accumulated other comprehensive loss


(5,323
)


(5,049
)Accumulated deficit


(120,474,050
)


(116,022,265
)Total stockholders equity (deficit)


879,640



(5,411,043
)Total liabilities and stockholders equity (deficit)

$
8,404,295


$
4,099,047





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




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WEBB INTERACTIVE SERVICES, INC.





CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS





(UNAUDITED)





Three Months EndedMarch 31,2002


2001Net revenues

$
861,053


$
99,825Cost of revenues


110,944



233,993Gross margin


750,109



(134,168
)Operating expenses:Sales and marketing


356,383



212,101Product development


652,868



654,979General and administrative


1,495,387



1,543,302Depreciation and amortization


546,069



544,7763,050,707



2,955,158Loss from operations


(2,300,598
)


(3,089,326
)Interest income


13,817



113,640Interest expense


(1,153,724
)


(2,645,479
)Loss on extinguishment of 10% note payable


(625,164
)


Other income


4,038



Gain (loss) on disposition of property and equipment


1,722



(12,416
)Net loss from continuing operations


(4,059,909
)


(5,633,581
)Loss from discontinued operations






(2,452,650
)Net loss before minority interest


(4,059,909
)


(8,086,231
)Minority interest in losses of subsidiary


110,178



113,365Net loss before extraordinary income


(3,949,731
)


(7,972,866
)Extraordinary income


224,811



Net loss


(3,724,920
)


(7,972,866
)Preferred stock dividends on Jabber preferred stock


(96,776
)


Accretion of preferred stock to stated value and other deemed dividends


(630,089
)


(2,856,627
)Net loss applicable to common stockholders

$
(4,451,785
)

$
(10,829,493
)Net loss applicable to common stockholders from continuing operations per share, basic and diluted

$
(0.33
)

$
(0.81
)Net loss applicable to common stockholders from discontinued operations per share, basic and diluted





$
(0.24
)Net loss applicable to common stockholders per share, basic and diluted

$
(0.33
)

$
(1.05
)Weighted average shares outstanding, basic and diluted


13,570,966



10,354,473





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




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WEBB INTERACTIVE SERVICES, INC.





CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS





(UNAUDITED)





Three Months EndedMarch 31,2002


2001Cash flows from operating activities:Net loss

$
(3,724,920
)

$
(7,972,866
)Adjustments to reconcile net loss to net cash used in operating activities:Depreciation expense


164,678



323,182Amortization expense


381,391



855,145Loss from extinguishment of 10% note payable


625,164



Extraordinary income from creditor concessions


(224,811
)


Minority interest in losses of subsidiary


(110,178
)


(113,365
)Stock and stock options issued for services


27,436



168,842Gain (loss) on sale and disposal of property and equipment


(1,722
)


12,416Bad debt expense






14,030Accrued interest payable on convertible note payable


2,186



Accrued interest income on note receivable






(3,548
)Interest expense on 10% note payable from beneficial conversion feature


255,060



2,394,234Interest expense for warrant issued for exchange of 10% note payable


537,770



Interest expense for reset of second 10% note payable warrant


74,086



Interest expense for reset of warrant issued with Jona short-term note payable


14,364



Amortization of 10% convertible note payable discount


49,144



44,440Amortization of short-term note payable discount


29,976



Amortization of 10% convertible note payable financing assets


135,388



121,765Changes in operating assets and liabilities:Increase in accounts receivable


(458,904
)


(738,889
)Increase in prepaid expenses


(139,229
)


(356,628
)Decrease in short-term deposits and other assets


36,050



339,858Decrease in accounts payable and accrued liabilities


(279,757
)


(657,746
)Increase (decrease) in accrued salaries and payroll taxes payable


453,280



(194,838
)Decrease (increase) in accrued interest payable


(48,632
)


6,465Increase in customer deposits and deferred revenue


81,426



120,788Net cash used in operating activities


(2,120,754
)


(5,636,715
)Cash flows from investing activities:Proceeds from the sale of property and equipment


1,722



8,500Purchase of property and equipment


(26,672
)


(31,878
)Collection of notes receivable from Company officers


3,336



30,000Net cash (used in) provided by investing activities


(21,614
)


6,622Cash flows from financing activities:Payments on capital leases


(35,599
)


(110,561
)Payment of short-term notes payable


(1,340,000
)


Payment on 10% note payable


(720,000
)


Proceeds from issuance of short-term notes payable


1,200,000



Proceeds from issuance of common stock and warrants


7,500,000



Proceeds from issuance of series C-1 preferred stock and warrants






2,500,000Preferred stock and warrant offering costs






(50,000
)Net cash provided by financing activities


6,604,401



2,339,439Net increase (decrease) in cash and cash equivalents


4,462,033



(3,290,654
)Effect of foreign currency exchange rate changes on cash


(274
)


218Cash and cash equivalents, beginning of period


922,365



4,856,686Cash and cash equivalents, end of period

$
5,384,124


$
1,566,250





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




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WEBB INTERACTIVE SERVICES, INC.





CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)





(UNAUDITED)





Three Months EndedMarch 31,2002

2001Supplemental disclosure of cash flow information:Cash paid for interest

$
55,749

$
78,575Supplemental schedule of non-cash investing and financing activities:Accretion of preferred stock to stated value and other deemed dividends

$
630,089

$
2,856,627Preferred stock dividends on Jabber preferred stock

$
96,776

$
Preferred stock converted to common stock

$
686,000

$
10% note payable exchanged for series D preferred stock

$
1,078,497

$






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




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WEBB INTERACTIVE SERVICES, INC.





NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





March 31, 2002 and December 31, 2001


(UNAUDITED)





NOTE 1  BASIS OF PRESENTATION





The accompanying unaudited interim condensed consolidated financial statements include the accounts of Webb Interactive Services, Inc. and its
subsidiaries (collectively Webb or the Company). All significant intercompany balances and transactions have been eliminated in consolidation. Webb is the founder and the majority stockholder of Jabber, Inc.
(Jabber), a company in the early stages of developing extensible instant messaging (IM) software products and services. Continuing operations of Webb refer to the Jabber business segment and Webbs corporate activities.
Minority interest share of the net loss of our Jabber subsidiary is recorded based upon the minority interest share in the net assets of Jabber. These condensed consolidated financial statements have been prepared without audit pursuant to rules and
regulations of the SEC and reflect, in the opinion of management, all adjustments, which are of a normal and recurring nature, necessary for a fair presentation of the financial position and results of operations for the periods presented. The
preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions. Such estimates and assumptions affect the reported amounts of assets and liabilities as well as
disclosure of contingent assets and liabilities at the date of the accompanying financial statements, and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. The results of
operations for the interim periods are not necessarily indicative of the results for the entire year. The interim financial statements should be read in connection with the financial statements included in our Annual Report on Form 10-KSB for the
year ended December 31, 2001, filed with the SEC.





NOTE 2  REVENUE RECOGNITION





Revenues are generated from the license of our software products and from professional service arrangements. Software license revenue is recognized in accordance with the American
Institute of Certified Public Accountants (AICPA) Statement of Position (SOP) 97-2 Software Revenue Recognition (SOP 97-2) and related interpretations and amendments as well as Technical Practice Aids
issued from time to time by the AICPA.





We recognize revenue on software arrangements only when persuasive evidence of an
agreement exists, delivery has occurred, the fee is fixed or determinable, and collectibility is probable. Under certain circumstances, software license revenue is deferred until all criteria of SOP 97-2 are met. Certain arrangements contain
provisions which result in the recognition of revenue from software licenses ratably over the term of the contract or in accordance with contract accounting.





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





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





We follow the
provisions of Emerging Issues Task Force (EITF) 00-3, Application of AICPA SOP 97-2, Software Revenue Recognition, to Arrangements That Include the Right to Use Software Stored on Another Entitys Hardware,
for software arrangements that include provisions for hosting. Under the EITF consensus, if the




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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.





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





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





Net revenues from continuing operations
are comprised of the following:





Three Months Ended March 31,2002

2001Net revenues:Licenses

$
588,899

$
10,000Services


228,471


89,825Services provided to France Telecom, a related party


43,683


Total service revenue


272,154


89,825Total net revenues

$
861,053

$
99,825





Included in net service revenues for the three months ended March 31,
2002, is $37,932 in professional service revenue and $5,751 in support and maintenance service revenue from France Telecom (collectively France Telecom and its subsidiaries or affiliates, FT), an investor in Jabber. In February 2002,
Jabber and FT entered into a fixed price professional services agreement, valued at $455,000, whereby Jabber is providing professional consulting services for general IM technology as well as IM technology integration with FT proprietary product
offerings. Jabber expects to recognize $341,204 in revenue from this contract during the remainder of 2002 and $75,864 during the first quarter of 2003. Support and maintenance revenue recognized in the first quarter relates to the one-year support
and maintenance agreement FT entered into on October 1, 2001, in connection with the license of Jabbers commercial server to FT. Jabber expects to recognize $11,500 in revenue from this contract during the remainder of 2002.





NOTE 3  INTANGIBLE ASSETS





On
January 1, 2002, we adopted Statement of Financial Accounting Standards (SFAS) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS 144). SFAS 144 requires us to evaluate the carrying value of
our long-lived assets and certain identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be




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recognized is measured by the amount which the carrying amount of the assets exceed the fair value of the assets. Assets to be disposed of are reported at the
lower of the carrying amount or fair value less the estimated cost to sell the asset. Based upon our review at March 31, 2002, we believe the carrying value of our recorded intangible assets are recoverable.





Intangible assets at March 31, 2002, consists of technology currently utilized by Jabber which was acquired by Webb in a 1999 acquisition. The
intangible assets are being amortized through June 30, 2002. We recorded amortization expense totaling $381,391 and $855,145 (including $493,502 from discontinued operation in 2001) for the three months ended March 31, 2002 and 2001, respectively.





NOTE 4  NET LOSS PER SHARE





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





March 31,2002

2001Stock options

3,851,949

3,966,525Warrants

12,865,315

1,231,845Series D preferred stock

3,784,000

10% convertible note payable



1,061,644Series B-2 preferred stock



391,200Series C-1 preferred stock



1,000,000Total

20,501,264

7,651,214





The number of shares excluded from the earnings per share calculation because
they are anti-dilutive, using the treasury stock method were 418,999 and 504,503 for the three months ended March 31, 2002 and 2001, respectively.





NOTE 5  Investment by Jona, Inc.





On January 17, 2002, we sold 1,100,000 units of our securities to Jona
Inc. (Jona) for $1,100,000 (the January 2002 Jona transaction). Each unit consisted of one share of common stock and one warrant to purchase an additional share of common stock at an exercise price of $1.00 per share. The
warrants may be exercised at any time by the holder from the date of issuance for a period of 5 years. On March 11, 2002, Webbs shareholders approved the sale to Jona of an additional 3,900,000 units for $3,900,000, which was purchased by Jona
on March 12, 2002.





