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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, 2004
                                   ---------------------------------------------

[_]      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                         (I.R.S. Employer
   incorporation or organization)                        Identification No.)

  1613 EAST 15TH STREET, TULSA, OKLAHOMA                       74120
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 (Address of principal executive offices)                    (Zip Code)

                                 (918) 583-7441
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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)

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
<PAGE>

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, 2004, was $6,964,943.

As of August 18, 2004, 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 $1,526,717.

As of August 18, 2004, 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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                                       2
<PAGE>


                               PALWEB CORPORATION
                                   FORM 10-KSB
                                TABLE OF CONTENTS

PART I

Item 1.    Description of Business                                            4

Item 2.    Description of Property                                           11

Item 3.    Legal Proceedings                                                 11

Item 4.    Submission of Matters to a Vote of Security Holders               12

PART II

Item 5.    Market for Common Equity, Related Stockholder Matters and
             Small Business Issuer Purchases of Equity Securities            12

Item 6.    Management's Discussion and Analysis or Plan of Operation         13

Item 7.    Financial Statements                                              23

Item 8.    Changes In and Disagreements with Accountants on Accounting
           and Financial Disclosure                                          23

Item 8A.   Controls and Procedures                                           23

PART III

Item 9.    Directors, Executive Officers, Promoters and Control Persons,
             Compliance with Section 16(a) of the Exchange Act               23

Item 10.   Executive Compensation                                            27

Item 11.   Security Ownership of Certain Beneficial Owners and Management
             and Related Stockholder Matters                                 29

Item 12.   Certain Relationships and Related Transactions                    32

Item 13.   Exhibits and Reports on Form 8-K                                  34

Item 14.   Principal Accountant Fees and Services                            40

           Signatures                                                        41

           Certifications                                              Exhibits


                                       3
<PAGE>

PART I.

ITEM 1.           DESCRIPTION OF BUSINESS

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

         PalWeb Corporation ("PalWeb") 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. In December 1997, PalWeb
acquired all of the issued and outstanding stock of Plastic Pallet Production,
Inc., a Texas corporation ("PPP"), and since that time, PalWeb has primarily
been engaged in the business of manufacturing and selling plastic pallets.

         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, was made to the number and price of
such shares as adjusted for the reverse split discussed above.

         Effective September 8, 2003, PalWeb acquired substantially all of the
assets of Greystone Plastics, Inc., an Iowa corporation, through the purchase of
such assets by PalWeb's newly

                                       4
<PAGE>

formed, wholly-owned subsidiary, Greystone Manufacturing, L.L.C., an Oklahoma
limited liability company ("GSM"). Greystone Plastics, Inc. was a manufacturer
of plastic pallets used in the beverage industry. For more information regarding
the acquisition of the assets of Greystone Plastics, Inc., see "Acquisition of
the Assets of Greystone Plastics, Inc." at the end of this Item 1.

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

PRODUCTS

         PalWeb's primary business is manufacturing and selling plastic pallets
through its wholly owned subsidiaries Plastic Pallet Production, Inc., or PPP,
and Greystone Manufacturing, L.L.C., or GSM. In addition, PalWeb has developed a
large multi-station plastic injection molding system known as the PIPER 600,
which it markets pursuant to a licensing agreement with a third party.

         PalWeb has an aggregate production capacity of approximately 73,000
pallets per month (40,000 pallets through PPP and 33,000 pallets through GSM).
As of May 31, 2004, PPP's product line included the following 48" X 40" pallets:

     o    HAWKER(TM) 4840 - A picture frame, web-top pallet that utilizes a
          patented inter-locking design and features CJ2(TM) fire retardant
          polymers that are UL 2335 certified. It has a rackable load of 2,500
          lbs., dynamic load of 5,000 lbs., static load of 25,000 lbs. and
          weighs 53 lbs.

     o   TANK(TM) PICTURE FRAME - A picture frame, web-top pallet that utilizes
         a patented inter-locking design and is produced using virgin materials.
         It has a rackable load of 3,000 lbs., dynamic load of 5,000 lbs.,
         static load of 29,900 lbs and weighs approximately 50 lbs.

     o    GRANADA(TM) PICTURE FRAME - A picture frame, web-top pallet that
          utilizes a patented inter-locking design and is produced using a
          proprietary blend of recycled plastics. It has a rackable capacity of
          2,500 lbs., a dynamic load of 5,000 lbs., static load of 25,000 lbs
          and weighs 47.5 lbs.

     o    GRANADA(TM) STACKABLE - A web-top pallet that is produced using a
          proprietary blend of recycled plastics, has a dynamic load of 5,000
          lbs., static load of 7,000 lbs and weighs 32 lbs.

     o    GRANADA(TM) NESTABLE - This pallet is the same as the Granada(TM)
          Stackable, except that its legs nestle inside one another for
          convenient and more efficient storage and it weighs 30 lbs.

                                       5
<PAGE>

     o    GRANADA(TM) 3-RUNNER - A web-top pallet that utilizes a patented
          inter-locking design on a three runner bottom and is produced using a
          proprietary blend of recycled plastics. It a rackable load of 1,200
          lbs., dynamic load of 5,000 lbs., static load of 12,000 lbs and weighs
          41 lbs.

     o    A3R FLAT DECK 3-RUNNER - This pallet is the same as the Grenada(TM)
          3-Runner, except it has a solid top and weighs 55 lbs.

GSM's product line includes a 40" X 32" pallet that is marketed solely to the
beverage industry and a 110cm X 120cm pallet (approximately 44" X 48").

         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.

         In January 2002, PalWeb submitted its Hawker(TM) 4840 pallet to
Underwriters Laboratory ("UL") for UL certification with respect to fire
retardancy. The Hawker(TM) 4840 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(TM) 4840, Tank(TM) Picture Frame,
Granada(TM) Picture Frame and Granada(TM) 3-Runner 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"), a nationally recognized independent testing
facility, in Lenexa, Kansas. 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(TM) Picture Frame 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
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

                                       6
<PAGE>

evaluation of all elements of materials handling systems. PalWeb's Tank(TM)
Picture Frame pallet 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 this pallet.

         Effective June 23, 2003, PalWeb entered into an agreement with
ForcePro, LLC, which gives 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.

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. At an overall average selling price of $9/wood 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% to 65% of the industry's revenues. The U.S. Forest Service
estimates that approximately 1.9 billion wood pallets are in circulation in the
United States today and that roughly 400 million of the wood pallets currently
in circulation were newly manufactured. On an annual basis, approximately 175
million wood pallets are recycled through a process of retrieval, repair,
re-manufacturing and secondary marketing, approximately 225 million are sent to
landfills, and approximately 100 million are burned, lost, abandoned or leave
the country.

         Infestation is a concern in the wood pallet industry. 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.

                                       7
<PAGE>

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.

         Until very recently, plastic pallets had not penetrated the market
significantly, due in part to their cost. Heavy duty plastic pallets cost $46 to
$100, heavy duty wood pallets typically cost approximately $26, and less sturdy
wood pallets typically cost $8 to $11. As stated in an article in the July 1996
issue of Material Handling Engineering, wood pallets have an estimated useful
life of 7 to 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.

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

EMPLOYEES

         As of May 31, 2004, PalWeb had 60 full-time employees and used a
temporary personnel service to provide additional production personnel as
needed. The number of temporary personnel utilized during the year ended May 31,
2004, generally ranged from 8 to 10.

MARKETING AND CUSTOMERS

         PalWeb's primary focus is to provide quality products and services to
its existing customers while continuing its marketing efforts to broaden its
customer base. PalWeb's existing customers are primarily located in the United
States and engaged in the food and beverage, pharmaceutical, automotive,
chemical and consumer products industries. In addition, PalWeb recently received
an initial purchase order of plastic pallets from Big Cola, one of Mexico's
largest cola producers. 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 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 sells its pallets through a combination of a network of
independent contractor distributors and its officers and employees. Currently,
PalWeb has approximately 10 active distributors. PalWeb will continue utilizing
this structure until sales volumes justify the development of an internal sales
staff.

         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

                                       8
<PAGE>

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.

COMPETITION

         PalWeb's primary competitors are a large number of small, privately
held firms that sell wood pallets in very limited geographic locations. PalWeb
believes that it can compete with manufacturers of wood pallets by emphasizing
the cost savings realized over the longer life of its plastic pallets as well as
the environmental benefits of its plastic pallets as compared to wood pallets.
PalWeb also competes with approximately three large and fifteen medium to small
manufacturers of plastic pallets. PalWeb believes that its proprietary designs
coupled with the competitive pricing of its products gives PalWeb a competitive
advantage over other plastic pallet manufacturers.

GOVERNMENT REGULATION

         The business operations of PalWeb are subject to existing and potential
federal, state and local environmental laws and regulations pertaining to the
handling and disposition of wastes (including solid and hazardous wastes) or
otherwise relating to the protection of the environment. In addition, 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.

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, 2004, 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

         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

                                       9
<PAGE>

         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 Westgate Capital
Company, L.L.C. ("WCC"), a company of which PalWeb's President and CEO is a
member, 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.

ACQUISITION OF ASSETS OF GREYSTONE PLASTICS, INC.

