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                                  UNITED STATES
                       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, 2003
                                               ------------

    [_]        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
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                 (Name of small business issuer in its charter)

                Oklahoma                                       75-2954680
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(State or other jurisdiction of incorporation               (I.R.S. Employer
            or organization)                               Identification No.)

                 1607 West Commerce Street, Dallas, Texas 75208
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                    (Address of principal executive offices)

                                 (214) 698-8330
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                           (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, $0.0001 par value
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                                (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. [_]

The issuer's revenue for the year ended May 31, 2003, was $1,280,945.

As of September 8, 2003, the aggregate market value of the voting common stock
held by non- affiliates of the registrant, computed by using the average of the
high and low price on such date, was $5,372,000.

As of September 8, 2003, the issuer had outstanding a total of 12,790,451 shares
of its $0.0001 par value common stock.

                       DOCUMENTS INCORPORATED BY REFERENCE

None.

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  15

Item 7.           Financial Statements                                       25

Item 8.           Changes In and Disagreements with Accountants on
                  Accounting and Financial Disclosure                        25

Item 8A.          Controls and Procedures                                    26



PART III

Item 9.           Directors, Executive Officers, Promoters and Control
                  Persons; Compliance with Section 16(a) of the
                  Exchange Act                                               26

Item 10.          Executive Compensation                                     29

Item 11.          Security Ownership of Certain Beneficial Owners and
                  Management and Related Stockholder Matters                 32

Item 12.          Certain Relationships and Related Transactions             35

Item 13.          Exhibits and Reports on Form 8-K                           39

Item 14.          Principal Accountant Fees and Services                     47

                  Signatures                                                 47

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PART I.

ITEM 1.                    DESCRIPTION OF BUSINESS

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

         PalWeb Corporation was incorporated in Delaware on February 24, 1969,
under the name Permaspray Manufacturing Corporation. It changed its name to
Browning Enterprises Inc. in April 1982, to Cabec Energy Corp. in June 1993, and
became PalWeb Corporation in April 1999.

         On May 2, 2002, PalWeb completed a redomiciliation merger having the
effect of changing its state of incorporation from Delaware to Oklahoma. The
redomiciliation merger did not result in any change in the number of shares
owned or percentage of ownership of any shareholder of the company, nor did it
result in any change in the business, management, location of the principal
executive offices, assets, liabilities or shareholders' equity of the company.
Upon completion of the merger, the holders of PalWeb's previously outstanding
shares of common stock, par value $0.10 per share, and convertible preferred
stock had their shares automatically converted into an equal number of shares of
common stock, par value $0.0001 per share, of PalWeb as an Oklahoma corporation,
and each outstanding share of PalWeb's Series 2001 12% Cumulative Convertible
Senior Preferred Stock ("2001 Preferred Stock") was automatically converted into
one share of 2001 Preferred Stock of PalWeb as an Oklahoma entity under the same
terms and conditions. PalWeb's common stock continues to be traded on the
National Association of Securities Dealers Automatic Quotation over-the-counter
bulletin board system as further discussed below under Item 5, "Market for
Common Equity and Related Stockholder Matters."

         As authorized by PalWeb's certificate of incorporation, PalWeb's Board
of Directors determined that a reverse split of PalWeb's common stock would be
beneficial to the company by enhancing the efficiency of the market for the
stock. Accordingly, the Board approved a reverse split of 1 share for each 50
shares of common stock outstanding. The reverse split was effective as of June
25, 2002. Appropriate adjustments were also made to the terms of the outstanding
2001 Preferred Stock, warrants and stock options of the company to reflect the
reverse stock split in accordance with the terms of such instruments.

         Unless otherwise noted, all references in this Form 10-KSB to the
shares of the company's common stock, including historical references to the
common stock of the company issued in connection with transactions occurring
prior to the effective date of the reverse stock split, shall be made to the
number and price of such shares as adjusted for the reverse split discussed
above.


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HISTORY OF BUSINESS
-------------------

         For the past three fiscal years, PalWeb's primary business has been (i)
manufacturing and selling plastic pallets, and (ii) custom designing,
manufacturing and selling large plastic injection molding machines and systems.
As of May 31, 2003, PalWeb had not sold any plastic injection molding machines;
however, effective June 23, 2003, PalWeb entered into a licensing agreement with
ForcePro, LLC, under which ForcePro was granted the exclusive right to market
and sell its PIPER 600 Multi-Station Injection Molding Equipment ("PIPER 600")
and PalWeb will be entitled to receive a 5% royalty of the gross proceeds from
sales of the PIPER 600. The licensing agreement is discussed further under the
headings "Current Business" in Item 1 and "Patent Licensing Agreement" under
Item 12 of this Form 10-KSB.

         On July 9, 1999, Paul Kruger became Chairman of PalWeb. Subsequent to
that date through May 31, 2002, Paul Kruger or his affiliated entities provided
over $8 million in funding through common stock purchases, cash advances,
consulting services and the contribution of equity in PalWeb's building and
land. Approximately $1.7 million of such cash advances and other contributions
of equity in PalWeb's building and land were converted into 2001 Preferred Stock
and $7 million of debt financing was provided in fiscal year 2003 as discussed
under the heading "Liquidity and Capital Resources" in Item 6 of this Form
10-KSB. Effective January 10, 2003, Paul Kruger resigned as a director and
officer of PalWeb.

         On January 10, 2003, Warren Kruger, the brother of Paul Kruger, was
President and Chief Executive Officer of PalWeb. Beginning in mid 2001, Warren
Kruger, and certain of his affiliated entities began providing financial
assistance to the company. These entities have provided over $5 million in
funding primarily through loans which were converted into 2001 Preferred Stock
and an additional $914,000 in cash advances in fiscal year 2003 as discussed
under the heading "Liquidity and Capital Resources" in Item 6 of this Form
10-KSB.

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

PRODUCTS

         PalWeb's subsidiary, PPP, is the entity through which PalWeb conducts
its business of selling plastic pallets and plastic injection molding machines.
During the past two years, PalWeb has been focused on the construction of its
patent-pending PIPER 600 at a total cost of $5,500,000, which funds were
generated from the private placement of the 2001 Preferred Stock. PalWeb's PIPER
600, which has a production capacity of approximately 40,000 pallets per month,
became fully operational in May 2002.

         As of May 31, 2003, PalWeb's pallet product line included seven items
all of which are a 48" X 40" plastic pallet as follows: Hawker(TM) FR, Tank(TM),
Tank(TM) 3-Runner, Granada(TM), Granada(TM) 3-Runner, AP, AP 3-Runner, Stackable
and Nestable. The Hawker FR utilizes a patented inter-locking design featuring
CJ2(TM) fire retardant polymers that are UL 2335 certified, and has a free span
racking capacity of 2,500 lbs., dynamic load of 5,000 lbs., static load of
25,000 lbs. and weighs approximately 53 lbs. The Tank also utilizes the patented
inter-locking

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design, and has a dynamic load of 5,000 lbs., rackable load of 3,000 lbs., and
weighs approximately 50 lbs. The Tank 3-Runner utilizes a design that allows for
easier handling by electric pallet trucks, has a dynamic load of 5,000 lbs., and
weighs approximately 45 lbs. The Granada Picture Frame and Granada 3-Runner
pallets are produced from recycled plastic material. The Granada Picture Frame
has a rackable capacity of 2,500 lbs., a dynamic load of 5,000 lbs. and weighs
47.5 lbs. The Granada 3-Runner has a dynamic capacity of 5,000 lbs. and weighs
41 lbs. The AP Picture Frame and AP 3-Runner are solid-top pallets whereas the
Hawker, Granada and Tank are web-tops. The Stackable consists of tops of the
Tank pallet, has a dynamic load of 5,000 lbs. and weighs approximately 32 lbs.
The Nestable is the same as the Stackable except that the legs nestle inside one
another for convenient and more efficient storage. In addition, with the
purchase of the assets of Greystone Plastics, Inc. on September 8, 2003 (as
further described under the captions "Acquisition of Greystone, Inc." in this
Item 1 and "Other" in Item 6 of this Form 10-KSB), PalWeb has acquired the
capacity to produce an additional size of plastic pallet (40" X 32"), which is
marketed principally to the beverage industry.

         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.

         In January 2002, PalWeb submitted its Hawker FR plastic pallet
manufactured from its PIPER 600 production equipment with CJ2(TM) fire retardant
formula to Underwriters Laboratory ("UL") for UL certification with respect to
fire retardancy. The Hawker FR pallet successfully completed the UL tests and
received the UL Standard 2335 Classification Flammability certification with
respect to fire retardancy for commodity storage and idle pallet storage. This
UL certification has enhanced the marketability of this pallet.

         At PalWeb's request, its Hawker, Tank and Granada picture frames and
3-runners pallet designs were 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 pallets as having passed the above
referenced tests. The testing procedures found the pallets to be stronger and
more versatile than the typical hardwood pallet.

         In August 2001, PalWeb subjected its Tank plastic pallet (manufactured
from virgin plastic) to testing 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

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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.

         PalWeb uses a patent-pending CJ2(TM) fire retardant formula licensed
from Westgate Capital Company, L.L.C. ("WCC"), in connection with the production
of some of its plastic pallets. As discussed below, pallets produced with
CJ2(TM) fire retardant have received UL 2335 classification with respect to fire
retardancy. WCC is owned by Warren Kruger and William Pritchard, two of PalWeb's
directors. Mr. Pritchard's father, Dr. James Pritchard, a respected technical
advisor in the area of custom polymer formulations, was involved in the
development of the CJ2(TM) technology.

         Effective June 23, 2003, PalWeb entered into certain agreements with
ForcePro, LLC, which give ForcePro the exclusive right to market and sell the
PIPER 600. Bryan Kirchmer, a member of PalWeb's board, is the President of
ForcePro. The term of the agreement is for five years with the right to renew
for three additional terms of five years each. PalWeb will receive a royalty of
5% of the gross proceeds from sales of the PIPER 600. ForcePro has an exclusive
right to market the PIPER 600 subject to royalty payments of $200,000 by April
1, 2005 and $100,000 annually thereafter. There is no assurance that ForcePro
will be able to sell any of the newly-designed PIPER 600 plastic injection
molding machines. These agreements will be attached to and explained in further
detail in PalWeb's quarterly report on Form 10-QSB for the period ended August
31, 2003, which will be filed pursuant to the rules and regulations of the SEC.
For a description of a Patent License Agreement dated January 1, 2003 between
PalWeb Corporation and Gravity Management & Engineering Group, LLC, of which
Bryan Karchner is a member, that was superceded and replaced by the license
agreement described above, see the caption "Patent Licensing Agreement" under
Item 12 of this Form 10-KSB.

PALLET INDUSTRY

         According to the U. S. Forest Service, as printed in the National
Wooden Pallet and Container Association publication, approximately 400 million
new 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. Projected sales of 40,000 pallets per month, or 480,000 pallets per year,
is less than 1/10th of 1% of the new pallet market, and it appears that the
market is moving toward the use and purchase of plastic pallets.

         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-

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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 industries, however, have
developed specialized pallet sizes. PalWeb's pallets currently produced on its
PIPER 600 are 40 inches by 48 inches in size. The purchase of the assets of
Greystone Plastics has provided PalWeb with an additional size of 40 inches by
32 inches which is marketed principally to the beverage industry.

         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. PalWeb
management believes that the trend will continue to switch from wood to plastic,
with the only limiting factor being price. 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.

                                        8
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EMPLOYEES

         As of May 31, 2003, PalWeb leased 13 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. In addition, PalWeb uses a temporary personnel
service to provide additional production personnel as needed. The number of
personnel utilized during the year ended May 31, 2003 generally ranged from 8 to
10. Should PalWeb successfully increase its production levels to 40,000 pallets
per month, it will need to employ a total of 15 to 25 production employees and 3
to 5 supervisory/staff employees.

MARKETING

         PalWeb distributes its pallets through a combination of a network of
independent contractor distributors and sales by PalWeb officers and employees.
PalWeb will continue this sales and marketing plan until sales volumes justify
the development of an internal sales staff. PalWeb believes that PalWeb's
patents on its plastic pallet designs, 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.

         PalWeb has generated and plans to continue to generate interest in its
pallets by attending trade shows sponsored by industry segments that would
benefit from PalWeb's products. PalWeb attributes the recent increase in
interest in its products to PalWeb's attendance at trade shows. PalWeb presently
has plans to attend additional trade shows in the future. Currently, PalWeb has
approximately 10 active distributors. PalWeb primary focus is to provide quality
product and service to its existing customer base while continuing its marketing
efforts to broaden the customer base. PalWeb derives, and expects that in the
foreseeable future it will continue to derive, substantially all of its revenue
from a few large customers. There is no assurance that PalWeb will retain these
customers' business at the same level, or at all. The loss of a material amount
of business from any one of these customers could have a material adverse effect
on PalWeb.

PATENTS AND TRADEMARKS

         PalWeb seeks to protect its technical advances by pursuing national and
international patent protection for its products and methods when appropriate.
As of May 31, 2003, PalWeb's subsidiary, PPP, held the following patents that
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

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         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 more compact
plastic injection molding machines.

         PalWeb also recently filed for patent protection for its PIPER 600
Multi-Station Injection Molding Equipment. In addition, PalWeb uses a
patent-pending CJ2(TM) fire retardant formula licensed from WCC in connection
with the production of PalWeb's plastic pallets. Pallets produced with CJ2(TM)
fire retardant have received UL 2335 classification with respect to fire
retardancy.

         In addition to guarding its technical innovation, PalWeb has received
federal trademark protection of the HAWKER, GRANADA and TANK trademarks used in
PalWeb's pallet product line. An application for federal registration is also
pending for the "PALWEB" service mark used for PalWeb's product sale and leasing
operations.

SUBSIDIARIES

         As of May 31, 2003, PalWeb had one wholly-owned subsidiary -- Plastic
Pallet Production, Inc., a Texas corporation. In August, 2003, PalWeb organized
Greystone Manufacturing, LLC, an Oklahoma limited liability company, of which
PalWeb is the sole member. Greystone Manufacturing, LLC, acquired the assets of
Greystone Plastics, Inc. effective September 8, 2003 (as further described under
the captions "Acquisition of Greystone, Inc." in this Item 1 and "Other" in Item
6 of this Form 10-KSB).

ACQUISITION AND DISPOSITION 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 1,000,000 shares of its common stock in exchange for all the outstanding
stock of Pace Holding, Inc., and PFS became an indirect wholly owned subsidiary
of PalWeb. All of the outstanding stock of Pace Holding, Inc., was owned by Paul
Kruger at time he was Chairman and Chief Executive Officer of PalWeb.

         PFS has been in business since 1952 and was 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

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regulatory difficulties with the ODS. As a result of these difficulties, PFS did
not engaged in any pallet financing activities.

         PFS entered into a negotiated arrangement with the ODS in late 2000
whereby a plan (the "Plan") was devised for redeeming depositors' passbook
savings accounts and time certificates (collectively referred to herein as
"Deposits") of PFS. In general, the Plan provided a method for redeeming the
outstanding Deposits through the transfer of 870,000 shares of the PalWeb common
stock owned by PFS ("PFS Shares") to an independent trustee and the sale of the
PFS 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 with the net sales proceeds being used to redeem the Deposits. Pursuant
to that certain Put Agreement (the "Put Agreement") by and between Paul Kruger,
Bill J. English, as Trustee (the "Trustee"), and PFS dated December 20, 2000,
the percentage of PFS Shares to be purchased by Paul Kruger is the difference
between the amount 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 account balances.

         In accordance with the Put Agreement and the Plan, on December 20,
2001, PFS made a payment of $357,000 to the Trustee, and Paul Kruger purchased
177,000 shares of the PFS Shares from the Trustee for $1,000,000 in order to
redeem 33 1/3% of account balances outstanding as of January 1, 2002. This was
the first time that any PFS Shares had been put to Paul Kruger. Accordingly, as
of December 20, 2001 (and as of May 31, 2002), there were 693,000 PFS Shares
held by the Trustee.