In connection with the January 2002, Jona transaction, we also granted Jona an option to purchase 2,500,000
units for $2,500,000 on or before August 31, 2002. The issuance of this option was approved by Webbs shareholders on March 11, 2002. On March 28, 2002, Jona exercised this option and purchased 2,500,000 units for which we received $2,500,000
in proceeds (the March 28, 2002 Jona transaction). In consideration for Jona exercising the option more than five months before the option expired and prior to the conclusion of the first quarter of the current fiscal year, we granted
Jona an additional warrant representing the right to acquire 2,500,000 shares of our common stock at $1.00 per share. The value of this warrant, totaling $1,769,369, was recorded as an offering cost of the Jona transactions.





We valued the warrants using the Black-Scholes option pricing model and allocated the relative fair value to the common stock and the warrants as
follows:




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2002 ClosingsSecurity

January 17

March 12

March 28Common stock

$
521,445

$
1,848,760

$
1,185,102Warrant to purchase common stock


578,555


2,051,240


1,314,898Total

$
1,100,000

$
3,900,000

$
2,500,000





We used the following assumptions to value the warrants:





2002 ClosingsJanuary 17

March 12

March 28

March 28Unit Warrant


Unit Warrant


Unit Warrant


Warrant Offering CostsNumber of Warrants


1,100,000


3,900,000


2,500,000


2,500,000Exercise price

$
1.00

$
1.00

$
1.00

$
1.00Fair market value of common stock on date of issuance

$
0.97

$
0.74

$
0.74

$
0.83Option life


5 years


5 years


5 years


5 yearsVolatility rate


127%


127%


127%


127%Risk-free rate of return


6%


6%


6%


6%Dividend rate


0%


0%


0%


0%Calculated value

$
921,959

$
2,435,594

$
1,561,278

$
1,769,369





In connection with the January 2002 and March 28, 2002 Jona transactions, we
issued two five-year warrants to purchase 450,000 and 125,000 shares, respectively, of our common stock to a financial advisor and a five year warrant to purchase 100,000 shares of our common stock to a private business owner and stockholder for
payment of fees associated with the transactions. The warrants may be exercised at any time from the date of issuance by the holder at an exercise price of $1.00 per share. We recorded the value of the warrants, totaling $549,447 as offering costs
and valued the warrants using the Black-Scholes option pricing model utilizing the following assumptions:





January 17, 2002

March 28, 2002Number of shares underlying warrants


550,000


125,000Exercise price

$
1.00

$
1.00Fair market value of common stock on date of issuance

$
0.97

$
0.83Option life


5 years


5 yearsVolatility rate


127%


127%Risk-free rate of return


6%


6%Dividend rate


0%


0%Calculated value

$
460,979

$
88,468





We allocated the warrant offering costs based on the relative fair value of the
units as follows:





Common Stock

Warrants

TotalRelative fair value of securities

$
3,555,307

$
3,944,693

$
7,500,0002,500,000 warrant offering costs

$
838,753

$
930,616

$
1,769,369550,000 warrant value


218,523


242,456


460,979125,000 warrant value


41,937


46,531


88,468Total

$
1,099,213

$
1,219,603

$
2,318,816




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The warrants issued in connection with the units as well as the warrants issued as offering costs provide for anti-dilution provisions
in the event we issue common stock at prices less than the current conversion or exercise price for the securities or the then current price for our common stock and for stock splits, stock dividends and other similar transactions. If the exercise
price is reduced, we may be required to record additional charges against income and such charges may be significant.





At the
time Jona agreed to purchase the units, it loaned us $900,000 at an interest rate of 10% per year. On January 8, 2002, Jona had also loaned us $300,000 at an interest rate of 10%. On March 12, 2002, we repaid the $1.2 million of principal and
accrued interest totaling $18,164. We also issued Jona a three-year warrant to purchase 60,000 shares of our common stock at an initial exercise price of $2.50 per share as part of the $300,000 loan. The exercise price was reduced to $1.00 in
connection with the January 2002 Jona transaction, for which we recorded a non-cash expense totaling $14,365 in the first quarter of 2002. The value of the warrant, totaling $29,976, was recorded as a discount to the $300,000 note and amortized to
interest expense during the first quarter of 2002.





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





Initial Valuation

January 17, 2002 ValuationExercise price

$
2.50

$
1.00Fair market value of common stock on date of issuance or revaluation

$
0.82

$
0.97Option life


3 years


3 yearsVolatility rate


131%


127%Risk-free rate of return


6%


6%Dividend rate


0%


0%Warrant value

$
29,976

$
44,341Expense recorded


N/A

$
14,365





In connection with the January 2002 Jona transaction, and in accordance with the
original terms of the securities, the conversion prices for our 10% convertible note payable and series C-1 preferred stock as well as the exercise prices for the second 10% note payable warrant and the series C-1 preferred stock warrant were all
reset to $1.00 per share (See Note 7 for the calculations of the resets). As a result, we recorded non-cash expenses in the first quarter of 2002 as follows:





Security Reset

Non-Cash Expense10% note payable (additional interest expense due to anti-dilution protection on conversion feature)

$
255,060Series C-1 preferred stock (additional deemed preferred stock dividend)


479,442Second 10% note payable warrant (non-cash interest expense)


74,086Series C-1 preferred stock warrant (additional deemed preferred stock dividend)


148,259Total

$
956,847





NOTE 6  PREFERRED STOCK AND 10% NOTE PAYABLE





At the same time we agreed to sell the units to Jona, Castle Creek Technology Partners LLC (Castle Creek) agreed to exchange up to 2,500
shares of series C-1 preferred stock and $1,212,192 of principal of our 10% note payable for up to 4,484 of our series D junior convertible preferred stock (the series D preferred stock) and a warrant to purchase 750,000 shares of our
common stock at an exercise price of $1.00 per share. As part of the agreement, we reduced the exercise price of existing warrants to purchase 650,116 shares of our common stock held




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by Castle Creek. The exercise price for these warrants is now $1.00. We recorded non-cash expense for the reset of these warrants in the first quarter of 2002
totaling $222,345 (See Note 7). The 4,484 shares of series D preferred stock are convertible into 4,484,000 shares of our common stock. If we had not reached the agreement to exchange the series C-1 convertible preferred stock and the 10%
convertible promissory notes, these securities would have been convertible into 3,712,192 shares of our common stock and Castle Creek would have been entitled to an additional warrant for 2,500,000 shares at an exercise price of $1.00 per share.





On January 31 and February 21, 2002, Castle Creek exchanged 1,500 and 550 shares, respectively, of series C-1 preferred stock
for 1,500 and 550 shares, respectively, of our series D preferred stock.





On March 12, 2002, we repaid $720,000 of principal of
the 10% convertible note and accrued interest of $37,585. On March 13, 2002, we exchanged the remaining principal balance of $1,212,192 for 1,984 shares of our series D preferred stock. As a result of this exchange, in the first quarter of 2002 we
recorded a non-cash loss on debt extinguishment totaling $625,164 computed as follows:





Balance of 10% note payable exchanged for series D preferred stock

$
1,212,192Number of common shares 10% note payable would have converted into immediately prior to exchange


1,212,192Number of common shares convertible into series D preferred stock immediately after exchange


1,984,000Increase in number of common shares


771,808Fair market value of common stock on March 13, 2002

$
0.81Loss on debt extinguishment

$
625,164





On January 17, 2002, we issued Castle Creek a five-year warrant to purchase
750,000 shares of our common stock as part of the exchange of our 10% note payable owned by Castle Creek for our series D junior preferred convertible stock. The exercise price for the warrant is currently $1.00 per share. The exercise price for the
warrant is also subject to anti-dilution protection if we issue our common stock at prices less than the exercise price for the warrant and for stock splits, stock dividends and other similar transactions. If the warrant price is reset, we may
record additional charges to income. The warrant is subject to early expiration for one-third of the shares if our common stock trades at $2.00 or more for five consecutive days and for an additional one-third of the shares if our common stock
trades at $3.00 or more for five consecutive days.





We recorded non-cash interest expense for the value of the warrant totaling
$537,770 in the first quarter of 2002. We valued the warrant using the Black-Scholes option pricing model utilizing the following assumptions:





Exercise price

$1.00Fair market value of common stock on date of issuance

$0.84Option life

5 yearsVolatility rate

127%Risk-free rate of return

6%Dividend rate

0%





Series D Junior Convertible Preferred Stock-





As a result of the transactions described above, we issued 4,034 shares of series D preferred stock and 3,784 shares were outstanding at March 31, 2002.
The series D preferred stock does not bear dividends and does not entitle the holders to any voting rights except as required by Colorado law. Each share of series D preferred stock is convertible into 1,000 shares of our common stock. The series D
preferred stock is convertible into common stock unless the conversion would result in the holder being a beneficial owner of more than 4.99% of our common stock. The current conversion price is $1.00 per share. The conversion price is also subject
to anti-dilution protection if we issue our common stock at prices less than the conversion price for the preferred stock or the then current price for our common stock and for stock splits, stock dividends and other similar transactions. If the
conversion price is reduced, we may be required to record a charge to income.




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The series D preferred stock has Liquidation Preferences. If we liquidate, dissolve or wind-up
our business, whether voluntarily or involuntarily, after we pay our debts and other liabilities, the holder of the preferred stock will be entitled to receive from our remaining net assets, before any distribution to the holders of our common
stock, the amount of $1,000 per share.





On March 15, 2002, the holder of our series D preferred stock converted 250 shares into
250,000 shares of our common stock at a conversion price of $1.00 per share. During April and May 2002, the holder converted 500 shares into 500,000 shares of our common stock at a conversion price of $1.00 per share (See Note 12).





Conversion of Series C-1 Preferred Stock-





During January and February 2002, the holder of our series C-1 preferred stock converted 450 shares into 450,000 shares of our common stock at conversion prices per share of $1.00 as
follows:





Number of SharesConversion Date

Series C-1 Preferred Stock

Common StockJanuary 22, 2002

175

175,000January 28, 2002

175

175,000February 2, 2002

100

100,000Total

450

450,000





NOTE 7  RESET OF CONVERSION AND EXERCISE PRICES OF SECURITIES





The original terms of our 10% convertible note payable, preferred stock and the warrants issued in connection with those securities provide for
anti-dilution provisions in the event we issue common stock at prices less than the current conversion or exercise price for the securities or the then current price for our common stock and for stock splits, stock dividends and other similar
transactions. On January 17, 2002, we issued common stock at $1.00 per share (See Note 5). Accordingly, in accordance with terms of the original agreements, the conversion prices for the 10% note payable and our series C-1 preferred stock as well as
the exercise prices for the second 10% note payable warrant and series C-1 preferred stock warrant were reset as indicated in the tables that follow.