         Effective September 8, 2003, PalWeb acquired the assets of Greystone
Plastics, Inc., a manufacturer of plastic pallets used in the beverage industry.
The purchase price for the assets was $12,500,000, of which $4,200,546 was paid
in cash and $8,299,454 was paid by issuing the following notes: a $5,000,000
note payable by GSM to Greystone Plastics, Inc. at 7.5% interest, due October 1,
2008; a $2,500,000 note payable by GSM to Greystone Plastics, Inc. at 7.5%
interest, due October 1, 2018; and a $799,454 note payable by GSM to Bill
Hamilton, one of the owners of Greystone Plastics, Inc., at 6% interest, due
February, 2008. The notes described in the preceding sentence are secured by all
of the assets acquired by PalWeb from Greystone Plastics, Inc. 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") as further described under "Recent Sales of Unregistered Securities" in
Item 5 of this Form 10-KSB.

SALE AND LEASEBACK OF DALLAS PLANT AND CERTAIN PRODUCTION EQUIPMENT

         On September 8, 2003, PalWeb completed a sale and leaseback transaction
whereby it sold its Dallas plant for $1,350,000 and certain production equipment
located in its Dallas plant, including its PIPER 600 plastic pallet injection
molding machine, for $5,650,000 to 1607 Commerce Limited Partnership, a Texas
limited partnership owned by Paul Kruger (a major stockholder of PalWeb) ("1607
Commerce"), in exchange for the cancellation of debt in the amount of $7,000,000
owed by PalWeb to Paul Kruger. The assets were sold at the assets' approximate
net book value and immediately leased back to PPP by 1607 Commerce. 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. In connection
with this sale and leaseback transaction, each of PalWeb, PPP and GSM has
granted 1607 Commerce a security interest in substantially all of its assets. In
addition, pursuant to two guaranty agreements, PalWeb has agreed to guarantee
PPP's obligations under the leases described in this paragraph and, pursuant to
a stock pledge agreement, PalWeb has pledged its ownership interests in PPP and
GSM as security for the payment of its obligations under the two guaranty
agreements.

                                       10
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ITEM 2.      DESCRIPTION OF PROPERTY

         In connection with the acquisition of the assets of Greystone Plastics,
Inc., as described above, PalWeb acquired approximately 3 acres of land in
Bettendorf, Iowa and a building with 60,000 square feet of manufacturing and
warehouse space. The manufacturing and warehouse space is sufficiently equipped
and designed to accommodate the manufacturing of plastic pallets. The notes
issued in connection with the acquisition of the assets of Greystone Plastics,
Inc., are secured by all of the assets acquired from Greystone Plastics, Inc.,
including the land and the building described in this paragraph. For more
information regarding the amounts and other terms of such notes, see
"Acquisition of Assets of Greystone Plastics, Inc." above under Item 1. In the
opinion of the management of PalWeb, the plant described in this paragraph is
adequately covered by insurance.

         In January 2002, PalWeb acquired the land and building in Dallas,
Texas, in which PPP's manufacturing facilities were 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. This 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. During 2004, PalWeb closed the Dallas plant and moved the equipment
located in this plant to Bettendorf, Iowa. The consolidation of PalWeb's
manufacturing operations into one facility was made by management in order to
improve customer service and reduce costs related to manufacturing operations.

ITEM 3.      LEGAL PROCEEDINGS

Justin Baker and Bobbie Baker v. Cooper Manufacturing, Inc., a foreign
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corporation, Stanford International, Inc., a foreign corporation, Allied
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Products, a foreign corporation, Cabec Energy Corporation, a foreign
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corporation, Tulsa Industries, Inc., a foreign corporation, Cabec Energy
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Industries, a foreign corporation, Curton Capital Corporation, a foreign
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corporation, The Union Group, a foreign corporation, PalWeb Corporation, a
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foreign corporation, BP America Production Company, f/k/a/ Amoco Production
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Company, a foreign corporation and John Doe, an unknown drilling representative,
--------------------------------------------------------------------------------
Cause No. D-101-CV-200301515, filed in the First Judicial District, County of
Santa Fe, State of New Mexico, on August 19, 2003.

Justin Baker and his wife, Bobbie Baker, have sued a number of defendants,
including PalWeb, in connection with an alleged accident that occurred on an oil
rig unit on February 1, 2002, in which Mr. Baker allegedly injured his right
leg. The plaintiffs claim, among other things, that: Mr. Baker's right leg was
amputated because of accident described in the preceding sentence; the oil rig
unit and its component parts were designed, manufactured, assembled, promoted,
advertised, sold and distributed by a certain manufacturers, including certain
companies of which PalWeb is a successor and/or parent corporation; and such
manufacturers were negligent, should be held strictly liable for plaintiffs'
injuries, and breached certain implied warranties. The plaintiffs are seeking
past and future compensatory and punitive damages, interest on such damages and
certain costs and expenses, all of which are in unspecified amounts. PalWeb has
answered the plaintiffs' petition denying any

                                       11
<PAGE>

liability and plans to vigorously defend the lawsuit. Discovery in this lawsuit
is still in the early stages.


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

         None.

PART II

ITEM 5.      MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL
             BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES

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"), under the symbol "PLWB." 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, 2002                $4.00                     $1.10

            Nov. 30, 2002                 2.85                      1.21

            Feb. 29, 2003                 1.60                      0.51

            May 31, 2003                  0.91                      0.51

            Aug. 31, 2003                 0.70                      0.30

            Nov. 30, 2003                 0.82                      0.30

            Feb. 29, 2004                 0.82                      0.62

            May 31, 2004                  0.83                      0.53

Quotations reflect inter-dealer prices, without retail mark-up, markdown or
commission and may not represent actual transactions.

HOLDERS
-------

         As of May 31, 2004, PalWeb had approximately 1,345 common stockholders
of record.

         As of May 31, 2004, there were approximately 2,906 beneficial owners
(including those holding in street names) of PalWeb's common stock.

                                       12
<PAGE>

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

         Simultaneously with the acquisition of the assets of Greystone
Plastics, Inc., described elsewhere in this Form 10-KSB and in order to
partially finance such acquisition, PalWeb sold 50,000 shares of 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 holder of the 2003 Preferred
Stock has been granted certain voting rights so that such holder has the right
to elect a majority of the Board of Directors of PalWeb. The material terms and
conditions of this 2003 Preferred Stock are set forth in the Certificate of
Designation relating to such 2003 Preferred Stock included as an exhibit to a
Form 8-K filed by PalWeb on September 23, 2003.

         The offer and sale of the shares of the 2003 Preferred Stock were not
registered under the Securities Act of 1933, as amended, in reliance upon the
exemption from the registration requirements of that act provided by Section
4(2) thereof and Regulation D promulgated by the Securities and Exchange
Commission thereunder. Paul Kruger is a sophisticated accredited investor with
the experience and expertise to evaluate the merits and risks of an investment
in PalWeb stock and the financial means to bear the risks of such an investment.
Paul Kruger was provided access to all of the material information regarding
PalWeb that he would have received if the offer and sale of the securities had
been registered.

PURCHASES OF EQUITY SECURITIES BY THE SMALL BUSINESS ISSUER AND AFFILIATED
--------------------------------------------------------------------------
PURCHASERS
----------

         None.

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, product sales 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

                                       13
<PAGE>

various risks and uncertainties described in this Form 10-KSB. For these
reasons, PalWeb's actual results may vary materially from the forward-looking
statements.

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

PALWEB CONTINUES TO OPERATE AT A LOSS.

         PalWeb was incorporated on February 24, 1969. From April 1993 to
December 1997, PalWeb was engaged in various businesses, including the business
of exploration, production, and development of oil and gas properties in the
continental United States and the operation of related service 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 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.

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 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.

                                       14
<PAGE>

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 and other companies that manufacture plastic
pallets. It is anticipated that the plastic pallet industry will be subject to
intense competition and rapid technological change. PalWeb could potentially
face additional 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 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

                                       15
<PAGE>

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

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

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

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

                                       16
<PAGE>

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 and Bill Hamilton, Vice President of Production, has a
significant role in oversight of the manufacturing process. The loss or
reduction of services of Warren Kruger, Bill Hamilton, or any other key employee
could have a material adverse effect on PalWeb. In addition, 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
ARE LIKELY TO BE SOLD IN THE FUTURE, 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. Sales or the expectation of sales of a substantial number of
shares of common stock in the public market by selling stockholders could
adversely affect the prevailing market price of the common stock, possibly
having a depressive effect on any trading market for the common stock, and may
impair PalWeb's ability to raise capital at that time through additional sale of
its equity securities.

                                       17
<PAGE>

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

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

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 35% of PalWeb's
common stock. Paul Kruger, Warren Kruger's brother, and entities with which he
is affiliated beneficially owns over 42% 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.

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

GENERAL

         The consolidated statements include PalWeb and its wholly-owned
subsidiaries, Greystone Manufacturing, L.L.C., or GSM, and Plastic Pallet
Production, Inc., or PPP.

         PalWeb's primary business is the manufacturing and selling of plastic
pallets through its wholly owned subsidiaries GSM and PPP. GSM is a newly formed
subsidiary of PalWeb which acquired substantially all the assets and operations
of Greystone Plastics, Inc. GSM manufactures pallets for the beverage industry,
operates at full capacity and sells its product to one customer.

         PPP also markets its own designed injection molding machine, the PIPER
600, through 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.

                                       18
<PAGE>

         As of May 31, 2004, PalWeb had 60 full-time employees and its
production capacity is about 73,000 plastic pallets per month, or 876,000 per
year. Production levels have generally been governed by sales and will increase
as sales dictate. PalWeb anticipates that a new production line will be
installed at its Iowa plant on or before November 15, 2004, at which time
PalWeb's production capacity will increase to approximately 84,000 pallets per
month, or 1,008,000 per year. Due to a full year's operating results from GSM
plus increased demand for the pallets produced by GSM coupled with GSM's
increased production capacity, PalWeb projects that its fiscal 2005 production
will increase by approximately 50% over fiscal year 2004 and that sales for
fiscal year 2005 could be in excess of $11,000,000. However, there is no
assurance that PalWeb will receive orders for pallets that justify any
significant increase to its current production level, or that it will maintain
or increase sales.

