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                    U. S. SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-KSB


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

          For the fiscal year ended MAY 31, 2001
                                    ------------

[ ]       TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
          EXCHANGE ACT OF 1934

          For the transition period from               to
                                         -------------    --------------

          Commission file number         000-26331
                                 --------------------------

                               PALWEB CORPORATION
                               ------------------
                 (Name of small business issuer in its charter)

           DELAWARE                                    75-1984048
-------------------------------            ------------------------------------
(State or other jurisdiction of            (I.R.S. Employer Identification No.)
 incorporation or organization)

                 1607 WEST COMMERCE STREET, DALLAS, TEXAS 75208
                    (Address of principal executive offices)

                                 (214) 698-8330
                           (Issuer's Telephone Number)

Securities registered under Section 12(b) of the Exchange Act:


    Title of each class            Name of each exchange
                                    on which registered

        NONE                               NONE
        ----                               ----

Securities registered under Section 12(g) of the Exchange Act:


                          COMMON STOCK, $0.10 PAR VALUE
--------------------------------------------------------------------------------
                                (Title of class)

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Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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

Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]

The issuer's revenue for the year ended May 31, 2001 was $89,211.

The aggregate market value of the voting Common Stock held by non-affiliates at
May 31, 2001 was $12,396,993. This amount was computed using the average of the
high and low price on May 31, 2001.

As of July 18, 2001, the issuer had outstanding a total of 231,973,244 shares of
its $0.10 par value Common Stock.

Transitional Small Business Disclosure Format (Check one):  Yes  [ ]   No  [X]

















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                               PALWEB CORPORATION
                                   FORM 10-KSB
                                TABLE OF CONTENTS

ITEM NUMBER AND CAPTION                                                    PAGE
                                                                          NUMBER

PART I

Item 1.  Description of Business                                              4

Item 2.  Description of Property                                             12

Item 3.  Legal Proceedings                                                   13

Item 4.  Submission of Matters to a Vote of Security Holders                 14

PART II

Item 5.  Market for Common Equity and Related Stockholder Matters            14

Item 6.  Management's Discussion and Analysis or Plan of Operation           16

Item 7.  Financial Statements                                                27

Item 8.  Changes In and Disagreements with Accountants on Accounting
                  and Financial Disclosure                                   27

PART III

Item 9.  Directors, Executive Officers, Promoters and Control Persons;
                  Compliance with Section 16(a) of the Exchange Act          27

Item 10.  Executive Compensation                                             29

Item 11.  Security Ownership of Certain Beneficial Owners and Management     30

Item 12.  Certain Relationships and Related Transactions                     31

Item 13.  Exhibits and Reports on Form 8-K                                   32

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PART I.

ITEM 1.                        DESCRIPTION OF BUSINESS

HISTORY
-------

           PalWeb Corporation ("PalWeb") is a Delaware corporation that was
incorporated on February 24, 1969 under the name Permaspray Manufacturing
Corporation. It changed its name to Browning Enterprises Inc. in April of 1982,
to Cabec Energy Corp. in June of 1993 and became PalWeb Corporation in April of
1999. Unless otherwise noted, all references to PalWeb include PalWeb's wholly
owned subsidiaries.

           From April 1993 to December 1997, PalWeb was engaged in various
businesses, including the business of exploration, production and development of
oil and gas properties in the continental United States and the operation of
related service businesses. In December 1997, PalWeb acquired all of the issued
and outstanding stock of Plastic Pallet Production, Inc. or "PPP," a Texas
corporation, in exchange for a majority of the issued and outstanding stock of
PalWeb. Pursuant to the terms of the reverse acquisition contract, all of the
assets, contract rights, and liabilities of PalWeb that related in any way to
the oil and gas business were transferred to The Union Group, Inc., a Nevada
corporation (the "Union Group"). In November 1998, PalWeb distributed all of the
issued and outstanding stock of the Union Group to its stockholders (other than
the former shareholders of Plastic Pallet Production, Inc.).

           Since the acquisition of PPP, PalWeb's primary business is (i)
manufacturing and selling plastic pallets, and (ii) the custom design,
manufacture and sale of large plastic injection molding machines and systems.
PalWeb is currently a development stage company. As of May 31, 2001, PalWeb has
not sold any plastic injection molding machines and sales of plastic pallets
have been limited.

           In October 1998, PalWeb entered into an agreement for sale of a
plastic injection molding machine with Pace Plastic Pallets, Inc. ("Pace") that
was intended to provide for the sale of specified machinery to Pace to permit
Pace to manufacture pallets for sale to PalWeb for further distribution by
PalWeb under patent licenses granted by PalWeb to Pace. In exchange for Pace's
agreement to purchase the machinery and make an earnest money deposit of
$300,000, 10 million shares of PalWeb were transferred by the former Chairman of
the Board and President of PalWeb, Michael John, to Pace. At the time of this
transaction, Pace was principally owned by Paul Kruger; however, neither Paul
Kruger nor any of his related entities, including Pace, were affiliated with or
related to PalWeb or any of its subsidiaries. The terms of this transaction were
entered into on an arm's length negotiated basis.

           PalWeb encountered difficulties in connection with the manufacturing
of the machinery required by this agreement due to the absence of available
funding and other reasons. As a result, in January 1999, PalWeb entered into a
consulting agreement with Paceco Financial Services, Inc. ("PFS"), an entity
owned by Mr. Kruger, in which PFS provided $189,000 in cash and comprehensive
management assistance to PalWeb in exchange for the issuance of 41 million

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shares of PalWeb Common Stock. PalWeb recorded an expense of $4.1 million in
connection with this transaction, which was equal to the estimated fair value of
the shares issued at that time. At the time of this transaction, Mr. Kruger was
not affiliated with PalWeb. This was an arm's length negotiated transaction
entered into between PFS and the former management of PalWeb. This transaction
was negotiated at a time when PalWeb was in serious financial difficulty. The
services performed included strategic planning, marketing, general consulting
and management services, including recovery of shares issued to other parties in
transactions potentially detrimental to PalWeb. The number of shares issued in
this transaction is roughly equal to the number of shares owned by Wolfgang
Ullrich and Rosarin Chaisayan, which were recovered by PalWeb.

           On July 9, 1999, Paul Kruger became Chairman of PalWeb. Subsequent to
that date, Mr. Kruger has been actively involved in the day to day management of
PalWeb in order to further its business plan. Also subsequent to that date
through May 31, 2001, Mr. Kruger or his affiliated entities have provided
approximately $2.48 million in funding for the operation of PalWeb in the form
of $1,187,479 in stock purchases, $947,000 in cash advances, and $350,021 in
consulting services. The cash advances have been made pursuant to various notes
with face amounts aggregating a total of $1,150,000, which are secured by
substantially all of the assets of PalWeb, including equipment, furniture,
fixtures, inventory, accounts receivables and patents. For more information on
these notes, see "Liquidity and Capital Resources" under Item 6 of this Form
10-KSB.

           Subsequent to becoming more active in management, Mr. Kruger
discovered various transactions and agreements that had been entered into with
various parties by prior management that were detrimental to PalWeb. Under Mr.
Kruger's guidance, PalWeb initiated litigation against these parties and
recovered approximately 55 million shares of PalWeb's common stock.

ACQUISITION OF PACECO FINANCIAL

           On April 3, 2000, PalWeb acquired Paceco Financial Services, Inc.
("PFS") by means of a merger of PFS's parent company, Pace Holding, Inc., into a
wholly owned subsidiary of PalWeb, PP Financial, Inc. In the acquisition, PalWeb
issued 50 million shares of its Common Stock in exchange for all the outstanding
stock of Pace Holding and PFS became an indirect wholly owned subsidiary of
PalWeb. All of the outstanding stock of Pace Holding was owned by Paul Kruger,
the Chairman and Chief Executive Officer of PalWeb. PFS, in addition to its
other assets, owned 43.5 million shares of PalWeb Common Stock, which by virtue
of the acquisition, were treated as treasury stock on PalWeb's records and,
accordingly, the acquisition resulted in the issuance of an additional 6.5
million shares of PalWeb Common Stock.

           The 50 million shares of PalWeb's Common Stock that PalWeb exchanged
for all of the outstanding stock of Pace Holding was authorized and approved by
the directors of PalWeb other than Mr. Kruger, Mark R. Kidd and Lyle W. Miller.
The 6.5 million incremental shares of PalWeb's Common Stock that were issued in
the acquisition of Pace Holding represented the value attributable to Paceco's
business, other than the ownership of PalWeb Common Stock.

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           PFS has been in business since 1952 and is engaged in the business of
making consumer and small business loans primarily in Oklahoma and is regulated
as an "investment certificate issuer" by the Oklahoma Department of Securities
("ODS"). PalWeb acquired PFS with the intent of using PFS to finance large
purchases of pallets. However, PFS encountered regulatory difficulties with the
ODS as described in "Investigation of PFS by the Oklahoma Department Securities"
at the end of this Item 1. As a result of these difficulties, PFS has not
engaged in any pallet financing activities as of May 31, 2001.

CURRENT BUSINESS
----------------

           PalWeb's principal subsidiary, Plastic Pallet Production, Inc. or
"PPP," is the entity through which PalWeb conducts its business of selling
plastic pallets and plastic injection molding machines. As of May 31, 2001,
PalWeb has not sold any plastic injection molding machines and the sales of
plastic pallets have been limited. PalWeb holds two patents that PalWeb
considers material to its business: a patent for the original design of a
materials handling plastic pallet, and a patent on a plastic injection molding
machine used to produce such pallets.

           PalWeb's plastic pallets are much more durable and sanitary than
traditional wood pallets. At PalWeb's request, its plastic pallet design has
been subjected to standard industry tests known as ASTM (American Society for
Testing and Materials) Standard D 1185-98a (a strength test) and D 4728-91 (a
vibration test), which were conducted by Container Technologies Laboratory, Inc.
("Container Technologies"), Lenexa, Kansas, a nationally recognized independent
testing facility. Container Technologies is certified as a Performance Oriented
Packaging (POP) Laboratory by the U.S. Department of Transportation. Container
Technologies is also an International Safe Transit Association (ISTA) Qualified
Test Laboratory and a National Motor Freight Classification (NMFC) Association
Certified Laboratory. Container Technologies certified PalWeb's plastic pallet
as having passed the above referenced tests. The testing procedures found the
pallet to be stronger and more versatile than the typical hardwood pallet.

           At PalWeb's request, its plastic pallets were also tested by The
Center for Unit Load Design of the Virginia Polytechnic Institute & State
University ("Virginia Tech"). The Center for Unit Load Design is an outgrowth of
Virginia Tech's William H. Sardo Jr. Pallet and Container Research Laboratory
(the "Sardo Laboratory"), which is the only research facility in the United
States that performs comprehensive research and development work, provides
technical assistance, and offers educational programs focusing exclusively on
pallets and containers, as well as the materials and fasteners with which the
pallets and containers are assembled. The goal of the Sardo Laboratory is to
provide leadership in conducting research, technical assistance, and continuing
education programs directly applicable to the pallet and container industries
and their clients. The Center for Unit Load Design expands the Sardo
Laboratory's research into the field of design and evaluation of all elements of
materials handling systems. PalWeb's pallets successfully passed tests using The
Center for Unit Load Design's FasTrack handling protocol for forklift, pallet
jack, racking and stacking under a 1,500-pound load, which further demonstrates
the strength and durability of PalWeb's pallets.

                                        6
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           PalWeb has conducted preliminary tests at the facilities of SGS US
Testing Company, Inc. on the fire retardency of the plastic formula used in its
pallets and has experienced favorable results. PalWeb anticipates that it will
schedule a UL Lab testing (UL 2335 Classification Flammability of Plastic
Pallets) prior to the quarter ending November 30, 2001.

           PalWeb has fabricated an operational prototype plastic injection
molding system. PalWeb is continually modifying and improving its equipment.
PalWeb began utilizing the prototype equipment by running a 10 hour shift 4 days
per week. As of August 24, 2000, PalWeb increased production by adding a second
shift. Two shifts utilizing the current equipment 5 days per week can produce
approximately 1,232 rackable and 196 floor pallets per month. As of June 1,
2001, PalWeb has sold 2,438 pallets and has approximately 2,000 rackable and
1,800 floor (non-rackable) pallets in inventory. With the addition of
approximately two more shifts, PalWeb anticipates that production will increase
to approximately 4,000 pallets per month. PalWeb expects to reach this
production level if and when PalWeb secures the orders necessary to justify such
production level. 4,000 pallets per month is the maximum capacity of PalWeb's
research/prototype plastic injection molding system.

           PalWeb is currently exploring methods to raise funds through various
means including, but not limited to, the private placement of equity securities,
private loans, commercial loans or technology licensing arrangements. Any loans
to PalWeb will likely be required to be secured and guaranteed by Paul Kruger.
PalWeb is dependent upon Mr. Kruger to provide and/or secure additional debt
financing. Mr. Kruger has no obligation to provide additional debt financing to
PalWeb or secure such financing on PalWeb's behalf and there is no assurance
that Mr. Kruger will do so. PalWeb plans to use future funding to continue to
build a fully functional plastic injection molding system comprised of multiple
plastic injection molding machines with integrated material feed lines. If
successful, the addition of these machines will permit PalWeb to expand its
production of pallets. Should PalWeb successfully increase its production
levels, it will need to employ additional production and supervisory employees,
as described in this section.

            In the past three years, approximately $2.5 million has been spent
on the development of PalWeb's business by designing plastic pallets and
building prototypes of the plastic injection molding machines that will be
manufactured by PalWeb for its own use in manufacturing plastic pallets and for
resale to industrial users of plastic injection molding systems. As of August
10, 2001, approximately $1.5 million has been spent and approximately $3.75
million worth of parts and materials have been ordered in connection with
building a line of fully functional plastic injection molding machinery. PalWeb
expects that its first line of fully functional plastic injection molding
machinery, which will have a production capicity of approximately 40,000 pallets
per month, will be in operation during the third quarter of fiscal year 2002.

           Carving a niche in an industry as competitive as the pallet business
will require more than just capital and equipment. PalWeb's future success will
depend in large part on the strategic planning of its management. PalWeb has
received very strong indications of interest from a number of extremely large
users of pallets now that the material handling pallet has been successfully
tested under applicable industry standards. This has substantially increased the
level of interest and has greatly increased the viability of PalWeb's pallet
being a large volume seller.

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However, there is no assurance that PalWeb will be successful in marketing the
pallets commercially.

           The principal raw materials used in manufacturing PalWeb's plastic
pallets are in abundant supply, and some of these materials may be obtained from
recycled plastic containers. At the present time, these materials are being
purchased from local suppliers and the supply is readily available.

PALLET INDUSTRY

           According to the U. S. Forest Service, as printed in the National
Wooden Pallet and Container Association publication, approximately 400 million
new wood pallets are purchased in the United States each year, and some research
sources estimate that even more than 400 million new pallets are purchased each
year. At an overall average selling price of $9/pallet, the pallet manufacturing
and sales business is approximately a $4 billion industry. It is estimated that
the United States wood pallet industry is served by approximately 3,600
companies, most of which are small, privately held firms that operate in only
one location. The industry is generally comprised of companies that manufacture
new pallets or repair and recycle pallets. New pallet manufacturing generates
about 60%-65% of the industry's revenues. The U.S. Forest Service estimates that
approximately 1.9 billion wood pallets are in circulation in the United States
today and that roughly 400 million of the wood pallets currently in circulation
were newly manufactured. On an annual basis, approximately 175 million wood
pallets are recycled through a process of retrieval, repair, re-manufacturing
and secondary marketing, approximately 225 million are sent to landfills, and
approximately 100 million are burned, lost, abandoned or leave the country.

           Within the last few years, concerns regarding infestation have arisen
in the wood pallet industry. For instance, according to Virginia Tech's Center
for Unit Loan Design Center Tech Note No. 1 dated November 11, 1998, the Asian
Longhorn Beetle ("ALB"), a devastating wood boring pest native to China and
other Asian countries, has invaded hardwood trees in New York City and Chicago.
The ALB outbreaks have been traced to solid wood packaging materials ("SWPM"),
including wood pallets imported from China. As a result, the USDA Animal and
Plant Health Inspection Service has proposed certain interim rules, which
include upgrading treatment procedures for SWPM. These treatments are estimated
to increase the cost of SWPM by at least 10%, and some treatments will double
the price of SWPM.