Conversion or Exercise Price Immediately Preceding Reset

Conversion or Exercise Price Immediately After Reset10% convertible note payable

$
2.50

$
1.00Series C-1 preferred stock

$
2.50

$
1.00Series C-1 preferred stock warrant

$
2.50

$
1.00Series B preferred stock warrants

$
0.766

$
0.766Second 10% note payable warrant

$
9.33431

$
1.00





The non-cash expense resulting from the rest was recorded as additional interest
expense for the 10% convertible note payable and as an additional deemed preferred stock dividend for the series C-1 preferred stock. The non-cash expense was calculated based on the incremental common shares issuable upon conversion and our
appropriate common stock value. The additional beneficial conversion feature non-cash expense in 2002 was limited to the net proceeds from the sale of the securities less the amount of beneficial conversion feature expense recorded in previous
periods. The calculations of the non-cash expense are presented in the tables that follow.




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Series C-1 Preferred Stock

10% Convertible Note PayableValue of security

$
2,500,000

$
1,932,192Conversion price before reset

$
2.50

$
2.50Number of common shares issuable upon conversion before reset


1,000,000


772,877Conversion price after reset

$
1.00

$
1.00Number of common shares issuable upon conversion after reset


2,500,000


1,932,192Fair market value of common stock on valuation date

$
0.97

$
0.97Calculated beneficial conversion feature

$
1,455,000

$
1,124,536Net proceeds from sale of securities

$
2,450,000

$
4,616,816Accretion or interest expense recorded in previous periods

$
1,970,558

$
4,361,756Additional interest expense due to anti-dilution protection on conversion feature




$
255,060Additional beneficial conversion feature recognized as deemed preferred stock dividend

$
479,442





The non-cash expense resulting from the reset was recorded as non-cash interest
expense for the second 10% note payable warrant and preferred stock accretion expense for the series C-1 preferred stock warrant computed based on the difference of the warrant value immediately before the reset to the value immediately after the
reset using the Black-Scholes option pricing model as indicated below:





Second 10% Note Payable Warrant

Series C-1 Preferred Stock WarrantImmediately Preceding Reset

Immediately After Reset

Immediately Preceding Reset

Immediately After ResetCommon stock issuable upon exercise of warrant


150,116


150,116


500,000


500,000Exercise price

$
9.33431

$
1.00

$
3.75

$
1.00Fair market value of common stock onvaluation date

$
0.97

$
0.97

$
0.97

$
0.97Option life


2.9 years


2.9 years


2 years


2 yearsVolatility rate


104%


126%


120%


131%Risk-free rate of return


6.0%


6.0%


6.0%


6.0%Dividend rate


0%


0%


0%


0%Calculated value

$
33,377

$
107,463

$
177,600

$
325,859Expense recorded


N/A

$
74,086


N/A

$
148,259





The exercise price for the series B preferred stock warrants is subject to being
reset every 90 days until January 20, 2003, based upon future market prices for our common stock. 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. The exercise price was reset to $0.71 per share on February 7, 2002. As a result, we recorded preferred stock accretion expense totaling $2,338 in the
first quarter of 2002 calculated using the Black-Scholes option pricing model utilizing the following assumptions:




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Immediately Preceding Reset

Immediately After ResetWarrant value

$
178,592

$
180,980Exercise price

$
0.766

$
0.71Fair market value of common stock on re-determination date

$
0.70

$
0.70Option life


3 years


3 yearsVolatility rate


126%


126%Risk free rate of return


6.71%


6.71%Dividend rate


0%


0%Expense recorded


NA

$
2,388





NOTE 8  STOCK BASED COMPENSATION EXPENSE





During 2000, Jabber issued 912,500 shares of its common stock to employees of Jabber, an officer of the Company and members of the Jabber advisory
boards. The shares vest over periods ranging from grant date to two years. We recorded the value of these shares as deferred compensation, totaling $523,700, and recognize the related non-cash expense in the period the shares vest. During the three
months ended March 31, 2002, we recognized $27,436 of deferred compensation as non-cash compensation expense. At March 31, 2002, the remaining deferred compensation related to the issuance of these shares totaled $7,500.





NOTE 9  DISCONTINUED OPERATIONS





During
October 2001, we terminated our AccelXlocal commerce business. In connection with the termination of this business, we granted a perpetual license for software used in this business to Nextron Communications, Inc. (Nextron) for a
license fee of $1 million. The terms of this perpetual license transferred substantially all of our rights and their related value for this technology. In addition, we sold assets used in this business to Nextron for an initial purchase price of
$500,000. In the event that Nextron completes a qualifying financing transaction by June 30, 2002, Nextron will pay Webb an additional $350,000 for the assets. The receipt of any additional proceeds as indicated above will be recorded as a gain. If
the financing transaction is not completed by June 30, 2002, Webb will not receive any additional consideration for the assets.





The termination of this segment is reflected as a sale of a discontinued operation in the accompanying condensed consolidated financial statements. Accordingly, the assets, liabilities; and revenues, costs and expenses of this discontinued
operation has been excluded from the respective captions in the Condensed Consolidated Balance Sheets and Condensed Consolidated Statement of Operations and have been reported as Net current liabilities from discontinued operations and
Loss from discontinued operations for all periods presented.





Loss from discontinued operations consist of the
following:





Three Months EndedMarch 31,2002

2001Net revenues

$


$
878,929Costs and expenses:Cost of revenues





1,080,981Sales and marketing expenses





392,778Product development expenses





1,090,500General and administrative expenses





233,128Depreciation and amortization





519,560Total costs and expenses





3,316,947Operating loss





(2,438,018
)Other income and expense, net





(14,632
)Loss from discontinued operations

$


$
(2,452,650
)




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Net current liabilities of discontinued operations consists of the following:





March 31, 2002

December 31, 2001Current liabilities of discontinued operations, net:Current assets of discontinued operations:Cash

$


$
3,167Accounts receivable, net





29,014Prepaid expenses and other current assets


1,944


7,353Total current assets of discontinued operations


1,944


39,534Accounts payable and accrued liabilities


19,924


325,149Accrued salaries and payroll taxes payable





21,231Total current liabilities of discontinued operations


19,924


346,380Net current liabilities of discontinued operations

$
17,980

$
306,846NOTE 10  EXTRAORDINARY INCOME  During the three months ended March 31, 2002, we negotiated settlements with our creditors in which we reduced our liabilities with them by $224,881 and recorded an extraordinary gain as
a result.  NOTE 11  BUSINESS SEGMENT INFORMATION  We have two reportable business segments: Jabber and Webb.Jabber is a commercial developer of real-time communications software and IM solutions and is building upon the growing demand and adoption of the
Jabber.org open-source project by offering proprietary, scalable extensible IM solutions for carriers and service providers, for OEM and ISV partners, and for large enterprises. Webb consists of corporate activities such as accounting,
administration, public reporting and financing activities.March 31, 2002

December 31, 2001AssetsWebb

$
2,353,773

$
(1,475,819
)Jabber


2,915,471


2,327,766Eliminations


3,135,051


3,247,100Total assets

$
8,404,295

$
4,099,047Property and equipment, netWebb

$
857,381

$
1,287,486Jabber


545,658


253,559Total

$
1,403,039

$
1,541,045Three Months Ended March 31,2002

2001Net revenues from continuing operationsWebb

$


$
Jabber


861,053


99,825Total net revenues from continuing operations

$
861,053

$
99,825




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Net loss from continuing operationsWebb

$
(4,046,507
)

$
(5,500,250
)Jabber


(1,413,806
)


(1,999,970
)Eliminations


1,400,404



1,866,639Total net loss from continuing operations

$
(4,059,909
)

$
(5,633,581
)Depreciation and amortizationWebb

$
119,662


$
158,967Jabber


426,407



385,809Total depreciation and amortization expense

$
546,069


$
544,776Property and equipment additionsWebb

$
10,000


$
24,248Jabber


16,672



7,630Total

$
26,672


$
31,878





NOTE 12  SUBSEQUENT EVENTS





Conversion of Jabber Securities into Jabber Common Stock and Purchase of Jabber Minority Interest by Webb-





On April 8, 2002, we entered into an agreement with Jabber and France Telecom Technologies Investissements (FTTI), pursuant to which Webb and FTTI agreed to convert
substantially all of their respective shares of Jabbers preferred stock into shares of Jabbers common stock as of the FTTI Effective Date. The FTTI Effective Date was April 29, 2002. As part of the agreement, the pledge by
Webb to FTTI of 1,400,000 shares of Webbs Jabber preferred stock was terminated, Webb exchanged the principal and interest of a $1,100,000 note payable from Jabber for shares of Jabbers common stock at $1.00 per share and FTTI converted
the principal and interest on a Jabber convertible note for $100,000 into shares of Jabbers common stock, also at $1.00 per share.





In a separate transaction, Webb acquired all of the shares of Jabbers common stock and preferred stock owned by DiamondCluster International, Inc. (DiamondCluster), valued at $759,503, in consideration for which Webb
issued to DiamondCluster 911,645 shares of Webbs common stock at $0.67 per share. The resulting difference between the value of the Webb shares issued and the value of the Jabber securities acquired is $118,065, resulting in a reduction in the
cost basis for Jabbers property and equipment and intangible assets.





Jabber common stock equivalents at April 29, 2002,
before the April 2002 stock transactions:





Securities

Webb

FTTI

DiamondCluster

Others

TotalSeries A preferred stock

8,050,000

750,000





8,800,000Series B preferred stock and accrued dividends



4,428,710

733,253



5,161,963Series C preferred stock and accrued dividends

8,458,079





26,397

8,484,476Common stock





37,500

875,000

912,500Total

16,508,079

5,178,710

770,753

901,397

23,358,939Ownership percentage

70.7%

22.2%

3.3%

3.8%

100.0%




17




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##### Table of Contents




Jabber common stock equivalents at April 29,2002, after the April 2002 stock transactions:





Securities

Webb


FTTI


DiamondCluster

Others


TotalSeries A preferred stock












Series B preferred stock and accrued dividends




100,000







100,000Series C preferred stock and accrued dividends

100,000







26,397


126,397Common stock

18,273,021


5,185,712




875,000


24,333,733Total

18,373,021


5,285,712




901,397


24,560,130Ownership percentage

74.8
%

21.5
%



3.7
%

100.0
%





The effect of these transactions was to increase Webbs consolidated
stockholders equity by approximately $5.3 million. If these transactions would have been completed by March 31, 2002, Webbs consolidated stockholders equity at March 31, 2002 would have been approximately $6,200,000.