         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. See "Liquidity and Capital Resources" under this
Item 6.

         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, 2004, COMPARED TO YEAR ENDED MAY 31, 2003

         Sales were $6,964,943 for fiscal year 2004 compared to $1,280,945 for
fiscal year 2003 for an increase of $5,683,998. The acquisition of GSM added
$6,029,336 to sales in fiscal year 2004. Sales by PPP declined approximately
$345,000 as a result of relocating the production equipment from its Dallas
plant to its Iowa plant as described below.

         Cost of sales was $6,768,426 (97% of sales) and $2,438,342 (190% of
sales) in fiscal years 2004 and 2003, respectively. Production levels were
approximately 100% of capacity for GSM in fiscal year 2004 and approximately 10%
of capacity for PPP in fiscal years 2004 and 2003. Because of the low production
rate for PPP, fixed costs in relation to the level of production resulted in a
higher rate of cost of sales to sales. In addition, during fiscal year 2003,
substantial costs were incurred during the first quarter in connection with the
startup of the PIPER 600 and for the repair and maintenance of the prototype
injection molding machine.

         General and administrative expense was $1,527,968 in fiscal year 2004
compared to $1,312,824 for fiscal year 2003 for an increase of $215,144. This
increase is primarily due to the acquisition of GSM as discussed above.

                                       19
<PAGE>

         Subsequent to the acquisition of GSM, PalWeb elected to consolidate its
operations at GSM's plant in Bettendorf, Iowa. The consolidation of PalWeb's
manufacturing operations into one facility was made by management in order to
improve customer service and reduce costs related to manufacturing operations.
As a result of the closing of the Dallas plant, PalWeb recorded an expense
$441,949 in fiscal year 2004 which includes $222,196 for relocation costs and
$219,753 for abandonment of leasehold improvements and estimated costs to settle
the outstanding lease agreement on the property. In 2003, PalWeb recorded a one
time impairment expense to adjust the cost on its prototype injection molding
machine based on estimated future cash flows.

         Other income of $12,134 includes income of $133,455 primarily from
settlement of a claim against a vendor offset by a loss of $121,321 from the
sale of equipment.

         Interest expense was $699,661 in fiscal year 2004 compared to $433,756
in fiscal year 2003 for an increase of $265,905.

         The consolidated net loss, before the deduction for preferred
dividends, in fiscal year 2004 was $(2,460,927) compared to $(3,214,852) in
fiscal year 2003 for a decrease of $753,925. This decrease results from the
reasons discussed above.

         After deducting dividends to preferred stockholders of $660,171 and
$900,166 in fiscal years 2004 and 2003, respectively, the consolidated net loss
available to common stockholders was $(3,121,098) ($(0.28) per share of common
stock) compared to $(4,115,018) ($(0.79) per share of common stock) in fiscal
year 2003. The disproportionate decline in the per share amounts from 2003 to
2004 is primarily due to the conversion of the Series 2001 preferred stock into
5,250,000 shares of common stock effective September 8, 2003.

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

         GENERAL

         PalWeb's cash requirements for operating activities consist principally
of accounts receivable, inventory, accounts payable requirements, operating
leases and scheduled payments of interest on outstanding indebtedness. PalWeb is
dependent on outside sources of cash to fund its operations. As of May 31, 2004,
revenues from sales remain insufficient to meet current liabilities.

         A summary of cash flows for the year ended May 31, 2004 is as follows:

              Cash used in operating activities                    $(1,964,405)

              Cash used in investing activities                     (4,450,436)

              Cash provided by financing activities                  6,682,717

                                       20
<PAGE>

         Contractual obligations of PalWeb are as follows:

<TABLE><CAPTION>
                                                 LESS THAN                                         OVER
                                   TOTAL           1 YEAR        1-3 YEARS       4-5 YEARS        5 YEARS
                                -----------     -----------     -----------     -----------     -----------
<S>                             <C>             <C>             <C>             <C>             <C>
           Long-term debt       $ 7,894,111     $ 1,503,612     $ 2,817,517     $ 2,003,575     $ 1,569,407
           Operating leases       6,121,800         788,640       1,205,160       1,152,000       2,976,000
           Total                $14,015,911     $ 2,292,252     $ 4,022,677     $ 3,155,575     $ 4,545,407
</TABLE>

         Cash used in investing activities during fiscal 2004 principally
consisted of the cash portion of the purchase price of the assets of Greystone
Plastics, Inc., which was raised from the sale of the Series 2003 Preferred
Stock as described under "Sales of Unregistered Securities" under Item 5 of this
Form 10-KSB. PalWeb anticipates equipment additions of approximately $1,500,000
in fiscal 2005 in connection with the purchase of a new injection molding
machine and new molds. PalWeb plans to finance these acquisitions of production
equipment either through long-term installment notes or operating leases.

         PalWeb anticipates that the cash necessary for funding its operating
activities will decline in fiscal 2005 as compared to fiscal 2004 based on its
projection of increased sales activities for fiscal 2005. To provide for the
additional cash to meet PalWeb's operating activities and contractual
obligations for fiscal 2005, PalWeb is exploring various options including
long-term debt and equity financing. However, there is no guarantee that PalWeb
will be able to raise sufficient capital to meet these obligations.

         PalWeb has accumulated a working capital deficit of $3,748,721 at May
31, 2004, which includes notes payable of $2,352,667 ($1,344,501 to entities
owned or controlled by Warren Kruger and $899,980 to a bank), $1,503,612 for
current portion of long-term debt and $1,578,917 in accounts payable and accrued
liabilities. This deficit reflects the uncertain financial condition of PalWeb
resulting from its inability to obtain long term financing from traditional
financing sources. There is no assurance that PalWeb will secure such financing.

         As described below, substantially all of the financing that PalWeb has
received through May 31, 2004, has been provided by loans from entities
controlled Warren Kruger, President and Chief Executive Officer of PalWeb, and
from entities affiliated with Paul Kruger, the brother of Warren Kruger, and
through the offering of 2001 Preferred Stock and 2003 Preferred Stock described
below to the same persons.

         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.

                                       21
<PAGE>

         PREFERRED STOCK FINANCING

         On January 4, 2002, PalWeb issued 750,000 of Series 2001 convertible
preferred stock, $10.00 par value and convertible at the rate of 7 shares of
common for each share of preferred stock, for a total of $7,500,000. Entities
owned by Paul Kruger, acquired 176,302 shares of 2001 Preferred Stock in
exchange for the conversion of $950,200 of existing indebtedness and $536,745 of
equity in the Dallas plant, based on an agreed value of $1,350,000, less
indebtedness assumed by PalWeb of $813,255. Entities owned or controlled by
Warren Kruger acquired 573,698 shares of 2001 Preferred Stock in exchange for
$522,680 in cash and the conversion of $5,214,297 of existing indebtedness.
Effective September 8, 2003, the holders of the Series 2001 preferred elected to
convert the outstanding 750,000 shares of preferred stock into 5,250,000 shares
of common stock.

         Effective September 8, 2003, PalWeb sold 50,000 shares of 2003
Preferred Stock for a total of $5,000,000 to Paul Kruger as further described
under "Sales of Unregistered Securities" under Item 5 of this Form 10-KSB. The
proceeds of the offering were primarily used for the acquisition of the assets
of Greystone Plastics, Inc.

         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.

         LOANS FROM WARREN KRUGER

         Through May 31, 2003, entities owned or controlled by Warren Kruger,
had loaned or advanced $901,422, at an interest rate of 9%, to PalWeb. Effective
September 8, 2003, PalWeb authorized the issuance of 629,811 shares of common
stock in exchange for the payment of $900,000 of such indebtedness at an
exchange rate of $1.429 per share of common stock. During fiscal year 2004, an
entity owned by Warren Kruger advanced an additional $1,344,501 for which
interest is accrued at an interest rate of 7.5%. At May 31, 2004, advances and
accrued interest due to such entities total $1,344,501 and $31,713.

         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.

         Effective September 8, 2003, PalWeb completed a sale and leaseback
transaction whereby it sold for agreed upon prices its Dallas, Texas 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.

                                       22
<PAGE>

         OTHER

         Effective September 8, 2003, PalWeb acquired the assets of Greystone
Plastics, Inc., a manufacturer of plastic pallets used in the beverage industry.
The purchase price for the assets was $12,500,000, of which $4,200,546 was paid
in cash and $8,299,454 was paid by issuing the following notes: a $5,000,000
note payable by GSM to Greystone Plastics, Inc. at 7.5% interest, due October 1,
2008; a $2,500,000 note payable by GSM to Greystone Plastics, Inc. at 7.5%
interest, due October 1, 2018; and a $799,454 note payable by GSM to Bill
Hamilton, one of the owners of Greystone Plastics, Inc., at 6% interest, due
February, 2008. 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., have been further
described in a Form 8-K filed on September 23, 2003 and a related Form 8-K/A
filed on February 18, 2004. For more information regarding this transaction, see
"Sale and Leaseback of Dallas Plant and Certain Production Equipment" under Item
1 of this Form 10-KSB.

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.

ITEM 8A.     CONTROLS AND PROCEDURES.