           Pallets are used in virtually all United States industries in which
products are broadly distributed, including, but not limited to, the automotive,
chemical, consumer products, grocery, produce and food production, paper and
forest products, retailing and steel and metals industries. Forklifts, pallet
trucks and pallet jacks are used to move loaded pallets, reducing the need for
costly hand loading and unloading at distribution centers and warehouses.

           Pallets come in a wide range of shapes and sizes. However, the
grocery industry, which accounts for about one-third of the demand for new
pallets, uses a standard 40 inch by 48 inch pallet and this has become the
standard pallet size in most industries in the United States. Some

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industries, however, have developed specialized pallet sizes. PalWeb's pallet is
40 inches by 48 inches in size.

           Block edge, rackable pallets are heavy duty pallets with 9 blocks
between the pallet decks, to allow true four-way entry by forklifts, pallet
trucks and pallet jacks. Block edge, rackable pallets are often used to
transport goods from manufacturers to distribution centers.

           Nestable pallets have "feet" on them so that they can be easily
stacked. Nestable pallets are often used to transport goods between distribution
centers and retail stores.

           Until very recently, plastic pallets had not penetrated the market
significantly, due in part to their cost. Heavy duty plastic pallets cost
$46-$100, heavy duty wood pallets typically cost approximately $26, and less
sturdy wood pallets typically cost $8-$11. As stated in an article in the July
1996 issue of Material Handling Engineering, wood pallets have an estimated
useful life of 7-10 trips before repair or recycling is required. A trip, or
cycle, is defined as the movement of a pallet under a load from a manufacturer
to a distributor (or from a distributor to a retailer) and the movement of the
empty pallet back to the manufacturer. Heavy duty plastic pallets, as currently
manufactured, have a useful life of 60 or more trips, on average.

           According to a survey by the National Wooden Pallet and Container
Association and Cahners, approximately 4% of the total pallet purchases in 1999
were plastic pallets while approximately 91% were wood pallets. However, the
trend that appears to be emerging is a switch from wood to plastic, with the
only limiting factor being price. As stated in the April 2001 issue of Pallet
Enterprise magazine, one estimate projected that plastic pallet usage will reach
about 20 million units in 2001, up from only 3 to 4 million in 1995. Therefore,
PalWeb will target both wood and plastic pallet users during its market
introduction phase.

           PalWeb intends to stay on the "cutting edge" of the market by
constantly conducting research on pallet design, plastic injection molding
system design and the materials used to make the plastic pallets.

EMPLOYEES

           As of July 1, 2001, PalWeb leases ten full time employees from Accord
Human Resources, Inc., an independent employee leasing company. PalWeb decided
to lease its employees because, considering the small number of employees
currently required by PalWeb's level of operations, it is more cost effective
than hiring its own employees.

           If PalWeb increases production levels to 4,000 pallets per month, it
will need to employ a total of eleven to thirteen production employees and three
to four supervisory/staff employees. Should PalWeb successfully increase its
production levels to 50,000 pallets per month, it will need to employ a total of
twenty to thirty production employees and five to seven supervisory/staff
employees. If PalWeb successfully increases its production levels to 100,000
pallets per month, it will need to employ a total of thirty-five to forty
production employees and ten to fifteen supervisory/staff employees.

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MARKETING

           PalWeb plans to distribute its pallets and its plastic injection
molding systems through a combination of a network of independent contractor
distributors and sales by PalWeb officers and employees. PalWeb believes that
PalWeb's patents on its plastic pallet designs and its plastic injection molding
machines, along with appropriate pricing of its products, should give PalWeb a
sales advantage with respect to its competition. PalWeb hopes to gain product
acceptance by marketing the concept that the widespread use of plastic pallets
could greatly reduce the destruction of trees on a worldwide basis.

             As of February 28, 2001, PalWeb had begun building a sales team by
engaging a full- time sales agent who will be paid a set amount per month for a
period of approximately six months, at which time the sales agent will be paid
commissions only. Also since February 28, 2001, PalWeb began advertising in
Pallet Enterprise and Materials Handling Management, and PalWeb's Vice President
of Marketing, Lyle Miller, has begun setting up a system of materials handling
distributors at various locations throughout the world, which PalWeb anticipates
will have a positive impact on sales. PalWeb's marketing efforts have also
generated several leads with customers who are considering sizable orders of
pallets. There is no assurance that PalWeb will secure any sizable orders of
pallets or, if it does, that PalWeb will be able to manufacture the pallets
necessary to fill such orders.

PATENTS

           PPP currently holds the following patents, which are material to its
business:

           1.        Materials Handling Plastic Pallet
                     Application No. 09/421,766
                     Filing Date: October 19, 1999
                     U.S. Patent No. 6,109,190 issued on August 29, 2000
                     Expiration Date: August 28, 2017

           2.        Multiple Mold Workstation with Single Injection Feeder and
                     Hydraulic Pumping Station
                     Application No. 09/346,165
                     Filing Date: July 1, 1999
                     U.S. Patent No. 6,241,508 B1 issued on June 5, 2001
                     Expiration Date: June 4, 2018


           The first patent is for a new concept in the construction of
materials handling plastic pallets. These pallets are lighter, stronger and more
durable than traditional wood pallets and have a unique two-part interlocking
system.

           The second patent is for a new concept in the construction of plastic
injection molding machines. These machines are approximately 20% to 30% of the
length of a traditional style plastic injection molding machine, use
approximately one-third of the electricity used by a

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traditional style machine, use approximately 10% of the oil (circulated) used by
a traditional style machine, and can be profitably sold to the end user at a
cost that is substantially less than the cost of a traditional style machine.
However, it must be noted that there is no assurance that PalWeb will be able to
sell any of the newly designed plastic injection molding machines.

           PPP's pallets and plastic injection molding machines have a broad
spectrum of possible applications. As a result, it is not foreseen that sales
will be dependent on one or a few major customers.

SUBSIDIARIES

           PalWeb has two wholly owned subsidiaries and one indirect wholly
owned subsidiary. A list of PalWeb's subsidiaries is set forth below:

                     Plastic Pallet Production, Inc., a Texas corporation;

                     PP Financial, Inc., a Texas corporation;

                     Paceco Financial Services, Inc., an Oklahoma corporation
                     and a wholly owned subsidiary of PP Financial, Inc.

INVESTIGATION OF PFS BY THE OKLAHOMA DEPARTMENT OF SECURITIES

           In connection with an examination of PFS in March 1999, the Oklahoma
Department of Securities determined that certain of PFS's activities, including
the ownership of real estate and the ownership of equity securities, did not
comply with the provisions of the Oklahoma Securities Act relating to the
permissible activities of investment certificate issuers. PFS sent a Notice to
Depositors of Paceco Financial Services, Inc. dated October 10, 2000 (the
"Initial Notice") stating that, at current market values, the net assets of PFS
were inadequate to redeem 100% of the depositors' passbook savings accounts and
time certificates (collectively referred to herein as "Deposits") as they come
due. Effective October 5, 2000, PFS exercised its right to suspend redemptions
of time certificates and withdrawals of passbook savings accounts and ceased
accepting any Deposits.

           PFS  sent a Supplemental Notice to Investment Certificate Holders of
Paceco Financial Services, Inc. dated November 3, 2000 (the "First Supplemental
Notice") and a Second Supplemental Notice to Investment Certificate Holders of
Paceco Financial Services, Inc. dated December 20, 2000, (the "Second
Supplemental Notice") stating that PFS had amended its plan for redeeming PFS's
outstanding Deposits as described in the earlier notices. The Initial Notice,
the First Supplemental Notice, and the Second Supplemental Notice constitute the
plan for redeeming the Deposits and are referred to herein as the "Plan."

           In general, as a result of a negotiated arrangement with the ODS, the
Plan provides a method for redeeming the outstanding Deposits through the
transfer of 43,500,000 shares of PalWeb common stock owned by PFS ("PFS Shares")
to an independent trustee and the sale of

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the PalWeb Shares by the trustee on or before December 31, 2004 either through
open market or private sales or by exercise of an option to put the shares to
Paul Kruger, the Company's chairman, Chief Executive Officer and principal
shareholder, with the net sales proceeds being used to redeem the Deposits.
Pursuant to that certain Put Agreement by and between Paul A. Kruger, Bill J.
English as Trustee and Paceco Financial Services, Inc. dated December 20, 2000,
the percentage of PFS shares to be purchased by Mr. Kruger shall be the
difference between the amounts payable to Deposit holders each year (20% of
account balances outstanding on December 1, 2000; 25% of account balances
outstanding on January 1, 2001; 33 1/3% of account balances outstanding on
January 1, 2002; 50% of account balances outstanding on January 1, 2003; and
100% of account balances outstanding on January 1, 2004, or such other amount as
shall cause the account balances to equal zero at December 31, 2004) and the
amount distributed to Deposit holders each year from sources other than the put,
as a percentage of the outstanding balances. Mr. Kruger's obligations with
regard to the puts are released in the event that any litigation is filed
against Mr. Kruger, PFS, PalWeb or any other affiliates of PFS in connection
with the passbook accounts or time certificates of PFS.

           In December 2000, PFS sold its real estate holdings to Onward,
L.L.C., a company 100% owned by Mr. Kruger, at appraised value and the proceeds
were distributed to Deposit holders in accordance with the Plan. As of May 31,
2001, PFS had approximately $5.1 million in Deposits outstanding, and it has not
been necessary to exercise any of the puts in connection with repaying the
Deposit holders in accordance with the Plan.

           PalWeb has not entered into any conditions, commitments or
requirements with the Oklahoma Securities Department that would require it to
fund or otherwise be financially responsible for the liabilities of PFS.
However, if PFS is unable to make payment to investment certificate holders as
described above, it is possible that holders of investment certificates may
assert claims against PalWeb that it is liable for the liabilities of PFS under
legal theories relating to piercing the corporate veil or otherwise. In such
event, PalWeb might incur additional costs to contest such claims and could
ultimately be found to be liable. The effect of any such claims being made
against PalWeb could also have an adverse effect on the value of PalWeb's common
stock and make it even more difficult for PFS to fund the repayment of its
investment certificate liability from liquidation of the PalWeb common stock
owned by it. Accordingly, PalWeb may be adversely affected if PFS is unable to
meet its obligations. However, the Company believes it is unlikely that PalWeb
will be sued in connection with PFS's Deposits because such litigation would
invalidate the puts described above.

ITEM 2.    DESCRIPTION OF PROPERTY

           PalWeb currently leases approximately five acres of land in an
industrial area of Dallas, Texas that is improved with 119,000 square feet of
manufacturing and warehouse space, and approximately 6,500 square feet of office
space. PalWeb leases this land from Onward, L.L.C., a an entity 100% owned by
Paul A Kruger, under a lease agreement that expires on April 30, 2002. Under the
terms of the lease agreement, PalWeb has the option to extend the Lease for four
additional terms of one year each. The lease agreement was approved by the Board
of Directors of PalWeb, other than Mr. Kruger.

           PalWeb has sufficient office equipment, such as computers, printers,
copiers, etc., to operate effectively. PalWeb has six computer stations, five
printers, and two copy machines in good working order.

            Except for the electrical service, the warehouse/manufacturing
facility is sufficiently equipped and designed to accommodate the manufacturing
of plastic pallets and plastic injection molding systems. The ceilings are very
high, which will allow for the use of cranes, if needed. The warehouse currently
has four heavy duty cranes installed above the work areas, and is situated on an
operational railroad spur. PalWeb will have to incur costs of approximately

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$41,000 to upgrade the electrical wiring before the fully functional plastic
injection molding machine is completed and installed.

ITEM 3.    LEGAL PROCEEDINGS

           As of May 31, 2001, there was one material legal proceeding in which
PalWeb was involved.

           PALWEB CORPORATION, INC. AND PLASTIC PALLET PRODUCTION, INC.,
PLAINTIFFS V. VIMONTA AG, DEFENDANTS, Case no. 3-00CV1388-P, filed in the United
States District Court for the Northern District of Texas on June 26, 2000.

           Service was made on Vimonta on August 14, 2000. PalWeb and PPP allege
that Vimonta claims that it is entitled to exclusive rights in all of PalWeb's
technology and formulas for plastic pallet production in Europe, Asia, the
territories of the former USSR and South America; that it is entitled to
immediately receive all of the valuable patents and proprietary information of
PalWeb and PPP; that PalWeb and PPP must ship products to Vimonta at cost and
without profit or margins of any kind and that PalWeb and PPP's only rights are
to receive whatever benefits PalWeb derives from being a 20% shareholder of
Vimonta.

           Vimonta bases its claims on certain alleged agreements that were
purportedly signed by PalWeb's former Chief Executive Officer, Michael John.
PalWeb and PPP contend that the purported agreements upon which Vimonta relies
to assert its claims are vague and incomplete and do not contain the requisite
information to form a valid contract. PalWeb and PPP have requested declaratory
judgment determining that Vimonta has no enforceable rights to the patents,
technology and other proprietary information and that the alleged agreements are
unenforceable and void. In addition, PalWeb and PPP contend that Vimonta and
Michael John, PalWeb's former Chief Executive Officer, have acted in concert to
deprive PalWeb and PPP of their valuable rights by creating documents that
purport to be binding agreements but which are unclear, incomplete and full of
confusion and which purport to convey valuable rights to Vimonta without
consideration. As a result, PalWeb and PPP have incurred damages in their
business and expenses due to these unfounded claims, which they seek to recover
from Vimonta.

           On September 25, 2000, Vimonta filed a Motion to Dismiss for Lack of
Personal Jurisdiction contending, INTER ALIA, that the agreements between
Vimonta and PalWeb were negotiated and signed in Europe and that no
representative of Vimonta came to the United States until April 2000, after the
dispute between Vimonta and PalWeb arose. PalWeb disputed the allegations
regarding the purported lack of personal jurisdiction and filed an objection to
the jurisdictional motion. The court denied the objection to personal
jurisdiction on May 17, 2001.

           Subsequently, on July 20, 2001, Vimonta's counsel of record in this
case sought and was granted leave by the court to withdraw. On July 25, 2001,
the court entered an order requiring Vimonta to obtain new counsel by August 23,
2001. The order provides that if Vimonta fails to do so, a default judgement
will be entered against Vimonta. As of August 27, 2001, PalWeb had not received
notice that Vimonta had obtained new counsel as required by the order.

                                       13
<PAGE>

           The following describes legal proceedings involving PalWeb that were
settled during the fiscal year ended May 31, 2001.

RALPH CURTON, JR. VS. PALWEB CORPORATION, CV 00-8683-C, filed in the County
Court at Law No. 3, Dallas County, Texas on July 27, 2000, and PALWEB
CORPORATION V. CRESCENT ROAD CORPORATION, CURTON CAPITAL CORPORATION AND
CONSOLIDATED CAPITAL CORPORATION, CV 01-1225-K, filed in the 192nd Judicial
District, District Court of Dallas County, Texas on February 15, 2001.

           As of May 31, 2001, PalWeb settled all litigation between PalWeb and
Ralph Curton, Jr., and certain of his affiliated entities. Under the terms of
the settlement, PalWeb paid Mr. Curton $300,000 in satisfaction of a $500,000
promissory note of PalWeb held by Mr. Curton. Funding for this settlement was
provided by a loan from Yorktown Management and Financial Services, L.L.C. of
which Warren Kruger, Paul Kruger's brother, is the principal shareholder.
Simultaneously, Mr. Curton and his affiliates agreed to surrender to PalWeb for
cancellation certificates representing 11 million shares of PalWeb's common
stock previously issued for consulting services that were not provided as
agreed. PalWeb dismissed a lawsuit filed by PalWeb against Mr. Curton and
certain related entities relating to these shares. PalWeb and Mr. Curton and
certain of his related entities executed mutual releases of all claims, bringing
to a conclusion all pending disputes between these parties; however, Mr. Curton
has yet to return 300,000 of the shares described above.

ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

           No matters were submitted to a vote of the security holders of
PalWeb, through solicitation of proxies or otherwise, during the fourth quarter
of the fiscal year covered by the report.