         Effective May 31, 2002, PalWeb sold 100% of the stock of PP Financial,
Inc., to Paul Kruger in exchange for a $1,000,000 loan to PalWeb to be funded,
at the direction of PalWeb's Board of Directors, by Paul Kruger on or subsequent
to May 31, 2002, with the condition that Paul Kruger assume any and all claims
and liabilities of PP Financial, Inc., and its wholly-owned subsidiary PFS. The
$1,000,000 loan was considered by PalWeb to be additional consideration for the
sale because of PalWeb's need for funding to continue operations, the loan's
below market fixed interest rate of 6% per annum, the subordination of the loan
to any and all bank and institutional indebtedness of PalWeb and the one-year
balloon maturity of principal and interest under the loan. The transaction also
resulted in the removal of approximately $3,749,951 in PFS investment
certificate liabilities reflected on PalWeb's consolidated balance sheet and
increased PalWeb's shareholders' equity by approximately $3,796,250. The sale of
the stock of PP Financial, Inc., to Paul Kruger was approved by the members of
PalWeb's Board of Directors other than Paul Kruger. Paul Kruger did not
participate in the discussion or approval process regarding such sale. Effective
January 10, 2003, Paul Kruger refinanced outstanding loans of $2,150,000,
including the $1,000,000 loan described above, to PalWeb by providing a
$7,000,000 loan at an interest rate of prime plus 3%, due June 4, 2004, secured
by all of

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PalWeb's assets as further described under the caption "Loan from Paul Kruger"
in Item 6 of this Form 10-KSB.

ACQUISITION OF GREYSTONE PLASTICS, INC.

         Effective September 8, 2003, PalWeb acquired the assets of Greystone
Plastics, Inc., a manufacturer of plastic pallets, for $12,500,000 including
$4,200,000 in cash, $8,300,000 in notes payable to the seller or an owner of the
seller as follows: a $5,000,000 note payable at 7.5% interest, due October 1,
2008; a $2,500,000 note payable at 7.5% interest, due October 1,2018; and an
$800,000 note at 6% interest, due October 26, 2007. Simultaneously with and in
order to partially finance such acquisition, PalWeb sold 50,000 shares of
preferred stock, Series 2003, par value $0.0001 ("2003 Preferred Stock"), to
Paul Kruger, a major stockholder of PalWeb, at $100 per share for a total
purchase price of $5,000,000. The 2003 Preferred Stock has a dividend rate equal
to the prime rate of interest plus 3.25% and may be converted into common stock
at the conversion rate of $1.50 per share, or for an aggregate of 3,333,333
shares of common stock. In addition, the holders of the 2003 Preferred Stock
have been granted certain voting rights so that such holders have the right to
elect a majority of the Board of Directors of PalWeb. These and other terms of
the 2003 Preferred Stock and further details relating to the acquisition of the
assets of Greystone Plastics, Inc. will be explained in further detail in a Form
8-K relating to such acquisition to be filed by PalWeb in accordance with the
rules and regulations of the Securities and Exchange Commission.

ITEM 2.  DESCRIPTION OF PROPERTY

         In connection with the preferred stock financing completed in January
2002 and described under the heading "Liquidity and Capital Resources" in Item 6
of this Form 10-KSB, PalWeb acquired the land and building in which its
manufacturing facilities are located. Effective September 8, 2003, PalWeb sold
the land and building pursuant to a sale and leaseback transaction as described
under the heading "Liquidity and Capital Resources" in Item 6 of this Form
10-KSB. The property consists of 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.

         In connection with the acquisition of the assets of Greystone Plastics,
Inc. on September 8, 2003, PalWeb acquired land and a building in Bettendorf,
Iowa as described under the heading "Liquidity and Capital Resources" in Item 6
of this Form 10-KSB. This warehouse has 60,000 square feet of manufacturing and
warehouse space.

         The warehouse/manufacturing facilities are sufficiently equipped and
designed to accommodate the manufacturing of plastic pallets and/or plastic
injection molding systems. The Dallas warehouse currently has four heavy duty
cranes installed above the work areas, and is situated on an operational
railroad spur.

         PalWeb has sufficient office equipment, such as computers, printers,
copiers, etc., to operate effectively.

                                       12
<PAGE>

ITEM 3.  LEGAL PROCEEDINGS

         As of May 31, 2003, there was one material legal proceeding in which
PalWeb was involved.

         PalWeb Corporation, Inc. and Plastic Pallet Production, Inc.,
Plaintiffs v. Vimonta AG, Defendant, 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. On May 17, 2001, the court overruled
Vimonta's objection, determining that the U.S. District Court for the Northern
District of Texas had jurisdiction over Vimonta.

         On July 20, 2001, counsel for Vimonta withdrew in this case. The court
entered an order requiring Vimonta to obtain new counsel by August 24, 2001, or
default judgement would be entered against Vimonta. Vimonta failed to obtain
counsel by the required date. On May 20, 2002, the court entered an Order To
Show Cause For Failure To Comply With Court Order directing Vimonta to show
cause in writing on or before June 3, 2002, why default judgment should not be
entered against it (the "Show Cause Order").

                                       13
<PAGE>

         Vimonta failed to respond to the court's Show Cause Order, and on June
11, 2002, this court entered an order granting default judgment against Vimonta
and dismissing Vimonta's counterclaim (the "Default and Dismissal Order") and
directed plaintiffs to submit a proposed final judgment. Both the Show Cause
Order and the Default and Dismissal Order were served by the clerk of the court
on Vimonta, but both were returned unclaimed. PalWeb thereafter obtained leave
of Court to serve all relevent motions and orders on Vimonta at their principal
place of business in Switzerland in accordance with the Hague Convention on the
Service Abroad of Judicial and Extrajudicial Documents. All such documents were
properly served on Vimonta on January 10, 2003. Vimonta failed and refused to
comply with the Court's previous order directing Vimonta to obtain new counsel.
By order entered on June 9, 2003, the Court afforded Vimonta one last chance to
obtain substitute counsel in this action, but Vimonta again failed and refused
to do so.

         On August 19, 2003, this action was concluded when the court entered
Final Judgement by default in favor of PalWeb and PPP and against Vimonta,
declaring that Vimonta has no enforceable rights to the patents, technology and
other proprietary information of PalWeb and PPP and that the alleged agreements
between PalWeb, PPP and Vimonta are void and unenforceable against PalWeb and
PPP. The Court dismissed, without prejudice, the claim of PalWeb and PPP for
money damages against Vimonta and ordered that the Final Judgment constitutes a
final judgement on all issues in the case.

         Representatives of Vimonta have previously threatened suit against
PalWeb in Germany. However, neither the company nor counsel has received any
notice that any such suit has been commenced.

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

None.

PART II

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

MARKET INFORMATION:

         PalWeb's common stock is traded on the National Association of
Securities Dealers Automatic Quotation (NASDAQ) over-the-counter bulletin board
system ("OTCBB"). From February 2, 2001 until June 25, 2002 (the effective date
of the reverse split of PalWeb's common stock), PalWeb's common stock traded on
the OTCBB, with "PAEB" as its trading symbol. Since that time, PalWeb's common
stock has traded on the OTCBB with "PLWB" 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
      --------------                 ----                        ---
      Aug. 31, 2001                 $5.75                       $2.55
      Nov. 30, 2001                  4.20                        1.75
      Feb. 29, 2002                  9.45                        3.00
       May 31, 2002                  7.25                        3.00
      Aug. 31, 2002                  4.00                        1.10
      Nov. 30, 2002                  2.85                        1.21

                                       14
<PAGE>

      QUARTER ENDING                 HIGH                        LOW
      --------------                 ----                        ---
      Feb. 29, 2003                  1.60                        0.51
       May 31, 2003                  0.90                        0.51

HOLDERS:

         As of May 31, 2003, PalWeb had approximately 1,192 common stockholders
of record.

         As of May 31, 2003, there were approximately 2,906 beneficial owners
(including those holding in street names) of PalWeb's common stock.

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:

         As holders of PalWeb's 2001 Preferred Stock, WCC and Hildalgo Trading
Company, LC ("Hildalgo"), an entity wholly owned by Paul Kruger, are entitled to
cumulative dividends of 12% per annum, $1.20 per share, or a total of $900,000.
In lieu of the quarterly payment of cash dividends due March 31, 2003 (an
aggregate of $224,384), PalWeb authorized the issuance of 407,971 shares of
common stock of PalWeb to WCC and Hildalgo. As of May 31, 2003, these shares had
not yet been issued. PalWeb will rely on the exemption set forth in Section 4(2)
of the Securities Act of 1933, as amended, in connection with this issuance of
common stock. WCC and Hildalgo are sophisticated entities, and there will be no
underwriting and no commissions paid to any party in connection with the
issuance of such common stock.

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, the
introduction of new products into the market and potential future financings.
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.

                                       15
<PAGE>

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

PALWEB CONTINUES TO OPERATE AT A LOSS.

         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. Although PalWeb has
completed the construction of a fully operational plastic injection molding
machine and commenced the sales of plastic pallets, it continues to incur
significant losses from operations and there is no assurance that it will
achieve profitability or obtain funds to finance continued operations.

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.

         PalWeb is in process of trying to gain market acceptance of its
pallets. 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 its pallets as well as the cost
benefits of its pallets compared to wood pallets. 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
sufficient cash flow to sustain operations for the foreseeable future. PalWeb
will need to raise

                                       16
<PAGE>

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 IS DEPENDENT ON A FEW LARGE CUSTOMERS.

         PalWeb derives, and expects that in the foreseeable future it will
continue to derive, substantially all of its revenue from a few large customers.
There is no assurance that PalWeb will retain these

customers' business at the same level, or at all. The loss of a material amount
of business from any one of these customers could 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. PalWeb currently has certain patent applications pending. There can
be no assurance that patent

                                       17
<PAGE>

applications will result in patents being issued, or that, if issued, the
patents will afford protection against competitors with similar technology.

         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 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

                                       18
<PAGE>

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.

         PalWeb is dependent on the experience, abilities and continued services
of its current management personnel. In particular, Warren Kruger, its President
and Chief Executive Officer, has played a significant role in the development
and management of PalWeb. The loss or reduction of services of Warren 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 SHAREHOLDERS OF ONE OF PALWEB'S FORMER 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. Approximately 693,000 shares of PalWeb's free trading common stock
are held in trust for one of PalWeb's former wholly owned subsidiaries and can
be sold into the market at any time. 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

                                       19
<PAGE>

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.

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 or its
common stock 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 EFFECT 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 effect on PalWeb's financial condition or other effects on PalWeb.
There is no assurance this proceeding will be resolved favorably.

PALWEB'S PRINCIPAL SHAREHOLDERS OWN A SIGNIFICANT AMOUNT OF COMMON STOCK, GIVING
THEM CONTROL OVER CORPORATE TRANSACTIONS AND OTHER MATTERS.

         Warren Kruger, President and Chief Executive Officer of PalWeb, and
entities with which he is affiliated, beneficially own over 40% of PalWeb's
common stock. Paul Kruger, Warren Kruger's brother, also beneficially owns over
40% of PalWeb's common stock. While these shareholder groups have not agreed to
act in concert with respect to all shareholder matters, they may act together in
connection with matters presented to the shareholders in the future. This
concentrated ownership makes it unlikely that any other holder or group of
holders of common stock will be able to affect the way PalWeb is managed or the
direction of its business. These factors may also delay or prevent a change in
the management or voting control of PalWeb.


                                       20
<PAGE>

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

GENERAL

         The consolidated statements include PalWeb and its wholly-owned
subsidiary, PPP. Effective May 31, 2002, PalWeb has disposed of its interest in
PFS as discussed in "Discontinued Operations" below.

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

         PalWeb's primary business is the manufacturing and selling of plastic
pallets. During the fiscal year ended May 31, 2002, PalWeb also began to explore
the possibility of selling its plastic injection molding equipment to third
parties. Effective June 23, 2003, PalWeb entered into a licensing agreement with
ForcePro, LLC, which gives ForcePro the exclusive right to market and sell the
PIPER 600. Pursuant to the terms of the licensing agreement, PalWeb will receive
a royalty of 5% of the gross proceeds from sales of the PIPER 600. For more
details regarding this license agreement, see the caption titled "Patent License
Agreement" under Item 12 of this Form 10-KSB.

         During the fiscal year 2003, PalWeb produced an average of 4,000
pallets per month. As of May 31, 2003, PalWeb had 13 full-time employees. During
the fiscal year 2002, the construction and installation of PalWeb's new PIPER
600 production line to manufacture plastic pallets was completed at a cost of
approximately $5,500,000. This new production line increased the capacity to
about 40,000 plastic pallets per month. Production levels have generally been
governed by sales and will increase as sales dictate. There is no assurance that
PalWeb will receive orders for pallets that will maintain, or justify any
significant increase to its current production level.

         For all years 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 that offsets the
amount of any tax benefit available for each period presented in the
consolidated statement of operations.

YEAR ENDED MAY 31, 2003, COMPARED TO YEAR ENDED MAY 31, 2002

         CONTINUING OPERATIONS

         Sales for fiscal year 2003 were $1,280,945 compared to $92,958 in
fiscal year 2002. Sales levels began to increase significantly during fiscal
year 2003 as a result of the continuing sales effort, introduction of new
product lines and the completion of the new production equipment.

         Cost of sales were $2,438,342 (190% of sales) and $621,919 (669% of
sales) in fiscal years 2003 and 2002, respectively. PalWeb's primary effort in
fiscal year 2002 was the construction and installation of the PIPER 600
injection molding machines; accordingly, the

                                       21
<PAGE>

relationship of cost of sales to sales is not comparable to fiscal year 2003.
Production levels during fiscal year 2003 averaged approximately 10% of
capacity. Accordingly, fixed costs for fiscal year 2003 in relation to the level
of production resulted in a higher rate of cost of sales to sales. In addition,
substantial costs were incurred during the first quarter of fiscal year 2003 for
startup costs on the PIPER 600 and for repair and maintenance costs of
approximately $516,000 incurred on the prototype injection molding machine and
the production plant.

         General and administrative costs were $1,312,824 in fiscal year 2003
compared to $1,498,239 in fiscal year 2002 for a decrease of $185,415. This
decrease results from a decline in development of product costs of approximately
$145,000 and rent expense of $212,000 ( the company acquired its production
plant in January 2002) offset by an increase in administrative salaries and
commissions of about $96,000.

         During fiscal year 2003, PalWeb recorded an expense of $310,875 to
recognize an impairment cost on its prototype injection molding machine. The
expense was recorded to reduce the cost of the equipment to its expected future
cash flows.

         Interest expense increased $202,138 from $231,618 in fiscal year 2002
to $433,756 in fiscal year 2003. Total interest in fiscal year 2002 was $403,995
of which $172,377 was capitalized as part of the new production equipment.

         The loss from continuing operations increased $956,034 from $2,258,818
in fiscal year 2002 to $3,214,852 in fiscal year 2003. This increase results
from the reasons discussed above.

         DISCONTINUED OPERATIONS

         Effective May 31, 2002, PalWeb transferred its ownership in PFS to Mr.
Paul Kruger, who at that time was Chairman and Chief Executive Officer of
PalWeb, in exchange for a loan agreement of $1,000,000. The operations of PFS
for fiscal year 2002 are classified as discontinued operations in the
accompanying financials. The loss on such discontinued operations for fiscal
year 2002 is $197,012.

         COMBINED

         The consolidated net loss for fiscal year 2002 of $2,455,830 compared
to the net loss of $3,214,852 for fiscal year 2003. After deducting dividends to
preferred stockholders of $900,166 and $211,440 in fiscal years 2003 and 2002,
respectively, the net loss to common stockholders is $4,115,018 ($0.79 per
share) in fiscal year 2003 compared to $2,667,827 ($0.57 per share) in fiscal
year 2002.