         PalWeb carried out an evaluation under the supervision of PalWeb's
Chief Executive Officer and Chief Financial Officer of the effectiveness of the
design and operation of PalWeb's disclosure controls and procedures pursuant to
the Securities Exchange Act Rules 13a-15(e) and 15d-15(e). Based on this
evaluation, PalWeb's Chief Executive Officer and Chief Financial Officer have
concluded that the disclosure controls and procedures as of the end of the
period covered by this report on Form 10-KSB are effective. The design of any
system of controls is based in part upon certain assumptions about the
likelihood of future events and there can be no assurance that any design will
succeed in adhering to its stated goals under all potential future conditions.
During the fourth quarter for the fiscal year ended May 31, 2004, there have
been no material changes in PalWeb's internal controls over financial reporting.

PART III

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

                                       23
<PAGE>

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, unless
appointed by the Board of Directors to fill a vacancy upon the resignation or
removal of a member or an increase in the number of member of the Board of
Directors. Executive officers serve at the pleasure of the Board of Directors.

                                                              TERM AS DIRECTOR
               NAME                   POSITION                     EXPIRES

  Warren F. Kruger               President and Chief                2005
                                  Executive Officer

  Bryan R. Kirchmer                   Director                      2005

  Robert B. Rosene, Jr.               Director                      2005

  Marshall S. Cogan                   Director                      2005

  Bill Hamilton             Vice President of Production             N/A

  Williams W. Rahhal           Chief Financial Officer               N/A

MARSHALL S. COGAN, NON-EXECUTIVE CHAIRMAN OF BOARD OF DIRECTORS

         Mr. Marshall S. Cogan was named Non-Executive Chairman of the Board of
Directors of PalWeb effective July 19, 2004. Mr. Cogan is 67 years old and was
the former Vice Chairman of Cogan, Berlind, Weill & Levitt-Hayden Stone, Inc.
(predecessor to Shearson Lehman/American Express). Mr. Cogan has had over 40
years of industrial and financial experience with custodial responsibility for
the following companies: General Felt Industries, Inc.; Sheller-Globe
Corporation; Color Tile, Inc.; Knoll International, Inc.; United Auto Group,
Inc.; Foamex International, Inc.; and the `21' Club.

         Mr. Cogan has an undergraduate degree and M.B.A. from Harvard
University. He serves as a Trustee of New York University Hospital, Boston Latin
School, New York Museum of Modern Art and is a member of Harvard University
serving on several committees.

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 48 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 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.,
acquired Century Ice in an industry rollup.

                                       24
<PAGE>

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.

BRYAN R. KIRCHMER
DIRECTOR

         Mr. Bryan R. Kirchmer, age 33, 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 PIPER 600 injection molding machine. 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.

MR. ROBERT B. ROSENE, JR., DIRECTOR

         Mr. Rosene, age 50, is President of Seminole Energy Services, L.L.C., a
natural gas marketing and gathering company that he co-founded in 1998. Also in
1998, Mr. Rosene co-founded Summit Exploration, L.L.C., and oil and gas
production company that holds oil and gas production in several states. Mr.
Rosene has served as a director of publicly traded Syntroleum Corporation since
1985. Mr. Rosene has a B.A. with an emphasis in accounting from Oklahoma Baptist
University.

         Mr. Rosene became a director of PalWeb effective June 14, 2004.

WILLIAM W. RAHHAL
CHIEF FINANCIAL OFFICER

         Mr. William W. Rahhal is 63 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
auditor 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

                                       25
<PAGE>

PriceWaterhouseCoopers, LLP) where he gained significant 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 PalWeb.

BILL HAMILTON, SENIOR VICE PRESIDENT OF PRODUCTION

         Mr. Bill Hamilton, age 43, was owner and operator of Greystone
Plastics, Inc., for the past six years prior to selling to PalWeb. He is also
owner of Greystone-Bill Hamilton Trucking. Mr. Hamilton has previously owned and
operated a construction business and a horse training facility.

         Mr. Hamilton was named Senior Vice President of Production effective
September 8, 2003.

IDENTIFICATION OF THE AUDIT COMMITTEE; AUDIT COMMITTEE FINANCIAL EXPERT
-----------------------------------------------------------------------

         Due to PalWeb's size and stage of development, it has had difficulty
recruiting individuals to serve on its Board of Directors who are qualified to
serve as an audit committee financial expert on an audit committee. As of May
31, 2004, the Company had not established an audit committee and the entire
Board of Directors essentially serves as PalWeb's audit committee.

CODE OF ETHICS
--------------

         As of May 31, 2004, PalWeb has not adopted a Code of Ethics applicable
to the Company's officers. Through May 31, 2004, PalWeb's primary focus has been
on achieving profitability. PalWeb intends to adopt a Code of Ethics in the
fiscal year 2005.

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 PalWeb 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 2004, to PalWeb's knowledge, all Section 16(a) filing requirements
applicable to its officers, directors and greater than 10% beneficial owners
during fiscal 2004 were complied with on a timely basis, except as follows:

                                       26
<PAGE>

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

        Bill Hamilton                          2                    2

        Hildalgo Trading Company, LC           1                    1


        Paul Kruger                            1                    2


        Westgate Investments, LP               1                    1


        Warren Kruger                          2                    2

ITEM 10.     EXECUTIVE COMPENSATION

         The following table sets forth the compensation paid to named executive
officers during the fiscal years ended May 31, 2002, 2003 and 2004:

<TABLE><CAPTION>
                           SUMMARY COMPENSATION TABLE
                                                                        LONG TERM
                                            ANNUAL COMPENSATION        COMPENSATION
                                            -------------------        ------------
        NAME AND           FISCAL YEAR                             SECURITIES UNDERLYING
   PRINCIPAL POSITION     ENDING MAY 31     SALARY        BONUS       OPTIONS/SARS (#)
   ------------------     -------------     ------        -----       ----------------
<S>                           <C>          <C>              <C>            <C>
Warren Kruger,                2004         $180,000        -0-            -0-
President and CEO (1)         2003            -0-          -0-          175,000

William W. Rahhal,            2004          $40,000        -0-            -0-
Chief Financial Officer(2)    2003          $25,327        -0-          100,000

Paul A. Kruger,               2003          $ 8,500       - 0 -         25,000
Chairman and CEO(3)           2002          $12,000       - 0 -         150,000


Bill Hamilton                 2004         $122,596        -0-          300,000
</TABLE>
________________________
(1)     Mr. Warren Kruger became President and CEO effective January 10, 2003.

                                       27
<PAGE>

(2)     Mr. William W. Rahhal became Chief Financial Officer on October 1, 2002.
(3)     Mr. Paul Kruger resigned effective January 10, 2003.
(4)     Mr. Bill Hamilton became Vice President of Production on September 8,
        2003.

         The following table sets forth information concerning the grant of
stock options during the fiscal year ended May 31, 2004, to named executive
officers:

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

                                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> <C>
  Bill Hamilton(1)              300,000            100%            $0.42         9/8/2008
________________________
</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. Once vested, the options are exercisable at any time and from time to
time until 5 years 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.

         The following table provides information with respect to named
executive officers concerning the exercise of options during the fiscal year
ended May 31, 2004, and unexercised options held as of May 31, 2004:

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

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

<S>                            <C>                           <C>                                  <C>
  Warren Kruger               -0-          N/A               93,750/275,000                        -0-

  William Rahhal              -0-          N/A               25000/100,000                         -0-

  Bill Hamilton               -0-          N/A                -0-/300,000                          -0-
</TABLE>

                                       28
<PAGE>

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

         PalWeb does not have any formal procedure for compensating the members
of its Board of Directors. From time to time in the past, PalWeb has granted
options to the members of its Board of Directors under its stock option plan as
compensation for serving on the Board of Directors. There were no options
granted to Directors during the fiscal year ended May 31, 2004.

EMPLOYMENT CONTRACTS
--------------------

         PalWeb entered into an employment agreement dated August 13, 2003, with
Warren Kruger, President and CEO, for a period of five years with three
automatic one year renewal periods, provided that either party give the other
party at least ninety days prior written notice that such party does not intend
to renew the contract prior to the end of the then-current term. Pursuant to the
employment agreement, Mr. Kruger is entitled to be paid a base annual salary of
$240,000.

         In connection with the acquisition of the assets of Greystone Plastics,
Inc., as described elsewhere in this Form 10-KSB, GSM entered into an employment
agreement dated September 3, 2003, with Bill Hamilton, one of the then owners
and the operator of Greystone Plastics, Inc. The term of the agreement is for
five years with three automatic five year renewal periods, provided that either
party give the other party at least ninety days prior written notice that such
party does not intend to renew the contract prior to the end of the then-current
term. Pursuant to the employment agreement, Mr. Hamilton is entitled to be paid
a base annual salary of $170,000 per year plus certain annual bonuses provided
that GSM achieves certain operating efficiencies. In addition, pursuant to the
employment agreement, Mr. Hamilton received an option to purchase common stock
of PalWeb as further under Item 10 of this Form 10-KSB.