Conversion of Series D Preferred Stock-





During April and May 2002, the holder of our series D preferred stock converted 500 shares into 500,000 shares of our common stock at conversion prices per share of $1.00 as follows:





Number of SharesConversion Date

Series D Preferred Stock

Common StockApril 3, 2002

200

200,000April 25,2002

100

100,000May 7, 2002

150

150,000May 8, 2002

50

50,000Total

500

500,000




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##### Table of Contents




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





Webb is the founder and the majority stockholder of Jabber. Continuing operations of Webb refer to the Jabber business segment and Webbs corporate activities. We formed Jabber in February 2000, to commercialize
the Jabber.org instant messaging system begun in 1998 by Jeremy Miller, the founder of this open-source movement. We became the commercial sponsor of the Jabber.org open-source movement in September 1999, in connection with our employment of Mr.
Miller. Jabbers business involves the development and marketing of extensible instant messaging software for telecommunications carriers, service providers, and enterprises that require real-time, XML-based, communication and collaboration
solutions. Jabbers business development efforts are focused on four areas:





| | · |  | Development of proprietary server technologies emphasizing scalability, reliability, customization and integration which are interoperable with the Jabber.org open source
server software;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | · |  | Expansion of direct and indirect sales channels;
| | - |  | ------------------------------------------------




| | · |  | Development of strategic relationships in order to expand distribution opportunities and to promote widespread adoption of Jabber-supported standards; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------




| | · |  | Financial and administrative support of the Jabber.org development community and the Jabber Foundation to support the widespread adoption of the open source extensible
messaging and presence protocol, or XMPP, as the preferred standard for XML-based message routing and delivery.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




On March 1, 2001, Jabber released its first proprietary server software, the Jabber Commercial Server 2.0, a highly scaleable Jabber server that provides the foundation for Jabbers current and future server products. The Jabber
Commercial Server provides enterprises and service providers with enhanced performance, scalability, reliability and security compared to the Jabber open-source software.





Prior to October 2001, we operated our AccelX business segment which was focused primary on selling software and services to distributors of local commerce. We terminated that
business in October 2001. The income and expense from this business segment is reflected as a discontinued operation for all periods presented.





On January 17, 2002 we entered into a Securities Purchase Agreement whereby we sold 7.5 million units of our securities for $7.5 million. Each unit consisted of one share of common stock and one warrant to purchase
one additional share of common stock. The exercise price for the warrants is $1.00 per share. In connection with the purchase of the last 2.5 million units, we issued the investor an additional five-year stock purchase warrant representing the right
to purchase up to 2.5 million shares of our common stock at its exercise price of $1.00 per share. See Item 1  Financial Statements Note 5 of the Notes to Condensed Consolidated Financial Statements for a description of the terms of the
securities.





At the same time we agreed to sell the units, Castle Creek agreed to exchange all of its outstanding shares of
series C-1 preferred stock and $1,212,192 of principal of our 10% note payable for our series D preferred stock and a warrant to purchase 750,000 shares of our common stock at an exercise price of $1.00 per share. As part of the agreement, we
reduced the exercise price of existing warrants to purchase 650,116 shares of our common stock held by Castle Creek. The exercise price for these warrants is now $1.00. The series D preferred stock is convertible at $1.00 per share. During the first
quarter of 2002, Castle Creek exchanged 2,050 shares of series C-1 preferred stock and $1,212,192 of principal of our 10% note payable for 4,034 shares of our series D preferred stock. In addition, we repaid $720,000 of principal of the 10%
convertible note and accrued interest of $37,585. At May 10, 2002, 3,334 shares of the series D preferred stock were outstanding. See Item 1  Financial Statements Note 6 of the Notes to Condensed Consolidated Financial Statements for a
description of the terms of this transaction.





As a result of the sale of the units to Jona in January 2002, and in accordance
with terms of the original agreements, the conversion prices for the 10% note payable and our series C-1 preferred stock as well as the exercise prices for the second 10% note payable warrant and series C-1 preferred stock warrant were reset to
$1.00 per share. As a result of the resets, we recorded $956,847 in non-cash expenses in the first quarter of 2002. We recorded a loss on debt extinguishment of $625,164 as a result of the exchange of our 10% note payable for the series D preferred




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##### Table of Contents

stock. We also recorded non-cash interest expense of $537,770 for the value of the 750,000 warrant we issued to Castle Creek.





We have incurred losses from operations since inception. At March 31, 2002, we had an accumulated deficit of approximately $120 million. The accumulated
deficit at March 31, 2002, included approximately $67 million of non-cash expenses related to the following:





| | · |  | Beneficial conversion features related to the 10% convertible note payable, preferred stock and preferred stock dividends;
| | - |  | --------------------------------------------------------------------------------------------------------------------------




| | · |  | Loss on extinguishment of debt;
| | - |  | -------------------------------




| | · |  | Reset of warrant exercise prices;
| | - |  | ---------------------------------




| | · |  | Stock and stock options issued for services;
| | - |  | --------------------------------------------




| | · |  | Warrants issued to customers;
| | - |  | -----------------------------




| | · |  | Interest expense on the 10% convertible note paid by the issuance of similar notes;
| | - |  | -----------------------------------------------------------------------------------




| | · |  | Amortization of intangible assets acquired in consideration for the issuance of our securities;
| | - |  | -----------------------------------------------------------------------------------------------




| | · |  | Impairment loss on acquired intangible assets and goodwill; and
| | - |  | ---------------------------------------------------------------




| | · |  | Write-off of securities received for our e-banking business.
| | - |  | ------------------------------------------------------------




We have not been profitable since inception. Our ability to become profitable depends on our ability to market our products and services and generate revenues sufficient to exceed our expenses. Because of the new and
evolving nature of instant messaging technologies and Jabbers early stage of development, we cannot be sure that our revenue model will prove to be viable, whether demand for our products and services will materialize at the prices we expect
to charge, or whether current or future pricing levels will be sustainable. We are also highly dependent on certain key personnel. We have expended significant funds to develop Jabbers current product offerings and we anticipate continuing
losses in 2002 as we further develop and market Jabbers products in advance of market acceptance in sufficient quantities to achieve positive cash flow from operations. Webb does not currently have a source of revenue which is independent from
its Jabber subsidiary, and is therefore dependent on the success of its Jabber subsidiary. As a result of the FTTI investment in Jabber, Jabber is being funded separately. Webb expects to make additional investments in Jabber in the future. Our
continued long-term viability depends, in part, on Jabbers ability to obtain additional profitable customer contracts.





Jabber projects revenues to increase significantly during 2002 compared to 2001 and to achieve positive cash flow from operations during 2003. Because of our limited operating history, we do not have significant historical financial data
upon which to base our revenue or expense forecasts and there can be no assurance that we will be able to meet our projections for 2002 and subsequent years. Jabbers revenues in the first quarter of 2002 were derived primarily from software
license sales, software support and maintenance fees and professional service fees.





We reported $3,164,859 in loss from
operations for the first quarter of 2002 in our press release for the first quarter. Our actual loss from operations for the first quarter of 2002 is $2,300,598. The $864,261 overstatement is a result of (i) the reclassification of $625,164 of
non-cash loss on debt extinguishment from operating expenses to other non-operating losses; and (ii) the reclassification of $88,450 and $150,647 non-cash expenses for the reset of warrant exercise prices from operating expenses to interest expense
and preferred stock accretion expense, respectively. The reclassifications did not change our net loss applicable to common stockholders or the net loss per share as reported in our press release for the first quarter.





RESULTS OF OPERATIONS





Continuing operations of
Webb refer to the Jabber business segment and Webbs corporate activities. Jabber commenced operations in May 2000, and was a development-stage enterprise through March 2001.





Revenues:





Jabbers total revenue for the first quarter of 2002 increased 8.6 times
to $861,053 compared to $99,825 for the first quarter of 2001. The revenue mix between license fees and services was 68% and 32%, respectively, for the first quarter of 2002. The significant increase in revenues in the 2002 period is primarily due
to revenues earned




20




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##### Table of Contents

from licensing Jabbers proprietary IM software products which were initially released in March 2001. Prior to March 2001, Jabber earned revenue primarily
from professional service contracts for the customization of its IM software and the open-source IM software.





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





Three Months Ended March 31,2002

2001Net revenues:Licenses

$
588,899

$
10,000Professional service fees


210,233


76,425Support and maintenance fees


61,921


13,400Total net revenues


861,053


99,825Cost of revenues:Cost of licenses


178


Cost of professional services


87,688


140,861Cost of support and maintenance


23,078


93,132Total cost of revenues


110,944


233,993Gross margin

$
750,109

$
(134,168
)





License revenues represent fees earned for granting customers licenses to use
Jabber software products. During the third quarter of 2001, Jabber began licensing products based on a perpetual license, registered user pricing model. For the three months ended March 31, 2002, Jabber recognized $588,899 in license revenue,
comprised primarily of $336,899 of software license revenue recognized on a percentage completion basis from a $360,000 license to AT&T and $180,000 from licenses to BellSouth. Software revenue recognized in the similar 2001 period was from a
single license of Jabbers IM client software for $10,000. We are forecasting revenues from license fees to be $2.4 million for the remainder of 2002 and to increase to $12.6 million in 2003 and to $22.2 million in 2004.





Professional service revenue represents fees earned for custom programming, installation and integration services of Jabber software
products, generally with larger enterprise organizations. Professional service revenues were $210,233 for the three months ended March 31, 2002, which represents a 175% increase when compared with $76,425 for the similar 2001 period. Revenue
recognized from professional services was primarily from AT&T in which we recognized $170,301 in fees for the integration and customization of our software products and $37,932 from France Telecom, a related party, for consulting services.
During 2001, we recognized $67,375 from go.com, a Walt Disney company, for custom programming related to the open-source IM software product, which commenced in July 2000. We are forecasting revenues from professional service contracts to be $1.4
million for the remainder of 2002 and increase to $2.3 million in 2003 and to $3.3 million in 2004.





Support and maintenance fee
revenues are derived from annual support and maintenance contracts associated with the sale of Jabbers software products and customized month-to-month support agreements with customers generally billed on a time and material basis. Annual fees
for support and maintenance are generally 15% to 20% of the license fee revenue and the related revenue is recognized over the term of the contract. Customers may purchase support and/or maintenance contracts for which they receive telephone support
and product updates and upgrades during the term of the agreement. Customers are not obligated to purchase support and maintenance. Support and maintenance fees were $61,921 for the three months ended March 31, 2002, compared to $13,400 for the
similar 2001 period. Support and maintenance fee revenues in 2002 were derived from annual support and maintenance agreements sold in connection with the licensing of Jabbers software, while revenues in 2001 were primarily from custom support
contracts which were billed at a fixed price or on a time and material basis and were for a fixed number of hours or a fixed period of time, generally less than two months. We are forecasting revenues from support and maintenance agreements to be
$318,000 for the remainder of 2002 and increase to $1.6 million in 2003 and to $4.5 million in 2004.