                                       22
<PAGE>

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

         GENERAL

         Currently, PalWeb's management projects that the sales of approximately
15,000 pallets per month are necessary to break even. Sales at this level would
provide monthly revenues of approximately $450,000 and should provide sufficient
cash flow to sustain its operations including about $225,000 in cash operating
expenses for labor, recurring overhead and interest and $225,000 for material
costs. 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.

         PalWeb has had difficulty in obtaining financing from traditional
financing sources. As described below, substantially all of the financing that
PalWeb has received through May 31, 2003, has been provided by loans from
entities controlled Warren Kruger, President and Chief Executive Officer of
PalWeb, and from entities affiliated with Paul Kruger, brother of Warren Kruger,
and through the offering of 2001 Preferred Stock described below to the same
persons. There is no assurance that Paul Kruger or Warren Kruger will continue
to provide loans or loan guarantees in the future.

         PREFERRED STOCK FINANCING

         On January 4, 2002, PalWeb entered into a Securities Purchase
Agreement, which was subsequently amended on January 21, 2002 (the "Purchase
Agreement"), with Hildalgo and Onward, LLC ("Onward"), entities that are 100%
owned by Paul Kruger, and Westgate Investments, L.P. ("Westgate"), of which WCC
is the general partner (collectively, the "Purchasers"). Pursuant to the
Purchase Agreement, PalWeb issued 750,000 shares of 2001 Preferred Stock and
warrants to purchase up to 4,500,001 shares of common stock for $5.00 per share
to the Purchasers in exchange for total consideration of $7,500,000. Hildalgo
acquired 95,020 shares of 2001 Preferred Stock and warrants to purchase 570,120
shares of common stock in exchange for the conversion of $950,200 of existing
indebtedness owed to Hildalgo. Onward acquired 81,282 shares of 2001 Preferred
Stock and warrants to purchase 487,693 shares of common stock in exchange for
the conversion of $276,082 of existing indebtedness owed to Onward and $536,745
of equity in the Building, based on an agreed value of $1,350,000, less
indebtedness assumed by PalWeb of $813,255. Westgate acquired 573,698 shares of
2001 Preferred Stock and warrants to purchase 3,442,188 shares of common stock
in exchange for $522,680 in cash and the conversion of $5,214,297 of existing
indebtedness owed to entities with which Warren Kruger is affiliated. Subsequent
to the original issuance of the 2001 Preferred Stock, the shares of 2001
Preferred Stock and warrants originally issued to Onward were transferred to
Paul Kruger.

         Each share of the 2001 Preferred Stock has a stated value of $10 per
share and is convertible at any time into 7 shares of common stock of PalWeb or
a total of 5,250,000 shares, which is an effective conversion price of $1.429
per share. Holders of the 2001 Preferred Stock are also entitled to cumulative
dividends of 12% per annum, $1.20 per share, or a total of

                                       23
<PAGE>

$900,000. The warrants are exercisable at a price of $5.00 per share for a
period of four years, subject to acceleration of the expiration date for three
separate 25% tranches of the total warrants, if PalWeb's common stock trades at
prices of $7.50, $10.00 and $12.50 per share, respectively.

         Effective September 8, 2003, the holders of the 2001 Preferred Stock
elected to convert their preferred stock holdings into 5,250,000 shares of
common stock. In addition, the holders of the 2001 Preferred Stock gave consent
to PalWeb to cancel, and PalWeb cancelled, the warrants described in the
preceding paragraph.

         Effective September 8, 2003, PalWeb issued 50,000 shares of Series 2003
Cumulative Convertible Senior Preferred Stock, par value $0.0001, at a stated
rate of $100 per share for a total of $5,000,000 to Paul Kruger. Each share of
the 2003 Preferred Stock is convertible at any time into approximately 66.67
shares of common stock. The proceeds of the offering were primarily used for the
acquisition of the assets of Greystone Plastics, Inc. The holders of this 2003
Preferred Stock have been granted certain voting rights so that such holders
have the right to elect a majority of the Board of Directors of PalWeb. These
and other terms of the 2003 Preferred Stock and further details relating to the
acquisition of the assets of Greystone Plastics, Inc. will be explained in
further detail in a Form 8-K relating to such acquisition to be filed by PalWeb
in accordance with the rules and regulations of the Securities and Exchange
Commission.

         PalWeb does not anticipate that it will make cash dividend payments to
any holders of its common stock unless and until the financial position of
PalWeb improves through increased revenues, another financing, or otherwise.

         YORKTOWN FINANCING

         Effective December 4, 2002, Yorktown Management & Financial Services,
LLC ("Yorktown"), an entity 100% owned by Warren Kruger, executed an unsecured
$500,000 loan to PalWeb at 9% interest, due January 4, 2003 with automatic
30-day extensions until Yorktown provides notice of its election not to further
extend such maturity. Yorktown has not provided any notice of an election not to
extend the maturity of the note. In addition, at May 31, 2002, Yorktown has
advanced an additional $401,422 for which interest is being accrued at the rate
of 9%.

         Effective September 8, 2003, Yorktown agreed and PalWeb authorized the
issuance of 629,811 shares of common stock in exchange for $900,000 of
indebtedness.

         LOAN FROM PAUL KRUGER

         Effective January 10, 2003, Paul Kruger refinanced outstanding loans of
$2,150,000 to PalWeb by providing a $7,000,000 loan at an interest rate of prime
plus 3%, due June 4, 2004, secured by all of PalWeb's assets. The additional
proceeds were used to pay outstanding bank debt of approximately $4,242,700 and
to provide working capital.

                                       24
<PAGE>

         Effective September 8, 2003, PalWeb completed a sale and leaseback
transaction whereby it sold for agreed upon prices its plant for $1,350,000 and
certain production equipment for $5,650,000 to a company owned by Paul Kruger in
exchange for the $7,000,000 note payable to Paul Kruger. The assets were sold at
approximately net book value. The lease agreement for the plant is a three year
triple net lease with a monthly rental of $17,720. The equipment lease is for
130 months with a monthly rental of $48,000 beginning six months after the first
day of the lease.

         OTHER

         Effective September 8, 2003, PalWeb acquired the assets of Greystone
Plastics, Inc., a manufacturer of plastic pallets, for $12,500,000 including
$4,200,000 in cash, $8,300,000 in notes payable to the seller as follows: a
$5,000,000 note payable at 7.5% interest, due October 1, 2008; a $2,500,000 note
payable at 7.5% interest, due October 1,2018; and an $800,000 note at 6%
interest, due October 26, 2007. The proceeds from the issuance of the Series
2003 Preferred Stock, described above, were utilized to make the cash payment.
As stated above, the terms of the 2003 Preferred Stock and further details
relating to the acquisition of the assets of Greystone Plastics, Inc. will be
explained in further detail in a Form 8-K relating to such acquisition to be
filed by PalWeb in accordance with the rules and regulations of the Securities
and Exchange Commission.

         PalWeb had accumulated a working capital deficit of $1,133,945 at May
31, 2003 which includes $901,422 due to Yorktown Management and $971,133 in
accounts payable and accrued liabilities. This deficit reflects the uncertain
financial condition of PalWeb resulting from its inability to obtain long term
financing. There is no assurance that PalWeb will secure such financing.

         PalWeb continues to be dependent upon Paul Kruger and Warren Kruger 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.

ITEM 7.  FINANCIAL STATEMENTS

         The Financial Statements of PalWeb are set forth on pages F-1 through
F-19 inclusive, found at the end of this report.

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

         None.


                                       25
<PAGE>

ITEM 8A. CONTROLS AND PROCEDURES.

         Based on their evaluations, PalWeb's Chief Executive Officer and
Principal Financial Officer have concluded that the PalWeb's disclosure controls
and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange
Act) as of the end of the period covered by this report on Form 10-KSB are
effective to ensure that information required to be disclosed by PalWeb in
reports that it files or submits under the Exchange Act are recorded, processed,
summarized and reported within the time periods specified in Securities and
Exchange Commission rules and forms.

         During the period covered by this report on Form 10-KSB, there have
been no changes in PalWeb's internal control over financial reporting that have
materially affected or are reasonably likely to materially affect the PalWeb's
internal control over financial reporting.

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 at annual meetings of shareholders. Executive
officers serve at the pleasure of the Board of Directors.

                                                                    TERM AS
                                                                    DIRECTOR
      NAME                             POSITION                     EXPIRES
      ----                             --------                     -------
Warren F. Kruger         President and Chief Executive Officer        2003

Bryan R. Kirchmer                      Director                       2003

Bradley C. Shoup                       Director                       2003

William W. Pritchard                   Director                       2003

Williams W. Rahhal              Chief Financial Officer               N/A

WARREN F. KRUGER
PRESIDENT, CHIEF EXECUTIVE OFFICER AND DIRECTOR

         Mr. Warren F. Kruger, Manager/CEO of privately-held Yorktown Management
& Financial Services, L.L.C., is 47 years old. Yorktown Management is involved
in investment banking, real estate, manufacturing, and energy endeavors. Mr.
Kruger earned a Bachelor of Business Administration Degree from the University
of Oklahoma, and an Executive MBA from Southern Methodist University. Mr. Kruger
has over twenty-five years experience in the

                                       26
<PAGE>

financial services industry. In 1980, Mr. Kruger co-founded MCM Group, Ltd.,
which owned and controlled United Bank Club Association, Inc. until 1996 when
the firm was sold to a subsidiary of Cendant Corp. (CD- NYSE). He also owned and
operated Century Ice, a manufacturer and distributor of ice products from 1996
to 1997, when Packaged Ice, Inc. (ICY-AMEX) acquired Century Ice in an industry
rollup. Mr. Kruger is a partner with William W. Pritchard in privately-held WCC,
with investments in oil and gas, real estate, and investment banking.
Additionally, he is a director of privately-held The F & M Bank and Trust
Company in Tulsa, Oklahoma.

         Mr. Kruger became a director of PalWeb on January 4, 2002 and has
served as President and Chief Executive Officer since January 10, 2003. He is
the brother of Paul A. Kruger.

BRYAN R. KIRCHMER
DIRECTOR

         Mr. Bryan R. Kirchmer, age 32, earned a Bachelor of Science in
Mechanical Engineering from the University of Tulsa and is a registered
Professional Engineer in the State of Oklahoma. Mr. Kirchmer has business and
project development experience in a variety of industries including investment
casting, control valves, and plastics equipment. Mr. Kirchmer is a co-founder of
an independent engineering consulting firm serving the plastics industry,
Gravity Management and Engineering Group, Inc. ("GME Group"). As President of
GME Group, Mr. Kirchmer has been responsible for developing and implementing
marketing strategies for the entire range of project management, engineering and
construction (EPC). In recent years, Mr. Kirchmer has spent a substantial amount
of time working on the development of next-generation injection molding
machines. Mr. Kirchmer and GME Group have been responsible for overseeing the
construction of the company's new line of injection molding equipment. Mr.
Kirchmer is also President of ForcePro, LLC, which was formed to market the
PIPER 600 pursuant to a license granted by PalWeb.

         Mr. Kirchmer became a director of PalWeb on January 4, 2002.

BRADLEY C. SHOUP
DIRECTOR

         Mr. Bradley C. Shoup, age 45, earned a Bachelor of Science in Civil
Engineering, with distinction, from the University of Kansas, and a Master of
Science from the Sloan School of Management at the Massachusetts Institute of
Technology. From 1988 through 1998, Mr. Shoup was a founding partner in several
related investment management and corporate finance advisory entities, including
Batchelder & Partners, Inc., DHB Partner LP, Girard Partners LP, and Relational
Investors LLC. Relational Investors is an investment management firm with over
one billion dollars under management. From 1999 to present, Mr. Shoup has been a
private investor focused on private start-up ventures and small public companies
in the development or high-growth stages. He has been an advisor or executive at
certain companies in which he has invested, including CRT Holdings, Inc.,
Belzberg Technologies Corporation (BLZ-Toronto Stock Exchange), Ivanhoe Energy
Corp. (IVAN-NASDAQ), and CyberCity Holdings Inc.

                                       27
<PAGE>

Currently, Mr. Shoup is the Chief Financial Officer of CRT Holdings Inc., a
private company engaged in the development of innovative technologies in the
power generation industry.

         Mr. Shoup became a director of PalWeb on January 4, 2002. Mr. Shoup
resigned as a director of PalWeb effective August 25, 2003.

WILLIAM W. PRITCHARD
DIRECTOR

         Mr. William W. Pritchard is 52 years old and has been an attorney with
the law firm of Hall, Estill, Hardwick, Gable, Golden & Nelson in Tulsa,
Oklahoma, since 1996. He earned his Bachelor Degree with honors at the
University of Kansas and his Juris Doctorate at the University of Tulsa. Mr.
Pritchard served as the Vice-President and General Counsel for Parker Drilling
Company (PKD-NYSE) for 20 years preceding his tenure with Hall, Estill and has
extensive experience in financial and commercial transactions in both domestic
and international markets. He is a partner with Warren F. Kruger in WCC, with
investments in oil & gas, real estate and investment banking. He was co-founder
of The Seminole Group, a privately-held, crude marketing and gathering company.
In addition, Mr. Pritchard was a co-founder and currently serves as a director
of privately-held Transcontinental Drilling Services, the largest seismic shot
hole company in the United States.

         Mr. Pritchard became a director of PalWeb on January 4, 2002. Mr.
Pritchard also provides legal services to the company. Mr. Pritchard resigned as
a director of PalWeb effective August 25, 2003.

WILLIAM W. RAHHAL
CHIEF FINANCIAL OFFICER

         Mr. William W. Rahhal is 62 years old and has been a shareholder and
managing officer of Hulme Rahhal Henderson, Inc., Certified Public Accountants,
in Ardmore, Oklahoma since 1988. Hulme Rahhal Henderson, Inc. was PalWeb's
auditors through May 31, 2002. Mr. Rahhal earned his BBA from the University of
Oklahoma and is a certified public accountant licensed in Oklahoma and Texas. He
also served as a Senior Manager with Price Waterhouse & Co. (now
PriceWaterhouseCoopers, LLP) with experience in auditing public companies. In
addition, he served as financial manager of a privately-held oil and gas
production company and contract drilling company.

         Mr. Rahhal became chief financial officer of PalWeb on October 1, 2002.
Mr. Rahhal also provides tax services to the company.

                                       28
<PAGE>

NEW OFFICER AND DIRECTOR

         Effective as of September 8, 2003 and in connection with the
acquisition of the assets of Greystone Plastics Inc. as further described in
"Other" under caption "Liquidity and Capital Resources" in Item 6 of this Form
10-KSB, Mr. Bill Hamilton, an owner/operator of Greystone Plastics Inc., was
appointed Senior Vice President of Production for PalWeb. Also effective
September 8, 2003, Rick Dahlson of Dallas was appointed as a member of the Board
of Directors of PalWeb.

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE:

         Section 16(a) of the Securities Exchange Act of 1934 requires PalWeb's
directors, officers and persons who beneficially own more than 10% of any class
of the company's equity securities registered under Section 12 to file with the
Securities and Exchange Commission initial reports of ownership and reports of
changes in ownership of such registered securities of the company. Officers,
directors and greater than 10% beneficial owners are required by regulation to
furnish to the company copies of all Section 16(a) reports they file.