ITEM 11.     SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
------------------------------------------------------------------

         As of May 31, 2004, PalWeb had one equity incentive plan under which
equity securities have been authorized for issuance to PalWeb's directors,
officers, employees and other persons who perform substantial services for or on
behalf of PalWeb. The following table provides certain information relating to
such stock option plan during the year ended May 31, 2004:

<TABLE><CAPTION>
                                NUMBER OF          PERCENT OF TOTAL
                               SECURITIES          OPTIONS GRANTED       EXERCISE
                            UNDERLYING OPTIONS     TO EMPLOYEES IN         PRICE         EXPIRATION
              NAME              GRANTED (#)          FISCAL YEAR         ($/SHARE)          DATE
              ----              -----------          -----------         ---------          ----
<S>                              <C>                    <C>               <C>                 <C>
   Bill Hamilton, Sr.            300,000                85.7%             $0.42         Sept. 8, 2008
   Vice Pres - Prod.
</TABLE>

                                       29
<PAGE>

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------

         As of August 18, 2004, 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 August 18, 2004, by (i) each person
known by PalWeb 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:

      Name and Address of                  Amount and Nature of        Percent
       Beneficial Owner                     Beneficial Owner(1)      of Class(2)
       ----------------                     -------------------      -----------

Paul A. Kruger                                 7,011,431(3)             42.9%
2500 South McGee, Ste. 147
Norman, OK 73072

Hildalgo Trading Company, LC                   1,767,014(4)             13.8%
2500 South McGee
Norman, OK 73072

Warren F. Kruger                               4,506,208(5)             35.0%
President & CEO
1613 East 15th Street
Tulsa, OK 74120

Marshall S. Cogan                                      0                   0%
Director
15 W. 53rd Street
New York, NY 10019

Bryan R. Kirchmer                                 35,000(6)              0.3%
Director
601 S. Boulder Ave., Suite 105
Tulsa, OK  74119

Robert Rosene, Jr.                                     0                   0%
1323 E. 71st Street
Suite 300
Tulsa, OK 74136

William W. Rahhal                                 25,000(6)              0.2%
Chief Financial Officer
100 E Street S.W., Suite 200
Ardmore, OK 73401


                                       30
<PAGE>

                                                       0                   0%
Bill Hamilton
Vice President of Production
2601 Shoreline Drive
Bettendorf, Iowa

All Current Directors & Officers
  as a Group (6 persons)                       4,566,208(7)             35.3%

(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) 1,345,584 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) 1,767,014 shares held of record by Hildalgo; (iv) 3,333,333
      shares that Paul Kruger has the right to acquire upon conversion of 2003
      Preferred Stock; (v) 40,000 shares he holds on behalf of his minor
      children; and (vi) 300,500 shares held by Paceco Financial Services, Inc.

(4)   The total includes 1,767,014 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) 4,243,458 shares of common stock beneficially
      owned directly by Warren Kruger; (ii)19,000 shares held of record by
      Yorktown; (iii) 93,750 shares of common stock that Warren Kruger directly
      has the right to acquire in connection with the options; (iv) 140,000
      shares owned by Westgate Capital, L.L.C., an entity for which Warren
      Kruger owns 50%; and (v) 10,000 shares of common stock that Warren Kruger
      holds on behalf of his minor children, of which he only holds the power to
      vote. By virtue of his ability to control Westgate Capital, L.L.C., Warren
      Kruger is also deemed to beneficially own the shares held therein.

(6)   The total is consists of shares issuable upon exercise of vest stock
      options.

(7)   The total includes: (i) 12,790,451 outstanding shares and (ii) 153,750
      shares issuable upon exercise of vested stock options.

CHANGE IN CONTROL
-----------------

         As described elsewhere in the Form 10-KSB, PalWeb sold 50,000 shares
the 2003 Preferred Stock to Paul Kruger, a major stockholder of PalWeb, on
September 8, 2003. In connection with such transaction, Paul Kruger, as the
holder of the 2003 Preferred Stock, was granted certain voting rights so that he
has the right to elect a majority of the Board of Directors of PalWeb. These
voting rights and other material terms and conditions of the 2003 Preferred
Stock are set forth in the

                                       31
<PAGE>

Certificate of Designation relating to such 2003 Preferred Stock included as an
exhibit to a Form 8-K filed by PalWeb on September 23, 2004.

ITEM 12.     CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

ISSUANCES OF SECURITIES

         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 of $1,508,581 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 "Sales of Unregistered Securities" in Item 5 of this
Form 10-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 Form 10-KSB.

ADVANCES AND LOANS

         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 Form 10-KSB. Interest paid to Paul Kruger on these loans was
$262,886 in fiscal year 2003 and $127,918 for the period from June 1, 2003
through September 8, 2003.

         For information regarding loans from Warren Kruger, see "Loans from
Warren Kruger" under the heading "Liquidity and Capital Resources" in Item 6 of
this Form10-KSB. Interest accrued or paid on loans from Warren Kruger during the
year ended May 31, 2004 total $56,715.

SALE AND LEASEBACK

         As of September 8, 2003, PalWeb's Dallas plant and certain production
equipment were sold to 1607 Commerce, an entity owned by Paul Kruger, and leased
back to PPP. For more information on this sale and leaseback transaction, see
"Sale and Leaseback of Dallas Plant and Certain Production Equipment" under Item
1 of this Form 10-KSB. During the year ended May 31, 2004, PalWeb paid rents of
$255,480 to 1607 Commerce.

PATENT LICENSING AGREEMENT

         For information regarding a licensing agreement between PalWeb and
ForcePro, LLC, an entity which Bryan Kirchmer, a Director of PalWeb, is
President, see "Current Business" in Item 1 of this Form10-KSB.

                                       32
<PAGE>

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).

         No minimum or other royalties have been paid or accrued by PalWeb under
the license agreement. However, as of May 31, 2004, PalWeb has recorded expenses
of approximately $126,000 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 thereafter GME began performing services directly
for PalWeb. For the years ended May 31, 2004 and 2003, PalWeb recorded expenses
for engineering services paid to GME Group of $4,110 and $124,951, respectively.
In addition, PalWeb paid Mr. Kirchmer $22,500 and $7,500 in 2003 for consulting
services in 2004 and 2003, respectively.

                                       33
<PAGE>

LEGAL SERVICES PERFORMED BY WILLIAM PRITCHARD

         William Pritchard, a former 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 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 period from June 1, 2003 to August 25,
2003, the date of Mr. Pritchard's resignation from the Board of Directors of
PalWeb, and the year ended May 31, 2003, PalWeb paid or accrued expenses for
legal services from Hall Estill in the total amount of $36,009 and $67,519,
respectively.

OTHER TRANSACTIONS

         During the year ended May 31, 2004, GSM paid or accrued fees totaling
$699,966 for freight to Greystone-Bill Hamilton Trucking, an entity owned by
Bill Hamilton, Vice President of Trucking, In addition, GSM paid or accrued fees
totaling $246,870 for grinding services to Whaco Plastics, an entity also owned
by Bill Hamilton. A portion of the fees paid to Whaco Plastics is applied to the
purchase of a grinder/granulator at a cost of $280,000, amortized over five
years at 7.5% interest.

         For information regarding employment contracts, see "Employment
Contracts" under Item 10 of this Form 10-KSB.

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).

                                       34
<PAGE>

EXHIBIT NO.         DESCRIPTION

  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               Certificate of the Designation, Preferences, Rights and
                    Limitations of PalWeb Corporation's Series 2003 Cumulative
                    Convertible Senior Preferred Stock (incorporated herein by
                    reference to Exhibit 4.1 of PalWeb Corporation's Form 8-K
                    dated September 8, 2003, which was filed with the SEC on
                    September 23, 2003).

  10.1              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).

  10.2              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).

  10.3**            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).

  10.4              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).

  10.5**            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).

  10.6**            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).

                                       35
<PAGE>

EXHIBIT NO.         DESCRIPTION

  10.7**            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).

  10.8**            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).

  10.9**            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).

  10.10             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).

  10.11             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).

  10.12             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).

  10.13             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).

  10.14             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).

                                       36
<PAGE>

EXHIBIT NO.         DESCRIPTION

  10.15             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).

  10.16             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).

  10.17             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).

  10.18             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).

  10.19             Letter Agreement dated January 22, 2003 between Gravity
                    Management & Engineering Group, LLC and PalWeb Corporation
                    (incorporated herein by reference to Exhibit 10.48 of PalWeb
                    Corporation's Form 10-KSB for the Fiscal Year Ended May 31,
                    2003, which was filed with the SEC on September 15, 2003).

  10.20             Asset Purchase Agreement between Greystone Plastics, Inc.
                    and Greystone Manufacturing, L.L.C. dated September 3, 2003
                    (incorporated herein by reference to Exhibit 10.1 of PalWeb
                    Corporation's Form 8-K dated September 8, 2003, which was
                    filed with the SEC on September 23, 2003).

  10.21             Senior Secured Promissory Note in the amount of $5,000,000
                    payable to Greystone Plastics, Inc. (incorporated herein by
                    reference to Exhibit 10.2 of PalWeb Corporation's Form 8-K
                    dated September 8, 2003, which was filed with the SEC on
                    September 23, 2003).

  10.22             Real Estate Note in the amount of $2,500,000 payable to
                    Greystone Plastics, Inc. (incorporated herein by reference
                    to Exhibit 10.3 of PalWeb Corporation's Form 8-K dated
                    September 8, 2003, which was filed with the SEC on September
                    23, 2003).

                                       37
<PAGE>

EXHIBIT NO.         DESCRIPTION

  10.23             Wraparound Promissory Note in the amount of $799,454.06
                    payable to Bill Hamilton (incorporated herein by reference
                    to Exhibit 10.4 of PalWeb Corporation's Form 8-K dated
                    September 8, 2003, which was filed with the SEC on September
                    23, 2003).