PART II

ITEM 5.    MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

MARKET INFORMATION:

           From August 1999 through October 6, 1999, PalWeb's Common Stock
traded on the National Association of Securities Dealers Automatic Quotation
(NASDAQ) over-the-counter bulletin board system ("OTCBB"), with "PAEB" as its
trading symbol from August 1999 through September 13, 1999 and "PAEBE" as its
trading symbol from September 13, 1999 through October 6, 1999. The following
table sets forth the range of high and low bid prices for PalWeb's Common Stock
during the time periods indicated. Prices, as reported by NASDAQ, reflect
quotations between dealers without adjustment for retail mark-up, mark-down or
commission and may not represent actual transactions.

                                       14
<PAGE>


        QUARTER ENDING                HIGH BID                  LOW BID
        --------------                --------                  -------
        Aug. 31, 1999                   0.27                     0.12
        Nov. 30, 1999(1)                0.175                    0.70

------------------------
(1) Information presented for the period ended November 30, 1999 is high and low
bid prices until PalWeb was de-listed from the NASDAQ over-the-counter bulletin
board system on October 6, 1999.

           On October 6, 1999, PalWeb's Common Stock was de-listed from the
OTCBB. From October 6, 1999 through February 1, 2001, PalWeb's common stock
traded on the NASDAQ over-the-counter pink sheet system, with "PAEB" as its
trading symbol. On February 2, 2001, PalWeb's common stock was re-listed on the
OTCBB. Since such time, PalWeb's common stock has traded on the OTCBB, with
"PAEB" as its trading symbol. The following table sets forth the range of high
and low prices at which PalWeb's common stock traded during the time periods
indicated, as reported by NASDAQ.


        QUARTER ENDING                      HIGH                        LOW
        --------------                      ----                        ---
        Nov. 30, 1999(1)                   $0.16                       $0.07
        Feb. 29, 2000                       0.25                        0.02
         May 31, 2000                       0.285                       0.06
        Aug. 31, 2000                       0.0825                      0.011
        Nov. 30, 2000                       0.023                       0.007
        Feb. 29, 2001                       0.075                       0.005
         May 31, 2001                       0.08                        0.02

------------------------
(1) Information presented for the period ended November 30, 1999 is high and low
prices from the date when PalWeb was de-listed from the OTCBB (October 6, 1999)
through the end of the quarter on November 30, 1999.

HOLDERS:

           As of July 18, 2001, PalWeb had approximately 1,272 common
stockholders of record.

DIVIDENDS:

           PalWeb paid no cash dividends to its common stockholders during the
last two fiscal years and does not plan to pay any cash dividends in the near
future.

RECENT SALES OF UNREGISTERED SECURITIES:

                                       15
<PAGE>

           During the fiscal year ended May 31, 2001, PalWeb issued certain
promissory notes to Hildalgo Trading Company, L.C. with face amounts aggregating
$1,150,000 pursuant to which PalWeb had been loaned $947,200 as of May 31, 2001
and Yorktown Management and Financial Services, L.L.C. with face amonts
aggregating $3,000,000 pursuant to which PalWeb had been loaned $1,536,559 as of
May 31, 2001. For more information on these notes, please see "Liquidity and
Capital Resources" under Item 6 and "History" under Item 1 of this Form 10-KSB.

           In June 2000, PalWeb issued 250,000 shares of its common stock in a
no-sale transaction upon the conversion of 250,000 shares of preferred stock.

           PalWeb relied on the exemption set forth in Section 4(2) of the
Securities Act of 1933, as amended, in connection with the issuances of the
notes set forth above. All parties listed above are sophisticated persons or
entities. There was no underwriting and no commissions were paid to any party
upon the issuance of such notes.

ITEM 6.    MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
----------------------------------------------------------

           This annual report on Form 10-KSB contains "forward-looking"
statements regarding potential future events and developments affecting the
business of PalWeb. Such statements relate to, among other things: future
operations of PalWeb, the development of distribution channels and product sales
and the introduction of new products into the market. Forward- looking
statements may be indicated by the words "expects," "estimates," "anticipates,"
"intends," "predicts," "believes," or other similar expressions. Forward-looking
statements appear in a number of places in this Form 10-KSB and may address the
intent, belief, or current expectations of PalWeb and its Board of Directors and
management with respect to PalWeb and its business. The forward-looking
statements are subject to various risks and uncertainties described in this Form
10-KSB. For these reasons, PalWeb's actual results may vary materially from the
forward-looking statements.

RISK FACTORS
------------

PALWEB IS A DEVELOPMENT STAGE COMPANY AND MAY NOT ACHIEVE PROFITABILITY.

           PalWeb was incorporated on February 24, 1969. From April 1993 to
December 1997, PalWeb was primarily engaged in various businesses, including the
business of exploration, production, and development of oil and gas properties
in the continental United States and the operation of related service business.
In December 1997, PalWeb acquired all of the issued and outstanding stock of
Plastic Pallet Production, Inc. and its principal business changed to selling
plastic pallets and plastic injection molding machines. As of May 31, 2001,
PalWeb was using a prototype plastic injection molding machine to produce
plastic pallets. PalWeb is in the process of building a fully operational
plastic injection molding machine. PalWeb is in the development stage, it has
incurred significant losses from operations and there is no assurance that it
will achieve profitability or obtain funds to finance continued operations.

                                       16
<PAGE>

PALWEB HAS LIMITED EXPERIENCE IN MANUFACTURING AND MARKETING.

           PalWeb's business strategy relies primarily on its success in
manufacturing and marketing, an area in which PalWeb has limited experience. The
success of its business strategy should be considered in light of the risks,
expenses and difficulties frequently encountered in entering into industries
characterized by intense competition. There can be no assurance that PalWeb will
be able to manufacture or market its products or proposed products, maintain or
expand its market share or achieve commercial revenues from its products or
proposed products in the future. In addition, certain aspects of PalWeb's
business strategy can only be implemented if PalWeb successfully secures
additional capital. Some of the foregoing factors are not within PalWeb's
control, and there can be no assurance that PalWeb will be able to implement its
business strategy, or that PalWeb's business strategy will result in
profitability.

PALWEB'S BUSINESS COULD BE AFFECTED BY CHANGES IN AVAILABILITY OF RAW MATERIALS.

           PalWeb uses a proprietary mix of raw materials to produce its plastic
pallets. Such raw materials are generally readily available and some may be
obtained from recycled plastic containers. At the present time, these materials
are being purchased from local suppliers. The availability of PalWeb's raw
materials could change at any time for various reasons. For example, the market
demand for PalWeb's raw materials could suddenly increase or the rate at which
plastic materials are recycled could decrease, affecting both availability and
price. Additionally, the laws and regulations governing the production of
plastics and the recycling of plastic containers could change and, as a result,
affect the supply of PalWeb's raw materials. Any interruption in the supply of
raw materials or components could have a material adverse effect on PalWeb.
Furthermore, certain potential alternative suppliers may have pre-existing
exclusive relationships with competitors of PalWeb and others that may preclude
PalWeb from obtaining its raw materials from such suppliers.

THE MARKET MAY NOT ACCEPT PALWEB'S PRODUCTS.

           Any unexpected developmental, regulatory or manufacturing problems
could delay the commercialization of PalWeb's proposed products and may have a
material adverse effect on PalWeb and its prospects. In addition, the market
acceptance of any of PalWeb's plastic pallets will be substantially dependent on
the ability of PalWeb to demonstrate to the business community the capabilities
and benefits of PalWeb's plastic pallets as well as to sell commercial
quantities of the plastic pallets at acceptable prices. There can be no
assurance that PalWeb will be able to gain market acceptance for its plastic
pallets.

PALWEB MAY NOT BE ABLE TO SECURE ADDITIONAL FINANCING NECESSARY TO SUSTAIN AND
GROW ITS OPERATIONS.

           PalWeb's financial statements have been qualified on a going concern
basis principally due to lack of long term financing to achieve its goal of
producing and marketing plastic pallets to compete with wood pallets. PalWeb has
funded its operations to date primarily through equity and debt financings.
PalWeb may need additional debt or capital in order to begin generating a

                                       17
<PAGE>

sufficient cash flow to sustain operations for the foreseeable future. PalWeb
will need to raise substantial additional funds to continue to fund operating
expenses or its expansion strategy. There can be no assurance that additional
financing will be available, or, if available, that such financing will be on
terms favorable to PalWeb. Failure to obtain such additional financing would
have a material adverse effect on PalWeb.

PALWEB'S BUSINESS COULD BE AFFECTED BY COMPETITION AND RAPID TECHNOLOGICAL
CHANGE.

           PalWeb currently faces competition from many companies that produce
wooden pallets at prices that are substantially lower than the prices PalWeb
charges for its plastic pallets. It is anticipated that the plastic pallet
industry will be subject to intense competition and rapid technological change.
PalWeb could potentially face competition from recycling and plastics companies,
many of which have substantially greater financial and other resources than
PalWeb and, therefore, are able to spend more than PalWeb in areas such as
product development, manufacturing and marketing. Although a company with
greater resources will not necessarily be able to bring a new product to market
before its smaller competitors, substantial resources enable a company to
support many new products simultaneously, thereby improving the likelihood of at
least some of its new products being among the first to make it to market.
PalWeb's revenues and profitability could be adversely affected by technological
change. Competitors may develop products that render PalWeb's products or
proposed products uneconomical or result in products being commercialized that
may be superior to PalWeb's products. In addition, alternatives to plastic
pallets could be developed, which would have a material adverse effect on
PalWeb.

PALWEB MAY NOT BE ABLE TO EFFECTIVELY PROTECT ITS PATENTS AND PROPRIETARY
RIGHTS.

           PalWeb relies on a combination of patents and trade secrets to
protect its proprietary technology, rights and know-how. There can be no
assurance that such patent rights will not be infringed upon, that PalWeb's
trade secrets will not otherwise become known to or independently developed by
competitors, that non-disclosure agreements will not be breached, or that PalWeb
would have adequate remedies for any such infringement or breach. Litigation may
be necessary to enforce proprietary rights of PalWeb or to defend PalWeb against
third-party claims of infringement. Such litigation could result in substantial
cost to, and a diversion of effort by, PalWeb and its management and may have a
material adverse effect on PalWeb. PalWeb's success and potential competitive
advantage is dependent upon its ability to exploit the technology under these
patents. There can be no assurance that PalWeb will be able to exploit the
technology covered by these patents or that it will be able to do so
exclusively.

           Although PalWeb is not aware of any claim against it for
infringement, there can be no assurances that parties will not bring claims
against PalWeb for infringement in the future. PalWeb's ability to commercialize
its products and proposed products depends, in part, on its ability to avoid
claims for infringement brought by other parties. Laws regarding the

                                       18
<PAGE>

enforceability of intellectual property vary from jurisdiction to jurisdiction.
There can be no assurance that intellectual property issues will be uniformly
resolved, or that local laws will provide PalWeb with consistent rights and
benefits. In addition, there can be no assurance that competitors will not be
issued patents that may prevent the manufacturing or marketing of PalWeb's
products or proposed products.

PALWEB'S BUSINESS COULD BE AFFECTED BY NEW LEGISLATION REGARDING ENVIRONMENTAL
MATTERS.

           The business operations of PalWeb are subject to extensive and
changing federal, state and local environmental laws and regulations pertaining
to the discharge of materials into the environment, the handling and disposition
of wastes (including solid and hazardous wastes) or otherwise relating to the
protection of the environment. As is the case with manufacturers in general, if
a release of hazardous substances occurs on or from PalWeb's properties or any
associated off-site disposal location, or if contamination from prior activities
is discovered at any of PalWeb's properties, PalWeb may be held liable. No
assurances can be given that additional environmental issues will not require
future expenditures.

           Both the plastics industry, in general, and PalWeb are subject to
existing and potential federal, state, local and foreign legislation designed to
reduce solid wastes by requiring, among other things, plastics to be degradable
in landfills, minimum levels of recycled content, various recycling
requirements, disposal fees and limits on the use of plastic products. In
addition, various consumer and special interest groups have lobbied from time to
time for the implementation of these and other such similar measures. Although
PalWeb believes that the legislation promulgated to date and such initiatives to
date have not had a material adverse effect on PalWeb, there can be no assurance
that any such future legislative or regulatory efforts or future initiatives
would not have a material adverse effect on PalWeb.

PALWEB'S BUSINESS WILL BE SUBJECT TO POTENTIAL PRODUCT LIABILITY CLAIMS.

           The testing, manufacturing and marketing of PalWeb's products and
proposed products involve the inherent risks of product liability claims or
similar legal theories against PalWeb, some of which may cause PalWeb to incur
significant defense costs. Although PalWeb currently maintains product liability
insurance coverage that it believes is adequate, there can be no assurance that
the coverage limits of its insurance are adequate or that all such claims will
be covered by insurance. In addition, these policies generally must be renewed
every year. While PalWeb has been able to obtain product liability insurance in
the past, there can be no assurance it will be able to obtain insurance in the
future on its products or proposed products. Product liability insurance varies
in cost, is difficult to obtain and may not be available in the future on terms
acceptable to PalWeb, if at all. A successful product liability claim or other
judgment against PalWeb in excess of its insurance coverage could have a
material adverse effect upon PalWeb.

PALWEB CURRENTLY DEPENDS ON CERTAIN KEY PERSONNEL.

                                       19
<PAGE>

           PalWeb is dependent on the experience, abilities and continued
services of its current management personnel. In particular, Mr. Kruger, its
Chairman of the Board and President, has played a significant role in the
development and management of PalWeb. The loss or reduction of services of Mr.
Kruger or any other key employee could have a material adverse effect on PalWeb.
There is no assurance that additional managerial assistance will not be
required.

PALWEB'S STOCK TRADES IN A LIMITED PUBLIC MARKET, IS SUBJECT TO PRICE VOLATILITY
AND THERE CAN BE NO ASSURANCE THAT AN ACTIVE TRADING MARKET WILL BE SUSTAINED.

           There has been a limited public trading market for PalWeb's Common
Stock and there can be no assurance that an active trading market will be
sustained. There can be no assurance that the Common Stock will trade at or
above any particular price in the public market, if at all. The trading price of
the Common Stock could be subject to significant fluctuations in response to
variations in quarterly operating results or even mild expressions of interest
on a given day. Accordingly, the Common Stock should be expected to experience
substantial price changes in short periods of time. Even if PalWeb is performing
according to its plan and there is no legitimate company-specific financial
basis for this volatility, it must still be expected that substantial percentage
price swings will occur in PalWeb's securities for the foreseeable future.

CERTAIN RESTRICTED SHARES OF PALWEB WILL BE ELIGIBLE FOR SALE IN THE FUTURE AND
CERTAIN SHARES OF FREE TRADING COMMON STOCK ARE HELD IN TRUST FOR THE BENEFIT OF
THE DEPOSIT HOLDERS OF ONE OF PALWEB'S INDIRECT WHOLLY OWNED SUBSIDIARIES AND
ARE LIKELY TO BE SOLD IN THE FUTURE, BOTH OF WHICH COULD AFFECT THE PREVAILING
MARKET PRICE OF PALWEB'S COMMON STOCK.

           Certain of the outstanding shares of Common Stock are "restricted
securities" under Rule 144 of the Securities Act, and (except for shares
purchased by "affiliates" of PalWeb as such term is defined in Rule 144) would
be eligible for sale as the applicable holding periods expire. In the future,
these shares may be sold only pursuant to a registration statement under the
Securities Act or an applicable exemption, including pursuant to Rule 144. Under
Rule 144, a person who has owned Common Stock for at least one year may, under
certain circumstances, sell within any three-month period a number of shares of
Common Stock that does not exceed the greater of 1% of the then outstanding
shares of Common Stock or the average weekly trading volume during the four
calendar weeks prior to such sale. A person who is not deemed to have been an
affiliate of PalWeb at any time during the three months preceding a sale, and
who has beneficially owned the restricted securities for the last two years is
entitled to sell all such shares without regard to the volume limitations,
current public information requirements, manner of sale provisions and notice
requirements. In addition, approximately 43,500,000 free trading shares are held
in trust for the benefit of the deposit holders of one of PalWeb's indirect
wholly owned subsidiaries and are likely to be sold in the future (for more
information on the circumstances surrounding these shares, see Item 1, Current
Business in this Form 10-KSB). Sales or the expectation of sales of a
substantial number of shares of Common Stock in the public market by selling
stockholders could adversely affect the prevailing market price of the Common
Stock, possibly having a depressive effect on any trading market for the Common
Stock, and may impair PalWeb's ability to raise capital at that time through
additional sale of its equity securities.