         Based solely on review of the copies of such reports furnished to
PalWeb and any written representations that no other reports were required
during fiscal 2003, to PalWeb's knowledge, all Section 16(a) filing requirements
applicable to its officers, directors and greater than 10% beneficial owners
during fiscal 2003 were complied with on a timely basis, except as follows:


                                                  NUMBER OF TRANSACTIONS
                        NUMBER OF                NOT REPORTED ON A TIMELY
NAME                   LATE REPORTS                        BASIS
----                   ------------                        -----

William W. Rahhal           1                                1


ITEM 10.          EXECUTIVE COMPENSATION

         During the last three completed fiscal years, other than Mr. Paul
Kruger and William W. Rahhal, no other named executive officers received a
salary as a part of executive compensation. The following table sets forth the
compensation paid to named executive officers during the fiscal years ended May
31, 2001, 2002 and 2003:


                                       29
<PAGE>

<TABLE><CAPTION>
                                    SUMMARY COMPENSATION TABLE


                                                   ANNUAL COMPENSATION             LONG TERM
                               FISCAL YEAR      -------------------------        COMPENSATION
            NAME AND              ENDING                                      SECURITIES UNDERLYING
       PRINCIPAL POSITION         MAY 31         SALARY             BONUS       OPTIONS/SARS (#)
       ------------------         ------         ------             -----        ----------------
<S>                               <C>           <C>                 <C>          <C>
Warren Kruger, President
and CEO (1)                        2003           -0-                -0-              175,000
William W. Rahhal, Chief
Financial Officer(2)               2003         $25,327              -0-              100,000
Paul A. Kruger, Chairman           2003         $ 8,500              -0-               25,000
and CEO (3)                        2002         $12,000              -0-              150,000
                                   2001         $12,000              -0-               50,000
</TABLE>

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

(1) Mr. Warren Kruger became President and CEO effective January 10, 2003.
(2) Mr. William W. Rahhal became Chief Financial Officer on October 1, 2002.
(3) Mr. Paul Kruger resigned; effective January 10, 2003.

         The following table sets forth information concerning the grant of
stock options during the fiscal year ended May 31, 2003, to named executive
officers:

                      OPTION/SAR GRANTS IN LAST FISCAL YEAR

<TABLE><CAPTION>
                     NUMBER OF % OF TOTAL
                    SECURITIES OPTIONS/SARS
                       UNDERLYING              GRANTED TO     EXERCISE OR
                      OPTIONS/SARS            EMPLOYEES IN     BASE PRICE
         NAME            GRANTED              FISCAL YEAR        ($/SH)     EXPIRATION DATE
<S>                      <C>                      <C>            <C>               <C>
Warren F.                150,000                  23%            $0.55       April 1, 2013
Kruger (1)               25,000                                  $1.60       June 26, 2012

William W.               100,000                  13%            $0.55       April 1, 2013
Rahhal (1)

Paul A. Kruger           25,000                    3%            $3.125     January 10, 2008
(2)
</TABLE>

------------------------
(1) The options become exercisable at the rate of 25% of the total shares
subject to the option on each of the first four anniversary dates of the date of
grant, which was June 26, 2002 and April 1, 2003. Once vested, the options are
exercisable at any time and from time to time until 10 years

                                       30
<PAGE>

after the date of grant, while the individual continues to serve as an employee
or director of Palweb. In the event employment by Palweb or service on its Board
of Directors is terminated other than for cause, the vested portions of the
options shall be exercisable within 3 months of such termination; provided that,
if employment is terminated but the individual continues to serve as a director,
his options will not expire within 3 months but will, instead, continue until he
ceases to be a director or ten years from the date of the grant, whichever date
is earlier. In the event of the death, the options shall become exercisable in
full by the individual's heirs within 12 months of such death.

(2) The options granted to Paul Kruger became fully exercisable at the date of
his resignation as an officer and director of PalWeb.

         The following table provides information with respect to named
executive officers concerning the exercise of options during the fiscal year
ended May 31, 2003, and unexercised options held as of May 31, 2003:

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

                                                            NUMBER OF SECURITIES
                           SHARES                          UNDERLYING UNEXERCISED         VALUE OF UNEXERCISED IN-THE-
                          ACQUIRED                                OPTIONS                        MONEY OPTIONS
                             ON            VALUE                 AT FY-END#                        AT FY-END
         NAME             EXERCISE       REALIZED        EXERCISABLE/UNEXERCISABLE         EXERCISABLE/UNEXERCISABLE

<S>                           <C>          <C>                 <C>                              <C>
Warren Kruger                -0-            N/A                25,000/275,000                         -0-

William Rahhal               -0-            N/A                 -0-/100,000                           -0-
</TABLE>

COMPENSATION OF DIRECTORS
-------------------------

         In addition to the options granted to Warren Kruger and Paul Kruger
reported above, during the fiscal year ended May 31, 2003, the following
directors received grants of stock options under the company's Stock Option
Plan: Lyle Miller - 25,000, Bryan R. Kirchmer -- 125,000 options, William W.
Pritchard -- 125,000 options, and Bradley C. Shoup -- 125,000 options. Except
for Lyle Miller whose options became fully exercisable on the date of his
resignation and expire on January 10, 2008, each of such option grants shall
become exercisable at the rate of 25% of the total shares subject to the options
on each of the first four anniversary dates of the date of grant, which was June
26, 2002 and April 1, 2003. Once vested, the options are exercisable at any time
and from time to time until 10 years after the date of grant, while such
directors continue to serve as members of the Board of Directors of PalWeb. In
the event that the service on the Board of Directors of any of such directors is
terminated other than for cause, the options shall be exercisable within three
months of such termination. In the event of the death of any of such directors,
the options shall become exercisable in full by his heirs within twelve (12)
months of such death. The foregoing options are exercisable at a price of $1.60
and $0.55 per share, which was the market value of the company's common stock on
the date of the grant.

                                       31
<PAGE>

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         As of September 8, 2003, PalWeb had 12,790,451 shares of Common Stock
and 50,000 shares of 2003 Preferred Stock outstanding. Each share of the 2003
Preferred Stock is convertible into approximately 66.67 shares of common stock.

         The following table sets forth certain information regarding the shares
of common stock beneficially owned as of September 8, 2003, by (i) each person
known by the company to own beneficially five percent (5%) or more of the
outstanding common stock, (ii) each director and officer, and (iii) all
directors and officers as a group:

<TABLE><CAPTION>
                    Name and Address of                     Amount and Nature of
                     Beneficial Owner                       Beneficial Owner(1)                Percent of Class(2)
                     ----------------                       -------------------                -------------------
<S>                                                             <C>                                  <C>
Paul A. Kruger                                                  6,753,929(3)                         39.5%
2500 South McGee, Ste. 147
Norman, OK 73072

Hildalgo Trading Company, LC                                    1,742,412(4)                         10.2%
2500 South McGee
Norman, OK 73072

Westgate Investments, L.P.                                      5,809,618(5)                         34.0%
320 S. Boston, Suite 400
Tulsa, OK  74103-3708

Westgate Capital Company, LLC                                   5,809,618(6)                         34.0%
320 S. Boston, Suite 400
Tulsa, OK  74103-3708

Warren F. Kruger                                                6,862,710(7)                         40.2%
President & CEO
1613 East 15th Street
Tulsa, OK 74120

William W. Pritchard                                            6,072,340(8)                         35.6%
Director
320 S. Boston, Suite 400
Tulsa, OK  74103-3708

Bryan R. Kirchmer                                                       0(9)                            0%
Director
601 S. Boulder Ave., Suite 105
Tulsa, OK  74119
</TABLE>
                                       32
<PAGE>

<TABLE><CAPTION>
                    Name and Address of                     Amount and Nature of
                     Beneficial Owner                       Beneficial Owner(1)                Percent of Class(2)
                     ----------------                       -------------------                -------------------
<S>                                                             <C>                                  <C>
Bradley C. Shoup                                                  225,000(10)                         1.3%
Director
4233 Normandy
Dallas, TX 75205

William W. Rahhal                                                       0                               0%
Chief Financial Officer
100 E Street S.W., Suite 200
Ardmore, OK 73401

All Current Directors & Officers as a Group (6 persons)         7,350,432(11)                        43.0%
</TABLE>

(1)    The number of shares beneficially owned by each person is calculated in
       accordance with the rules of the SEC, which provide that person shall be
       deemed to be a beneficial owner of a security if that person has the
       right to acquire beneficial ownership of the security within 60 days
       through options, warrants, or the conversion of a security; provided,
       however, if such person acquires any such rights in connection with or as
       a participant in any transaction with the effect of changing or
       influencing control of the issuer, immediately upon such acquisition, the
       holder will be deemed to be the beneficial owner of the securities. The
       number the shares of common stock beneficially owned by each person
       includes common stock, the number of shares of common stock each person
       has the right to acquire upon the conversion of 2003 Preferred Stock, and
       the number of shares of common stock each person has the right to acquire
       upon the exercise of options.

(2)    The percentage ownership for each person is calculated in accordance with
       the rules of the SEC, which provide that any shares a person is deemed to
       beneficially own by virtue of having a right to acquire shares upon the
       conversion of warrants, options or other rights, or upon the conversion
       of preferred stock or other rights are considered outstanding solely for
       purposes of calculating such persons percentage ownership.

(3)    The total includes: (i)1,277,184 shares of common stock beneficially
       owned directly or indirectly; (ii) 225,000 shares of common stock that
       Paul Kruger directly has the right to acquire in connection with the
       options; (iv) 1,742,412 shares that Hildalgo beneficially; (iv) 3,333,333
       shares that Paul Kruger has the right to acquire upon conversion of 2003
       Preferred Stock; (v) 50,000 shares he holds on behalf of his minor
       children; and (vi) 126,000 shares of which he only holds the power to
       vote pursuant to a proxy granted by Michael John. However, Michael John
       publicly claimed that he only owns 4,800 shares of common stock.

(4)    The total includes 1,842,412 shares of common stock beneficially owned
       directly by Hildalgo. By virtue of his ownership of and control over
       Hildalgo, these shares are also included in the number of shares
       beneficially owned by Paul Kruger.

(5)    The total includes: (i) 5,809,618 shares of common stock beneficially
       owned directly by Westgate. The sole business of Westgate is the
       ownership of the PalWeb securities listed above. WCC is the general
       partner of Westgate, and Warren Kruger and William Pritchard are the sole
       members of WCC. By virtue of their ability to control Westgate, WCC,
       Warren Kruger and William Pritchard are also deemed to beneficially own
       the shares beneficially owned by Westgate. Although WCC is the general
       partner of Westgate, WCC also engages in other business activities,
       including but not limited to the

                                       33
<PAGE>

       development and licensing of WCC's CJ2(TM) fire retardant process
       technology (as discussed under "Technology License Agreement" in Item 12
       of this Form 10-KSB), which activities are conducted wholly separate from
       the business of Westgate. Westgate has no right to participate in the
       conduct of such other business activities of WCC and does not share in
       any profit or loss derived from such activities.

(6)    The total includes the shares owned by Westgate as further described in
       footnote (5).

(7)    The total includes: (i) 274,592 shares of common stock beneficially owned
       directly by Warren Kruger; (ii)649,000 shares held of record by Yorktown;
       (iii) 25,000 shares of common stock that Warren Kruger directly has the
       right to acquire in connection with the options; (iv) the shares owned by
       Westgate as further described in footnote (5); and (v) 104,500 shares of
       common stock that Warren Kruger holds on behalf of his minor children, of
       which he only holds the power to vote. WCC is the general partner of
       Westgate, and Warren Kruger is one of the two members of WCC. By virtue
       of his ability to control Westgate, Warren Kruger is also deemed to
       beneficially own the shares beneficially owned by Westgate.

(8)    The total includes 560 shares of common stock beneficially owned directly
       by William Pritchard, the shares owned by Westgate as further described
       in footnote (5), (ii) 225,000 shares of common stock that William
       Pritchard directly has the right to acquire in connection with the
       options; and 37,162 shares owned by his family. WCC is the general
       partner of Westgate, and William Pritchard is one of the two members of
       WCC. By virtue of his ability to control Westgate, William Pritchard is
       also deemed to beneficially own the shares beneficially owned by
       Westgate.

(9)    Although Bryan Kirchmer is a limited partner in Westgate, applicable
       rules regarding the foregoing beneficial ownership table do not require
       that Mr. Kirchmer be deemed a beneficial owner of the shares beneficially
       owned by Westgate. Therefore, no shares beneficially owned by Westgate
       have been included in the shares beneficially owned by Mr. Kirchmer for
       purposes of such table.

(10)   The total includes 225,000 shares of common stock that Bradley Shoup has
       the right to acquire in connection with options. Although Bradley Shoup
       is a limited partner in Westgate, applicable rules regarding the
       foregoing beneficial ownership table do not require that Mr. Shoup be
       deemed a beneficial owner of the shares beneficially owned by Westgate.
       Therefore, no shares beneficially owned by Westgate have been included in
       the shares beneficially owned by Mr. Shoup for purposes of such table.

(11)   The total includes: (i) 12,790,451 outstanding shares; (ii) 3,333,333
       shares issuable upon conversion of 2003 Preferred Stock; and (iii)
       955,000 shares issuable upon exercise of vested stock options.

                                       34
<PAGE>

ITEM 12.          CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

ISSUANCES OF SECURITIES

         For information on the issuance of 2001 Preferred Stock and warrants on
January 4, 2002, to affiliates of Paul Kruger and Warren Kruger, see "Preferred
Stock Financing" under the heading "Liquidity and Capital Resources" in Item 6
of this Form10-KSB.

         Westgate Investment, LP, an entity affiliated with Warren Kruger, and
Hildalgo Trading Company, LC, an entity owned by Paul Kruger, received from
PalWeb a combined total of 2,162,031 shares of common stock in lieu of cash
dividends on the 2001 Preferred Stock for the period the preferred stock was
outstanding, January 10, 2002 through September 8, 2003.

         For information on issuance of 2003 Preferred Stock on September 8,
2003, to Paul Kruger, see "Preferred Stock Financing" under the heading
"Liquidity and Capital Resources" in Item 6 of this Form10-KSB.

         For information on issuance of 629,811 shares of common stock to Warren
Kruger in exchange for $900,000 of indebtedness, see "Yorktown Financing" under
the heading "Liquidity and Capital Resources" in Item 6 of this Form10-KSB

         Effective October 17, 2002, 15,584 shares of common stock were issued
to Paul Kruger in exchange of interest payable of $23,376.

SALE OF PP FINANCIAL, INC., TO PAUL KRUGER

         For information regarding the sale of PalWeb's former wholly-owned
subsidiary, PP Financial, Inc., and the resulting transfer of PalWeb's former
indirect subsidiary, PFS, to Paul Kruger effective May 30, 2002, see
"Acquisition and Disposition of Paceco Financial" under Item 1 of this Form 10-
KSB.

OFFICE SHARING ARRANGEMENT

         In April 2001, PalWeb entered into an agreement with Foresight, Inc., a
company of which Paul Kruger was on the Board of Directors and that was a
wholly-owned subsidiary of a publicly-held company of which Paul Kruger
beneficially owned in excess of 10%, whereby Foresight, Inc., agreed to make a
portion of its leased premises in Norman, Oklahoma, available to one full-time
employee of PalWeb, provide the services of a part-time employee of Foresight,
Inc., 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
terminated May 31, 2002. The amount payable by PalWeb under its agreement with
Foresight, Inc., was subsequently increased from the amount reflected in the
written agreement. During the year ended May 31, 2002, PalWeb paid rent to
Foresight, Inc., of $87,622.

                                       35
<PAGE>

ADVANCES AND LOANS

         As of January 4, 2002, Paul Kruger's affiliated entities had loaned
PalWeb approximately $1,226,282, pursuant to various notes with face amounts
aggregating a total of $2,000,000. These loans were made from approximately June
2000 through December of 2001. The maturity dates of all of these notes was
January 15, 2002, and the notes accumulated interest at the rate of 12% per
year. These loans were secured by substantially all of the assets of PalWeb and
PPP, including equipment, furniture, fixtures, inventory, accounts receivables
and patents. As described above, on January 4, 2002, the principal amounts of
these loans were converted into 2001 Preferred Stock and warrants. Also on
January 4, 2002, PalWeb paid the interest accrued on these loans in the amount
of $174,608.