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Included in net revenues for the three months ended March 31, 2002, are $37,932 in professional
services revenue and $5,751 in support and maintenance fee revenue from FT, an investor in Jabber. In February 2002, Jabber and FT entered into a fixed price professional services agreement, valued at $455,000, whereby Jabber is providing
professional consulting services for general IM technology as well as IM technology integration with FT proprietary product offerings. Jabber expects to recognize $341,204 of revenue from this contract during the remainder of 2002 and $75,864 during
the first quarter of 2003. Support and maintenance revenue recognized in the first quarter relates to the one-year support and maintenance agreement FT entered into on October 1, 2001, in connection with the license of Jabbers commercial
server to FT. Jabber expects to recognize $11,500 of revenue from this contract during the remainder of 2002.





Cost of Revenues:





Cost of license revenues of $178 for 2002 consists of shipping costs to deliver software products net of amounts billed to customers.





Cost of professional service revenues consists of compensation costs and consulting fees associated with performing custom
programming, installation and integration services for Jabbers customers. Cost of professional service revenues was $87,688 for the three months ended March 31, 2002, or 42% of net professional service revenues, compared to $140,861, or 184%
of net professional service revenues for the similar 2001 period. During 2002, we reduced our fixed costs by approximately $115,000 compared to the same 2001 period as a result of restructuring the professional services organization in the third
quarter of 2001 through the consolidation of responsibilities and the reduction in the number of employees in this organization from ten to four in order to better meet our current customer service levels. Fixed costs are expected to be
approximately $51,000 per month for the remainder of 2002 before allocation of costs to sales or product development activities. Direct project expenses for 2002 were $87,688 on revenues of $210,233 representing a gross margin of 58%, compared to
$25,246 on revenues of $76,425 representing a gross margin of 67% for the similar 2001 period. The decrease in gross margin in 2002 is a result of lower effective billing rates in 2002 for two fixed price customer contracts compared with two time
and material contracts in 2001. We expect cost of professional service revenue to be 46% of net professional service revenues for the remainder of 2002 and in 2003 and 47% in 2004.





Cost of support and maintenance revenue was $23,078 for the three months ended March 31, 2002, or 37% of net support and maintenance revenues, compared to $93,132, or 695% of net support
and maintenance revenues for the similar 2001 period. The decrease in absolute dollars in 2002 is a result of cost saving measures we implemented in the third quarter of 2001 to reduce our fixed costs in this organization through the reduction in
headcount by eliminating five positions and the consolidation of responsibilities. We expect cost of support and maintenance revenues to be 53% of support and maintenance revenues for the remainder of 2002, 31% in 2003 and 23% in 2004. Projected
increases in costs associated with delivering these services are expected to result only to the extent required to support new customer contracts.





Operating Expenses:





Sales and marketing expenses consist primarily of employee compensation, cost of travel,
advertising and public relations costs, trade show expenses, and costs of marketing materials. Sales and marketing expenses were $356,383 for the three-month period ended March 31, 2002, or 41% of net revenues, compared to $212,101, or 212% of net
revenues for the similar 2001 period. The increase in absolute dollars is primarily attributable to (i) incurring $79,541 more in employee compensation costs and bonuses as a result of increasing headcount by 3 employees in 2002; (ii) an increase in
commission expense of $31,524; and (iii) and an increase in travel expenses of $9,943 associated with increased sales activities. These increases were partially off-set by a reduction in employee relocation costs of $19,153. We expect Jabbers
sales and marketing expenses to increase on an absolute dollar basis in future periods as Jabber continues to market its products and services, develop business relationships and execute its sales plan. We estimate sales and marketing expenses to be
approximately $1.5 million for the remainder of 2002.




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Product development expenses consist primarily of employee compensation and programming fees
relating to the development and enhancement of the features and functionality of Jabbers software products. During 2002 and 2001, all product development costs were expensed as incurred. Product development expenses were $652,868 for the three
month period ended March 31, 2002, or 76% of net revenues, compared to $654,979 or 656% of net revenues for the similar 2001 period. The absolute dollar decrease was primarily due to (i) a decrease in wage expense of $43,640 as a result of a
decrease in headcount of 2 employees;(ii) a decrease in contract labor expense of $28,642; and (iii) a decrease in travel expense of $22,464. These decreases were partially off-set by an increase in bonus expense of $68,867. We believe that
significant investments in product development are critical to attaining Jabbers strategic objectives and, as a result, we expect Jabbers product development expenses to continue to increase in future periods. We estimate product
development expenses to be approximately $2.2 million for the remainder of 2002.





General and administrative expenses consist
primarily of employee compensation, consulting expenses, fees for professional services, and non-cash expense related to stock and warrants issued for services. General and administrative expenses were $1,495,387 for the period ended March 31, 2002,
or 174% of net revenues, compared with $1,543,302, or 1546% of net revenues for the similar 2001 period. General and administrative expenses specifically related or allocated to Jabber were $726,594 for the three months ended March 31, 2002,
compared to $612,914 for the similar 2001 period. The increase in absolute dollars in 2002 is primarily due to (i) an increase in compensation costs including bonuses of $195,970 as a result of adding five employees, including a chief financial
officer; (ii) incurring $51,694 more in legal and accounting fees; (iii) incurring $37,103 more in office rent for the sublease of a larger space; and (iv) incurring $15,218 more in travel costs primarily for travel to Europe. These increases were
partially off-set by a reduction in non-cash compensation expense of $83,665 related to grants of Jabbers common stock in 2000. In addition, Jabber incurred $63,289 for its share of Webbs corporate expenses, a decrease of $116,508 from
2001, comprised primarily of employee compensation and related expenses. We expect Jabbers general and administrative expenses to increase in future periods as Jabber continues to build the administrative infrastructure needed to support its
business. We estimate Jabbers general and administrative expenses to be at least $2.2 million for the remainder of 2002.





General and administrative expenses specifically related or allocated to Webb, primarily for general corporate activities, were $768,794 for the three month period ended March 31, 2002, compared with $930,388 for the similar 2001 period.
General and administrative expenses were reduced primarily as a result of cost saving measures implemented in the fourth quarter of 2001 and a general reduction in costs associated with supporting a smaller organization since the termination our
AccelX business in October 2001. We reduced headcount from 18 to 5 employees between the first quarter of 2001 and the first quarter of 2002 which resulted in a reduction of $153,498 in compensation and other employee related and travel
expenses in 2002. General and administrative expenses were further reduced as a result of (i) a decrease of $108,696 in office rent due to the assignment and of the lease to Jabber at a reduced monthly cost; (ii) a reduction in of $65,867 for
computer hardware and software expenses including support agreements and outsourced hosting services; (iii) a reduction of $61,614 in consulting fees incurred in 2001 for investor relations; (iv) a reduction of $39,840 in accounting fees; and (v) a
reduction of $37,098 in contract labor associated with outsourced human resource and recruiting services. These reductions were partially off-set by a decrease of $220,220 in expenses allocated to Jabber. In future periods, we expect corporate
general and administrative expenses to decrease as a percentage of revenues as revenues increase. We estimate Webbs general and administrative expenses to be approximately $1.1 million for the remainder of 2002.





Depreciation and amortization was $546,069 for the quarter ended March 31, 2002, compared to $544,776 for the similar 2001 period. During the first
quarter of 2002, Jabber recorded amortization expense totaling $381,391 related to intangible assets compared to $361,634 for the same 2001 period. At March 31, 2002, Jabbers intangible assets total $345,910, which will be fully amortized at
June 30, 2002.




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Other Income and Expenses:





Interest income was $13,817 for the quarter ended March 31, 2002, compared to $113,640 for the quarter ended March 31, 2001. We earn interest by investing surplus cash in highly liquid
investment funds or AAA or similarly rated commercial paper.





Interest expense was $1,153,724 for the quarter ended March 31,
2002, compared to $2,645,479 for the similar 2001 period. We recorded interest expense related to the convertible note payable issued by Jabber totaling $2,187 for the quarter ended March 31, 2002. We recorded $62,504 of interest expense for the
three months ended March 31, 2002, related to the short-term notes payable, including $29,976 of non-cash interest expense for the amortization of the associated discount and $14,364 for the reset of the warrant issued to the note holder. We
recorded the following interest expense related to the 10% convertible note payable:





Three Months Ended March 31,2002

2001Amortization of discount

$
49,144

$
44,440Amortization of financing assets


135,388


121,765Additional interest expense due to anti-dilution protection on conversion feature


255,060


2,394,234Additional interest expense due to issuance of warrants in connection with exchange for series D preferred stock


537,770


Additional interest expense due to reset of second 10% note payable warrant


74,086


Total non cash interest expense


1,051,448


2,560,439Interest expense payable in cash


37,585


69,479Total 10% note payable interest expense

$
1,089,033

$
2,629,918





The 10% convertible note payable was initially convertible into shares of our
common stock at a conversion price of $10.07 per share. The conversion price was subject to anti-dilution protection in the event we issued common stock at prices less than the conversion price for the 10% convertible note payable or the then
current price for our common stock and for stock splits, stock dividends and other similar transactions. The exercise price was reset to $2.50 in February 2001, and then to $1.00 in January 2002. As a result of the resets, we recorded non-cash
interest expense totaling $255,060 in the three months ended March 31, 2002, and $2,394,234 in the similar 2001 period. The non-cash interest expense was calculated by multiplying the increase in the number of common shares issuable upon conversion
by the fair market value of our common stock on the reset date. The 2002 non-cash interest expense was limited to the net proceeds from the sale of the 10% note payable less the total non-cash interest expense resulting from anti-dilution provisions
recorded in previous periods. We also recorded non-cash interest expense of $71,086 and $14,364 for the resets of the second 10% note payable warrant and the warrant issued to an investor in connection with the issuance of a short-term note payable,
respectively. The non-cash interest expense was calculated by computing the difference between the warrant value immediately preceding and after the reset using the Black-Scholes option pricing model. Refer to Item 1  Financial Statements
Notes 6 and 7 to Notes to Condensed Consolidated Financial Statements for the calculation of these charges.





Loss on debt
extinguishment was $625,164 resulting from consummating a transaction with the holder of our 10% convertible note in which $1,212,192 of the outstanding principal was exchanged for 1,984 shares for our series D preferred stock in March 2002. The
loss was calculated by multiplying the increase in the number of common shares issuable upon conversion by the fair market value of our common stock on the date the transaction closed. Refer to Item 1  Financial Statements Note 7 to Notes to
Condensed Consolidated Financial Statements for a description of this transaction.





Other income was $4,038 for the three months
ended March 31, 2002, and was comprised primarily of collection of accounts receivable, which were previously written off as a bad debt expense in 2001.




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Gain on disposition of property and equipment totaled $1,722 for the three months ended March
31, 2002, compared to a loss of $12,416 for the same 2001 period. During the first quarter of 2002, we sold our remaining excess computer equipment which had no net book value at January 1, 2002.