                                       20
<PAGE>

PALWEB DOES NOT EXPECT TO DECLARE OR PAY ANY DIVIDENDS IN THE FORESEEABLE
FUTURE.

           PalWeb has not declared or paid any dividends on its Common Stock.
PalWeb currently intends to retain future earnings to fund the development and
growth of its businesses, to repay indebtedness and for general corporate
purposes, and, therefore, does not anticipate paying any cash dividends in the
foreseeable future.

PALWEB'S COMMON STOCK MAY BE SUBJECT TO SECONDARY TRADING RESTRICTIONS RELATED
TO PENNY STOCKS.

           Certain transactions involving the purchase or sale of Common Stock
of PalWeb may be affected by a Securities and Exchange Commission rule for
"penny stocks" that imposes additional sales practice burdens and requirements
upon broker-dealers that purchase or sell such securities. For transactions
covered by this penny stock rule, broker-dealers must make certain disclosures
to purchasers prior to the purchase or sale. Consequently, the penny stock rule
may impede the ability of broker-dealers to purchase or sell PalWeb's securities
for their customers and the ability of persons now owning or subsequently
acquiring PalWeb's securities to resell such securities.

THE RESULTS OF PENDING LITIGATION AGAINST PALWEB MAY HAVE AN ADVERSE AFFECT ON
ITS FINANCIAL CONDITION OR BUSINESS PROSPECTS.

           PalWeb is a party to a pending legal proceeding that involves claims
or potential claims against PalWeb and if resolved unfavorably to PalWeb could
have an adverse affect on PalWeb's financial condition or other effects on
PalWeb. There is no assurance this proceeding will be resolved favorably.

RESULTS OF OPERATIONS
---------------------

GENERAL TO ALL PERIODS

           PalWeb is in the development stage, it has incurred significant
losses from operations and there is no assurance that it will achieve
profitability or obtain funds to finance continued operations.

           PalWeb's primary business is the manufacturing and selling of plastic
pallets referred herein as manufacturing. It also indirectly owns a subsidiary
finance company, Paceco Financial Services, Inc. ("PFS"), acquired in April
2000, which was previously engaged in consumer and small business lending and
real estate activities. As described below, the finance activities have been
curtailed until PFS is able to repay outstanding investment certificate
liabilities and in December 2000, the real estate activities were discontinued.

           As of May 31, 2001, production of plastic pallets utilizing prototype
production equipment is approximately 800 pallets per month and the current
production capacity of the prototype machine is approximately 4,000 pallets per
month. The recent hiring of two additional

                                       21
<PAGE>

employees will enable PalWeb to increase production to approximately 2,000
pallets per month. Production levels of approximately 4,000 pallets per month
can be attained by adding approximately two more shifts. Based on current
demand, management anticipates that it will produce about 800 pallets per month
using existing personnel. Management will continue to increase production to
achieve capacity as it receives orders for pallets that justify higher
production levels. There is no assurance that the Company will receive orders
for pallets that justify any significant increase to the Company's current
production level.

           Sales for fiscal year 2002 using existing production equipment are
expected to total approximately 2,000 pallets per quarter. However, see
discussion under "Prospects for Future" regarding acquisition of a new
production line. Inventory levels at May 31, 2001 include approximately 1,800
stackable and 2,000 rackable pallets. As of May 31, 2001, PalWeb's sales team
consists of one full-time sales agent who will be paid a set amount per month
for a period of approximately three months, at which time the sales agent will
be paid commissions only. PalWeb's marketing efforts have generated several
leads with customers who are considering sizable orders of pallets. There is no
assurance that PalWeb will secure any sizable orders of pallets or, if it does,
that PalWeb will be able to manufacture the pallets necessary to fill such
orders.

           PalWeb has an EZ Pay Plan whereby certain qualified purchasers are
able to purchase pallets in quantities of 1,000 pallets or more by financing the
purchase of such pallets. Under the terms of the EZ Pay Plan, purchasers will
pay $19 down and make payments of $19 in each of two subsequent years. The total
sales price under the EZ Pay Plan of $57 factors in an interest rate of
approximately 12% per year. After paying for the pallets in full, the purchaser
may sell the pallets back to PalWeb for $19. PalWeb intends to resell these
pallets on a used basis with a markup or to recycle the pallets to defray the
cost of the raw materials of the pallets it later produces. As of May 31, 2001,
PalWeb has not sold any pallets through the EZ Pay Plan.

           For all periods presented, PalWeb's effective tax rate is 0%. PalWeb
has generated net operating losses since inception, which would normally reflect
a tax benefit in the statement of operations and a deferred asset on the balance
sheet. However, because of the current uncertainty as to PalWeb's ability to
achieve profitability, a valuation reserve has been established which offsets
the amount of any tax benefit available for each period presented in the
consolidated statement of operations.

           The consolidated statements include PalWeb Corporation and its
wholly-owned active subsidiaries Plastic Pallet Production, Inc. ("PPP") and
PFS. PPP represents the manufacturing segment of PalWeb and PFS represents the
financial segment.

           DISCONTINUED OPERATIONS

           In December, 2000, PFS sold its real estate operations at appraised
values to Onward, L.L.C., a company 100% owned by Mr. Paul Kruger, Chairman and
President of PalWeb. The sales price was approximately $1,352,000 in cash and
resulted in a gain of approximately $33,000. This sale was accomplished in
connection with the plan to redeem all of PFS's

                                       22
<PAGE>

investment certificates to enable PFS to fund a portion of the required payments
to depositors in 2000. See "Liquidity and Capital Resources." During the nine
month period ended February 28, 2001, the real estate segment had revenues of
$110,440 and a gain from disposition of assets of $31,099 for total income of
$73,838.

YEAR ENDED MAY 31, 2001 COMPARED TO YEAR ENDED MAY 31, 2000

           MANUFACTURING

           During fiscal year 2001, PalWeb sold approximately 900 rackable
pallets and 1,500 stackable pallets, generating revenues of $89,211. The
stackable pallet sells for about one-half of the rackable pallet. However, sales
revenues remained insufficient to cover material and operating costs. There were
sales of $14,013 and approximately 325 pallets for the comparable period in the
prior year.

           During 2001, research and development consists of $95,000 paid to an
independent laboratory. The expense is for the development of a patented formula
for fire retardation in plastic pallets.

           Salaries and benefits were $307,085 in 2001 compared to $357,226 in
2000 for a decrease of $50,141. This decrease is due to the resignation of the
former President of PPP and to capitalization of a portion labor costs to
inventory.

           The general and administrative expenses decreased $1,042,047 from
$1,949,987 in 2000 to $907,940 in 2001. This decrease is primarily due to
reduction of consulting costs which were $1,489,000 in 2000.

           Interest expense increased $111,629 from $188,822 in 2000 to $300,451
in 2001. The increase is due to the increase in notes payable to fund current
operations and deposits to purchase production equipment.

           During 2001, PalWeb recorded a gain on settlement of contracts and
liabilities in the amount of $1,541,783. This gain results from $1,275,000 for
cancellation of a consulting contract, $152,500 for settlement of notes payable
to Ralph Curton and $114,283 from settlement of certain accounts payable. In
2000, PalWeb entered into a consulting agreement with Crescent Road Corporation
and Consolidated Capital Group. The consultants received 11,000,000 shares of
common stock for their services valued at $1,100,000 plus a penalty of $175,000
for failure to provide tradeable common stock. During 2001, the contract was
terminated by mutual agreement, the common shares were returned and cancelled
except for 300,000 shares yet to be returned, and a release of all remaining
claims.

           The loss from the manufacturing segment in 2001 and 2000 was $184,066
and $2,634,225, respectively. The decrease from fiscal 2000 to 2001 of
$2,450,159 is primarily due to the reasons discussed above.

                                       23
<PAGE>

           FINANCE

           The finance segment was acquired April 3, 2000 and the operating
results for 2000 includes two months of operations. Accordingly, 2001 results of
operations are not comparable to 2000. The finance segment reported revenues of
$200,183 in 2001 and a net loss of $1,368,493. Interest expense on thrift
certificates was $319,381 in 2001. This loss resulted from, among other things,
noncash depreciation and amortization charges of $782,398 including an
additional charge of $426,980 to recognize impairment of goodwill and costs
associated with the closing of the Company's Duncan, Oklahoma facility.
Management also increased the allowance for doubtful accounts by $173,426.
PalWeb expects that the finance segment will continue to record losses until the
repayment of the outstanding thrift certificates.

           COMBINED

           PalWeb incurred net losses of $1,478,721, or $0.01 per share, and
$3,095,442, or $0.02 per share, for 2001 and 2000, respectively. The decrease in
the net loss of $1,616,721 resulted from the reasons described above.

LIQUIDITY AND CAPITAL RESOURCES
-------------------------------

           Currently, PalWeb's management projects that the sale of
approximately 4,000 pallets per month are necessary to break even. Sales at this
level will provide revenues of approximately $200,000 and will provide
sufficient cash flow to sustain manufacturing operations which includes cash
operating expenses for labor, recurring overhead, and interest of approximately
$100,000 per month and material costs of approximately 50% of sales or $100,000.
There is no assurance that this sales level will be achieved. Until sales reach
this level, PalWeb will remain dependent on outside sources of cash to fund its
operations as its sales revenues will be insufficient to meet current
liabilities.

           Due to its development stage status, PalWeb has had difficulty in
obtaining financing from third parties and PalWeb's attempts for bank financing
have all been contingent on personal guarantees from its Chairman, Chief
Executive Officer and principal shareholder, Mr. Paul Kruger. Accordingly, Mr.
Kruger has elected to provide financing direct from his affiliated entities and
has requested and received security equivalent to that which a bank would
require.

           As of May 31, 2001, Mr. Kruger's affiliated entities had loaned
PalWeb approximately $947,200, pursuant to various notes with face amounts
aggregating a total of $1,150,000. Mr. Kruger is not obligated to make further
advances under these notes. All of these notes are due on October 15, 2001 and
currently bear interest at the rate of 12% per year. Loans totaling $750,000
bore interest at 18% annually until December 1, 2000, when the rate was reduced
to 12%. The notes had accrued interest owing as of February 28, 2001 in the
amount of approximately $99,000 which had not been paid and is included in
accrued liabilities. These loans are secured by substantially all of the assets
of PalWeb and PPP, including equipment, furniture, fixtures, inventory, accounts
receivables and patents.

                                       24
<PAGE>

           Effective March 1, 2001, PalWeb entered into a $250,000 line of
credit with Yorktown Management and Financial Services, LLC, for a six month
term at 12% interest, of which all $250,000 is outstanding at May 31, 2001. An
additional line of credit was provided on April 1, 2001 by Yorktown in the
amount of $2,750,000, 12% interest and maturing October 15, 2001, of which
$1,536,559 was outstanding at May 31, 2001. Yorktown is an entity principally
owned by Mr. Kruger's brother, Warren Kruger. This line of credit is secured,
subordinate to the lien described above, by substantially all of the assets of
PalWeb and PPP, including equipment, furniture, fixtures, inventory, accounts
receivables and patents. PalWeb is using the proceeds principally for the
acquisition of a new production line of manufacturing equipment and to retire
the Curton note payable.

           On May 8, 2001, PalWeb announced that it had signed a letter of
intent for a private placement of 500,000 shares of convertible preferred stock
and warrants to purchase 150,000,000 shares of common stock for a total of
$5,500,000. The letter of intent is with Westgate Capital Company, L.L.C., a
Tulsa, Oklahoma based private investment group ("Westgate") and Hidalgo Trading
Company, LLC, which is 100% owned by the Company's Chief Executive Officer, Paul
Kruger. Of the total $5.5 million consideration, $1 million will be provided by
Hidalgo through conversion of existing secured indebtedness of PalWeb and $4.5
million will be provided in cash from an investment fund managed by Westgate.
One of the principals of Westgate is Warren Kruger, the bother of Paul Kruger.
Proceeds will be used to construct pallet production equipment, repay loans made
by Yorktown as described above, repay other current liabilities, and for working
capital. Under the terms of the proposed investment, each share of the
convertible preferred stock will be convertible into 350 shares of common stock
of the Company or a total of 175,000,000 shares, which is an effective
conversion price of $0.0286 per share. Holders of the preferred stock will also
be entitled to cumulative dividends of 12% per annum, $1.20 per share, or a
total of $600,000. The warrants will be exercisable at a price of $0.10 per
share for a period of four years and 25% of the warrants will be callable by
PalWeb if common stock trades at prices of $0.15, $0.20 and $0.25 per share,
respectively. Closing of the proposed investment is subject to Westgate
obtaining the necessary financing agreements and customary closing conditions
and is expected to occur in one or more tranches during the second quarter of
fiscal year 2002. Hidalgo is not required to convert its secured debt unless the
entire $4.5 million in cash equity is raised. There is no assurance that this
private placement will close. The ability to convert the preferred stock and
exercise the warrants described above depends on PalWeb amending its certificate
of incorporation to authorize additional capital and to reduce the par value of
its common stock.

           PalWeb is dependent upon Mr. Kruger and Yorktown to provide and/or
secure additional financing and there is no assurance that either will do so. As
such, there is no assurance that funding will be available for PalWeb to
continue operations.

           The Company had accumulated a working capital deficit of $3,988,000
at May 31, 2001 in connection with its manufacturing operations, which includes
$947,200 in loans due to Mr. Kruger or his affiliates, $1,536,559 in notes
payable to Yorktown, and $1,705,033 in accounts payable and accrued liabilities,
and approximately $118,000 of accrued interest owed to Mr. Kruger and Yorktown.
This deficit reflects the uncertain financial condition of the Company

                                       25
<PAGE>

resulting from its inability to obtain long term financing to progress beyond
the development stage. There is no assurance that the Company will secure such
financing.

           PalWeb occupies its facility under an arrangement whereby the plant
was sold to Onward, LLC, an affiliate of Mr. Paul Kruger, and leased back with
an option to purchase. Effective May 1, 2001, Onward and PalWeb entered into a
new lease for a one year term with four one-year renewal options. The Board of
Directors also elected to terminate the option to purchase provision in the
original lease. Accordingly, the plant is no longer carried on the books of
PalWeb and the gain of $707,044 is deferred to be amortized to additional paid
in capital over the estimated period to utilize the facility.

           As reported in prior Securities Exchange Commission filings, PalWeb's
indirect wholly owned subsidiary, PFS, has ceased issuing any new investments
certificates and is in the process of repaying depositor account balances. PFS
and Mr. Kruger have entered into certain agreements to provide for the ultimate
repayment of the investment certificates. In December 2000, PFS sold its real
estate holdings to Onward, L.L.C., a company 100% owned by Mr. Kruger, at
appraised value and the proceeds were distributed to security holders in
accordance with one of these agreements. In addition, PFS has placed its
43,500,000 shares of PalWeb common stock with an independent trustee who will
liquidate the stock over a four year period in an amount sufficient to
distribute the funds to certificate holders in repayment of the depositor
account balances. In December 2000, PFS made the first installment payment to
investment certificate holders in the amount of $1,316,000.

           PalWeb has not entered into any conditions, commitments or
requirements with the Oklahoma Securities Department that would require it to
fund or otherwise be financially responsible for the liabilities of PFS.
However, if PFS is unable to make payment to investment certificate holders as
described above, it is possible that holders of investment certificates may
assert claims against PalWeb that it is liable for the liabilities of PFS under
legal theories relating to piercing the corporate veil or otherwise. In such
event, PalWeb might incur additional costs to contest such claims and could
ultimately be found to be liable. The effect of any such claims being made
against PalWeb could also have an adverse effect on the value of PalWeb's common
stock and make it even more difficult for PFS to fund the repayment of its
investment certificate liability from liquidation of the PalWeb common stock
owned by it. Accordingly, PalWeb may be adversely affected if PFS is unable to
meet its obligations.