         Beginning on March 1, 2001, entities with which Warren Kruger is
affiliated began to provide financing to PalWeb in the form of loans and cash
advances. Through January 4, 2002, such entities had advanced a total of
$5,214,297, pursuant to various notes bearing interest at 12% and maturing on
January 15, 2002, and undocumented advances made on the same terms. These notes
were 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 used the proceeds
principally for the acquisition of a new production line of manufacturing
equipment. PalWeb also used $300,000 of such proceeds to settle certain
litigation involving Ralph Curton, Jr., as reported in PalWeb's Form 10-KSB for
the fiscal year ended May 31, 2001. As described above, on January 4, 2002, the
principal amounts of these loans were converted into 2001 Preferred Stock and
warrants. On December 14, 2001, PalWeb paid the interest accrued on these loans
through November 30, 2001, in the amount of $192,205. In June 2002, PalWeb paid
the interest accrued from December 1, 2001, through January 4, 2002, in the
amount of $56,835.

         For information regarding a $7,000,000 loan from Paul Kruger, see
"Loans from Paul Kruger" under the heading "Liquidity and Capital Resources" in
Item 6 of this Form10-KSB. Interest paid to Paul Kruger on these loans as of May
31, 2003 totaled $262,886.

         For information regarding loans from Warren Kruger, see "Yorktown
Financing" under the heading "Liquidity and Capital Resources" in Item 6 of this
Form10-KSB. Interest accrued on these loans as of May 31, 2003 total $23,216.

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

         For additional information involving funds advanced to PalWeb by
entities with which Warren Kruger is affiliated, see "History" under Item 1, and
"Liquidity and Capital Resources" under Item 6 of this Form 10-KSB.

LEASE AGREEMENTS

         From June 2000 through January 2002, PalWeb occupied its Dallas
facility under a lease with Onward, an affiliate of Paul Kruger. As of January
4, 2002, this facility was transferred to

                                       36
<PAGE>

PalWeb in connection with the private placement described under "Liquidity and
Capital Resources" in Item 6 of this Form 10-KSB. During the year ended May 31,
2001, PalWeb paid rent to Onward of $163,380. During the year ended May 31,
2002, PalWeb paid rent to Onward of $150,938.

         For information on the sale and leaseback transaction of the Dallas
facility effective September 8, 2003 between PalWeb and Paul Kruger in exchange
for the $7,000,000 note payable, see "Loan from Paul Kruger" under the heading
"Liquidity and Capital Resources" in Item 6 of this Form10-KSB.

OBLIGATIONS OF PAUL KRUGER AND HIS AFFILIATED ENTITIES

         At May 31, 2002, PalWeb had previously paid expenses on behalf of Paul
Kruger or entities with which he is affiliated in the aggregate amount of
$126,866, which amount was reflected on PalWeb's financial statements as
accounts receivable - related party. Of such total, $13,588 was due from PFS,
primarily for life insurance premiums required under the Plan between PFS and
the ODS (referenced under Acquisition and Disposition of Paceco Financial in
Item 1 of this From 10-KSB), and $113,278 was due from Onward, primarily for ad
valorem taxes and utilities expenses related to the facilities in Dallas, Texas,
paid by PalWeb in 1999 and 2000 but reimbursable by Onward or its other prior
tenants. The receivable does not bear interest. The receivable was paid in
fiscal year 2003.

PATENT LICENSING AGREEMENT

         Effective January 1, 2003, PalWeb entered into a Patent License
Agreement with Gravity Management & Engineering Group, LLC, of which Bryan
Kirchmer (a member of PalWeb's Board of Directors) is a member ("GME Group"),
and a related letter agreement of the same date, which granted GME Group the
exclusive right to market and sell the PIPER 600. There was not any material
business that was conducted pursuant to the terms of such agreements. Effective
June 23, 2003, PalWeb entered into certain agreements with ForcePro, LLC, which
replace and supercede the agreements described in the preceding sentence and
give ForcePro the exclusive right to market and sell the PIPER 600. Bryan
Kirchmer, a member of PalWeb's board, is the President of ForcePro. The term of
the agreement is for five years with the right to renew for three additional
terms of five years each. PalWeb will receive a royalty of 5% of the gross
proceeds from sales of the PIPER 600. ForcePro has an exclusive right to market
the PIPER 600 subject to royalty payments of $200,000 by April 1, 2005 and
$100,000 annually thereafter. These agreements will be attached to and explained
in further detail in PalWeb's quarterly report on Form 10-QSB for the period
ended August 31, 2003, which will be filed pursuant to the rules and regulations
of the SEC. There is no assurance that ForcePro will be able to sell any of the
newly-designed PIPER 600 plastic injection molding machines.

TECHNOLOGY LICENSE AGREEMENT

         In April 2001, PalWeb entered into a License Agreement with WCC, an
entity owned by Warren Kruger and William Pritchard, providing for PalWeb to
have the exclusive right and license to use fire retardancy technology then
being developed under the direction and expense of WCC. The License Agreement
was negotiated and executed 9 months before Warren Kruger, William Pritchard, or
entities with which they are affiliated became directors or beneficial owners of
10% or more of PalWeb's common stock in January 2002. Under the agreement,
PalWeb must pay the greater of 2.5% of PalWeb's gross monthly revenues derived
from the sale of UL listed pallets using the technology or a minimum monthly
royalty of $10,000. However, WCC also agreed in the License Agreement to convey
to PalWeb ownership of the licensed Process (as defined in the agreement) in the
event that cumulative royalties paid by PalWeb equaled $250,000 during the first
two years of the agreement, subject to an override or carried interest in favor
of WCC equal to 2.5% of the gross monthly revenues which are the same payments
as would have been received under the License Agreement. Subsequent to the
execution of the original agreement which provided for a "coating" technology,
WCC developed an additive process which PalWeb used to successfully obtain a UL
listing. The technology is currently known as CJ2(TM).

                                       37
<PAGE>

         No minimum or other royalties have been paid or accrued by PalWeb.
However, PalWeb has recorded expenses of approximately $126,000 that are
associated with the License Agreement. WCC has not asserted that PalWeb is in
default under the license agreement, and WCC has indicated that it has no
current intentions of asserting any default by PalWeb under such agreement.
PalWeb is exploring the possibility of purchasing the technology from WCC.

ENGINEERING SERVICES AGREEMENT

         Bryan Kirchmer, a director of PalWeb, is President and principal owner
of GME Group, an engineering firm. GME Group has performed and is expected to
perform in the future work for PalWeb in connection with the design,
construction and implementation of its plastic pallet injection molding
equipment. GME Group was originally contracted by Yorktown, a company owned by
Warren Kruger, to perform services in connection with the plastic pallet
injection molding equipment that eventually became PalWeb's PIPER 600. Under its
agreement with Yorktown, GME Group was to perform such engineering services on
the basis of its customary rates for similar services performed for other
clients with a not-to-exceed limit of $550,000. Yorktown was reimbursed for the
payments that it made to GME Group for the benefit of PalWeb's PIPER 600
equipment in connection with the preferred stock financing discussed in the
section "Preferred Stock Financing" under the heading "Liquidity and Capital
Resources" in Item 6 of this From 10-KSB. Subsequently the agreement with GME
Group was assigned by Yorktown to PalWeb, and the not-to-exceed limit was
waived. The payments made to GME Group have been reflected on PalWeb's books as
expenses of the company, and GME is now performing services directly for PalWeb.
For the year ended May 31, 2001, PalWeb recorded expenses paid to GME Group of
$226,559 for engineering services. For the years ended May 31, 2003 and 2002,
PalWeb recorded expenses for engineering services paid to GME Group of $124,951
and $643,218, respectively. In addition, PalWeb paid Mr. Kirchmer $7,500 in 2003
for consulting services.

LEGAL SERVICES PERFORMED BY WILLIAM PRITCHARD

         William Pritchard, a director of PalWeb, is of counsel in the law firm
Hall, Estill, Hardwick, Gable, Golden & Nelson, a P.C. ("Hall Estill"). Hall
Estill has performed and is expected to perform in the future legal services for
PalWeb, which services are charged on the basis of the standard hourly rates
charged by Hall Estill to other clients for similar services. During the years
ended May 31, 2003 and 2002, PalWeb paid or accrued expenses for legal services
from Hall Estill in the total amount of $67,519 and $79,455, respectively.

                                       38
<PAGE>

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

(A)   EXHIBITS:


EXHIBIT NO.    DESCRIPTION

    2.1        Certificate of Ownership and Merger Merging PalWeb Corporation, a
               Delaware Corporation, into PalWeb Oklahoma Corporation, an
               Oklahoma Corporation filed with the Delaware Secretary of State
               on May 2, 2002 (incorporated herein by reference to Exhibit 2.1
               of PalWeb Corporation's Form 8-K12G3 dated May 2, 2002, which was
               filed with the SEC on May 24, 2002).

    2.2        Certificate of Ownership and Merger Merging PalWeb Corporation, a
               Delaware Corporation, into PalWeb Oklahoma Corporation, an
               Oklahoma Corporation filed with the Oklahoma Secretary of State
               on May 2, 2002 (incorporated herein by reference to Exhibit 2.2
               of PalWeb Corporation's Form 8-K12G3 dated May 2, 2002, which was
               filed with the SEC on May 24, 2002).

    3.1        Certificate of Incorporation of PalWeb Oklahoma Corporation filed
               with the Oklahoma Secretary of State on May 2, 2002 (incorporated
               herein by reference to Exhibit 3.1 of PalWeb Corporation's Form
               8-K12G3 dated May 2, 2002, which was filed with the SEC on May
               24, 2002).

    3.2        Bylaws of PalWeb Oklahoma Corporation as adopted on May 2, 2002
               (incorporated herein by reference to Exhibit 3.2 of PalWeb
               Corporation's Form 8- K12G3 dated May 2, 2002, which was filed
               with the SEC on May 24, 2002).

    4.1        Certificate of Incorporation of PalWeb Oklahoma Corporation filed
               with the Oklahoma Secretary of State on May 2, 2002 (included in
               Exhibit 3.1).

    4.2        Securities Purchase Agreement by and among PalWeb Corporation and
               certain purchasers dated January 4, 2002 (incorporated herein by
               reference to Exhibit 10.7 of PalWeb Corporation's Form 10-QSB for
               the Quarterly Period Ended November 30, 2001, which was filed
               with the SEC on January 14, 2002).

    4.3        Shareholders and Voting Agreement by and among PalWeb Corporation
               and certain shareholders dated January 4, 2002 (incorporated
               herein by reference to Exhibit 10.8 of PalWeb Corporation's Form
               10-QSB for the Quarterly Period Ended November 30, 2001, which
               was filed with the SEC on January 14, 2002).

    4.4        Form of Common Stock Purchase Warrant used in connection with
               Securities Purchase Agreement by and among PalWeb Corporation and
               certain purchasers dated January 4, 2002 (incorporated herein by
               reference to Exhibit 10.9 of PalWeb Corporation's Form 10-QSB for
               the Quarterly Period Ended November 30, 2001, which was filed
               with the SEC on January 14, 2002).

    4.5        Amendment No. 1 to Securities Purchase Agreement and Shareholders
               and Voting Agreement by and between PalWeb Corporation and
               certain purchasers dated January 21, 2002 (incorporated herein by
               reference to Exhibit 10.1 of PalWeb Corporation's Form 10-QSB for
               the Quarterly Period Ended February 28, 2002, which was filed
               with the SEC on April 12, 2002).

                                       39
<PAGE>

EXHIBIT NO.    DESCRIPTION

    10.1       Personnel Staffing Agreement by and between Accord Human
               Resources, Inc. and Plastic Pallet Production Company, Inc. dated
               January 19, 1999 (incorporated herein by reference to Exhibit
               10.2 of Amendment No. 3 to PalWeb Corporation's Form 10-SB, which
               was filed on May 2, 2000).

    10.2       Promissory Note in the amount of $400,000 payable to Hildalgo
               Trading Company, L.C. dated July 27, 2000 (incorporated herein by
               reference to Exhibit 10.8 of Amendment No. 5 to PalWeb
               Corporation's Form 10-SB, which was filed with the SEC on July
               20, 2000).

    10.3       Security Agreement by and between PalWeb Corporation and Hildalgo
               Trading Company, L.C. dated July 27, 2000 (incorporated herein by
               reference to Exhibit 10.9 of Amendment No. 5 to PalWeb
               Corporation's Form 10-SB, which was filed with the SEC on July
               20, 2000).

    10.4       Security Agreement by and between Plastic Pallet Production, Inc.
               and Hildalgo Trading Company, L.C. dated July 27, 2000
               (incorporated herein by reference to Exhibit 10.10 of Amendment
               No. 5 to PalWeb Corporation's Form 10-SB, which was filed with
               the SEC on July 20, 2000).

    10.5       Promissory Note in the amount of $350,000 payable to Hildalgo
               Trading Company, L.C. dated August 15, 2000 (incorporated herein
               by reference to Exhibit 10.1 of PalWeb Corporation's Form 10-QSB
               for the Quarterly Period Ended November 30, 2000, which was filed
               with the SEC on January 16, 2001).

    10.6       Promissory Note in the amount of $400,000 payable to Hildalgo
               Trading Company, L.C. dated November 15, 2000 (incorporated
               herein by reference to Exhibit 10.2 of PalWeb Corporation's Form
               10-QSB for the Quarterly Period Ended November 30, 2000, which
               was filed with the SEC on January 16, 2001).

    10.7       Extension and Modification Agreement by and between Hildalgo
               Trading Company, L.C., PalWeb Corporation and Plastic Pallet
               Production, Inc. dated December 1, 2000 (incorporated herein by
               reference to Exhibit 10.3 of PalWeb Corporation's Form 10-QSB for
               the Quarterly Period Ended November 30, 2000, which was filed
               with the SEC on January 16, 2001).

    10.8       Promissory Note in the amount of $250,000 payable to Yorktown
               Management and Financial Services, L.L.C. dated March 1, 2001
               (incorporated herein by reference to Exhibit 10.1 of PalWeb
               Corporation's Form 10-QSB for the Quarterly Period Ended February
               28, 2001, which was filed with the SEC on April 16, 2001).

                                       40
<PAGE>

EXHIBIT NO.    DESCRIPTION

    10.9       Security Agreement between Yorktown Management and Financial
               Services, L.L.C. and PalWeb Corporation dated March 1, 2001
               (incorporated herein by reference to Exhibit 10.2 of PalWeb
               Corporation's Form 10-QSB for the Quarterly Period Ended February
               28, 2001, which was filed with the SEC on April 16, 2001).

    10.10      Security Agreement between Yorktown Management and Financial
               Services, L.L.C. and Plastic Pallet Production, Inc. dated March
               1, 2001 (incorporated herein by reference to Exhibit 10.3 of
               PalWeb Corporation's Form 10-QSB for the Quarterly Period Ended
               February 28, 2001, which was filed with the SEC on April 16,
               2001).

    10.11      Promissory Note in the amount of $2,750,000 payable to Yorktown
               Management and Financial Services, L.L.C. dated March 5, 2001
               (incorporated herein by reference to Exhibit 10.12 of PalWeb
               Corporation's Form 10-KSB for the Fiscal Year Ended May 31, 2001,
               which was filed with the SEC on September 13, 2001).

    10.12      Agreement (relating to use of office space and employees) dated
               April 27, 2001 by and between Foresight, Inc. and PalWeb
               Corporation (incorporated herein by reference to Exhibit 10.13 of
               PalWeb Corporation's Form 10-KSB for the Fiscal Year Ended May
               31, 2001, which was filed with the SEC on September 13, 2001).

    10.13      Lease Agreement dated May 1, 2001, by and between Onward, L.L.C.
               and Plastic Pallet Production, Inc. (incorporated herein by
               reference to Exhibit 10.14 of PalWeb Corporation's Form 10-KSB
               for the Fiscal Year Ended May 31, 2001, which was filed with the
               SEC on September 13, 2001).