Discontinued Operations:





In October 2001, we terminated our AccelX
local commerce business.





The termination of this segment is reflected as a sale of a discontinued operation in the accompanying
condensed consolidated financial statements. Accordingly, the revenues, costs and expenses of this discontinued operation has been excluded from the respective captions in the Condensed Consolidated Statement of Operations and has been reported as
Loss from discontinued operations for all periods presented.





Loss from discontinued operations consist of the
following:





Three Months Ended March 31,2002

2001Net revenues

$    

$
878,929Costs and expenses:

Cost of revenues




1,080,981Sales and marketing expenses




392,778Product development expenses




1,090,500General and administrative expenses




233,128Depreciation and amortization




519,560Total costs and expenses




3,316,947Operating loss




(2,438,018
)Other income and expense, net




(14,632
)Loss from discontinued operations

$    

$
(2,452,650
)





Minority Interest:





Minority interest arises from the allocation of losses in Jabber to its minority stockholders. Minority stockholders of Jabber include holders of Jabbers common stock, holders of
Jabbers series B preferred stock, the holder of 750,000 shares of Jabbers series A-1 preferred stock and the holder of 25 shares of Jabbers series C preferred stock. We allocate a portion of Jabbers net losses to the minority
shareholders to the extent of their share in the net assets of Jabber. For the three months ended March 31, 2002, we allocated $110,178 of Jabbers losses to its minority stockholders, compared to $113,365 for the three months ended March 31,
2001.





During April 2002, we entered into a transaction with FTTI pursuant to which Webb and FTTI agreed to convert
substantially all of their respective shares of Jabbers preferred stock into shares of Jabbers common stock effective April 29, 2002. As part of the agreement, the pledge by Webb to FTTI of 1,400,000 shares of Webbs Jabber
preferred stock was terminated, Webb exchanged the principal and interest of a $1,100,000 note payable from Jabber for shares of Jabbers common stock at $1.00 per share and FTTI converted the principal and interest on a Jabber convertible note
for $100,000 into shares of Jabbers common stock, also at $1.00 per share.





In a separate transaction, Webb acquired all
of the shares of Jabbers common stock and preferred stock owned by DiamondCluster, valued at $759,503, in consideration for which Webb issued to DiamondCluster 911,645 shares of Webbs common stock at $0.67 per share. The resulting
difference between the value of the Webb shares issued and the value of the Jabber securities acquired is $118,065, resulting in a reduction in the cost basis for Jabbers property and equipment and intangible assets.




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The summary of the Jabber equity transactions is as follows:





Jabber common stock equivalents at April 29, 2002, before the April 2002 stock transactions:





Securities

Webb


FTTI


DiamondCluster


Others


TotalSeries A preferred stock

8,050,000


750,000








8,800,000Series B preferred stock and accrued dividends




4,428,710


733,253





5,161,963Series C preferred stock and accrued dividends

8,458,079








26,397


8,484,476Common stock







37,500


875,000


912,500Total

16,508,079


5,178,710


770,753


901,397


23,358,939Ownership percentage

70.7
%

22.2
%

3.3
%

3.8
%

100.0
%





Jabber common stock equivalents at April 29, 2002, after the April 2002 stock
transactions:





Securities

Webb


FTTI


DiamondCluster

Others


TotalSeries A preferred stock












Series B preferred stock and accrued dividends




100,000







100,000Series C preferred stock and accrued dividends

100,000







26,397


126,397Common stock

18,273,021


5,185,712




875,000


24,333,733Total

18,373,021


5,285,712




901,397


24,560,130Ownership percentage

74.8
%

21.5
%



3.7
%

100.0
%





The effect of these transactions was to increase Webbs consolidated
stockholders equity by approximately $5.3 million. If these transactions would have been completed by March 31, 2002, Webbs consolidated stockholders equity at March 31, 2002 would have been approximately $6,200,000 versus its
actual consolidated stockholders equity at March 31, 2002 of approximately $880,000.





Preferred Stock Accretion Expense and Dividends:





The terms of our preferred stock grant the holders the right to convert the preferred stock into shares of our common stock
at specified conversion prices. In each issuance of preferred stock, the conversion price has included a beneficial conversion feature because the value of the common stock resulting from a theoretical conversion of the preferred stock on the
issuance date was greater than the allocated value of the preferred stock. In addition, if the conversion price of the preferred stock is reduced in future periods, accounting principles generally accepted in the United States require us to record a
deemed dividend to the preferred shareholder based upon the amount of additional shares that are issuable as a result of the change in the conversion feature.





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





Accretion expense was $630,089 for the three months ended March 31, 2002. We recorded accretion expense of $479,442 as a result of the reset of the conversion price of our series C-1
preferred stock in January 2002, from $2.50 per share to $1.00 per share. The accretion expense was calculated by multiplying the increase in the number of common shares issuable upon conversion by the fair market value of our common stock on the
reset date.




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The accretion expense was limited to the net proceeds from the sale of the series C-1 preferred stock less the total
accretion expense recorded in previous periods. We also recorded accretion expense of $148,259 and $2,388 for the resets of the series C-1 preferred stock and series B preferred stock warrants, respectively. The accretion expense was calculated by
computing the difference between the warrant value immediately preceding and after the reset using the Black-Scholes option pricing model. Refer to Item 1  Financial Statements Note 7 to Notes to Condensed Consolidated Financial Statements for
the calculation of these charges.





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





The series D junior preferred stock issued in the first quarter of 2002 is also subject to anti-dilution protection in the event we issue common stock at prices less than the current
conversion price for the preferred stock or the then current price for our common stock and for stock splits, stock dividends and other similar transactions. If the conversion prices are reduced, we may be required to record additional charges
against income and such charges may be significant.





We may also incur additional preferred stock accretion expense in future
periods as a result of the convertible preferred stock Jabber issued in connection with the investment by FTTI in Jabber. The accretion expense, if any, in future periods as a result of this transaction or the issuance of other securities with
similar terms may be significant.





The terms of Jabbers series B preferred stock provided for an 8% cumulative dividend.
For the three months ended March 31, 2002, we recorded $96,283 of preferred stock dividends, all of which are payable to third parties. In addition, Jabbers series C preferred stock also provides for an 8% cumulative dividend. The series C
preferred stock dividends totaled $155,265 for the three months ended March 31, 2002, of which $154,772 were eliminated in consolidation as the dividends were payable to Webb.





Net Loss Applicable to Common Stockholders:





Net loss allocable to common stockholders
was $4,451,785 for the three months ended March 31, 2002, compared with $10,829,493 for the similar 2001 period. Jabbers net loss allocable to common stockholders for the three month period ended March 31, 2002, was $1,665,355, including
$251,548 in non-cash preferred stock dividend expense, compared with $1,999,970 for the similar 2001 period.





The decrease in
losses for the three months ended March 31, 2002, are primarily a result of incurring $2,440,989 less in operating losses for our AccelX operations as a result of the termination of this business segment in October 2001. Losses for 2002 were
further reduced by (i) a reduction of Webbs interest expense of $1,582,392; (ii) a decrease of $2,129,762 in preferred stock dividends and preferred stock accretion expense; and (iii) an increase in Jabbers gross margin of $884,277,
primarily a result of a change in the revenue mix from lower margin professional service fees to higher volume software license fee revenues. These reductions in 2002 were partially off-set by an increase of $95,549 in operating expenses. We expect
Webbs losses to be approximately $1.1 million for the remainder of 2002. We expect Jabber to incur approximately $2.8 million in losses for the remainder of 2002, before non-cash preferred stock dividends of approximately $96,776, due to the
significant time between product development and market introduction as well as the long sales cycle for most of Jabbers products and continued increases in operating expenses during 2002, due to the continuing development of Jabbers
business.





Included in net losses allocable to common stockholders are non-cash expenses for transactions related to
acquisitions, financing, and securities we issued for services as summarized in the following table:




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Three Months Ended March 31,2002

2001Amortization of intangible assets and goodwill

$
381,391

$
855,145Stock and warrants issued for services


27,436


168,842Beneficial conversion feature, amortization of discount and financing costs to interest expense and non-cash interest related to the
10% convertible note payable


1,051,448


2,560,439Amortization of discount and non-cash interest expense on short-term note payable


44,340


Loss on debt extinguishment from the exchange of our 10% note payable for series D preferred stock


625,164


Preferred stock dividends


96,776


Accretion of preferred stock and other deemed preferred stock dividends


630,089


2,856,627Total

$
2,856,644

$
6,441,053





LIQUIDITY AND CAPITAL RESOURCES





We used $2,120,754 in cash to fund our operations for the three months ended March 31, 2002, compared to $5,636,715 for the similar 2001 period. We used $21,614 in cash from investing
activities for the first quarter of 2002, compared with receiving $6,662 in cash for the similar 2001 period. We received $6,604,401 in cash from financing activities for the three month period ended March 31, 2002, compared with $2,339,439 for the
similar 2001 period.





Following the purchase of Jabber preferred stock by FTTI in July 2001, our Webb and Jabber businesses have
been separately funded. Consequently, liquidity and capital resources for each business is presented below.





As of March 31,
2002, Jabber had cash and cash equivalents of $1,068,349 and working capital deficit of $335,305. We financed our Jabber operations and capital expenditures and other investing activities during the first quarter of 2002 primarily through a $1.1
million investment by Webb.





Jabber used $912,614 in cash to fund its operations for the first quarter of 2002, compared to
$1,852,741 for the similar 2001 period. The decrease in 2002 is primarily due to a decrease in payments to vendors of approximately $525,000 and an increase in cash collected from customers for the period of approximately $306,000.





Jabber used $16,672 in investing activities for the purchase of property and equipment for the three months ended March 31, 2002, compared
with $7,630 for the similar 2001 period. Jabber plans to purchase approximately $180,000 of property and equipment for the remainder of 2002.





We believe that the cash on hand and the $2.5 million Webb has allocated from its remaining working capital to fund Jabbers operations will be sufficient to fund Jabbers activities until the second quarter
of fiscal 2003, when Jabber is projected to have positive cash flow from operations. Our belief regarding Jabbers cash requirements is based on Jabbers current financial projections which forecasts Jabber consuming $2.4 million of cash
for operations during the last three quarters of 2002 and $620,000 in the first quarter of 2003 and generating $550,000 of positive cash in the second quarter of 2003 and continuing to generate positive cash from operations thereafter. The use of
cash is predicated on Jabber meeting its revenue projections and managing its expense levels to forecasted amounts. We estimate Jabber revenues for the last three quarters of 2002 to be $4.1 million and 2003 to triple over 2002 and double from 2003
to 2004. Software license fees are projected to account for 58% of net revenues in for the remainder of 2002, and 75% in 2003 and 2004. We estimate Jabbers expenses to be $6.6 million for the last three quarters of 2002 and to increase to
$11.5 million in 2003 and $15.4 million in 2003. Jabber has a limited operating history upon which to base its projections, particularly its revenue projections, and there can be no assurance that Jabber will be able to meet its projections for
revenues and expenses. In addition, since many of Jabbers expenses are fixed or must be incurred in advance of revenues, Jabbers working capital requirements




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could increase significantly over projected levels if Jabber does not meet its revenue projections. Therefore, Jabber may require more cash for its operations
than our current projections indicate. In this circumstance, Jabber would have to seek additional funding or reduce its operating activities.