PROSPECTS FOR FUTURE

           Management has initiated the construction and installation of a new
production line to manufacture plastic pallets at a cost of approximately
$4,700,000. Substantially all major components have been ordered and
installation is in process. The project is expected to be in operation during
the third quarter of fiscal year 2002. At August 10, 2001 PalWeb had placed
orders for production equipment totaling $3,755,000. Yorktown Management and
Financial Services, LLC, is providing the interim financing for these purchases,
as discussed above in "Liquidity and Capital Resources."

                                       26
<PAGE>

           The new line will have the capacity of producing about 40,000 pallets
per month. Gravity Management, an engineering firm in Tulsa, Oklahoma, has been
engaged to engineer and oversee the project. Brian Kirchmer is the engineer in
charge of the project. The United States market for new pallets is, at a
minimum, approximately 400,000,000 annually. Projected sales of 40,000 pallets
per month, or 480,000 pallets per year, is less than 1/10th of 1% of the total
new pallet market, and it appears that the market trend is moving toward the use
and purchase of plastic pallets.

           As discussed above in "General to all Periods," management is
currently enhancing its marketing program in anticipation of this additional
capability. Efforts have included targeting major users of pallets and
distributors.

           In addition, PalWeb continues to test and improve its pallet with
respect to strength, durability and fire retardency. Verbal notification has
been received from the Virginia Polytech Institute & State University's
("Virginia Tech") Fastrack Evaluation that the pallet has
successfully passed the Virginia Tech Fastrack strength and durability test. The
successful completion of this test is a significant credential in marketing
PalWeb's pallet. In addition, PalWeb has embarked in developing its own patented
formula for fire retardency. Dr. James Pritchard, a respected technical advisor
in the area of custom polymer formulations, has been engaged to oversee this
project. Preliminary tests are being performed to qualify the product to meet
the requirements of UL2335, Classification Flammability of Plastic Pallets.

           Management's goal is to attain profitability during the fourth
quarter of 2002.

ITEM 7.    FINANCIAL STATEMENTS

           The Financial Statements of PalWeb are set forth on pages F-1 through
F-18 inclusive, found at the end of this report.

ITEM 8.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
           FINANCIAL DISCLOSURE

           None.

PART III

ITEM 9.    DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
           COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT

DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS:

           The following lists the directors and executive officers of PalWeb.
Directors of PalWeb are elected annually at each annual meeting of shareholders.
Executive officers serve at the pleasure of the Board of Directors.


                                       27
<PAGE>

                                                               TERM AS DIRECTOR
    NAME                         POSITION                     OR OFFICER EXPIRES
    ----                         --------                     ------------------
Paul A. Kruger        Director, President and Chairman              2001
                      of the Board

Lyle W. Miller        Director and Executive Vice                   2001
                      President (Marketing)

Mark R. Kidd          Director                                      2001

PAUL A. KRUGER
CHAIRMAN OF THE BOARD OF DIRECTORS AND PRESIDENT

           Mr. Kruger, age 47, earned a Bachelor of Business Administration
degree in accounting from Cameron University, Lawton, Oklahoma, and earned a
Juris Doctor degree from the University of Oklahoma City Law School. He has 25
years of experience in the financial services industry. Mr. Kruger co-founded
United Bank Club Association, Inc. ("UBCA"), Norman, Oklahoma, in 1980, and
served as its President and CEO until February 1996, when UBCA was sold. Mr.
Kruger supervised and participated in every facet of UBCA's business, including
strategic planning, sales, marketing, operations and service quality. Under Mr.
Kruger's leadership, UBCA grew to more than 350 employees, and had operational
and sales branches in Michigan, Florida, Arizona, Texas and Mexico. At the time
UBCA was sold, it provided financial enhancement services to more than 2,000
client institutions serving more than 6,000,000 individual customers throughout
the United States, Puerto Rico, the U.S. Virgin Islands and Mexico.

           In 1997, Mr. Kruger became the Chairman of the Board of Directors of
Paceco Financial Services, Inc. In February 1999, Mr. Kruger became Chief
Executive Officer and a director of Foresight, Inc. in Norman, Oklahoma.
Foresight, Inc. is a marketing company that develops membership and loyalty
programs for companies that are designed to solidify and enhance customer
relationships. Foresight, Inc. services over 250,000 customers nationwide
through relationships with companies in numerous industries including
rent-to-own, banking, and financial services. Effective December 7, 2000,
Foresight, Inc. was aquired by a subsidiary of Precis, Inc., a publicly-held
company. Precis, Inc. designs membership programs for rental-purchase companies,
financial organizations, employer groups, retailers and association-based
organizations. Membership in these programs are offered and sold as a part of
point-of-sale transactions and through direct marketing. Since December 2000,
Mr. Kruger has served as the Chairman of the Board of Directors and the Chief
Executive Officer of Precis, Inc. His responsibilities and contributions to all
of these companies include assisting in the development, implementation and
execution of strategic planning. Mr. Kruger also currently holds managing
officer positions in both Hildalgo, L.C. and Onward, L.L.C.

           Mr. Kruger became a director of PalWeb on July 9, 1999 and became
President on January 22, 2000.

LYLE W. MILLER
DIRECTOR AND EXECUTIVE VICE PRESIDENT (MARKETING)

           Mr. Miller, age 57, earned a Bachelor of Business Administration
degree from Michigan State University and attended Michigan State University's
Master's program in Finance. For the past six years, Mr. Miller has been the
President and a Director of McMiller Holding Company, Northern Leasing & Sales,
Inc. and Northern Connections, Inc., which are based in Lansing, Michigan. Each
of these companies are privately held and are engaged in the real estate

                                       28
<PAGE>

business. Additionally, Mr. Miller is a partner in MahMill Acres, a closely held
real estate development partnership; President and a Director of Servco
Incorporated, a privately-held company; and owner of Lansing Ice & Gymnastic
Center, Inc., a privately held corporation that operates the Lansing Ice &
Gymnastic Center and Landings Restaurant in Lansing, Michigan. Mr. Miller is a
Director of Capital Bancorp Limited, a publicly-held bank holding company, and
Precis, Inc., a publicly-held corporation.

           Mr. Miller became a director of PalWeb and Vice President of
Marketing on January 22, 2000.

MARK R. KIDD
DIRECTOR

           Mr. Kidd, age 34, earned a Bachelor of Business Administration in
Accounting from Southern Methodist University, Dallas, Texas, in 1988. Mr. Kidd
began his career at the accounting firm of Arthur Andersen, L.L.P. where he
earned the designation of Certified Public Accountant. He worked at Arthur
Andersen for eight years where he served financing services clients ranging in
size from less than $10,000,000 to greater than $2,000,000,000. Mr. Kidd served
as the Chief Financial Officer for Republic Bank of Norman, Oklahoma, a
financial institution with over $100,000,000 in assets. Mr. Kidd served as an
Executive Vice President, Chief Financial Officer, and board member of
Foresight, Inc. in Norman, Oklahoma from February 1999 to December 2000. Since
December 2000, Mr. Kidd has served as the President and a board member of
Foresight, Inc. Foresight, Inc. is a marketing company that develops membership
and loyalty programs for companies that are designed to solidify and enhance
customer relationships. Foresight, Inc. services over 250,000 customers
nationwide through relationships with companies in numerous industries including
rent-to-own, banking, and financial services. Since September of 1999, Mr. Kidd
has served as the Chief Financial Officer of Precis, Inc., a publicly-held
corporation. Precis, Inc. designs membership programs for rental-purchase
companies, financial organizations, employer groups, retailers and
association-based organizations. Membership in these programs are offered and
sold as a part of point-of-sale transactions and through direct marketing.
Effective December 7, 200, Foresight, Inc. was acquired by a subsidiary of
Precis, Inc. Mr Kidd has served as a board member of Precis, Inc. since December
2000.

           Mr. Kidd became a director of PalWeb on January 22, 2000.

ITEM 10.             EXECUTIVE COMPENSATION

           Other than Mr. Kruger, no other parties receive a salary as a part of
executive compensation. The following table sets forth the compensation paid to
Mr. Kruger during fiscal years 2000 and 2001.

                                       29
<PAGE>

<TABLE><CAPTION>
                                                      SUMMARY COMPENSATION TABLE

                                                                                                               LONG TERM
                                                                    ANNUAL COMPENSATION                       COMPENSATION
                                                   ---------------------------------------------------        ------------
             NAME AND                FISCAL                                               OTHER ANNUAL
        PRINCIPAL POSITION            YEAR           SALARY              BONUS            COMPENSATION           OPTIONS
<S>                                   <C>          <C>                   <C>                  <C>               <C>
Paul A. Kruger,                       2001         $12,000               - 0 -                - 0 -             2,500,000
Chairman of Board and                 2000         $ 6,000(1)            - 0 -                - 0 -               - 0 -
President
</TABLE>
------------------------
(1)  MR. KRUGER WAS FIRST PLACED ON THE PAYROLL OF PALWEB ON DECEMBER 1, 1999.

           THE FOLLOWING TABLE SETS FORTH INFORMATION RELATED TO OPTIONS GRANTED
TO NAMED EXECUTIVE OFFICERS AND DIRECTORS OF PALWEB.

<TABLE><CAPTION>
                                                  OPTION GRANTS IN LAST FISCAL YEAR

                              NUMBER OF SECURITIES
                               UNDERLYING OPTIONS              % OF TOTAL            EXERCISE OR
       NAME                         GRANTED                 OPTIONS GRANTED              BASE           EXPIRATION DATE
<S>                                <C>                            <C>                   <C>             <C>
Paul A. Kruger                     2,500,000                      26.3                  $0.04           MAY 11, 2011(1)
LYLE W. MILLER                     2,500,000                      26.3                  $0.04           MAY 11, 2011(1)
MARK R. KIDD                       2,500,000                      26.3                  $0.04           MAY 11, 2011(1)
</TABLE>
------------------------
(1) THE OPTIONS GRANTED TO MESSRS. KRUGER, MILLER, AND KIDD ARE EXERCISABLE AT
ANY TIME AND FROM TIME TO TIME UNTIL TEN (10) YEARS AFTER THE EFFECTIVE DATE
THEIR RESPECTIVE STOCK OPTION AGREEMENTS WHILE THEY CONTINUE TO SERVE AS AN
EXECUTIVE OFFICER OR ON THE BOARD OF DIRECTORS OF PALWEB, AS THE CASE MAY BE. IN
THE EVENT OF DEATH OF ANY OF THE GRANTEES, THE OPTIONS ARE EXERCISABLE IN FULL
BY THEIR HEIRS WITHIN 12 MONTHS OF SUCH DEATH. IN THE EVENT THE SERVICE OF THE
ANY OF THE GRANTEES IS TERMINATED OTHER THAN FOR CAUSE, THE OPTIONS OF SUCH
GRANTEE SHALL BE EXERCISABLE WITHIN 3 MONTHS OF SUCH TERMINATION.

<TABLE><CAPTION>
                AGGREGATE OPTION EXERCISES IN THE LAST FISCAL YEAR AND FY-END OPTION VALUES

                            SHARES
                           ACQUIRED                          NUMBER OF SECURITIES       VALUE OF UNEXERCISED IN-
                              ON              VALUE         UNDERLYING UNEXERCISED        THE-MONEY OPTIONS AT
           NAME            EXERCISE          REALIZED         OPTIONS AT FY-END                  FY-END
<S>                           <C>              <C>               <C>                             <C>
Paul A. Kruger                -0-              N/A               2,500,000(1)                    $87,500
LYLE W. MILLER                -0-              N/A               2,500,000(1)                    $87,500
MARK R. KIDD                  -0-              N/A               2,500,000(1)                    $87,500
</TABLE>
------------------------
(1) NONE OF THESE OPTIONS ARE EXERCISABLE UNLESS AND UNTIL THE SHAREHOLDERS OF
PALWEB AMEND THE CERTIFICATE OF INCORPORATION OF PALWEB TO REDUCE THE PAR VALUE
OF THE COMMON STOCK OF PALWEB.

ITEM 11.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

           The following table sets forth certain information regarding the
shares of Common Stock and the shares of original issue Preferred Stock
beneficially owned as of May 31, 2001, by (i) each person known by PalWeb to
beneficially own five percent (5%) or more of the outstanding Common Stock or
Preferred Stock, (ii) each current director and executive officer and (iii) all
current directors and executive officers as a group. The original issue
Preferred Stock is considered the equivalent of Common Stock, since it is voting
and convertible into Common Stock on a share for share basis. As of July 18,
2001, PalWeb had 231,973,244 shares of Common Stock and 2,525,000 shares of
Preferred Stock outstanding.

<TABLE><CAPTION>
                                                                             SHARES                PERCENT
                                    NAME                               BENEFICIALLY OWNED           OWNED
                                    ----                               ------------------           -----
<S>                                                                       <C>                       <C>
Paul A. Kruger, Chairman of the Board and President .............         59,800,000(1)             25.8%
</TABLE>

                                       30

<PAGE>


<TABLE><CAPTION>
                                                                             SHARES                PERCENT
                                    NAME                               BENEFICIALLY OWNED           OWNED
                                    ----                               ------------------           -----
<S>                                                                       <C>                       <C>
Lyle W. Miller, Director and Vice President (Marketing)..........          6,500,000                        2.8%
Mark R. Kidd, Director ..........................................            500,000                         0.2%
All Directors & Officers as a Group (3 persons)..................         66,680,000(1)                     28.8%
</TABLE>
----------------------------
(1) TOTAL INCLUDES 9,300,000 SHARES OF COMMON STOCK OF WHICH MR. KRUGER ONLY
HOLDS THE POWER TO VOTE PURSUANT TO A PROXY GRANTED BY MICHAEL JOHN; HOWEVER, AS
OF JULY 31, 2000, MICHAEL JOHN PUBLICLY CLAIMED THAT HE ONLY OWNS 240,000 SHARES
OF COMMON STOCK. TOTAL ALSO INCLUDES 2,500,000 SHARES OF COMMON STOCK THAT MR.
KRUGER HOLDS ON BEHALF OF HIS MINOR CHILDREN.

           The closing of the private placement of convertible preferred stock
and warrants to purchase common stock described under "Liquidity and Capital
Resources" in Item 6 of this Form 10-KSB could result in a change of control of
PalWeb to the purchasing group.

ITEM 12.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

           For a related party transaction involving funds advanced to PalWeb by
affiliates of Paul Kruger, see "History" under Item 1, and "Liquidity and
Capital Resources" under Item 6 of this Form 10-KSB.

           For a related party transaction involving funds advanced by Yorktown
Management and Financial Services, L.L.C., of which Warren Kruger, Paul Kruger's
brother, is the principal shareholder see "History" under Item 1, and "Liquidity
and Capital Resources" under Item 6 of this Form 10-KSB. For a related party
transaction involving Westgate Capital Company, L.L.C., of which Warren Kruger
is a principal beneficial owner, see "Liquidity and Capital Resources" under
Item 6 of this Form 10-KSB.

           For a related party transaction involving manufacturing and warehouse
space leased from an affiliate of Paul Kruger, see Item 2 of this Form 10-KSB.

           In April of 2001, PalWeb entered into an agreement with Foresight,
Inc., a company of which Messrs. Paul Kruger, Miller and Kidd are on the Board
of Directors and that is a wholly owned subsidiary of a publicly-held company of
which Paul Kruger beneficially owns in excess of 10%, whereby Foresight agreed
to make a portion of its leased premises available to one full- time employee of
PalWeb, provide the services of a part-time employee of Foresight, and pay
PalWeb's expenses in connection with normal office usage for telephone, fax,
copying, postage and other expenses in exchange for the sum of $3,000 per month.
The agreement was effective as of January 1, 2001 and may be terminated by
either party at any time upon 30 days written notice.

           For a related party transaction that occurred in February 2000 in
connection with PalWeb's acquisition of Paceco Financial Services, Inc., see
Item 1 of this Form 10-KSB.

                                       31
<PAGE>

           On January 10, 2000, PalWeb issued the following number of shares of
unregistered Common Stock to the following parties as consideration for the
cancellation of the debt set forth opposite of such parties' name:

                                   DEBT OWED          NO. OF SHARES ISSUED IN
PARTIES' NAME                      BY PALWEB         CANCELLATION OF SUCH DEBT
-------------                      ----------        -------------------------
Hildalgo Trading Co., L.C.          $701,000                 7,010,000
Onward, L.L.C.                       312,429                 3,124,786
Paul A. Kruger                       174,000                 1,740,000

Hildalgo Trading Co., L.C. and Onward, L.L.C. are wholly owned by Paul A.
Kruger.