  10.24             Security Agreement between Greystone Plastics, Inc. and
                    Greystone Manufacturing, L.L.C. dated September 3, 2003
                    (incorporated herein by reference to Exhibit 10.5 of PalWeb
                    Corporation's Form 8-K dated September 8, 2003, which was
                    filed with the SEC on September 23, 2003).

  10.25**           Employment Agreement between Greystone Manufacturing, L.L.C.
                    and Bill Hamilton dated September 3, 2003 (incorporated
                    herein by reference to Exhibit 10.6 of PalWeb Corporation's
                    Form 8-K dated September 8, 2003, which was filed with the
                    SEC on September 23, 2003).

  10.26             Asset Purchase Agreement between Plastic Pallet Production,
                    Inc. and 1607 Commerce Limited Partnership dated September
                    8, 2003 (incorporated herein by reference to Exhibit 10.7 of
                    PalWeb Corporation's Form 8-K dated September 8, 2003, which
                    was filed with the SEC on September 23, 2003).

  10.27             Letter Agreement between Plastic Pallet Production, Inc. and
                    1607 Commerce Limited Partnership dated September 8, 2003
                    (incorporated herein by reference to Exhibit 10.8 of PalWeb
                    Corporation's Form 8-K dated September 8, 2003, which was
                    filed with the SEC on September 23, 2003).

  10.28             Sale Agreement between Plastic Pallet Production, Inc. and
                    1607 Commerce Limited Partnership dated September 8, 2003
                    (incorporated herein by reference to Exhibit 10.9 of PalWeb
                    Corporation's Form 8-K dated September 8, 2003, which was
                    filed with the SEC on September 23, 2003).

  10.29             Equipment Lease between 1607 Commerce Limited Partnership
                    and Plastic Pallet Production, Inc. dated September 8, 2003
                    (incorporated herein by reference to Exhibit 10.10 of PalWeb
                    Corporation's Form 8-K dated September 8, 2003, which was
                    filed with the SEC on September 23, 2003).

  10.30             Lease Agreement between 1607 Commerce Limited Partnership
                    and Plastic Pallet Production, Inc. dated September 8, 2003
                    (incorporated herein by reference to Exhibit 10.11 of PalWeb
                    Corporation's Form 8-K dated September 8, 2003, which was
                    filed with the SEC on September 23, 2003).

  10.31             Security Agreement among PalWeb Corporation, Plastic Pallet
                    Production, Inc., Greystone Manufacturing, L.L.C. and 1607
                    Commerce Limited Partnership dated September 8, 2003
                    (incorporated herein by reference to Exhibit 10.12 of PalWeb
                    Corporation's Form 8-K dated September 8, 2003, which was
                    filed with the SEC on September 23, 2003).

                                       38
<PAGE>

EXHIBIT NO.         DESCRIPTION

  10.32             Guaranty of Obligations of Tenant Pursuant to Equipment
                    Lease by PalWeb Corporation and Greystone Manufacturing,
                    L.L.C. dated September 8, 2003 (incorporated herein by
                    reference to Exhibit 10.13 of PalWeb Corporation's Form 8-K
                    dated September 8, 2003, which was filed with the SEC on
                    September 23, 2003).

  10.33             Guaranty of Obligations of Tenant Pursuant to Lease by
                    PalWeb Corporation and Greystone Manufacturing, L.L.C. dated
                    September 8, 2003 (incorporated herein by reference to
                    Exhibit 10.14 of PalWeb Corporation's Form 8-K dated
                    September 8, 2003, which was filed with the SEC on September
                    23, 2003).

  10.34             Stock Pledge Agreement between PalWeb Corporation and 1607
                    Commerce Limited Partnership dated September 8, 2003
                    (incorporated herein by reference to Exhibit 10.15 of PalWeb
                    Corporation's Form 8-K dated September 8, 2003, which was
                    filed with the SEC on September 23, 2003).

  10.35             Employment Agreement between PalWeb Corporation and Warren
                    Kruger dated August 13, 2003 (submitted herewith).

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

  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 Rules
                    13a-14(a) and 15d-14(a) promulgated under the Securities
                    Exchange Act of 1934, as amended, and Item 601(b)(31) of
                    Regulation S-B, as adopted pursuant to Section 302 of the
                    Sarbanes-Oxley Act of 2002 (submitted herewith).

  31.2              Certification of Chief Financial Officer pursuant to Rules
                    13a-14(a) and 15d-14(a) promulgated under the Securities
                    Exchange Act of 1934, as amended, and Item 601(b)(31) of
                    Regulation S-B, as adopted pursuant to Section 302 of the
                    Sarbanes-Oxley Act of 2002 (submitted herewith).

  32.1              Certification of Chief Executive Officer pursuant to 18
                    U.S.C. Section 1350, as adopted pursuant to Section 906 of
                    the Sarbanes-Oxley Act of 2002 (submitted herewith).

  32.2              Certification of Chief Financial Officer pursuant to 18
                    U.S.C. Section 1350, as adopted pursuant to Section 906 of
                    the Sarbanes-Oxley Act of 2002 (submitted herewith).

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

                                       39
<PAGE>

(b) REPORTS ON FORM 8-K:

         On March 24, 2004, PalWeb filed a Form 8-K under Item 12, Results of
Operations and Financial Conditions, attaching a press release of PalWeb, which
announced PalWeb's results for the third quarter ended February 29, 2004. No
financial statements were filed in connection with such Form 8-K.

ITEM 14.     PRINCIPAL ACCOUNTANT FEES AND SERVICES

The following is a summary of the fees billed to PalWeb by Murrell, Hall &
McIntosh, PLLP, PalWeb's independent auditors, for professional services
rendered for the fiscal years ended May 31, 2004 and May 31, 2003:

Fee Category                   Fiscal 2004 Fees            Fiscal 2003 Fees

Audit Fees(1)                      $  36,312                  $  34,000
Audit-Related Fees                         0                          0
Tax Fees                                   0                          0
All Other Fees                             0                          0
                                   ---------                  ---------

Total Fees                         $  36,312                  $  34,000
                                   =========                  =========

----------
(1) Audit Fees consist of aggregate fees billed for professional services
rendered for the audit of PalWeb's annual financial statements and review of the
interim financial statements included in quarterly reports or services that are
normally provided by the independent auditors in connection with statutory and
regulatory filings or engagements during the fiscal years ended May 31, 2004 and
May 31, 2003, respectively.


     The entire Board of Directors of PalWeb is responsible for the appointment,
compensation and oversight of the work of the independent auditors and approves
in advance any services to be performed by the independent auditors, whether
audit-related or not. The entire Board of Directors reviews each proposed
engagement to determine whether the provision of services is compatible with
maintaining the independence of the independent auditors. All of the fees shown
above were pre-approved by the entire Board of Directors.

                                       40
<PAGE>

SIGNATURES

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

                                                   PALWEB CORPORATION
                                                       (Registrant)

Date:  08/30/04         /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:  08/30/04         /s/ Warren F Kruger
                        Warren F. Kruger, President and Chief Executive Officer
                        (Principal Executive Officer)

Date:  08/30/04         /s/ William W. Rahhal
                        William W. Rahhal, Chief Financial Officer
                        (Principal Financial and Accounting Officer)

Date:  08/30/04
                        Marshall S. Cogan, Director

Date:  08/30/04         /s/ Bryan R Kirchmer
                        Bryan R. Kirchmer, Director

Date:  08/30/04         /s/Robert B. Rosene, Jr.
                        Robert B. Rosene, Jr., Director











                                       41
<PAGE>

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

FINANCIAL STATEMENTS OF PALWEB CORPORATION

Report of Independent Registered Public Accounting Firm.....................F-1

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

Consolidated Statements of Operations ......................................F-3

Consolidated Statements of Changes in Stockholders' Equity (Deficit)........F-4

Consolidated Statements of Cash Flows ......................................F-5

Notes to Consolidated Financial Statements..................................F-6




























                                       42
<PAGE>

             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


To the Stockholders
of PalWeb Corporation


         We have audited the accompanying consolidated balance sheet of PalWeb
Corporation (an Oklahoma corporation) and its subsidiaries as of May 31, 2004,
and the related consolidated statements of operations, stockholders' equity
(deficit) and cash flows for each of the years ended May 31, 2004 and 2003.
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 audits.

         We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board. Those standards require that we plan and
perform the audits 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
audits provide 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 subsidiaries as of May 31, 2004, and the consolidated
results of their operations and cash flows for each of the years ended May 31,
2004 and 2003, 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, 2004 raises substantial doubt about its ability to continue as a
going concern unless additional funds from outside sources, its president or
other board members are obtained. Management's plans in regard to these matters
are described in Note 2. The financial statements do not include any adjustments
that might result from the outcome of these uncertainties.