As of March 31, 2002, Webb had cash and cash equivalents of $4,315,775 and working capital of $5,156,789. We financed our operations and capital expenditures and other investing activities during 2002 through the sale
of securities for which we received $7,500,000 in net proceeds, compared to $3,568,219 for the similar 2001 period. (See Item IFinancial Statements Note 5 to Notes to Condensed Consolidated Financial Statements for information regarding sales
of securities). Of the $7.5 million raised in the first quarter of 2002, approximately $1.1 million has been used to pay outstanding obligations, $1.1 million has been invested in Jabber, $822,000 was used to pay the portion of the principal of our
10% convertible note payable which was not exchanged for shares of our preferred stock and the outstanding interest, approximately $775,000 has been used to pay Webbs 2002 operating expenses, and approximately $2.5 million has been allocated
to fund Jabbers operations. The balance of approximately $1.1 million is being used to fund Webbs operating expenses for the remainder of 2002, which are separate from those for Jabber.





We used $1,208,140 in cash to fund Webbs operations for the three months ended March 31, 2002, compared to $3,783,974 for the similar 2001 period.
The decrease in 2002 is primarily a result of $2,452,650 in losses in 2001 from our AccelX business which we terminated in October 2001, and a net reduction of $161,594 in Webbs corporate expenses in 2002 as a result of reducing the
size of Webbs corporate organization. These reductions in the use of cash were partially off-set by an increase of in the use of cash of $900,000 as a result of paying 2001 obligations in the first quarter of 2002. Webbs monthly cash
operating expenses are estimated to average approximately $130,000 per month for the remainder of 2002.





Webb used $1,106,664 in
net investing activities for the three months ended March 31, 2002, compared with $2,339,439 for the similar period of 2001. Webb invested $1.1 million in Jabber in the first quarter of 2002 and purchased $10,000 of property and equipment. Webb
plans to invest approximately $2.5 million in Jabber during the remainder of 2002, through the purchase of Jabber securities. Webb does not plan to purchase a significant amount of property and equipment during 2002.





During the three months ended March 31, 2002, Webb received $6,604,401 in net cash from financing activities, compared with $1,834,789 for the similar
2001 period. During 2002, Webb received proceeds of $1.2 million from the issuance of short-term notes payable and $7.5 million from the sale of common stock warrants. During 2002, Webb repaid $1.34 million of short-term notes payable and $35,599 in
capital leases payable.





We believe our cash on-hand of approximately $3.9 million at May 1, 2002, which includes the $2.5
million Webb has allocated for Jabber, will be sufficient to fund Webbs and Jabbers operating expenses for at least the next twelve months. In order to provide greater flexibility in determining the timing and the level of investments in
marketing and product development initiatives, to provide operating reserves which could be required to fund operations in the event that Jabber does not achieve projected revenues and to establish additional strategic relationships, we are
continuing to seek additional equity investments through either additional sales of Webbs capital stock or sales of Jabbers capital stock. We have no commitments or agreements for the sale of any additional securities and there can be no
assurance that we will be able to raise any additional working capital.




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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 Condensed Consolidated Financial Statements and
Item 2  Managements Discussion and Analysis of Financial Condition and Results of Operations.





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





| | · |  | Limited ability to respond to competitive developments;
| | - |  | -------------------------------------------------------

| | · |  | Exaggerated effectof unfavorable changes in general economic and market conditions;
| | - |  | -----------------------------------------------------------------------------------

| | · |  | Limited ability to adjust our business plan to address marketplace and technological changes; and
| | - |  | -------------------------------------------------------------------------------------------------

| | · |  | Difficulty in obtaining operating capital.
| | - |  | ------------------------------------------




We expect to incur net losses into 2003. We have incurred net losses since we began our business totaling approximately $120 million through March 31, 2002, including approximately $67 million of non-cash expenses. We expect
to incur additional substantial operating and net losses in 2002, and do not expect to achieve positive cash flow from operations until at least 2003. We expect to incur these additional losses because:





| | · |  | We intend to incur capital expenditures and operating expenses in excess of revenues of approximately $2.8 millionduring the remainder of 2002 to cover the increasing
activities of Jabber, Inc.;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · |  | We expect to spend approximately $1.1 million during the remainder of 2002 to finance operating expenses besides those for Jabber, Inc.; and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------

| | · |  | We will incur significant non-cash expenses from current financing transactions and may continue to incur significant non-cash expenses due to financing and other equity-based
transactions.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




If we are unable to raise additional working capital, we may not be able to sustain our
operations.Our present cash and cash equivalents and working capital will, based on current estimates, be adequate to sustain operations for Jabber, Inc. and for our other operations until the second quarter of 2003. In the event that
Jabbers revenues are less than projected or we desire to increase marketing and business development expenses over projected levels, we will need to obtain additional capital to fund our business. Operating expenses for Jabber, Inc. currently
exceed revenues by approximately $300,000 per month. Operating expenses for our corporate activities, to be funded separately from those for Jabber, Inc., are expected to be approximately $1.1 million for the remainder of 2002. There is no assurance
that we will be able to raise additional funds in amounts required or upon acceptable terms. If we cannot raise additional funds when needed, we may be required to curtail or scale back our operations or sell some of our assets, including our stock
in our Jabber subsidiary.





We may not earn revenues sufficient to remain in business. Our ability to become
profitable depends on whether we can sell our products and services for more than it costs to produce and support them. Our future sales also need to provide sufficient margin to support our ongoing operating activities. The success of our revenue
model will depend upon many factors including:





| | · |  | The extent to which consumers and businesses use our products and services; and
| | - |  | -------------------------------------------------------------------------------

| | · |  | The success of our distribution partners in marketing their products and services.
| | - |  | ----------------------------------------------------------------------------------




Because of the new and evolving nature of the Internet, the early stage of our Jabber products and our limited operating history, we cannot predict whether our revenue model will prove
to be viable, whether demand for our products and services will materialize at the prices we expect to charge, or whether current or future pricing levels will be sustainable.




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If the Internet does not develop into a significant source of business-related communication, then our business will not be
successful.Our business plan assumes that the Internet will develop into a significant source of business-related communication and communication interactivity. However, the Internet market is new and rapidly evolving and there is no
assurance that the Internet will develop in this manner. If the Internet does not develop in this manner, our business may not be successful.





A limited number of our customers generate a significant portion of our revenues. We had two customers representing 83% of revenues for the three months ended March 31, 2002. We expect that current
customers will account for a significant percentage of our revenues during both fiscal 2002 and 2003. There is no assurance that we will be able to retain major customers or attract additional major customers. The loss of, or reduction in demand for
our products or services from major customers could have a material adverse effect on our operating results and cash flow from operations.





We must continually develop new products which appeal to our customers. 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.
| | - |  | -----------------------------------------------------------------------------




Even if we are able to identify new opportunities, our working capital constraints limit our ability to pursue them. If we are unable to identify and develop and introduce new products
and services on a timely basis, demand for our products and services will decline.





We must identify and develop
markets for our products and services. A suitable market for our products and services may not develop or, if it does develop, it may take years for the market to become large enough to support significant business opportunities. Even if we
are able to successfully identify, develop, and introduce new products and services there is no assurance that a suitable market for these products and services will materialize. The following factors could affect the success of our products and
services and our ability to address sustainable markets:





| | · |  | The failure of our business plan to accurately predict the types of products and services the future Internet marketplace will demand;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------

| | · |  | Our limited working capital may not allow us to commit the resources required to adequately support the introduction of new products and services;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------

| | · |  | The failure of our business plan to accurately predict the estimated sales cycle, price and acceptance of our products and services; or
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------

| | · |  | The development by others of products and services that makes our products and services noncompetitive or obsolete.
| | - |  | -------------------------------------------------------------------------------------------------------------------




There is a lot of competition in the Internet market which could hurt our revenues or cause our expenses to increase.Our current and
prospective competitors include many companies, including Microsoft Corporation and AOL Time Warner, Inc., whose financial, technical, marketing and other resources are substantially greater than ours. We may not 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 hurt our business by causing us to:





| | · |  | Reduce the selling prices for our products and services; or
| | - |  | -----------------------------------------------------------

| | · |  | Increase our spending on marketing, sales and product development.
| | - |  | ------------------------------------------------------------------




We may not be able to offset the effects of price reductions or increases in spending. Further, our financial condition may put us at a competitive disadvantage relative to our competitors.




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It usually takes a long time before we are able to make a sale of our products and services to a customer. While our
sales cycle varies from customer to customer, it is long, typically ranging from two to six months or more, and unpredictable. 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 about 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.





Offering proprietary products based on the Jabber.org open-source movement may jeopardize our relationship with open-source communities. An important element of the business model for our Jabber, Inc. subsidiary is based upon
Jabbers ability to offer proprietary products compatible with Jabber.org open-source instant messaging systems. A key element of open-source software development movements is that the software and its code be offered to other developers and
users free, provided that anyone who makes an improvement or modification to the software and who intends to commercialize the improvement or modification, makes them available for free to the community and other users. If the Jabber.org open-source
community or other open-source communities withdraw their support for either Jabber, Inc. or Jabber instant messaging products, demand for Jabber instant messaging products will likely decline.





We may be unable to reduce our expenses if sales do not occur as expected. Because of our limited operating history, we do not have significant historical financial
data upon which to base planned operating expenses or to forecast revenues and there can be no assurance that we will be able to meet our revenue or expense projections. Our expense levels are based in part on our expectations of 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. 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 result in operating losses or reduced profitability. Further, we intend to incur significant capital expenditures
and operating expenses to fund the operations of our Jabber, Inc. subsidiary. If these expenditures are not subsequently followed by increased sales with substantial margins, then we will need to raise additional capital to stay in business.





An investment in our common stock is risky because the price of our stock is highly volatile. Our common stock
closed as high as $1.18 per share and as low as $0.52 per share between January 1, 2002 and May 8, 2002. 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; 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 8, 2002, we had issued warrants and
options to acquire approximately 16,700,000 shares of our common stock, exercisable at prices ranging from $0.65 to $34.94 per share, with a weighted average exercise price of approximately $1.92 per share. We had also reserved 3,284,000 shares of
common stock for issuance upon conversion of our series D junior convertible preferred stock. During the terms of these derivative securities, the holders will have the opportunity to profit from an increase in the market price of our common stock
with resulting dilution to the holders of shares who purchased shares for a price higher than the applicable exercise or conversion price. The increase in the outstanding shares of our common stock because of the exercise or conversion of these
derivative securities could result in a significant decrease in the percentage ownership of our common stock by current and future holders of our common stock.