           Also on January 10, 2000, PalWeb issued 3,500,210 shares of
unregistered Common Stock of PalWeb to Hildalgo Trading Co., L.C. as
consideration for consulting services provided to PalWeb by Hildalgo Trading
Co., L.C.

           On July 26, 1999, PalWeb issued 400,000 shares of preferred stock to
Randall McClesky in consideration of management services for serving as an
officer and director of PalWeb. Also on July 26, 1999, PalWeb issued 2,558,890
shares of preferred stock to Ralph Curton, Jr. and assigns in consideration of
management services for serving as an officer and director of PalWeb and to
reimburse Mr. Curton for certain expenses he incurred on behalf of PalWeb.
Neither Mr. McClesky nor Mr. Curton is currently an officer or director of
PalWeb.

ITEM 13.             EXHIBITS AND REPORTS ON FORM 8-K

(a)   Exhibits:

 EXHIBIT NO.       DESCRIPTION

     2.1          Agreement and Plan of Reorganization by and among PalWeb
                  Corporation, PP Financial, Inc. and Pace Holding, Inc. dated
                  January 21, 2000(1)

     3.1          Certificate of Incorporation of PalWeb Corporation(1)

     3.2          By-laws of PalWeb Corporation(1)

     4.1          Certificate of Designation, Preferences and Rights of
                  Preferred Stock Providing for an Issue of Preferred Stock
                  Designated "Convertible Preferred Stock"(2)

     10.1         Personnel Staffing Agreement by and between Accord Human
                  Resources, Inc. and Plastic Pallet Production Company, Inc.
                  dated January 19, 1999(1)

     10.2         Pallet Test # 714 prepared dated November 24, 1999 for Plastic
                  Pallet Production, Inc. prepared by Container Technology
                  Laboratory, Inc.(2)

                                       32
<PAGE>

 EXHIBIT NO.       DESCRIPTION

     10.3         Promissory Note in the amount of $400,000 payable to Hildalgo
                  Trading Company, L.C. dated July 27, 2000(2)

     10.4         Security Agreement by and between PalWeb Corporation and
                  Hildalgo Trading Company, L.C. dated July 27, 2000(2)

     10.5         Security Agreement by and between Plastic Pallet Production,
                  Inc. and Hildalgo Trading Company, L.C. dated July 27, 2000(2)

     10.6         Promissory Note in the amount of $350,000 payable to Hildalgo
                  Trading Company, L.C. dated August 15, 2000(4)

     10.7         Promissory Note in the amount of $400,000 payable to Hildalgo
                  Trading Company, L.C. dated November 15, 2000(4)

     10.8         Extension and Modification Agreement by and between Hildalgo
                  Trading Company, L.C., PalWeb Corporation and Plastic Pallet
                  Production, Inc. dated December 1, 2000(4)

     10.9         Promissory Note in the amount of $250,000 payable to Yorktown
                  Management and Financial Services, L.L.C. dated March 1,
                  2001(5)

     10.10        Security Agreement between Yorktown Management and Financial
                  Services, L.L.C. and PalWeb Corporation dated March 1, 2001(5)

     10.11        Security Agreement between Yorktown Management and Financial
                  Services, L.L.C. and Plastic Pallet Production, Inc. dated
                  March 1, 2001(5)

     10.12        Promissory Note in the amount of $2,750,000 payable to
                  Yorktown Management and Financial Services, L.L.C. dated March
                  5, 2001

     10.13        Agreement (relating to use of office space and employees)
                  dated April 27, 2001 by and between Foresight, Inc. and PalWeb
                  Corporation

     10.14        Lease Agreement dated May 1, 2001, by and between Onward,
                  L.L.C. and PalWeb Corporation

     10.15        Extension Agreement by and between Hildalgo Trading Company,
                  L.C. and PalWeb Corporation and Plastic Pallet Production,
                  Inc. dated June 1, 2001

     10.16        Promissory Note in the amount of $850,000 payable to Hildalgo
                  Trading Company, L.C. dated June 1, 2001

                                       33
<PAGE>

 EXHIBIT NO.       DESCRIPTION

     10.17        Extension Agreement by and between Yorktown Management and
                  Financial Services, L.L.C. and PalWeb Corporation and Plastic
                  Pallet Production, Inc. dated September 1, 2001

     99.1         Notice to depositors of Paceco Financial Services, Inc. dated
                  October 10, 2000(6)

     99.2         Supplemental Notice to Investment Certificate Holders of
                  Paceco Financial Services, Inc.(7)

     99.3         Second Supplemental Notice to Investment Certificate Holders
                  of Paceco Financial Services, Inc.(8)

     99.4         Put Agreement by and among Paul A. Kruger, Bill J. English as
                  Trustee and Paceco Financial Services, Inc. dated December 20,
                  2000(8)

     99.5         Trust Agreement between Paceco Financial Services, Inc. and
                  Bill J. English dated December 20, 2000(8)

     99.6         Letter from the State of Oklahoma Department of Securities
                  dated December 15, 2000 regarding Paceco Financial Services,
                  Inc.(8)

     99.7         Stock Option Plan of PalWeb Corporation (effective May 11,
                  2001)

     99.8         Form of Non-Qualified Stock Option Agreement

     99.9         Form of Incentive Stock Option Agreement

     99.10        Form of Nonemployee Director Stock Option Agreement

     21.1         Subsidiaries of PalWeb Corporation

------------------

(1)  Incorporated herein by reference to Part III, Item 1 of Amendment No. 3 to
     PalWeb's Form 10-SB, which was filed on May 2, 2000.

                                       34
<PAGE>

(2)  Incorporated herein by reference to Part III, Item 1 of Amendment No. 5 to
     PalWeb's Form 10-SB, which was filed on July 20, 2000.

(3)  Incorporated herein by reference to Part III, Item 15 of PalWeb's Form
     10-KSB for the period ended May 31, 2000, which was filed on May 15, 2001.

(4)  Incorporated herein by reference to Part II, Item 6 of PalWeb's Form 10-QSB
     for the period ended November 30, 2000, which was filed on January 10, 2001

(5)  Incorporated herein by reference to Part I, Item 6 of PalWeb's Form 10-QSB
     for the period ended February 28, 2001, which was filed on April 16, 2001

(6)  Incorporated herein by reference to Part II, Item 6 of PalWeb's Form 10-QSB
     for the period ended August 31, 2001, which was filed on April 16, 2000

(7)  Incorporated herein by reference to Item 7 of PalWeb's Form 8-K filed on
     November 17, 2000

(8)  Incorporated herein by reference to Item 7 of PalWeb's Form 8-K filed on
     January 2, 2001

(b) Reports on Form 8-K:

           On May 15, 2001, PalWeb filed a Form 8-K under Item 5, Other Events
reporting that a letter of intent had been signed in connection with the private
placement of convertible preferred stock and warrants to purchase common stock
of PalWeb. No financial statements were filed in connection with such Form 8-K.

                                       34
<PAGE>

SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

                                    PALWEB CORPORATION
                                       (Registrant)

Date:  08/12/01
                                    /s/ Paul A. Kruger
                                    --------------------------------------------
                                    Paul A. Kruger, Chairman of the Board and
                                    President

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

Date:  08/12/01
                                    /s/ Paul A. Kruger
                                    --------------------------------------------
                                    Paul A. Kruger, Chairman of the Board and
                                    President (Chief Executive Officer,
                                    Principal Financial Officer and Principal
                                    Accounting Officer)

Date:  08/12/01
                                    /s/ Lyle W. Miller
                                    --------------------------------------------
                                    Lyle W. Miller, Director and Vice-President,
                                    Marketing

Date:  08/12/01
                                    /s/ Mark R. Kidd
                                    --------------------------------------------
                                    Mark R. Kidd, Director




                                       35
<PAGE>


                          INDEX TO FINANCIAL STATEMENTS
                          -----------------------------

FINANCIAL STATEMENTS OF PALWEB CORPORATION

Independent Auditor's Report................................................F-1

Consolidated Balance Sheet..................................................F-2

Consolidated Statements of Operations ......................................F-4

Consolidated Statements of Changes in Stockholders' Deficiency..............F-5

Consolidated Statements of Cash Flows ......................................F-6

Notes to Consolidated Financial Statements..................................F-7

<PAGE>

                          INDEPENDENT AUDITOR'S REPORT

Board of Directors
PalWeb Corporation
Dallas, Texas

We have audited the accompanying consolidated balance sheet of PalWeb
Corporation and subsidiaries as of May 31, 2001, and the related consolidated
statements of operations, stockholders' deficiency, and cash flows for the years
ended May 31, 2001 and 2000. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.

We conducted our audits in accordance with U.S. generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material aspects, the financial position of PalWeb Corporation and
subsidiaries as of May 31, 2001, and the results of their operations and their
cash flows for the years ended May 31, 2001 and 2000, in conformity with
generally accepted accounting principles.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company is in the development
stage and has suffered significant losses from operations. Substantial
additional funding will be required to implement its business plan and to attain
profitable operations. The lack of adequate funding to maintain working capital
and stockholders' deficits at May 31, 2001, raises substantial doubt about its
ability to continue as a going concern. In addition, PalWeb has a wholly owned
subsidiary which issues thrift accounts and savings certificates to investors.
The subsidiary does not have sufficient assets to liquidate investors' thrift
accounts and savings certificates. Management's plans in regard to these matters
are described in Note 2. The financial statements do not include any adjustments
that might result from the outcome of these uncertainties.

                                                    HULME RAHHAL HENDERSON, INC.

August 15, 2001
Ardmore, Oklahoma

                                       F-1
<PAGE>

                               PALWEB CORPORATION
                          (A DEVELOPMENT STAGE COMPANY)
                           CONSOLIDATED BALANCE SHEET
                                  MAY 31, 2001

           ASSETS
           ------

MANUFACTURING:
  Current Assets:
   Cash                                                               $   10,923
   Accounts receivable                                                    72,788
   Inventory (Note 4)                                                    142,689
   Prepaid Expenses                                                       95,000
                                                                      ----------
           Total current assets                                          321,400

  Property, Plant and Equipment, net
   of accumulated depreciation (Note 6)                                2,325,483

  Other Assets (Note 7)                                                   76,031
                                                                      ----------

           TOTAL MANUFACTURING ASSETS                                  2,722,914
                                                                      ----------

FINANCE:
  Cash                                                                    69,546
  Loans receivable, net of allowance for
   doubtful accounts (Note 5)                                            814,349
                                                                      ----------

           TOTAL FINANCE ASSETS                                          883,895
                                                                      ----------

TOTAL ASSETS                                                          $3,606,809
                                                                      ==========







                                       F-2
<PAGE>

LIABILITIES AND STOCKHOLDERS' DEFICIENCY
----------------------------------------

MANUFACTURING:
  Current Liabilities:
   Note payable (Note 8)                                           $  1,536,559
   Note payable - related party (Note 8)                                947,200
   Accounts payable                                                   1,705,033
   Accrued interest payable                                             118,031
                                                                   ------------

           Total current liabilities                                  4,306,823

  Deferred Income (Note 12)                                             707,044
                                                                   ------------

           TOTAL MANUFACTURING LIABILITIES                            5,013,867
                                                                   ------------

FINANCE:
  Thrift accounts and time certificates (Note 9)                      5,107,257
  Accrued interest payable                                              204,061
  Notes payable (Note 8)                                                171,836
                                                                   ------------

           TOTAL FINANCE LIABILITIES                                  5,483,154
                                                                   ------------

COMMITMENT AND CONTINGENCY (Notes 18 and 19)

STOCKHOLDERS' DEFICIENCY (Notes 13 and 14):
  Preferred stock, $.0001 par, 20,000,000 shares
   authorized, 2,525,000 shares outstanding                                 253
  Common stock, $.10 par value, 250,000,000
   authorized, 231,928,244 shares outstanding                        23,192,825
  Additional paid-in capital                                          9,725,686
  Deficit accumulated during development stage                      (35,258,710)
                                                                   ------------
                                                                     (2,339,946)
  Treasury stock, 43,500,000 shares common, at cost                  (4,550,266)
                                                                   ------------
           TOTAL STOCKHOLDERS' DEFICIENCY                            (6,890,212)
                                                                   ------------

TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY                     $  3,606,809
                                                                   ============

The accompanying notes are an integral part of this consolidated financial
statement.

                                       F-3
<PAGE>

                               PALWEB CORPORATION
                          (A DEVELOPMENT STAGE COMPANY)
                      CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE><CAPTION>
                                                                                                     From Inception
                                                                 Year Ended May 31,                   (November 20,
                                                       -------------------------------------             1995) to
                                                            2001                    2000               May 31, 2001
                                                       -------------           -------------           -------------
<S>                                                    <C>                     <C>                     <C>
MANUFACTURING:
  Sales                                                $      89,211           $      14,013           $     195,918

  Expenses:
   Research and development                                   95,000                    --                   501,943
   Salaries and benefits                                     307,085                 357,226               1,658,417
   General and administrative
    expenses                                                 907,940               1,949,987               9,665,648
   Depreciation expense                                      204,584                 204,805                 818,503
   Impairment                                                   --                      --                 3,456,231
   Interest expense                                          300,451                 188,822                 952,464
                                                       -------------           -------------           -------------
           Total expenses                                  1,815,060               2,700,840              17,053,206
                                                       -------------           -------------           -------------
  Other income (expense):
   Gain on settlement of contracts
    and liabilities                                        1,541,783                  57,479               1,599,262
   Other                                                        --                    (4,877)                272,308
                                                       -------------           -------------           -------------
           Total other income (expense)                    1,541,783                  52,602               1,871,570
                                                       -------------           -------------           -------------

           LOSS FROM MANUFACTURING OPERATIONS               (184,066)             (2,634,225)            (14,985,718)

FINANCE:
  Revenues -
   Interest and fees on loans                                177,580                  68,906                 246,486
   Other income                                                3,988                   1,004                   4,992
   Gain (loss) on sale of assets                              18,615                  (1,250)                 17,365
                                                       -------------           -------------           -------------
           Total Revenues                                    200,183                  68,660                 268,843
                                                       -------------           -------------           -------------

  Expenses -
   Interest on thrift accounts and
    time certificates                                        319,381                  72,514                 391,895
   Interest on notes payable                                  17,366                   3,293                  20,659
   Salaries and benefits                                      40,311                  16,864                  57,175
   Other operating expenses                                  235,794                 141,871                 377,665
   Provision for credit losses                               173,426                 180,000                 353,426
   Depreciation and amortization                             782,398                 105,910                 888,308
                                                       -------------           -------------           -------------
           Total expenses                                  1,568,676                 520,452               2,089,128
                                                       -------------           -------------           -------------

           LOSS FROM FINANCE OPERATIONS                   (1,368,493)               (451,792)             (1,820,285)
                                                       -------------           -------------           -------------

LOSS FROM TOTAL OPERATIONS, BEFORE                        (1,552,559)             (3,086,017)            (16,806,003)
DISCONTINUANCE AND EXTRAORDINARY ITEMS

INCOME (LOSS) FROM DISCONTINUED OPERATIONS                    73,838                  (9,425)               (792,648)

EXTRAORDINARY GAIN                                              --                      --                    68,616
                                                       -------------           -------------           -------------

NET LOSS                                               $  (1,478,721)          $  (3,095,442)          $ (17,530,035)
                                                       =============           =============           =============
LOSS PER COMMON SHARE:
 Loss before discontinued operations
  and extraordinary loss                               $       (0.01)                  (0.02)
 Loss from discontinued operation                               --                      --
 Extraordinary loss                                             --                      --
                                                       -------------           -------------

 Loss per common share                                 $       (0.01)          $       (0.02)
                                                       =============           =============

WEIGHTED AVERAGE SHARES OUTSTANDING                      198,293,000             207,608,000
                                                       =============           =============
</TABLE>
The accompanying notes are an integral part of this consolidated financial
statement.