MURRELL, HALL, MCINTOSH & CO., PLLP

Norman, Oklahoma
August 13, 2004


                                       F-1
<PAGE>
                       PALWEB CORPORATION AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEET
                                  MAY 31, 2004


<TABLE><CAPTION>
<S>                                                            <C>

ASSETS
------

CURRENT ASSETS:
  Cash                                                         $    274,085
  Accounts receivable                                               951,596
  Inventory (Note 3)                                                521,376
                                                               ------------
         TOTAL CURRENT ASSETS                                     1,747,057

PROPERTY, PLANT AND EQUIPMENT, net
 of accumulated depreciation (Note 4)                             6,589,028

OTHER ASSETS:
  Goodwill (Note 14)                                              6,164,435
  Other (Note 5)                                                    490,441
                                                               ------------
         TOTAL OTHER ASSETS                                       6,654,876
                                                               ------------
         TOTAL ASSETS                                          $ 14,990,961
                                                               ============

LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------

CURRENT LIABILITIES:
  Notes payable (Note 6)                                       $  2,352,667
  Current portion of long-term debt (Note 6)                      1,503,612
  Accounts payable and accrued expenses                           1,578,917
  Preferred dividends payable                                        60,582
                                                               ------------
         TOTAL CURRENT LIABILITIES                                5,495,778

LONG-TERM DEBT (Note 6)                                           6,390,499

COMMITMENTS AND CONTINGENCIES (Note 15 and 16)

STOCKHOLDERS' EQUITY (Notes 2, 9 and 10):
  Preferred stock, $0.0001 par value, 20,750,000
    shares authorized, 50,000 shares outstanding                          5
  Common stock, $0.0001 par value, 5,000,000,000
    authorized, 12,790,451 shares outstanding                         1,279
  Additional paid-in capital                                     48,265,496
  Deficit                                                       (45,162,096)
                                                               ------------
         TOTAL STOCKHOLDERS' EQUITY                               3,104,684
                                                               ------------

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                     $ 14,990,961
                                                               ============
</TABLE>



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

                                       F-2
<PAGE>
                       PALWEB CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS


<TABLE><CAPTION>
                                                              Year Ended May 31,
                                                       ------------------------------
                                                           2004              2003
                                                       ------------      ------------
<S>                                                    <C>               <C>

Sales                                                  $  6,964,943      $  1,280,945

Cost of sales, including depreciation
 of $357,952 and $165,736, respectively                   6,768,426         2,438,342
                                                       ------------      ------------

Gross profit (loss)                                         196,517        (1,157,397)

Expenses:

  General and administrative                              1,527,968         1,312,824
  Impairment and relocation expenses                        441,949           310,875
                                                       ------------      ------------
         Total expenses                                   1,969,917         1,623,699
                                                       ------------      ------------

Operating loss                                           (1,773,400)       (2,781,096)

Other Income (Expense):
  Other Income                                               12,134                --
  Interest expense                                         (699,661)         (433,756)
                                                       ------------      ------------

Net Loss                                                 (2,460,927)       (3,214,852)

Preferred Dividends                                         660,171           900,166
                                                       ------------      ------------

Net Loss Available to Common Stockholders              $ (3,121,098)     $ (4,115,018)
                                                       ============      ============
LOSS AVAILABLE TO COMMON STOCKHOLDERS
 PER COMMON SHARE (Note 1)                             $      (0.28)     $      (0.79)
                                                       ============      ============

WEIGHTED AVERAGE SHARES OUTSTANDING                      11,026,000         5,201,000
                                                       ============      ============
</TABLE>


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

                                       F-3
<PAGE>
                       PALWEB CORPORATION AND SUBSIDIARIES
      CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)



<TABLE><CAPTION>
                                Preferred Stock                  Common Stock                           Additional        Total
                          ----------------------------   ----------------------------      Paid-in      Accumulated      Equity
                             Shares          Amount         Shares          Amount         Capital        Deficit     (Deficiency)
                          ------------    ------------   ------------    ------------   ------------   ------------   ------------
<S>                       <C>             <C>            <C>             <C>            <C>            <C>            <C>
BALANCES, May 31, 2002         750,000              75      4,691,625            469      40,732,767    (37,925,980)     2,807,331

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

Issuance of common stock            --              --         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)


Common stock in lieu of
 preferred dividends                --              --        971,918             97         396,890       (396,987)            --

Preferred dividends paid
 or accrued                         --              --             --             --              --       (263,184)      (263,184)

Stock issued in exchange
 for debt                           --              --        629,811             63         899,937             --        900,000

Conversion of 2001
 preferred Stock              (750,000)            (75)     5,250,000            525            (450)            --             --

Issuance of 2003
 preferred stock                50,000               5             --             --       4,999,995             --      5,000,000

Net loss                            --              --             --             --              --     (2,460,927)    (2,460,927)
                          ------------    ------------   ------------    ------------   ------------   ------------   ------------
BALANCES, May 31, 2004          50,000    $          5     12,790,451   $      1,279    $ 48,265,496   $(45,162,096)  $  3,104,684
                          ============    ============   ============    ============   ============   ============   ============
</TABLE>


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

                                       F-4
<PAGE>
                       PALWEB CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS



<TABLE><CAPTION>
                                                               Year Ended May 31,
                                                          ----------------------------
                                                              2004            2003
                                                          ------------    ------------
<S>                                                       <C>             <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
 Net loss                                                 $ (2,460,927)   $ (3,214,852)
 Adjustments to reconcile net loss to cash used
 by operating activities:
   Depreciation and amortization                               413,008         230,794
   Loss on sale of equipment                                   121,321              --
   Expenses paid by issuance of common stock                        --          57,126
   Impairment of investment                                         --         310,875
   Changes in accounts receivable                             (603,752)       (304,198)
   Changes in inventory                                       (136,819)       (180,111)
   Changes in other assets                                      (1,300)        (24,208)
   Changes in accounts payable and accrued
     expenses                                                  668,482         440,265
   Change in preferred dividends payable                        60,582              --
   Other                                                       (25,000)             --
                                                          ------------    ------------

         Net cash used in continuing operations             (1,964,405)     (2,684,309)

CASH FLOWS FROM INVESTING ACTIVITIES:
 Purchase of property and equipment                         (4,450,436)     (1,474,475)
                                                          ------------    ------------

         Net cash used in investing activities              (4,450,436)     (1,474,475)

CASH FLOWS FROM FINANCING ACTIVITIES:
 Proceeds from notes and advances payable                    2,631,245       8,401,422
 Payments on notes payable                                    (685,343)     (4,277,700)
 Preferred dividends paid                                     (263,184)             --
 Proceeds from issuance of common/preferred stock            5,000,000         27,750
                                                          ------------    ------------

         Net cash provided by financing activities           6,682,717       4,151,472
                                                          ------------    ------------

NET INCREASE (DECREASE) IN CASH                                267,876          (7,312)
CASH, beginning of period                                        6,209          13,521
                                                          ------------    ------------

CASH, end of period                                       $    274,085    $      6,209
                                                          ============    ============
SUPPLEMENTAL INFORMATION (Note 12)

</TABLE>



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

                                       F-5
<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 subsidiaries
         Plastic Pallet Production, Inc. ("PPP") and Greystone Manufacturing,
         LLC ("GSM"), is engaged in the manufacture and marketing of plastic
         pallets.

         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
         generally accepted accounting principles in the United States of
         America 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.

         ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS
         -------------------------------------------------------
         PalWeb carries its accounts receivable at their face value less an
         allowance for doubtful accounts. On a periodic basis, PalWeb evaluates
         its accounts receivable and establishes an allowance for doubtful
         accounts based on a combination of specific customer circumstances and
         credit conditions and based on a history of collections. The allowance
         for doubtful accounts at May 31, 2004 was $69,727.

                                       F-6
<PAGE>

         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 over the estimated useful
         lives or the units of production method, as follows:

         Plant building                                      39 years
         Production machinery equipment                    5-10 years or Unit
                                                                of Production
         Office equipment & furniture & fixtures           3- 5 years

         The production equipment being amortized on the unit of production
         method had a total cost of $633,924 at May 31, 2004.

         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.

         GOODWILL
         --------
         Goodwill is reviewed annually for impairment relying on a number of
         factors including operating results, business plans and future cash
         flows. An impairment charge is recognized for any amount by which the
         carrying value of goodwill exceed its fair value. Discounted cash flows
         are used to establish fair values

                                       F-7
<PAGE>

         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 15-17 years.

         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.

         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 net
         loss for the year. Convertible preferred stock and stock options are
         not considered as their effect is antidilutive.

                                       F-8
<PAGE>

         RECENT PRONOUNCEMENTS
         ---------------------
         In December 2003, the SEC issued Staff Accounting Bulletin ("SAB") No.
         104, REVENUE RECOGNITION. This SAB revises or rescinds portions of the
         revenue recognition interpretive guidance included in the SAB
         codification to make it consistent with current authoritative
         accounting guidance. The principal revisions relate to revenue
         recognition guidance no longer necessary due to developments in U.S.
         generally accepted accounting principles. The pronouncement had no
         impact on the Company's historical financial statements.

         FASB Interpretation No. 46 (revised December 2003), CONSOLIDATION OF
         VARIABLE INTEREST ENTITIES, AN INTERPRETATION OF ACCOUNTING RESEARCH
         BULLETIN NO. 51, addresses consolidation by business enterprises of
         variable interest entities. PalWeb has no variable interest entities
         and accordingly this statement has on impact on the company's
         historical financial statements.


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

         The accompanying financial statements have been prepared assuming 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 raises 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, 2004 consists of:

         Raw materials                                $ 432,662
         Finished goods                                  88,714
                                                      ---------
         Total inventory                              $ 521,376
                                                      =========




                                      F-9
<PAGE>

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

         A summary of the property, plant and equipment at May 31, 2004, is as
         follows:

            Production machinery and equipment                   $  4,681,433
            Building and land                                       2,510,500
            Furniture and fixtures                                    138,246
                                                                  -----------
                                                                    7,330,179
            Less: accumulated depreciation                           (741,151)
                                                                  -----------

                                                                  $ 6,589,028
                                                                  ===========


         Depreciation expense for the years ended May 31, 2004 and 2003 is
         $377,788 and $186,388, respectively.