    10.14      Extension Agreement by and between Hildalgo Trading Company, L.C.
               and PalWeb Corporation and Plastic Pallet Production, Inc., dated
               June 1, 2001 (incorporated herein by reference to Exhibit 10.15
               of PalWeb Corporation's Form 10-KSB for the Fiscal Year Ended May
               31, 2001, which was filed with the SEC on September 13, 2001).

    10.15      Promissory Note in the amount of $850,000 payable to Hildalgo
               Trading Company, L.C. dated June 1, 2001 (incorporated herein by
               reference to Exhibit 10.16 of PalWeb Corporation's Form 10-KSB
               for the Fiscal Year Ended May 31, 2001, which was filed with the
               SEC on September 13, 2001).

    10.16      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 (incorporated
               herein by reference to Exhibit 10.17 of PalWeb Corporation's Form
               10-KSB for the Fiscal Year Ended May 31, 2001, which was filed
               with the SEC on September 13, 2001).

                                       41
<PAGE>

EXHIBIT NO.    DESCRIPTION

    10.17      Securities Purchase Agreement by and among PalWeb Corporation and
               certain purchasers dated January 4, 2002 (incorporated herein by
               reference to Exhibit 10.7 of PalWeb Corporation's Form 10-QSB for
               the Quarterly Period Ended November 30, 2001, which was filed
               with the SEC on January 14, 2002).

    10.18      Shareholders and Voting Agreement by and among PalWeb Corporation
               and certain shareholders dated January 4, 2002 (incorporated
               herein by reference to Exhibit 10.8 of PalWeb Corporation's Form
               10-QSB for the Quarterly Period Ended November 30, 2001, which
               was filed with the SEC on January 14, 2002).

    10.19      Assumption Agreement between Onward, L.L.C., PalWeb Corporation
               and Texas Capital Bank dated January 4, 2002 (not signed by Texas
               Capital Bank) (incorporated herein by reference to Exhibit 10.19
               of PalWeb Corporation's Form 10-KSB for the Fiscal Year Ended May
               31, 2002, which was filed with the SEC on September 13, 2002).

    10.20      Amendment No. 1 to Securities Purchase Agreement and Shareholders
               and Voting Agreement by and between PalWeb Corporation and
               certain purchasers dated January 21, 2002 (incorporated herein by
               reference to Exhibit 10.1 of PalWeb Corporation's Form 10-QSB for
               the Quarterly Period Ended February 28, 2002, which was filed
               with the SEC on April 12, 2002).

    10.21      License Agreement by and between Westgate Capital Company,
               L.L.C., and PalWeb Corporation dated April 20, 2001 (incorporated
               herein by reference to Exhibit 10.21 of PalWeb Corporation's Form
               10-KSB for the Fiscal Year Ended May 31, 2002, which was filed
               with the SEC on September 13, 2002).

    10.22      Unsecured Subordinated Promissory Note in the amount of
               $1,000,000 payable to Paul A. Kruger dated May 31, 2002
               (incorporated herein by reference to Exhibit 10.22 of PalWeb
               Corporation's Form 10-KSB for the Fiscal Year Ended May 31, 2002,
               which was filed with the SEC on September 13, 2002).

    10.23      Non Exclusive Distribution Agreement between PalWeb Corporation
               and Bosh Material Handling Incorporated dated August 5, 2002
               (incorporated herein by reference to Exhibit 10.23 of PalWeb
               Corporation's Form 10-KSB for the Fiscal Year Ended May 31, 2002,
               which was filed with the SEC on September 13, 2002).

    10.24      Plastic Pallet Production, Inc. Revolving Note payable to The F &
               M Bank & Trust Company in the amount of $3,000,000 dated December
               11, 2001 (incorporated herein by reference to Exhibit 10.3 of
               PalWeb Corporation's Form 10-QSB for the Quarterly Period Ended
               November 30, 2001, which was filed with the SEC on January 14,
               2002).

                                       42
<PAGE>

EXHIBIT NO.    DESCRIPTION

    10.25      Plastic Pallet Production, Inc. Loan Agreement by and between
               Plastic Pallet Production, Inc. and The F & M Bank & Trust
               Company dated December 11, 2001 (incorporated herein by reference
               to Exhibit 10.1 of PalWeb Corporation's Form 10-QSB for the
               Quarterly Period Ended November 30, 2001, which was filed with
               the SEC on January 14, 2002).

    10.26      Security Agreement by and between Plastic Pallet Production,
               Inc., and The F & M Bank & Trust Company dated December 11, 2001
               (incorporated herein by reference to Exhibit 10.2 of PalWeb
               Corporation's Form 10-QSB for the Quarterly Period Ended November
               30, 2001, which was filed with the SEC on January 14, 2002).

    10.27      Paul Kruger Guaranty dated December 11, 2001 (incorporated herein
               by reference to Exhibit 10.4 of PalWeb Corporation's Form 10-QSB
               for the Quarterly Period Ended November 30, 2001, which was filed
               with the SEC on January 14, 2002).

    10.28      Pledge Assignment and Security Agreement by and between Paul A.
               Kruger and The F & M Bank & Trust Company dated December 11, 2001
               (incorporated herein by reference to Exhibit 10.5 of PalWeb
               Corporation's Form 10-QSB for the Quarterly Period Ended November
               30, 2001, which was filed with the SEC on January 14, 2002).

    10.29      Warren Kruger Limited Guaranty dated December 12, 2001
               (incorporated herein by reference to Exhibit 10.6 of PalWeb
               Corporation's Form 10-QSB for the Quarterly Period Ended November
               30, 2001, which was filed with the SEC on January 14, 2002).

    10.30**    Form of Indemnity Agreement between Members of the Board of
               Directors and PalWeb Corporation (incorporated herein by
               reference to Exhibit 10.30 of PalWeb Corporation's Form 10-KSB
               for the Fiscal Year Ended May 31, 2002, which was filed with the
               SEC on September 13, 2002).

    10.31      Indemnity Agreement by and between The Union Group, Inc., and
               Cabec Energy Corp. dated August 31, 1998 (incorporated herein by
               reference to Exhibit 10.6 of Amendment No. 3 to PalWeb
               Corporation's Form 10-SB, which was filed on May 2, 2000).

    10.32**    Stock Option Plan of PalWeb Corporation (effective May 11, 2001),
               as amended (incorporated herein by reference to Exhibit 10.32 of
               PalWeb Corporation's Form 10-KSB for the Fiscal Year Ended May
               31, 2002, which was filed with the SEC on September 13, 2002).

                                       43
<PAGE>

EXHIBIT NO.    DESCRIPTION

    10.33**    Form of Non-Qualified Stock Option Agreement (incorporated herein
               by reference to Exhibit 99.8 of PalWeb Corporation's Form 10-KSB
               for the Fiscal Year Ended May 31, 2001, which was filed with the
               SEC on September 13, 2001).

    10.34**    Form of Incentive Stock Option Agreement (incorporated herein by
               reference to Exhibit 99.9 of PalWeb Corporation's Form 10-KSB for
               the Fiscal Year Ended May 31, 2001, which was filed with the SEC
               on September 13, 2001).

    10.35**    Form of Nonemployee Director Stock Option Agreement (incorporated
               herein by reference to Exhibit 99.10 of PalWeb Corporation's Form
               10-KSB for the Fiscal Year Ended May 31, 2001, which was filed
               with the SEC on September 13, 2001).

    10.36**    Form of Employee Director Incentive Stock Option Agreement
               (incorporated herein by reference to Exhibit 10.36 of PalWeb
               Corporation's Form 10-KSB for the Fiscal Year Ended May 31, 2002,
               which was filed with the SEC on September 13, 2002).

    10.37      Consulting Agreement between Yorktown Management & Financial
               Services, L.L.C., and Gravity Management & Engineering Group,
               LLC, dated on or about February 19, 2001 (incorporated herein by
               reference to Exhibit 10.37 of PalWeb Corporation's Form 10-KSB
               for the Fiscal Year Ended May 31, 2002, which was filed with the
               SEC on September 13, 2002).

    10.38      Settlement Agreement by and among PalWeb Corporation, Crescent
               Road Corporation, Curton Capital Corporation, Consolidated
               Capital Group, Inc., Ralph Curton, Jr., and Jeffrey Van Putten
               dated April 30, 2001 (incorporated herein by reference to Exhibit
               10.38 of PalWeb Corporation's Form 10-KSB for the Fiscal Year
               Ended May 31, 2002, which was filed with the SEC on September 13,
               2002).

    10.39      Assignment and Indemnity Agreement between PalWeb Corporation and
               Paul A. Kruger (regarding transfer of stock of PP Financial,
               Inc.) dated May 30, 2002 (incorporated herein by reference to
               Exhibit 10.39 of PalWeb Corporation's Form 10-KSB for the Fiscal
               Year Ended May 31, 2002, which was filed with the SEC on
               September 13, 2002).

    10.40      Promissory Note in the amount of $500,000.00 executed by PalWeb
               Corporation and Plastic Pallet Production, Inc., in favor of
               Yorktown Management & Financial Services, Inc., dated December 4,
               2002 (incorporated herein by reference to Exhibit 10.1 of PalWeb
               Corporation's Form 10-QSB for the Quarterly Period Ended November
               30, 2002, which was filed with the SEC on January 14, 2003).

                                       44
<PAGE>

EXHIBIT NO.    DESCRIPTION

    10.41      Letter Agreement between PalWeb Corporation, Plastic Pallet
               Production, Inc., and Paul A. Kruger dated January 10, 2003
               (incorporated herein by reference to Exhibit 10.2 of PalWeb
               Corporation's Form 10-QSB for the Quarterly Period Ended November
               30, 2002, which was filed with the SEC on January 14, 2003).

    10.42      Loan Agreement between PalWeb Corporation, Plastic Pallet
               Production, Inc., and Paul A. Kruger dated January 10, 2003
               (incorporated herein by reference to Exhibit 10.3 of PalWeb
               Corporation's Form 10-QSB for the Quarterly Period Ended November
               30, 2002, which was filed with the SEC on January 14, 2003).

    10.43      Promissory Note in the amount of $7,000,000.00 executed by PalWeb
               Corporation and Plastic Pallet Production, Inc., in favor of Paul
               A. Kruger dated January 10, 2003 (incorporated herein by
               reference to Exhibit 10.4 of PalWeb Corporation's Form 10-QSB for
               the Quarterly Period Ended November 30, 2002, which was filed
               with the SEC on January 14, 2003).

    10.44      Stock Pledge Agreement executed by PalWeb Corporation in favor of
               Paul A. Kruger dated January 10, 2003 (incorporated herein by
               reference to Exhibit 10.5 of PalWeb Corporation's Form 10-QSB for
               the Quarterly Period Ended November 30, 2002, which was filed
               with the SEC on January 14, 2003).

    10.45      Security Agreement between PalWeb Corporation, Plastic Pallet
               Production, Inc., and Paul A. Kruger dated January 10, 2003
               (incorporated herein by reference to Exhibit 10.6 of PalWeb
               Corporation's Form 10-QSB for the Quarterly Period Ended November
               30, 2002, which was filed with the SEC on January 14, 2003).

    10.46      Deed of Trust executed by Plastic Pallet Production, Inc., in
               favor of Paul A. Kruger dated January 10, 2003 (incorporated
               herein by reference to Exhibit 10.7 of PalWeb Corporation's Form
               10-QSB for the Quarterly Period Ended November 30, 2002, which
               was filed with the SEC on January 14, 2003).

    10.47      Letter Agreement between PalWeb Corporation and Lyle W. Miller
               dated January 10, 2003 (amending terms of outstanding stock
               options) (incorporated herein by reference to Exhibit 10.8 of
               PalWeb Corporation's Form 10-QSB for the Quarterly Period Ended
               November 30, 2002, which was filed with the SEC on January 14,
               2003).

    10.48      Patent License Agreement dated as of January 1, 2003 between
               PalWeb Corporation and Gravity Management & Engineering Group,
               LLC (submitted herewith).

    10.49      Letter Agreement dated January 22, 2003 between Gravity
               Management & Engineering Group, LLC and PalWeb Corporation
               (submitted herewith).

    11.1       Computation of Loss Per Share is in Note 1 in the Notes to the
               Financial Statements.

                                       45
<PAGE>

EXHIBIT NO.    DESCRIPTION

    21.1       Subsidiaries of PalWeb Corporation (submitted herewith).

    23.1       Consent of Murrell, Hall, McIntosh & Co., PLLP (submitted
               herewith).

    31.1       Certification of Chief Executive Officer pursuant to Rule
               13a-14(a) (submitted herewith).

    31.2       Certification of Chief Financial Officer pursuant to Rule
               13a-14(a) (submitted herewith).

    32.1       Certification of Chief Executive Officer pursuant to Rule
               13a-14(b) and Section 906 of the Sarbanes-Oxley Act of 2002
               (submitted herewith).

    32.2       Certification of Chief Financial Officer pursuant to Rule
               13a-14(b) and Section 906 of the Sarbanes-Oxley Act of 2002
               (submitted herewith).

    99.1       Put Agreement by and among Paul A. Kruger, Bill J. English as
               Trustee and Paceco Financial Services, Inc. dated December 20,
               2000 (incorporated herein by reference to Exhibit 99.2 of PalWeb
               Corporation's Form 8-K dated December 20, 2000, which was filed
               with the SEC on January 2, 2001).

    99.2       Trust Agreement between Paceco Financial Services, Inc. and Bill
               J. English dated December 20, 2000 (incorporated herein by
               reference to Exhibit 99.3 of PalWeb Corporation's Form 8-K dated
               December 20, 2000, which was filed with the SEC on January 2,
               2001).

**       Management contract or compensatory plan or arrangement required to be
         filed as an exhibit to this report.

(B) REPORTS ON FORM 8-K:

         No reports on Form 8-K were filed during the last fiscal quarter
covered by this Form 10- KSB. However, on September 9, 2003, PalWeb filed a Form
8-K under Item 9, Regulation FD Disclosure, attaching a press release of PalWeb,
which announced an acquisition, recapitalization and changes to the board of
directors. No financial statements were filed in connection with such Form 8- K.



                                       46
<PAGE>

ITEM 14.          PRINCIPAL ACCOUNTANT FEES AND SERVICES

         During the year ended May 31, 2003, PalWeb paid or accrued fees payable
to Murrell, Hall & McIntosh, PLLP of $24,000 for audit services.

         During the years ended May 31, 2003 and 2002, PalWeb paid or accrued
fees payable to Hulme Rahhal Henderson, Inc. of $23,060 and $23,775 for audit
services, respectively, and of $0 and $4,575 for tax services relating to the
preparation of income tax returns, respectively.


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:  09/15/03                  /s/ Warren F Kruger
                                 -----------------------------------------------
                                 Warren F. Kruger, President and Chief
                                 Executive Officer (Principal Executive Officer)

         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:  09/15/03                  /s/ Warren F Kruger
                                 -----------------------------------------------
                                 Warren F. Kruger, President and Chief Executive
                                 Officer (Principal Executive Officer)

Date:  09/15/03                  /s/ William W. Rahhal
                                 -----------------------------------------------
                                 William W. Rahhal, Chief Financial Officer
                                 (Principal Financial and Accounting Officer)

Date:  09/15/03                  /s/ Bryan R Kirchmer
                                 -----------------------------------------------
                                 Bryan R. Kirchmer, Director


Date:  09/  /03
                                 -----------------------------------------------
                                 Rick Dahlson, Director







                                       47
<PAGE>

                          INDEX TO FINANCIAL STATEMENTS

FINANCIAL STATEMENTS OF PALWEB CORPORATION

Report of Independent Public Accountants.....................................F-1

Consolidated Balance Sheet...................................................F-3

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

Consolidated Statements of Changes in Stockholders' Equity (Deficit).........F-5

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

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































                                       48
<PAGE>

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS


To the Stockholders
of PalWeb Corporation


         We have audited the accompanying consolidated balance sheet of PalWeb
Corporation (an Oklahoma corporation) and its subsidiary as of May 31, 2003, and
the related consolidated statements of operations, stockholders' equity
(deficit) and cash flows for the year then ended. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on the consolidated financial statements
based on our audit. The consolidated financial statements of PalWeb Corporation
as of May 31, 2002 were audited by other auditors whose report dated August 15,
2002, on those statements included an explanatory paragraph that described the
uncertainty of the Company continuing as a going concern as discussed in Note 2
to the financial statements.