                                       F-4
<PAGE>

<TABLE><CAPTION>
                                                                      PALWEB CORPORATION
                                                                 (A DEVELOPMENT STAGE COMPANY)
                                                CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIENCY

                             Preferred Stock                  Common Stock             Additional                        Total
                      ----------------------------    ----------------------------      Paid-in       Accumulated    Stockholders'
                         Shares          Amount          Shares          Amount         Capital         Deficit        Deficiency
                      ------------    ------------    ------------    ------------    ------------    ------------    ------------
<S>                   <C>             <C>             <C>             <C>             <C>             <C>             <C>
BALANCES,
 May 31, 1999              880,000              88     217,981,046      21,798,105       2,027,465     (27,391,427)     (3,565,769)

Issuance of stock for
 services                  125,000              13      14,625,210       1,462,521          18,737            --         1,481,271

Contribution of debt
 to capital                   --              --              --              --           189,000            --           189,000

Stock issued in
 satisfaction of
 debt                    3,963,890             396      12,334,790       1,233,479         627,538            --         1,861,413

Default judgement on
 related party debt           --              --              --              --         1,619,422            --         1,619,422

Preferred stock
 converted to common    (2,193,890)           (219)      2,193,890         219,389        (219,170)           --              --

Cancellation of
 common stock                 --              --       (54,856,692)     (5,485,669)      5,485,669            --              --

Stock issued in
 acquisition                  --              --        50,000,000       5,000,000            --        (3,293,120)      1,706,880

Net loss                      --              --              --              --              --        (3,095,442)     (3,095,442)
                      ------------    ------------    ------------    ------------    ------------    ------------    ------------

BALANCES,
 May 31, 2000            2,775,000             278     242,278,244      24,227,825       9,748,661     (33,779,989)        196,775

Stock issued in
 satisfaction of
 debt                         --              --           100,000          10,000           2,000            --            12,000

Preferred stock
 converted to common      (250,000)            (25)        250,000          25,000         (24,975)           --              --

Cancellation of
 common stock                 --              --       (10,700,000)     (1,070,000)           --              --        (1,070,000)

Net loss                      --              --              --              --              --        (1,478,721)     (1,478,721)
                      ------------    ------------    ------------    ------------    ------------    ------------    ------------

BALANCES,
 May 31, 2001            2,525,000             253     231,928,244    $ 23,192,825    $  9,725,686    $(35,258,710)   $ (2,339,946)
                      ============    ============    ============    ============    ============    ============    ============
</TABLE>

The accompanying notes are an integral part of this consolidated financial
statement.

                                       F-5
<PAGE>

                               PALWEB CORPORATION
                          (A DEVELOPMENT STAGE COMPANY)
                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE><CAPTION>
                                                                                         From Inception
                                                         Year Ended May 31,               (November 20,
                                                 ---------------------------------           1995) to
                                                     2001                 2000             May 31, 2001
                                                 ------------         ------------         ------------
<S>                                              <C>                  <C>                  <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
 Net loss                                        $ (1,478,721)        $ (3,095,442)        $(17,530,035)
 Adjustments to reconcile net loss to
  cash used by operating activities:
   Depreciation and amortization                    1,001,348              315,509            1,756,771
   Extraordinary gain on debt retirement                 --                   --                (68,616)
   Consulting services paid by
    issuance of common stock                       (1,070,000)           1,481,271            5,646,271
   Impairment of investment                              --                   --              3,145,000
   Loss (gain) of disposition of property             (31,099)               4,877              285,009
   Provision for credit losses                        173,426              180,000              353,426
   Changes in accounts receivable                     (71,988)                (800)             (72,788)
   Changes in inventory                              (128,966)              (3,785)            (142,689)
   Changes in other assets                             58,918              (78,303)            (105,222)
   Changes in payable - related party                    --                707,909            2,930,901
   Changes in accounts payable
    and accrued expenses                            1,121,869              201,882            3,165,615
   Increase in customer deposits                         --                   --                300,000
                                                 ------------         ------------         ------------
           Net cash provided by (used)
            operating activities                     (425,213)            (286,882)            (336,357)

CASH FLOWS FROM INVESTING ACTIVITIES:
 Purchase of property and equipment                (1,804,231)            (233,049)          (5,252,853)
 Decrease in loans receivable                       1,380,379               89,483            1,469,862
 Net liabilities from acquisition
  of finance and real estate                             --                230,724              230,724
 Proceeds from sale of equipment                    1,362,000               19,461            1,456,456
 Proceeds from lease finance obligation                  --                   --                149,517
                                                 ------------         ------------         ------------
           Net cash provided by (used)
       investing activities                           938,148              106,619           (1,946,294)

CASH FLOWS FROM FINANCING ACTIVITIES:
 Proceeds from notes and advances payable           1,898,759              452,500            3,365,066
 Payments on notes payable                         (1,042,875)              (9,355)          (1,291,980)
 Decrease in savings certificates                  (1,556,232)               4,290           (1,551,942)
 Proceeds from mortgage payable -
  related party                                          --                   --              1,350,000
 Proceeds from issuance of common stock                  --                   --                491,976
                                                 ------------         ------------         ------------
           Net cash provided (used) by
      financing activities                           (700,348)             447,435            2,363,120
                                                 ------------         ------------         ------------

NET INCREASE (DECREASE) IN CASH                      (187,413)             267,172               80,469
CASH, beginning of period                             267,882                  710                 --
                                                 ------------         ------------         ------------

CASH, end of period                              $     80,469         $    267,882         $     80,469
                                                 ============         ============         ============
</TABLE>

SUPPLEMENTAL INFORMATION (Note 16)

The accompanying notes are an integral part of this consolidated financial
statement.

                                       F-6
<PAGE>

                               PALWEB CORPORATION
                          (A DEVELOPMENT STAGE COMPANY)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
       ------------------------------------------

       ORGANIZATION
       ------------

       Effective December 12, 1997, PalWeb Corporation ("PalWeb"), formerly
       Cabec Energy Corporation, was acquired in a reverse acquisition by the
       stockholders of Plastic Pallet Production, Inc.("PPP") whereby the
       stockholders of PPP became majority owners of PalWeb. Pursuant to the
       agreement, PalWeb exchanged its common stock for the outstanding common
       stock of PPP and the assets and liabilities of PalWeb and its
       subsidiaries as of the effective date were to be transferred into a new
       company whose stock was to be distributed to the stockholders of PalWeb,
       other than the new stockholders resulting from the PPP stock transfer.
       This latter distribution was effected November 10, 1998.

       The business of PalWeb as of December 12, 1997 was principally involved
       in energy services. Since the disposition of the energy services net
       assets was approved at the time of approval of the PPP stock exchange,
       these net assets were accounted for as discontinued operations. Further,
       the distribution effected as of November 10, 1998 is accounted for as a
       spin off in accordance with APB Opinion No. 29, "Accounting for
       Nonmonetary Transactions."

       PalWeb is principally engaged in the manufacture and marketing of plastic
       pallets and the related injection molding equipment necessary to produce
       plastic pallets. In addition, PalWeb is engaged in consumer loans through
       its indirect subsidiary, Paceco Financial Services, Inc. ("PFS").

       PRINCIPLES OF CONSOLIDATION
       ---------------------------

       The accompanying consolidated financial statements include the accounts
       of PalWeb and its subsidiaries. All material intercompany accounts and
       transactions have been eliminated.

       DEVELOPMENT STAGE COMPANY
       -------------------------

       PPP from its inception, November 20, 1995, has pursued the development of
       a plastic pallet which will compete with traditional wood pallets.
       Additionally, PPP has designed an injection molding machine which it
       anticipates can be built and operated more economically than competitive
       equipment. At May 31, 2001, a prototype model of the injection molding
       machine is in operation and producing plastic pallets for sale. Further,
       PalWeb is constructing an injection molding facility which will
       substantially increase PalWeb's productive capacity. However, PalWeb will
       retain its development stage status until it is capable of generating
       sufficient sales to maintain its operations.

       STATEMENT OF CASH FLOWS
       -----------------------

       PalWeb considers all short-term investments with an original maturity of
       three months or less to be cash equivalents.

                                       F-7
<PAGE>

       USE OF ESTIMATES
       ----------------

       The preparation of PalWeb's financial statements in conformity with U.S.
       generally accepted accounting principles requires PalWeb's management to
       make estimates and assumptions that affect the amounts reported in these
       financial statements and accompanying notes. Actual results could differ
       materially from those estimates.

       INVENTORY
       ---------

       Inventory consists of finished pallets and is stated at the lower of cost
       (first-in, first-out) or market value.

       LOANS AND ALLOWANCE FOR CREDIT LOSSES
       -------------------------------------

       Installment loans are stated at the amount of unpaid principal and
       interest, reduced by unearned interest and an allowance for credit
       losses. Interest income is recognized when earned except where serious
       doubt exists as to the ultimate collectibility of the interest in which
       case no accrual of interest is made. At May 31, 2001, substantially all
       of the loans receivable are on a nonaccrual basis.

       PFS performs ongoing credit valuations of customers and generally
       requires collateralization of the loan. The allowance for credit losses
       is maintained at a level adequate to absorb probable losses. Management
       determines the adequacy of the allowance based upon reviews of the
       installment loans, recent loss experience, current economic conditions,
       the risk characteristics of the various categories of loans, and other
       pertinent factors. Loans deemed uncollectible are charged to the
       allowance. Provisions for credit losses and recoveries on loans
       previously charged off are added to the allowance.

       PROPERTY, PLANT AND EQUIPMENT
       -----------------------------

       PalWeb's property, plant and equipment is stated at cost. Depreciation
       expense is computed on the straight-line method over the estimated useful
       lives, as follows:

         Manufacturing:
          Plant building                                    20 years
          Plant improvements                                 7 years
          Production machinery equipment                  5-10 years
          Office equipment & furniture & fixtures         3- 5 years

       Upon sale, retirement or other disposal, the related costs and
       accumulated depreciation of items of property, plant or equipment are
       removed from the related accounts and any gain or loss is recognized.
       When events or changes in circumstances indicate that assets may be
       impaired, an evaluation is performed comparing the estimated future
       undiscounted cash flows associated with the asset to the assets carrying
       amount. If the asset carrying amount exceeds the cash flows, a write-down
       to market value or discounted cash flow value is required.

                                       F-8
<PAGE>

       INVESTMENT IN VIMONTA AG
       ------------------------

       PalWeb's 20% ownership in Vimonta AG carried on the cost basis of
       accounting since management has no board representation, financial
       information or other influence on the operation of Vimonta AG. The asset
       is valued at $5,000 and is included in other assets in the manufacturing
       segment.

       PATENTS
       -------

       Amortization expense for the costs incurred by PalWeb to obtain the
       patents on the modular pallet system and accessories is computed on the
       straight- line method over the estimated life of 17 years.

       GOODWILL
       --------

       The excess of cost over the value of net assets acquired (goodwill) is
       being amortized on a straight-line basis over thirty months, except that
       during fiscal year 2001, management recognized an impairment to its
       goodwill and incurred an additional charge of $333,480 to fully amortize
       the balance of its goodwill.

       STOCK OPTIONS
       -------------

       PalWeb applies the intrinsic value-based method of accounting prescribed
       by Accounting Principles Board Opinion No. 25, ACCOUNTING FOR STOCK
       ISSUED TO EMPLOYEES, and related interpretations, in accounting for its
       stock options. As such, compensation expense would be recorded on the
       date of grant only if the current market price of the underlying stock
       exceeded the exercise price. SFAS No. 123, ACCOUNTING FOR STOCK-BASED
       COMPENSATION, established accounting and disclosure requirements for
       stock-based employee compensation plans. As allowed by SFAS No. 123,
       PalWeb has elected to continue to apply the intrinsic value-based method
       of accounting under APB No. 25, and has adopted the disclosure
       requirements of SFAS No. 123 as reflected in Note 14.

       RECOGNITION OF REVENUES
       -----------------------

       Revenue is recognized when the product is shipped.

       INCOME TAXES
       ------------

       PalWeb accounts for income taxes under the liability method, which
       requires recognition of deferred tax assets and liabilities for the
       expected future tax consequences of events that have been included in the
       financial statements or tax returns. Under this method, deferred tax
       assets and liabilities are determined based in the difference between the
       financial statements and tax bases of assets and liabilities using
       enacted tax rates in effect for the year in which the differences are
       expected to reverse.

       RESEARCH AND DEVELOPMENT COSTS
       ------------------------------

       Research and Development costs are charged to operations in the period
       incurred.

                                      F-9
<PAGE>

       LOSS PER SHARE
       --------------

       Loss per share is computed based on weighted average number of shares
       outstanding. Convertible preferred stock and stock options are not
       considered as their effect is antidilutive.

       RECENT PRONOUNCEMENTS
       ---------------------

       Recent pronouncements issued by the Financial Accounting Standards Board
       include SFAS No. 138, ACCOUNTING FOR CERTAIN DERIVATIVE INSTRUMENTS AND
       CERTAIN HEDGING ACTIVITIES, SFAS No. 139, RESCISSION OF FASB STATEMENT
       NO. 53 AND AMENDMENTS TO FASB STATEMENTS NO. 63, 89, AND 121, SFAS No.
       140, ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND
       EXTINGUISHMENT OF LIABILITIES, and SFAS No. 141, BUSINESS COMBINATIONS,
       and SFAS No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS. The
       implementation of these standards are not expected to have a material
       effect on PalWeb's consolidated financial statements.

2.     CONTINUATION AS A GOING CONCERN
       -------------------------------

       The accompanying financial statements have been prepared assuming that
       PalWeb will continue as a going concern. PalWeb is in the development
       stage and has suffered significant losses from operations. To date,
       PalWeb has received substantial advances from investors but will require
       additional substantial funding in order to implement its business plan
       and have an opportunity to achieve profitable operations. Management has
       been successful in financing its operations through short-term loans from
       an individual and advances and loans from its principal stockholder and
       officer. Management continues to seek long-term and/or permanent
       financing through pursuit of a private placement of securities. Neither
       the receipt of additional funding in adequate amounts nor the successful
       implementation of its business plan can be assured. The combination of
       these factors raise substantial doubt about PalWeb's ability to continue
       as a going concern. It is management's opinion that the funding required
       to reach necessary production levels will be obtained and, based upon
       expressions of interest from potential customers, PalWeb will obtain
       adequate sales to reach a profitable status, and will continue as a going
       concern.

       Effective October 5, 2001, PFS notified its investment certificate
       holders that it was suspending redemptions of depositors' passbook
       savings accounts and time certificates. PFS has appointed a trustee to
       oversee a plan to liquidate the investment and savings certificates over
       a four year period ending December 31,2004. To facilitate the
       liquidation, PFS will be required to liquidate substantially all of its
       assets, including common stock holdings of PalWeb. As of May 31, 2001,
       there would not be sufficient funds to fully redeem the certificates;
       however, if necessary, the trustee can "put" certain shares to Paul
       Kruger, Chairman and CEO, and Mr. Kruger would agree to purchase ths
       shares at a price sufficient to effect the liquidation throughout the
       period of liquidation. At May 31, 2001, PFS had assets and liabilities as
       follows:

                                      F-10
<PAGE>

              Liquid assets:
                     Cash                                         $    70,000
                     Loans receivable, net
                      of allowance for losses                         814,000
                     PalWeb common stock, 43,500,000
                      shares at seven cents per share               3,050,000
                                                                  -----------
                                                                    3,934,000

              Liabilities:
                     Thrift accounts and
                      time certificates                             5,107,000
                     Accrued liabilities                              204,000
                     Notes payable                                    172,000
                                                                  -----------
                                                                    5,483,000

             Deficit                                              $(1,549,000)
                                                                  ===========

3.     SEGMENT OF BUSINESS
       -------------------

       The Company's business has two reportable segments - manufacturing, and
       finance. The manufacturing segment is the production of plastic pallets
       and the finance segment is the business of lending money. Both segments
       are individually presented in the accompanying financial statements. The
       accounting policies are the same as those described in the summary of
       significant accounting policies. Intersegment transactions are not
       significant.