The significant number of shares issuable upon conversion of our convertible securities could make it difficult to obtain additional financing. 3,284,000 shares of our common stock may be issued if our
series D junior




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convertible preferred stock is converted. The number of our shares issuable upon conversion or exercise of our derivative securities could increase due to
future financings. Due to this significant potential increase in the number of our outstanding shares of common stock, new investors may either decline to make an investment in Webb due to the potential negative effect this additional dilution could
have on their investment or require that their investment be on terms at least as favorable as the terms of the notes or convertible preferred stock. If we are required to provide similar terms to obtain required financing in the future, the onerous
terms and significant dilution of these financings could be perpetuated and significantly increased. The current price of our common stock may make it difficult to raise capital because of the terms of the notes and the convertible preferred stock.
Issuances of common stock below $1.00 in future financings would result in substantial additional shares being issued to a significant shareholder and to holders of our convertible securities, causing substantial dilution to other shareholders as
well as substantial non-cash charges against our earnings.





Future sales of our common stock in the public market could
depress the price of our common stock. Actual or potential future sales of substantial amounts of common stock in the public market could depress 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 8, 2002, these shares consist of:





| | · |  | Up to 3,284,000 shares issuable upon conversion of our series D junior convertible preferred stock; and
| | - |  | -------------------------------------------------------------------------------------------------------

| | · |  | Approximately 16,700,000 shares issuable to warrant and option holders.
| | - |  | -----------------------------------------------------------------------




Future sales of our common stock in the public market could limit our ability to raise capital. Actual or potential future sales of substantial amounts of our common stock
in the public by our officers and directors, and upon exercise or conversion of derivative securities could affect our ability to raise capital through the sale of equity securities.





The issuance of convertible securities has resulted in significant non-cash expenses which has increased significantly our net loss applicable to common shareholders. We
recorded approximately $2.1 million of non-cash expenses in the first quarter of 2002 due to the reset of the conversion price for our 10% note payable and series C-1 preferred stock and the reset of exercise price for warrants issued in connection
with those securities and the exchange of our 10% note payable and series C-1 preferred sock for shares of series D junior convertible preferred stock.




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PART II





OTHER INFORMATION





Items 1, 3 and 5. Not Applicable





Item 2. Changes in Securities and Use of Proceeds





Pursuant to a Securities Purchase Agreement dated
January 17, 2002, we sold 7.5 million units of our securities for $7.5 million to a single investor. In connection with the purchase of the last 2.5 million 2,500,000 units, we issued the investor an additional five-year stock purchase warrant
representing the right to purchase up to 2.5 million shares of our common stock at its exercise price of $1.00 per share. In consideration for services rendered in connection with the sale of the units, we issued warrants representing the right to
purchase 575,000 shares of our common stock at $1.00 per share to a registered representative of US Bancorp, Piper Jaffray, Inc. and a warrant representing the right to purchase 100,000 shares of our common stock at $1.00 per share to a private
business owner and stockholder. The securities were not registered under the Securities Act of 1933, as amended, in reliance upon Regulation D promulgated by the Securities and Exchange Commission. See Item 1Financial Statements Note 5 of the
Notes to Condensed Consolidated Financial Statements for a description of the terms of the securities and Item 2  Managements Discussion and Analysis of Financial Condition and Results of Operations  Liquidity and Capital Resources for
how the proceeds are to be used.





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





On March 7, 2002, the Company held a special
meeting of stockholders which was adjourned and reconvened on March 11, 2002, at which stockholders of the Company approved the issuance of up to 7.5 million units of our securities pursuant to a Securities Purchase Agreement dated as of January 17,
2002 between Webb Interactive Services, Inc. and Jona, Inc. The sale of the securities was approved with 5,432,372 shares voting for approval of the sale and 118,868 shares voting against approval of the sale.





Item 6. Exhibits and Reports on Form 8-K





|(a) |  | Listing of Exhibits:
|--- |  | --------------------




3.1

Articles of Incorporation, as amended, of Webb Interactive Services, Inc. (1)3.2

Bylaws of Webb Interactive Services, Inc. (2)4.1

Specimen form of Webb Interactive Services, Inc. Common Stock certificate (3)4.2

Webb Interactive Services, Inc. Stock Option Plan of 1995 (2)4.3

Form of Incentive Stock Option Agreement for Webb Interactive Services, Inc. Stock Option Plan of 1995 (2)4.4

Form of Nonstatutory Stock Option Agreement for Webb Interactive Services, Inc. Stock Option Plan of 1995 (2)4.5

Webb Interactive Services, Inc. Stock Option Plan of 2000, including forms of Incentive and Nonstatutory Stock Option Agreements (4)4.6

Jabber, Inc. Stock Option Plan of 2000, including forms of Incentive and Nonstatutory Stock Option Agreements (4)4.7

Articles of Amendment setting forth the terms of Series D Junior Convertible Preferred Stock (5)4.8

Stock Purchase Warrant dated August 25, 1999, as amended December 18, 1999, issued by Webb Interactive Services, Inc. to Castle Creek Technology Partners, Inc.
(6)4.9

Stock Purchase Warrant dated December 18, 1999 issued by Webb Interactive Services, Inc. to Castle Creek Technology Partners, Inc. (6)4.10

Stock Purchase Warrant dated December 31, 1999 issued to by Webb Interactive Services, Inc. Marshall Capital Management, Inc. and Castle Creek Technology Partners, LLC
(7)4.11

Form of Stock Purchase Warrant dated February 28, 2001 issued by Webb Interactive Services, Inc. to Castle Creek Technology Partners, LLC (8)




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4.12

Form of Stock Purchase Warrant, form of Series D Stock Purchase Warrant and form of amended Stock Purchase Warrants dated January 17, 2002 issued by Webb Interactive
Services, Inc. to Castle Creek Technology Partners, LLC (5)4.13

Form of Stock Purchase Warrant dated December 21, 2001 issued by Webb Interactive Services, Inc. to Jona, Inc. (5)4.14

Form of Stock Purchase Warrant dated January 17, 2002 issued by Webb Interactive Services, Inc. to Jona, Inc. (5)10.1

Form of Nondisclosure and Nonsolicitation Agreement between Webb Interactive Services, Inc. and its employees (1)10.2

Employment Agreement between Jabber, Inc. and Robert Balgley, dated December 11, 2000 (12)10.3

Employment Agreement between Jabber, Inc. and Gwenael Hagen, dated August 1, 2001 (12)10.4

Employment Agreement between Webb Interactive Services, Inc. and William R. Cullen, dated March 1, 2002 (12)10.5

Employment Agreement between Webb Interactive Services, Inc. and Lindley S. Branson, dated March 1, 2002 (12)10.6

Office lease for Webb Interactive Services, Inc.s principal offices commencing May 2000 (9)10.7

First Amendment to office lease, Assignment and Assumption of Lease and Consent to Lease (12)10.8

Agreement for sublease of office space (12)10.9

Form of Change of Control Agreement between Webb Interactive Services, Inc. and certain employees (10)10.10

Stock Purchase Agreement dated July 6, 2001, among Jabber, Inc., France Telecom Technologies Investissements and Webb Interactive Services. Included as an exhibit is the
certificate of designation for Jabber, Inc. series B convertible preferred stock, investors rights agreement and stockholders agreement (11)10.11

Agreement dated April 8, 2002, among Webb Interactive Services, Inc., Jabber, Inc. and France Telecom Technologies Investissements (13)10.12

Exchange Agreement dated as of April 26, 2002 between Webb Interactive Services, Inc. and DiamondCluster International, Inc. (13)10.13

Securities Purchase Agreement dated as of January 17, 2002, between Webb Interactive Services, Inc. and Jona, Inc. Included as an exhibit is a Registration Rights Agreement
(5)10.14

Letter Agreement between Webb Interactive Services, Inc. and Jona, Inc. (12)10.15

Exchange Agreement dated January 17, 2002 between Webb Interactive Services, Inc. and Castle Creek Technology Partners LLC. Included as an exhibit is a Registration Rights
Agreement (5)10.16

General Agreement for the Procurement of The License of Software and Services Between Jabber, Inc. and AT&T Corp. dated March 22, 2002 (*)21

Subsidiaries of Webb Interactive Services, Inc. (12)


---

|* |  | Filed herewith.
|- |  | ---------------

|(1) |  | Filed with the Registration Statement on Form S-3, filed January 29, 1999, Commission File No. 333-71503.
|--- |  | ---------------------------------------------------------------------------------------------------------

|(2) |  | Filed with the Registration Statement on Form SB-2, filed April 5, 1996, Commission File No. 333-3282-D.
|--- |  | --------------------------------------------------------------------------------------------------------

|(3) |  | Filed with the Registration Statement on Form S-3, filed September 24, 1999, Commission File No. 333-86465.
|--- |  | -----------------------------------------------------------------------------------------------------------

|(4) |  | Filed with the Form 10-KSB Annual Report for the year ended December 31, 2002. Commission File No. 0-28462.
|--- |  | -----------------------------------------------------------------------------------------------------------

|(5) |  | Filed with the current report on Form 8-K, filed on January 22, 2002 and amended on January 29, 2002.
|--- |  | -----------------------------------------------------------------------------------------------------

|(6) |  | Filed with Amendment No. 2 to Webbs Registration Statement on Form S-3, filed January 3, 2000, Commission File No. 333-87887.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------

|(7) |  | Filed with the Form 8-K Current Report, filed January 5, 2000, Commission File No. 0-28642.
|--- |  | -------------------------------------------------------------------------------------------



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(8)

Filed with the Form 8-K Current Report, filed March 1, 2001, Commission File No. 0-28642.(9)

Filed with the Form 10-KSB Annual Report for the year ended December 31, 1999, Commission File No. 0-28462.(10)

Filed with the Form 10-KSB Annual Report for the year ended December 31, 1998, Commission File No. 0-28462.(11)

Filed with the current report on Form 8-K, filed August 1, 2001, Commission File No. 0-28642.(12)

Filed with the From 10-KSB Annual report for the year ended December 31, 2001, Commission File No. 0-28462.(13)

Filed with the current report on Form 9-K, filed May 2, 2002, Commission File No. 0-286842.(b)    Reports on Form 8-K. The Company filed reports on Form 8-K during the quarter ended March 31, 2002, as
follows: (i) under Item 5 of Form 8-K, as amended, onJanuary 28, 2002; (ii) under Item 5 of Form 8-K on May 2, 2002.







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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 15, 2002

By

/s/    William R. CullenChief Executive Officer  Chief Financial Officer/s/    Stuart LuckoController




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