         We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated 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 audit provides a reasonable basis for our opinion.

         In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
PalWeb Corporation and its subsidiary as of May 31, 2003, and the consolidated
results of their operations and cash flows for the year then ended, in
conformity with accounting principles generally accepted in the United States of
America.

         The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. The Company 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, 2003, raises substantial doubt about its ability to continue as a
going concern. Management's plans in regard to these matters are described in
Note 2. The financial

                                       F-1

<PAGE>

statements do not include any adjustments that might result from the outcome of
these uncertainties.


MURRELL, HALL, MCINTOSH & CO., PLLP

Norman, Oklahoma
June 27, 2003, except for Note 16, as to
which the date is September 15, 2003




































                                       F-2
<PAGE>

                       PALWEB CORPORATION AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEET
                                  MAY 31, 2003

           ASSETS
           ------

  CURRENT ASSETS:
   Cash                                                      $      6,209
   Accounts receivable                                            347,844
   Inventory (Note 3)                                             384,557
                                                             ------------
         TOTAL CURRENT ASSETS                                     738,610

  PROPERTY, PLANT AND EQUIPMENT, net
   of accumulated depreciation (Note 4)                         7,921,542

  OTHER ASSETS (Note 5)                                           141,198
                                                             ------------

         TOTAL ASSETS                                        $  8,801,350
                                                             ============

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
----------------------------------------------

CURRENT LIABILITIES:
   Notes payable (Note 6)                                    $    901,422
   Accounts payable and accrued expenses                          971,133
                                                             ------------
         TOTAL CURRENT LIABILITIES                              1,872,555

LONG-TERM DEBT (Note 6)                                         7,000,000

COMMITMENTS AND CONTINGENCIES (Note 15)

STOCKHOLDERS' EQUITY (DEFICIT) (Notes 9 and 10):
  Preferred stock, $.0001 par value, 20,750,000 shares
   authorized, 750,000 shares outstanding                              75
  Common stock, $0.0001 par value, 5,000,000,000
   authorized, 5,938,722 shares outstanding                           594
  Additional paid-in capital                                   41,969,124
  Deficit                                                     (42,040,998)
                                                             ------------
         TOTAL STOCKHOLDERS' EQUITY (DEFICIT)                     (71,205)
                                                             ------------

TOTAL LIABILITIES AND STOCKHOLDERS'
 EQUITY (DEFICIT)                                            $  8,801,350
                                                             ============

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

                                       F-3
<PAGE>

                       PALWEB CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS


                                                       Year Ended May 31,
                                                 ------------------------------
                                                     2003               2002
                                                 -----------        -----------
Sales                                            $ 1,280,945        $    92,958

Cost of sales, including depreciation
 of $165,736 and $104,028, respectively            2,438,342            621,919
                                                 -----------        -----------

Gross profit (loss)                               (1,157,397)          (528,961)

Expenses:

  General and administrative                       1,312,824          1,498,239

  Impairment                                         310,875               --
                                                 -----------        -----------
         Total expenses                            1,623,699          1,498,239
                                                 -----------        -----------

Operating loss                                    (2,781,096)        (2,027,200)

Interest expense                                     433,756            231,618
                                                 -----------        -----------

Loss before discontinued operations               (3,214,852)        (2,258,818)

Loss from discontinued operations                       --             (197,012)
                                                 -----------        -----------

Net Loss                                          (3,214,852)        (2,455,830)

Preferred Dividends                                  900,166            211,440
                                                 -----------        -----------

Net Loss Available to Common Stockholders'       $(4,115,018)       $(2,667,270)
                                                 ===========        ===========

LOSS PER COMMON SHARE (Note 1):
 LOSS BEFORE DISCONTINUED OPERATIONS             $     (0.79)             (0.53)
 LOSS FROM DISCONTINUED OPERATIONS                      --                (0.04)
                                                 -----------        -----------

 LOSS PER COMMON SHARE                           $     (0.79)       $     (0.57)
                                                 ===========        ===========

WEIGHTED AVERAGE SHARES OUTSTANDING                5,201,000          4,662,000
                                                 ===========        ===========



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

                                       F-4
<PAGE>

<TABLE><CAPTION>
                                                PALWEB CORPORATION AND SUBSIDIARIES
                               CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)


                             Preferred Stock            Common Stock             Additional                                Total
                            ------------------   ---------------------------      Paid-in    Accumulated     Treasury      Equity
                              Shares    Amount      Shares         Amount         Capital      Deficit        Stock     (Deficiency)
                            ----------   -----   ------------   ------------   ------------  ------------  -----------  -----------
<S>                          <C>           <C>    <C>             <C>             <C>         <C>           <C>          <C>
BALANCES, May 31, 2001       2,525,000     253    231,928,244     23,192,825      9,725,686   (35,258,710)  (4,550,266)  (6,890,212)

Preferred stock conversion  (2,020,000)   (202)     2,020,000        202,000       (201,798)         --           --           --

Amortization of deferred
 income - related party           --      --             --             --           82,388          --           --         82,388

Issuance of preferred stock    750,000      75           --             --        7,476,079          --           --      7,476,154

Sale of treasury stock            --      --             --             --           74,290          --        925,731    1,000,021

Common stock for services         --      --          100,000         10,000           --            --           --         10,000

Reincorporation               (505,000)    (51)       505,000    (23,381,370)    23,381,421          --           --           --

Disposition of Paceco
 Financial Services to
 related party                    --      --             --             --          171,715          --      3,624,535    3,796,250

Reverse stock split               --      --     (229,861,619)       (22,986)        22,986          --           --           --

Preferred dividends payable       --      --             --             --             --        (211,440)        --       (211,440)

Net loss                          --      --             --             --             --      (2,455,830)        --     (2,455,830)
                            ----------   -----   ------------   ------------   ------------  ------------  -----------  -----------
BALANCES, May 31, 2002         750,000      75      4,691,625            469     40,732,767   (37,925,980)        --      2,807,331

Common stock in lieu
 of preferred dividends -
         2003 dividends           --      --        1,058,263            106        900,060      (900,166)        --           --
         2002 dividends           --      --          132,150             13        211,427       211,440

Issuance of common stock
 for debts                        --      --           40,584              4         97,122          --           --         97,126

Options exercised                 --      --           16,100              2         27,748          --           --         27,750

Net loss                          --      --             --             --             --      (3,214,852)        --     (3,214,852)
                            ----------   -----   ------------   ------------   ------------  ------------  -----------  -----------

BALANCES, May 31, 2003         750,000   $  75      5,938,722   $        594   $ 41,969,124  $(42,040,998) $      --    $   (71,205)
                            ==========   =====   ============   ============   ============  ============  ===========  ===========
</TABLE>

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

                                       F-5
<PAGE>

                       PALWEB CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE><CAPTION>
                                                                Year Ended May 31,
                                                         ------------------------------
                                                             2003               2002
                                                         -----------        -----------
<S>                                                      <C>                <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
 Net loss                                                $(3,214,852)       $(2,455,830)
 Add: Loss from discontinued operations                         --              197,012
 Adjustments to reconcile net loss to
  cash used by operating activities:
   Depreciation and amortization                             230,794            157,364
   Expenses paid by
    Issuance of common stock                                  57,126             10,000
   Impairment of investment                                  310,875               --
   Changes in accounts receivable                           (304,198)            29,142
   Changes in inventory                                     (180,111)           (61,757)
   Changes in other assets                                   (24,208)           (11,834)
   Changes in payable - related party                           --               (1,867)
   Changes in accounts payable
    And accrued expenses                                     440,265         (1,282,196)
                                                         -----------        -----------
         Net cash used in continuing operations           (2,684,309)        (3,419,966)
         Net cash used in discontinued operations               --             (122,552)
                                                         -----------        -----------
         Net cash used in operating activities            (2,684,309)        (3,542,518)

CASH FLOWS FROM INVESTING ACTIVITIES:
 Purchase of property and equipment                       (1,474,475)        (3,997,531)
 Decrease in loans receivable                                   --              582,148
                                                         -----------        -----------
         Net cash used in investing activities            (1,474,475)        (3,415,383)

CASH FLOWS FROM FINANCING ACTIVITIES:
 Proceeds from notes and advances payable                  8,401,422          6,949,520
 Payments on notes payable                                (4,277,700)          (200,091)
 Payments on savings certificates                               --           (1,357,306)
 Sale of treasury stock                                         --            1,000,000
 Proceeds from issuance of
  common/preferred stock                                      27,750            498,830
                                                         -----------        -----------
         Net cash provided by financing activities         4,151,472          6,890,953
                                                         -----------        -----------

NET DECREASE IN CASH                                          (7,312)           (66,948)
CASH, beginning of period                                     13,521             80,469
                                                         -----------        -----------

CASH, end of period                                      $     6,209        $    13,521
                                                         ===========        ===========
</TABLE>

SUPPLEMENTAL INFORMATION (Note 13)

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

                                       F-6
<PAGE>

                       PALWEB CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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

PalWeb Corporation ("PalWeb") through its wholly-owned subsidiary Plastic Pallet
Production, Inc. ("PPP") is engaged in the manufacture and marketing of plastic
pallets and the related injection molding equipment necessary to produce plastic
pallets. Effective May 31, 2002, PalWeb sold its finance segment, PP Financial,
Inc. and its subsidiary Paceco Financial Services, Inc. to Paul Kruger, Chairman
and CEO, as discussed further in Note 12, "Discontinued Operations.

Effective June 25, 2002, PalWeb effected a reverse stock split of its par value
$0.0001, common stock whereby each stockholder received one share for each fifty
shares held. Fractional shares were rounded up to one share. All previously
reported per share common share data has been restated to reflect the reverse
split.

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.

PRIOR YEAR FINANCIAL STATEMENTS
-------------------------------

The prior year statement of operations has been restated for comparative
purposes.

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

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

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 raw materials and is stated at the
lower of cost (first-in, first-out) or market value.

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


                                       F-7

<PAGE>

useful lives except for its newly completed production equipment which is
computed on the units of production method, as follows:


      Plant building                                    20 years

      Production machinery equipment                    5-10 years and Unit
                                                        of Production
                                                        (5,000,000 units for
                                                        injection molding
                                                        machines and
                                                        1,250,000 for molds)

      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.

INVESTMENT
----------

PalWeb has a 20% ownership in Vimonta AG which is 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 included in other assets.

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. During fiscal year 2002, PalWeb took
additional amortization of $48,756 to write off obsolete patents.

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 10.

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

Revenue is recognized when the product is shipped.

PalWeb establishes an allowance for doubtful accounts to reduce its receivable
to their net realizable value. The allowance is estimated by management based on
general factors including aging of receivables and historical collection
experience. There was no allowance for doubtful allowance at May 31, 2003.

                                       F-8
<PAGE>

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

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

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.

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

Basic loss per share is computed by dividing the loss available to common
stockholders by the weighted average number of common shares outstanding for the
year. In arriving at income (loss) available to common stockholders, preferred
stock dividends are added to the loss from continuing operations and net loss
for the year. Convertible preferred stock, warrants 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. 147, ACQUISITIONS OF CERTAIN FINANCIAL INSTITUTIONS, AN AMENDMENT OF
SFAS NO. 72 AND 144 AND SFAS INTERPRETATION NO. 9, SFAS No. 148, ACCOUNTING FOR
THE STOCK-BASED COMPENSATION-TRANSITION AND DISclosure, SFAS No. 149, AMENDMENT
OF STATEMENt 133 on Derivative INSTRUMENTS AND HEDGING ACTIVITIES, and SFAS No.
150, ACCOUNTING FOR CERTAIN FINANCIAL INSTRUMENTS WITH CHARACTERISTICS OF BOTH
LIABILITIES AND EQUITY. SFAS No. 147 relates to the application of the purchase
method of accounting for all acquisitions of financial institutions. SFAS No.
148 provides alternative methods of transition for a voluntary change to the
fair value based method of accounting for stock-based employee compensation.
SFAS No. 149 clarifies financial accounting and reporting for derivative
instruments including certain derivative instruments embedded in other contracts
and for hedging activities under SFAS No. 133,ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES. SFAS No. 150 establishes standards for how
an issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity. The implementation of these
standards is not expected to have a material effect on PalWeb's consolidated
financial statements.

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

The accompanying financial statements have been prepared assuming


                                       F-9
<PAGE>

that PalWeb will continue as a going concern. PalWeb has suffered significant
losses from operations. Currently, management believes that PalWeb has the
capacity to produce sufficient plastic pallets to achieve profitability;
however, sales have not reached such level. To date, PalWeb has received
substantial advances from investors but will require additional substantial
funding in order to attain its business plan and have an opportunity to achieve
profitable operations. Management has been successful in financing its
operations primarily through short-term loans and personal guarantees on bank
loans by two of its principal stockholders, Paul Kruger and Warren Kruger.
Management continues to seek long-term and/or permanent financing. 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 (1) based upon expressions of interest
from potential customers, adequate sales will be attained to reach a profitable
status, (2) the funding for working capital required to reach necessary
production levels will be obtained and (3) PalWeb will continue as a going
concern.

NOTE 3.  INVENTORY
         ---------

         Inventory at May 31, 2003 consists of:

               Raw materials                              $  182,985
               Finished goods                                201,572
                                                          ----------

               Total inventory                            $  384,557
                                                          ==========

NOTE 4.  PROPERTY, PLANT AND EQUIPMENT
         -----------------------------

A summary of the property, plant and equipment at May 31, 2003, is as follows:

               Production machinery and equipment         $7,130,236

               Building and land                           1,348,646
               Furniture and fixtures                        138,246
                                                          ----------
                                                           8,617,128
               Less: accumulated depreciation               (695,586)
                                                          ----------
                                                          $7,921,542
                                                          ==========

Depreciation expense for the years ended May 31, 2003 and 2002 is $186,388 and
$104,028, respectively.

         A summary of interest costs for the years ended May 31, is:

                                                             2003       2002
                                                          ---------  ---------
               Interest capitalized as property, plant
                 and equipment                            $    --    $ 172,377

               Interest expensed                            433,756    231,618
                                                          ---------  ---------

               Total interest cost                        $ 433,756  $ 403,995
                                                          =========  =========

                                      F-10
<PAGE>

NOTE 5.  OTHER ASSETS
         ------------

At May 31, 2003, other assets consist of:

               Loan origination fee, net of accumulated
                 amortization of $35,000                             $ 105,000
               Patents, net of accumulated amortization of $1,719       20,598
               Investments                                               5,000
               Deposits and other                                       10,600
                                                                     ---------

                           Total Other Assets                        $ 141,198
                                                                     =========

Amortization of patent costs was $656 and $53,336 in 2003 and 2002,
respectively.

NOTE 6.  LONG-TERM DEBT AND NOTES PAYABLE
         --------------------------------

At May 31, 2003, long-term debt consists of a $7,000,000 note payable to Paul
Kruger, interest at three percent over the prime rate of interest (7.25% at May
31, 2003), payable June 4, 2004. The assets of PalWeb and PPP are pledged as
security. PalWeb, among other things, may not pay any cash or asset dividends
and is limited on the amount of additional debt without the prior consent of the
lender. PalWeb paid Paul Kruger a loan organization fee of $140,000 which is
being amortized over the life of the lien. The amount amortized in 2003 and
classified as interest expense is $35,000.

At May 31, 2003, notes payable of $901,422 consist of advances from Yorktown
Management, LLC, entities owned or controlled by Warren Kruger, President and
Chief Executive Officer. The notes accrue interest at nine percent.