4.     INVENTORY
       ---------

       Inventory at May 31, 2001 consists of:

                           Raw materials                    $   31,793
                           Finished goods                      110,896
                                                            ----------

                           Total inventory                  $  142,689
                                                            ==========

5.     LOANS RECEIVABLE
       ----------------

       Loans for finance and real estate at May 31, 2001 consist of the
       following:

                     Installment loans                      $1,249,924
                     Unearned interest                         (10,207)
                     Allowance for credit losses              (425,368)
                                                            ----------
                                                            $  814,349
                                                            ==========

       Changes in the allowance for credit losses for the year ended May 31,
       2001 are as follows:

            Balance, beginning of year                      $  489,847
            Provision                                          173,426
            Loans charged-off                                 (237,905)
            Recoveries                                               -
                                                            ----------
            Balance, end of period                          $  425,368
                                                            ==========

                                      F-11
<PAGE>

       At May 31, 2001, substantially all loans are on a nonaccrual basis.

       The installment loans, in order to reduce credit risk, are secured by
       various forms of collateral, including first mortgages on real estate,
       liens on personal property, savings deposits, etc. In the event of
       default by the borrower, the Company would incur a loss to the extent
       that the value of the collateral is less than the outstanding balance of
       the loan.

6.     PROPERTY, PLANT AND EQUIPMENT
       -----------------------------

       A summary of the property, plant and equipment is as follows:

             Manufacturing:
              Production machinery and equipment, including
               construction in progress of $1,643,624        $ 2,602,718
              Furniture and fixtures                             127,936
                                                             -----------
                                                               2,730,654
        Less: accumulated depreciation                          (405,171)
                                                             -----------

                                                             $ 2,325,483

       Depreciation expense for the years ended May 31, 2001 and 2000 is
       $353,609 and $210,031, respectively.

7.     OTHER ASSETS
       ------------

       For the manufacturing segment, at May 31, 2001, other assets consist of:

                       Patents, net of accumulated
                        amortization of $11,213             $    60,431
                       Deposits and other                        15,600
                                                            -----------
                          Total Other Assets                $    76,031
                                                            ===========

8.     NOTES PAYABLE
       -------------

       A summary of the notes and advances payable as of May 31, 2001 are as
       follows:

         Manufacturing:

          Note payable to Yorktown Management and
           Financial Services, LLC, interest at
           12%, due October 15, 2001                         $ 1,536,559
                                                             -----------


          Note payable to Hidalgo Trading Company, LLC,
           Interest at 12%, due June 1, 2001                 $   947,200
                                                             ===========


         Finance:

          Note payable to bank, prime interest rate
            (6.75% at 5/31/01),due September, 2004           $  171,836
                                                             ===========



                                      F-12
<PAGE>

       Maturities of notes payable for years ended May 31 is as follows:

                            2002                 $2,503,630
                            2003                     21,789
                            2004                     22,743
                            2005                    107,433

       The note payable to Yorktown Management and Financial Services, LLC is a
       line of credit totaling $3,000,000, 12% interest, due October 15, 2001.
       Effective June 1, 2001, the note payable to Hildalgo Trading Company,
       LLC, a company owned by Mr. Paul Kruger, Chairman and CEO, was renewed
       and extended into a line of credit totaling $2,000,000, 12% interest, due
       October 15, 2001. Both the Yorktown and Hidalgo notes are secured by
       PalWeb's equipment, inventory and accounts receivable.

9.     THRIFT ACCOUNTS AND TIME CERTIFICATES
       -------------------------------------

       As discussed in Note 2, PFS has suspended redemption of thrift and time
       certificates and will redeem the accounts annually over four years in
       substantially equal installments with the last installment to be made in
       December, 2004. As the time certificates mature, PFS will accrue interest
       at the passbook rate of 6%. At May 31, 2001, the thrift and time
       certificates total $5,107,257 and accrued interest totals $204,061.

10.    RELATED PARTY TRANSACTIONS
       --------------------------

       In September 1999, PalWeb obtained a $20,000,000 default judgement
       against a stockholder/investor. Additionally, the judgement canceled
       41,443,308 shares of common stock held by the investor. The investor has
       four years from the date of judgement to file an action seeking to set
       aside the judgement. The cancellation of the common stock was accounted
       for as a contribution to additional paid in capital.

       In March 2000, PalWeb obtained a default judgement against certain
       related parties, Chartex AG and New Inter HKB AG, causing the
       cancellation of 13,413,384 shares of common stock and advances from
       related party in the amount of $1,619,422. The cancellations were
       recorded as a contribution to additional paid in capital.

       During fiscal year 2000, the chairman and principal stockholder received
       11,874,790 shares of common stock in exchange for debt in the amount of
       $1,187,479. The exchange ratio was based on fair value of the common
       stock. In addition, the individual received 3,625,210 shares of common
       stock in exchange for services totaling $362,521. The value of the
       services is based on the fair value of the common stock. Also, the
       chairman and principal stockholder received 50,000,000 shares of common
       stock in exchange for the outstanding common stock of Pace Holding, Inc.
       and its subsidiary, PFS.

       PalWeb leases commercial space from Onward, LLC, owned by Mr. Paul
       Kruger, chairman and CEO. Total rentals paid to these entities were
       $199,380 and $153,820 in fiscal years 2001 and 2000, respectively. At May
       31, 2001, prepaid rent in the amount of $95,000 had also been paid to
       these entities.

                                      F-13
<PAGE>

       Mr. Kruger provides working capital to the company under a note as
       described in Note 8. The outstanding balances of the note and accrued
       interest payable at May 31 2001 are $947,200 and $98,994, respectively.

       In December, 2000, the real estate segment was sold to Mr. Paul Kruger
       for appraised value of $1,352,000. A gain of $31,099 was recorded from
       the sale.

11.    FEDERAL INCOME TAXES
       --------------------

       Deferred taxes as of May 31, 2001 are as follows:

                     Net operating loss                      $4,421,443
                     Loss on impairment of investment         1,151,070
                     Stock based compensation                    34,447
                     Allowance for credit losses                161,640
                                                             ----------
                                                              5,768,600
                     Less: Valuation allowance               (5,768,600)
                                                             ----------
                               Total                         $        -
                                                             ==========

       Management has provided a valuation allowance for the full amount of the
       deferred tax asset as PalWeb has yet to progress beyond the development
       stage of its operations. While management projects that the products
       being developed will be profitable and the deferred asset will ultimately
       be realized, PalWeb has not yet reached such stage in its development to
       place reasonable reliability on product acceptance and marketability

       The net change in deferred taxes is as follows:

                                                          Year Ended May 31,
                                                         2001           2000
                                                     -----------    -----------
                     Net operating loss              $   326,925    $ 1,001,163
                     Accrued liabilities                 (41,800)        41,800
                     Allowance for credit losses          93,240         68,400
                     Gain on sale of plant
                       for tax purposes                 (160,681)             -
                     Stock based compensation             34,447              -
                     Change in Valuation
                       allowance                        (252,131)    (1,111,363)
                                                     -----------    -----------

                               Tax Benefit           $         -    $         -
                                                     ===========    ===========

       PalWeb's effective tax rate differs from the federal statutory rate as
       follows:
                                                          Year Ended May 31,
                                                         2001           2000
                                                     -----------    -----------
             Tax benefit using statutory tax rate    $   534,419    $ 1,052,450
             Effect of state tax rates                    47,155         97,475
             Net change in valuation allowance          (252,131)    (1,111,163)
             Amortization of goodwill                   (244,059)             -
             Other deductions                            (85,384)       (38,762)
                                                     -----------    -----------

             Tax benefit, per financial statements   $         -    $         -
                                                     ===========    ===========

                                      F-14
<PAGE>

       PalWeb has a net operating loss (NOL) for Federal income tax purposes as
       of May 31, 2000 of $11,086,000 as follows:

                                                    Year of
                       Amount                      Expiration
                       ------                      ----------
                    $1,290,000                        2012
                     1,291,000                        2018
                     5,871,000                        2019
                     2,634,000                        2020
                       883,000                        2021

12.    DEFERRED INCOME
       ---------------

       In April 1999, an entity owned by Mr. Paul Kruger, chairman and CEO,
       acquired PalWeb's plant in Dallas, with a three year option, expiring
       April 2002, to purchase the property. Due to the existence of the option
       to repurchase the property, the transaction had been accounted for as a
       financing arrangement whereby the plant and related mortgage debt assumed
       by the buyer was maintained as an asset and depreciated and liability,
       respectively, for financial statement purposes. Effective May 1, 2001,
       PalWeb entered into a new lease with the entity and the option was
       cancelled. Accordingly, the asset and related liability were removed from
       the financial statements and the gain from the transaction is deferred to
       be amortized over the estimated use of the property. Since the
       transaction is with a related party, the amortization of the gain will be
       to additional paid in capital.

13.    STOCKHOLDERS' EQUITY
       --------------------

       Reference is made to Note 9, regarding certain stock transactions with
       related parties.

       PalWeb issued 12,334,790 shares of common stock and 3,963,890 shares of
       preferred stock in fiscal year 2000 to retire certain liabilities.

       In fiscal year 2000, PalWeb entered into consulting agreements with
       certain consultants in exchange for 11,000,000 shares of PalWeb common
       stock valued at $1,100,000. In fiscal year 2001, management and the
       consultants agreed to terminate the agreements and cancel the shares
       previously issued. As of May 31, 2001, the consultants have returned
       10,700,000 shares. Management recorded a $175,000 charge to income in the
       first quarter of fiscal year 2001 resulting from penalty for failure to
       perform certain requirements under the agreements. The settlement
       released both parties from further liability including the penalty. A
       credit of $1,275,000 was recorded as gain on settlement on contracts and
       liabilities.

       During 2001, PalWeb issued 100,000 shares of common stock to a creditor
       in settlement of $12,000 of accounts payable.

                                      F-15
<PAGE>

       Preferred stock is convertible into common stock at a ratio of one to
       one. Preferred stock outstanding at May 31, 2001 totals 2,525,000 shares.

14.    STOCK OPTIONS
       -------------

       Effective May 1, 2001, PalWeb issued options to certain employees to
       purchase 9,500,000 shares of its common stock at $0.04 per share. The
       options are vested immediately and exercisable for a period of ten years.
       PalWeb applies APB Opinion No. 25 in accounting for its stock options and
       accordingly, no compensation cost has been recognized for its stock
       options in the financial statements. Had PalWeb determined compensation
       cost at the grant date based on fair value under SFAS No. 123, PalWeb's
       net loss would have been increased to the pro forma amount indicated
       below:

                      Net loss, as reported                $ (1,478,721)

                      Net Los, Pro forma                   $ (1,571,821)

       The fair value of the options used to compute the compensation cost is
       estimated using the Black-Scholes option pricing model using the
       following assumptions:

                      Dividend Yield                            None
                      Expected Volatility                       1.47
                      Risk Free Interest Rate                   5%
                      Expected Holding Period                   5 years

       Following is a summary of option activity for the year ended May 31,
       2001:

                                                               Shares  Exercise
                                                                (000's)  Price
                                                                 -----  -------
                      Options outstanding at May 31, 2000            -  $    -
                      Granted                                    9,500     .04
                                                                 -----  -------
                      Options outstanding at May 31, 2001        9,500     .04

       The options are currently not exercisable since the exercise price of
       $0.04 is less than the common stock's par value of $0.10. Management
       anticipates proposing a change in the common stock's par value and
       expects to receive shareholder approval. Once the par value is
       appropriately reduced, all outstanding options will be exercisable.

15.    FINANCIAL INSTRUMENTS
       ---------------------

       PalWeb's financial instruments consist principally of accounts payable,
       accrued liabilities and notes and mortgages payable. Management estimates
       the market value of the notes and mortgage payable based on expected cash
       flows and believes these market values approximate carrying values at May
       31, 2001 and 2000.

                                      F-16
<PAGE>

16.    DISCONTINUED OPERATIONS
       -----------------------

       As discussed in Note 9, PalWeb sold its real estate segment for
       $1,352,000. Information relating to operations discontinued in 2001 and
       2000 is as follows:

                                                            2001        2000
                                                         ---------   ----------

                     Rental Income                       $ 110,040   $   28,114
                     Income (loss) from operations          42,739       (9,425)
                     Gain on disposal                       31,099         --


17.    SUPPLEMENTAL INFORMATION OF CASH FLOWS
       --------------------------------------

       Non-cash investing and financing activities for the year ended May 31,
       are as follows:


                                                            2001        2000
                                                         ---------   ----------
       Common stock issuances in exchange for
         (cancellations):
           Consulting services                          (1,070,000)   1,481,271
           Retirement of debt through
             issuance of common stock                       12,000    1,861,413
           Acquisition of Pace Holding, Inc.                  --      1,706,880

       Elimination of related party debt
         through default judgement                            --      1,619,422

       Conversion of preferred stock                        25,000      239,389

       Contribution of related party debt
         to paid in capital                                   --        189,000

       Reduction of debt and accrued interest
        through foreclosure, negotiated settle-
        ment or issuance of common stock                   471,783         --

       Interest paid                                       341,908       53,347

18.    LEASE AGREEMENT
       ---------------

       PalWeb leases commercial space from Onward, LLC, owned by Mr. Paul
       Kruger, chairman and CEO. The lease dated May 1, 2001, provides for a
       triple-net lease at the rate of $258,750 per year and is for one year
       with four one-year renewals.

       Rental expense on operating leases totaled $199,380 and $153,830 for 2001
       and 2000, respectively.

19.    REGULATORY REQUIREMENTS
       -----------------------

       PFS is regulated by the Oklahoma Department of Securities. Under the
       Oklahoma Securities Act, PFS is required to maintain stockholder's
       equity, which is defined as stockholder's equity plus the allowance for
       credit losses and valuation allowances, if any, equal to at least 10
       percent of thrift accounts, time certificates, and accrued interest

                                      F-17
<PAGE>

       payable thereon. As of May 31, 2001, PFS is not in compliance with the
       Act as it pertains to the stockholder's equity requirement.

       As discussed in Note 2, PFS has implemented a plan to liquidate the
       investment and savings certificates. PFS will redeem the securities over
       a four-year period ending December, 2004. A trustee has been appointed to
       oversee the redemption which requires liquidating substantially all of
       PFS' assets including its 43,500,000 shares of PalWeb common stock. If
       necessary, the trustee can "put" certain shares to Paul Kruger, Chairman
       and CEO, and Mr. Kruger would agree to purchase ths shares at a price
       sufficient to effect the liquidation throughout the period of
       liquidation.

20.    PROPOSED STOCK OFFERING
       -----------------------

       In May 2001, PalWeb signed a letter of intent for a private placement of
       500,000 shares of convertible preferred stock and warrants to purchase
       150,000,000 shares of common stock for a total of $5,500,000. The letter
       of intent is with Westgate Capital Company, L.L.C., a Tulsa, Oklahoma
       based private investment group ("Westgate") and Hidalgo Trading Company,
       LLC, which is 100% owned by the Company's Chief Executive Officer, Paul
       Kruger. Of the total $5.5 million consideration, $1 million will be
       provided by Hidalgo through conversion of existing secured indebtedness
       of PalWeb and $4.5 million will be provided in cash from an investment
       fund managed by Westgate. One of the principals of Westgate is Warren
       Kruger, the bother of Paul Kruger. Proceeds will be used to construct
       pallet production equipment, repay current liabilities and for working
       capital. Under the terms of the proposed investment, each share of the
       convertible preferred stock will be convertible into 350 shares of common
       stock of the Company or a total of 175,000,000 shares, which is an
       effective conversion price of $0.0286 per share. Holders of the preferred
       stock will also be entitled to cumulative dividends of 12% per annum,
       $1.20 per share, or a total of $600,000. The warrants will be exercisable
       at a price of $0.10 per share for a period of four years and all but 25%
       of the warrants will be callable by PalWeb if common stock trades at
       prices of $0.15, $0.20 and $0.25 per share, respectively. Closing of the
       proposed investment is subject to Westgate obtaining the necessary
       financing agreements and customary closing conditions and is expected to
       occur in one or more tranches within 120 days. Hidalgo is not required to
       convert its secured debt unless the entire $4.5 million in cash equity is
       raised. There is no assurance that this private placement will close. The
       issuance of the convertible preferred will necessitate an adjustment to
       PalWeb's authorized common stock to accommodate the conversion
       provisions.

                                       F-18