NOTE 7.  RELATED PARTY TRANSACTIONS
         --------------------------

Paul Kruger is a significant shareholder in PalWeb and held the position of
Chairman and President until his resignation January 10, 2003. Warren Kruger
brother to Paul Kruger, was named President and CEO effective January 10, 2003.

In connection with the issuance of Series 2001 preferred stock, see Note 9, Paul
Kruger and his affiliated companies received 176,302 shares of preferred stock
in exchange for indebtedness of $1,226,282 and $536,745 of equity in the
building which contains PalWeb's manufacturing facility. The equity in the
building is based on an agreed upon value of $1,350,000 less indebtedness
assumed by PalWeb of $813,255. The building is reflected on PalWeb's accounting
records at $725,344, which is the agreed upon value of $1,350,000 less
unamortized deferred income of $624,656 which originated at the time of the sale
and leaseback transaction of the building between Paul Kruger and PalWeb.

As discussed in Note 6, loans were provided to PalWeb by Paul Kruger

                                      F-11
<PAGE>

and an entity owned by Warren Kruger. Interest paid or accrued on indebtedness
to Paul Kruger was $262,886 and $70,132 for 2003 and 2002, respectively,
including $23,376 in 2003 for which Paul Kruger received 15,584 shares of PalWeb
common stock in exchange for the debt. Interest expense accrued to an entity
owned by Warren Kruger was $23,216. The proceeds from the $7,000,000 loan from
Paul Kruger during 2003 were used to refinance an outstanding loan with Paul
Kruger in the amount of $2,150,000, to pay outstanding bank debt of $4,242,700
and to provide working capital. Additionally, during 2003 Paul Kruger received
15,584 shares of common stock of PalWeb as payment for accrued interest of
$23,376; the exchange rate of $1.50 per share was based on the market price of
the common stock on the date of authorization.

At May 31, 2002, PalWeb has advances receivable from companies owned by Paul
Kruger in the total amount of $126,866. These advances were paid in fiscal year
2003 as an offset to a loan origination fee as discussed in Note 6.

During 2002, PalWeb incurred expense for rent and support services in the
amounts of $15,000, respectively, paid to Foresight, Inc. or its parent company
Precis, Inc., a company of which Paul Kruger was a director and the beneficial
owner of in excess of 10%.

PalWeb leased commercial space from Onward, LLC, owned by Paul Kruger, Chairman
and CEO, through January 1, 2002. Total rentals paid were $150,938 fiscal year
2002. Effective January 1, 2002, PalWeb purchased the property from Mr. Kruger
as discussed above.

As discussed in Note 1, Paul Kruger acquired the finance segment of PalWeb by
purchasing PP Financial, Inc. and its wholly-owned subsidiary Paceco Financial
Services, Inc. in exchange for providing a one year, 6%, $1,000,000 loan.

PalWeb has a contract with a consulting engineering firm for the design and
supervision of the construction of the new production equipment. The president
of the consulting engineers was elected in 2002 to be a Director of PalWeb. Fees
paid to the engineering firm were $124,951 and $643,218 in 2003 and 2002,
respectively. In addition, PalWeb paid the director, individually, $7,500 in
consulting fees.

A Director of PalWeb provided legal services through a law firm of which he is
of counsel. The fees for 2003 and 2002 were $67,519 and $79,455, respectively.

See Note 15, Commitments and Contingencies, regarding a licensing agreement
between PalWeb and Westgate Capital, LLC, an entity owned by directors Warren
Kruger and William Pritchard.

Effective June 23, 2003, PalWeb entered into an agreement with ForcePro, LLC,
for the right to market and sell PalWeb's injection molding machine, PIPER 600,
for a royalty of 5% of the sales price or gross lease payment. Bryan Kirchmer, a
director of PalWeb, is a President of ForcePro, LLC.

                                      F-12
<PAGE>

NOTE 8.  FEDERAL INCOME TAXES
         --------------------

Deferred taxes as of May 31, 2003 and 2002 are as follows:

                                                      2003            2002
                                                  -----------     -----------
        Deferred Tax Assets:
              Net operating loss                  $ 6,839,880     $ 5,298,168
              Loss on impairment of investment      1,151,700       1,151,070
                                                  -----------     -----------
                Total deferred tax assets           7,991,580       6,449,238

        Deferred Tax Liabilities:
              Depreciation and amortization,
               tax over financial                    (623,359)       (148,053)
                                                  -----------     -----------
                                                    7,367,591       6,301,185
              Less: Valuation allowance            (7,367,591)     (6,301,185)
                                                  -----------     -----------

                       Total                      $      --       $      --
                                                  ===========     ===========

Management has provided a valuation allowance for the full amount of the
deferred tax asset as PalWeb continues to incur substantial losses from 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 sufficient reliability on product acceptance and marketability to
reduce the valuation allowance.

The net change in deferred taxes is as follows:

                                                       Year Ended May 31,
                                                  ---------------------------
                                                      2003            2002
                                                  -----------     -----------
        Net operating loss                        $ 1,541,712     $   876,725
        Depreciation, tax over financial             (475,306)       (148,053)
        Allowance for credit losses                      --          (161,640)
        Stock based compensation                         --           (34,447)
        Change in Valuation
          allowance                                (1,066,406)       (532,585)
                                                  -----------     -----------

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

PalWeb's effective tax rate differs from the federal statutory rate as follows:

                                                       Year Ended May 31
                                                  ---------------------------
                                                      2003            2002
                                                  -----------     -----------
        Tax benefit using statutory tax rate      $ 1,093,050     $   767,998
        Effect of state tax rates                      96,446          71,086
        Net change in valuation allowance          (1,066,406)       (532,585)
        Other deductions                             (123,090)       (306,499)
                                                  -----------     -----------

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

                                      F-13
<PAGE>

PalWeb has a net operating loss (NOL) for Federal income tax purposes as of May
31, 2003 of $18,506,000 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
                            2,370,000                   2022
                            4,167,000                   2023

NOTE 9.  STOCKHOLDERS' EQUITY
         --------------------

Effective June 25, 2002, PalWeb declared a 50 for 1 reverse split of its common
stock. References to common shares have been adjusted for the reverse stock
split, except in the statement of changes in stockholders' equity (deficit)
wherein the adjustment was recognized as a lump sum during 2002.

Reference is made to Note 7, regarding certain stock transactions with related
parties.

During 2002, PalWeb issued 2,000 shares of common stock valued at $10,000 for
services of a consultant. Values for the common stock were based on market
value.

In January 2002, PalWeb issued 750,000 shares of Series 2001, cumulative
convertible preferred stock, par value $0.0001, and warrants to purchase
4,500,000 shares of common stock for a total consideration of $7,500,000. Each
share of the preferred stock has a stated value of $10.00 and is convertible at
any time into 7 shares of common stock of PalWeb or a total of 5,250,000 shares,
which is an effective conversion price of $1.429 per share. Holders of the
preferred stock are also entitled to cumulative dividends of 12% per annum,
$1.20 per share, or a total of $900,000. The warrants are exercisable at a price
of $5.00 per share for a period of four years and all but 25% of the warrants
will be callable by PalWeb in three separate trances of 25% if its common stock
trades at prices of $7.50, $10.00 and $12.50 per share, respectively. Pursuant
to a Shareholders and Voting Agreement dated January 4, 2002, as amended,
between PalWeb and Westgate Investment, LP, purchaser of 573,698 shares of the
Series 2001 preferred for consideration of indebtedness of $5,214,297 and cash
of $522,680, the parties agreed, among other things, that Westgate shall have
the right to designate for nomination at least two-thirds of the Board and have
representation on any committee of the Board. In addition, the agreement
provides that 60% approval of the Board is required for, among other things,
indebtedness exceeding $250,000, payment of dividends to common stockholders,
capital expenditures exceeding $250,000 in any one year and organizational
changes or reorganizations of PalWeb.

The board of directors have authorized issuance of common stock in lieu of cash
to pay the dividends on preferred stock. The rate of exchange is based on the
market value of the stock on the date authorized. The issuances are as follows:

                                      F-14
<PAGE>

                            Preferred       Common Stock       Rate per Share
        Dividend Date        Dividend          Issued            of Common

      March 31, 2002         $211,440         132,150              $1.60
      June 30, 2002          $225,000         140,625              $1.60
      September 30,          $223,934         149,289              $1.50
      2002
      December 31,           $226,849         360,078              $0.63
      2002
      March 31, 2003         $224,384         407,971              $0.55

NOTE 10. STOCK OPTIONS
         -------------

PalWeb has a stock option plan that provides for the granting of options to key
employees and non-employee directors. The options are to purchase common stock
at not less than fair market value at the date of the grant. The maximum number
of shares of common stock for which options may be granted is 20,000,000 of
which 18,390,000 are available for grant as of May 31, 2003. Stock options
generally expire in ten years from date of grant or upon termination of
employment and are generally exercisable one year from date of grant in
cumulative annual installments of 25%, except that the options granted in fiscal
2001 were 100% vested at the date of grant. Following is a summary of option
activity for the two years ended May 31, 2003:

                                                                  Weighted
                                                                  Average
                                                       Shares     Exercise
                                                       (000's)     Price
                                                       ------     --------
        Options outstanding at May 31, 2001               190     $   2.00
        Options granted                                   690         3.18
                                                       ------     --------
        Options outstanding at May 31, 2002               880         2.92
        Options granted                                   760         0.88
        Options exercised                                 (25)        2.00
        Options cancelled                                 (30)        2.00
                                                       ------     --------
        Options outstanding at May 31, 2003             1,585     $   1.96
                                                       ======     ========

        Exercisable as of May 31, 2002                    190     $   2.00
                                                       ======     ========
        Exercisable as of May 31, 2003                    555     $   2.70
                                                         ======   ========

With respect to options outstanding at May 31, 2003:

                                      F-15
<PAGE>

                                 Weighted        Weighted
                    Options       Average         Average
     Range        outstanding      Life            Price      Exercisable
     -----        -----------      ----            -----      -----------

     $2.00          135,000      5.3 years          $2.00       135,000

     $3.125-        690,000      7.3 years          $3.17       360,000
     $4.00

     $1.60          210,000      7.8 years          $1.60        60,000

     $0.55          550,000      9.8 years          $0.55          --
                  ---------                                   ---------
     Total        1,585,000      8.1 years          $1.96       555,000
                  =========                                   =========

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:

                                                        2003          2002
                                                        ----          ----
        Net loss to common shareholders:
                          As reported              $(4,115,018)   $(2,667,270)

                          Pro forma                $(4,230,753)   $(3,074,246)

        Per share:

                          As reported              $     (0.79)   $     (0.57)

                          Pro Forma                $     (0.81)   $     (0.66)

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                                  1.68
        Risk Free Interest Rate                              4%
        Expected Holding Period                              5 years

NOTE 11. 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, 2002 and
2001.

NOTE 12. DISCONTINUED OPERATIONS
         -----------------------

In May 2002, PalWeb sold its finance segment of business. Information relating
to operations discontinued in 2002 is as follows:

                                                               2002
                                                            ---------
        Revenue                                             $  46,330
        Loss from operations                                  197,012
        Gain on disposal                                      171,715

                                      F-17
<PAGE>

NOTE 13. SUPPLEMENTAL INFORMATION OF CASH FLOWS
         --------------------------------------

Non-cash activities for the years ended May 31, are as follows:

                                                         2003          2002
                                                      ----------    ----------
        Common stock issuances for:
              Consulting services                     $     --      $   10,000
              Retirement of debt                          97,126          --
              Dividends on preferred stock -
                    For year ended May 31, 2002          211,440          --
                    For year ended May 31, 2003          900,166          --
        Preferred stock issuances for:
              Retirement of debt                            --       6,440,579
              Acquisition of property                       --         725,344
        Debt assumed in acquisition of property             --         813,255

        Interest paid (including
         capitalized interest in 2002 of $172,377)       475,835       459,019

NOTE 14. OPERATING LEASES
         ----------------

Rental expense on operating leases totaled $212,538 during 2002 and none in
2003.

NOTE 15. COMMITMENTS AND CONTINGENCIES
         -----------------------------

The Board of Directors authorized payment in the form of restricted common stock
for the June 30, 2003, quarterly dividend of $226,849 on the Series 2001
preferred stock at a rate of $0.60 per share of common stock based on the market
price at July 1, 2003. A total of 560,959 shares of common stock were issued.

In April 2001, PalWeb entered into a Licensing Agreement with Westgate Capital,
LLC ("WCC"), an entity owned by Warren Kruger and William Pritchard, providing
PalWeb the exclusive right and license to use fire retardancy technology then
being developed under the direction and expense of WCC. The Licensing Agreement
was negotiated and executed prior to Warren Kruger, William Prichard or entities
which they are affiliated became directors or beneficial owners of 10% of more
of PalWeb's common stock in January 2002. Under the agreement, PalWeb must pay
the greater of 2.5% of gross sales of UL listed pallets using fire retardant
technology or a minimum monthly royalty of $10,000. The agreement also provided
that in the event that cumulative payments to WCC total $250,000 during the
first two years, WCC would convey the ownership of the technology process to
PalWeb subject to the 2.5% royalty payment. Subsequent to the execution of the
original agreement which provided for a "coating" process technology, the fire
retardancy process changed to a chemical additive which WCC and PalWeb
incorporated in the

                                      F-18
<PAGE>

manufacturing process and used to successfully obtain the UL listing. As of May
31, 2003, no minimum or other royalties have been paid or accrued by PalWeb.
However, PalWeb has recorded expenses of approximately $126,000 that are
associated with the license agreement. WCC has not asserted that PalWeb is in
default under the license agreement, and WCC has indicated that it has no
current intentions of asserting any default by PalWeb under such agreement.
PalWeb is exploring the possibility of purchasing the technology from WCC.

PalWeb derives, and expects that in the foreseeable future it will continue to
derive, substantially all of its revenue from a few large customers. There is no
assurance that PalWeb will retain these customers' business at the same level,
or at all. The loss of a material amount of business from any one of these
customers could have a material adverse effect on PalWeb.

NOTE 16. SUBSEQUENT EVENTS
         -----------------

Effective September 8, 2003, PalWeb completed several transactions which are
described below.

PalWeb acquired the assets of Greystone Plastics, Inc., a manufacturer of
plastic pallets, for $12,500,000 including $4,200,000 in cash, $8,300,000 in
notes payable to the seller as follows: a $5,000,000 note payable at 7.5%
interest, due October 1, 2008; a $2,500,000 note payable at 7.5% interest, due
October 1,2018; and an $800,000 note at 6% interest, due October 26, 2007.
PalWeb simultaneously sold to Paul Kruger, a major stockholder of PalWeb, 50,000
of preferred stock, Series 2003, par value $0.0001, at $100 per share for a
total of $5,000,000. The preferred has a dividend rate equal to the prime rate
of interest plus 3% and a conversion rate to common stock of $1.50 per share for
a total of 3,333,333 shares of common.

The Series 2001 preferred stockholders elected to convert their outstanding
750,000 shares of preferred stock to common stock at seven shares of common for
each share of preferred for a total of 5,250,000 shares of common stock.
Additionally, the Series 2001 preferred stockholders agreed to cancel the
outstanding warrants which were received in connection with the issuance of the
Series 2001 preferred stock.

Warren Kruger, President and Chief Executive Officer, elected to convert
$900,000 principal amount of indebtedness to common stock at the rate of $1.429
per common share. A total of 629,811 shares will be issued in connection with
the exchange.

PalWeb completed a sale and leaseback transaction whereby it sold its plant for
$1,350,000 and certain production equipment for $5,650,000 to a company owned by
Paul Kruger in exchange for the $7,000,000 note payable to Paul Kruger. The
assets were sold at approximately net book value which approximates fair value.
The lease agreement for the plant is a three year triple net lease with a
monthly rental of $17,720. The equipment lease is for 130 months with a monthly
rental of $48,000 beginning six months after the first day of the lease.

                                      F-19