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

         At May 31, 2004, other assets consist of:

            Note receivable                                            314,000
            Patents, net of accumulated amortization of $10,689        160,841
            Investments                                                  5,000
            Deposits and other                                          10,600
                                                                     ---------

                                Total Other Assets                   $ 490,441
                                                                     =========

         Amortization of patent and debt origination costs was $35,220 and
         $44,406 in 2004 and 2003, respectively.

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

         Long-term debt at May 31, 2004 consists of the following:

              Note payable to Greystone Plastics, Inc.,
              7.5% interest, due September 7, 2008,
              secured by equipment with net book
              value of $3,149,270                                   $4,500,000

              Note payable to Greystone Plastics, Inc.,
              7% interest, due September 7, 2018, secured
              by land and building with net book value of
              $2,215,207                                             2,402,747

              Note payable to Bill Hamilton, 6% interest,
              due February, 2008                                       680,474

              Note payable to Whaco Plastics, 7.5% interest,
              Due January, 2009                                        264,413

                                      F-10
<PAGE>

              Other notes payable                                       46,477
                                                                    ----------

              Total                                                  7,894,111

              Less: Current portion                                  1,503,612
                                                                    ----------

                  Long-term debt                                    $6,390,499
                                                                    ==========

         The notes payable to Greystone Plastics, Inc. and Bill Hamilton were
         debt incurred pursuant to the acquisition of the assets of Greystone
         Plastics by PalWeb's subsidiary Greystone Manufacturing, LLC. Bill
         Hamilton commenced employment with PalWeb as of the date of the
         acquisition in the capacity of Vice President of Production.

         Whaco Plastics is an entity owned by Bill Hamilton, Vice President of
         Production. The issuance of the note for purchase of equipment is
         described in Note 7,"Related Party Transactions."

         Maturities of long term debt for the five years after May 31, 2004 are
         $1,503,612, $1,405,682, $1,411,835, $1,376,592, $626,983, and
         $1,569,407 thereafter.

         At May 31, 2004, notes payable of $2,352,667 consist of a note payable
         to a bank in the amount of $899,980, prime rate of interest plus 1%,
         due October 2004, a note payable of $108,186 to Paul Kruger, 7.5%
         interest and due October, 2004, and notes payable of $276,101, due
         October 2004, and advances of $1,068,400, all at 7.5% interest, from
         entities owned or controlled by Warren Kruger, President and Chief
         Executive Officer.

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

         Bill Hamilton, Vice President of Production, owns a trucking company,
         Greystone-Bill Hamilton Trucking, that provided freight services
         totaling $699,966 for the year ended May 31, 2004. PalWeb believes that
         the freight rates are equivalent to an arms-length transaction.

         GSM paid or accrued fees totaling $246,870 for grinding services to
         Whaco Plastics, an entity also owned by Bill Hamilton. A portion of the
         fees paid to Whaco Plastics is applied to the purchase of a
         grinder/granulator at a cost of $280,000, amortized over five years at
         7.5% interest.

         Until September 8, 2003, PalWeb had a $7,000,000 note payable to Paul
         Kruger, a significant stockholder, at an interest rate of prime plus
         3%, due June 4, 2004, secured by all of PalWeb's assets. Effective
         September 8, 2003, PalWeb completed a sale and leaseback transaction
         whereby it sold for agreed upon prices its plant for

                                      F-11
<PAGE>

         $1,350,000 and certain production equipment for $5,710,698, including
         expenses, to 1607 Commerce Limited Partnership, an entity owned by Paul
         Kruger, in exchange for the $7,000,000 note payable and accrued
         interest of $60,698, which resulted in no gain or loss on the
         transaction. 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 March 8, 2004.
         The total cost of the lease, $5,952,000 ($48,000 per month for 124
         months), will be amortized to cost of sales using the unit of
         production method so the cost is allocated pro rata based on the
         estimated number of pallets to be produced during the term of the
         lease. During 2004, the total amounts paid to 1607 Commerce Limited
         Partnership under these leases totaled $255,480.

         Interest paid or accrued on indebtedness to Paul Kruger was $133,824
         and $262,886 in 2004 and 2003, respectively, including $23,376 in 2003
         for which Paul Kruger received 15,584 shares of PalWeb common stock in
         exchange for the debt. The exchange rate of $1.50 per share was based
         on the market price of the common stock on the date of authorization.

         Interest paid or accrued on notes and advances to entities owned or
         controlled by Warren Kruger, President and CEO, total $56,715 and
         $23,216 in 2004 and 2003, respectively. Effective May 1, 2004, PalWeb
         commenced reimbursing an entity owned by Warren Kruger for office rent
         at $1,500 per month.

         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 is a Director of PalWeb. Fees
         paid to the engineering firm were $4,110 and $124,951 in 2004 and 2003,
         respectively. In addition, PalWeb paid the director, individually,
         $22,500 and $7,500 in consulting fees during 2004 and 2003,
         respectively.

         A former director of PalWeb provided legal services through a law firm
         of which he is of counsel. The fees for 2004, through the date of his
         resignation, and 2003 were $36,009 and $67,519, 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.

         See also Note 9, "Stockholders' Equity."

                                      F-12
<PAGE>

NOTE 8.  FEDERAL INCOME TAXES

         Deferred taxes as of May 31, 2004 and 2003 are as follows:

                                                        2004           2003
                                                    -----------    -----------
            Deferred Tax Assets:
               Net operating loss                   $ 6,575,091    $ 6,839,880
               Loss on impairments                    1,057,740      1,151,070
               Accrued expenses                         151,148           --
               Allowance for doubtful accounts           23,707           --
                                                    -----------    -----------
                        Total deferred tax assets     7,807,686      7,990,950

            Deferred Tax Liabilities:
               Depreciation and amortization,
                 tax over financial                    (336,872)      (623,359)
                                                    -----------    -----------
                                                      7,470,814      7,367,591
            Less: Valuation allowance                (7,470,814)    (7,367,591)
                                                    -----------    -----------

                           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 losses               $  (264,789)   $ 1,541,712
            Depreciation, tax over financial       286,487       (475,306)
            Accrued expenses                       151,148           --
            Impairments                            (93,330)          --
            Allowance for doubtful accounts         23,707           --
            Change in Valuation allowance         (103,223)    (1,066,406)
                                               -----------    -----------

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


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

                                                           Year Ended May 31
                                                       ------------------------
                                                           2004         2003
                                                       -----------  -----------
            Tax benefit using statutory tax rate       $   838,841  $ 1,093,050
            Effect of state tax rates                         --         96,446

                                      F-13
<PAGE>

            Effect of rate adjustment                     (272,601)        --
            Net change in valuation allowance             (103,223)  (1,066,406)
            Tax gain on sale of property and equipment    (682,540)        --
            Other                                          219,523     (123,090)
                                                       -----------  -----------

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

         PalWeb has a net operating loss (NOL) for Federal income tax purposes
         as of May 31, 2004 of $19,666,000 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
                            1,160,000                   2024


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.

         In September, 2003, PalWeb issued 50,000 shares of Series 2003,
         cumulative, convertible preferred stock, par value $0.0001, to Paul
         Kruger for a total purchase price of $5,000,000. Each share of the
         preferred stock has a stated value of $100.00 and 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 an aggregate
         of 3,333,333 shares of common stock. The holder of the preferred stock
         has been granted certain voting rights so that such holder has the
         right to elect a majority of the Board of Directors of PalWeb.

         In September, 2003, the holders of the outstanding Series 2001
         cumulative, convertible preferred stock, 750,000 shares, converted the
         preferred stock into 5,250,000 shares of common stock for an exchange
         rate of $1.429 per share.

         In September, 2003, Warren Kruger, President and CEO, exchanged
         $900,000 of debt for 629,811 shares of common stock at a rate of $1.429
         per share.

         The board of directors authorized issuance of common stock in lieu

                                      F-14
<PAGE>

         of cash to pay the dividends on the Series 2001 preferred stock. The
         rate of exchange is based on the market value of the stock on the date
         authorized. The issuances are as follows:



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


           June 30, 2002            $225,000        140,625          $1.60

           September 30, 2002       $223,934        149,289          $1.50

           December 31, 2002        $226,849        360,078          $0.63

           March 31, 2003           $224,384        407,971          $0.55

           June 30, 2003            $224,384        560,959          $0.40

           September 8, 2003        $172,603        410,959          $0.40

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 18,065,000 are available
         for grant as of May 31, 2004. 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 three years ended May 31, 2004:

                                                                  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
           Options granted                                 350       0.54
                                                         -----   --------

                                      F-15
<PAGE>

           Options outstanding at May 31, 2004           1,935   $   1.68
                                                         =====   ========

           Exercisable as of May 31, 2002                  190   $   2.00
                                                         =====   ========

           Exercisable as of May 31, 2003                  555   $   2.70
                                                         =====   ========

           Exercisable as of May 31, 2004                1,131   $   2.16
                                                         =====   ========

         With respect to options outstanding at May 31, 2004:

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

            $0.42-$0.65       860,000       7.3 years      $0.51      287,500

            $1.429-$1.60      250,000       6.5 years      $1.57      138,750

               $2.00          135,000       4.3 years      $2.00      135,000

            $3.125-$4.00      690,000       6.3 years      $3.17      570,000
                            ---------                               ---------

               Total        1,935,000       6.6 years      $1.68    1,131,250

         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:

                                                 2004         2003
                                                 ----         ----
           Net loss to common shareholders:

             As reported                     $(3,127,352)   $(4,115,018)

             Pro forma                       $(3,146,943)   $(4,230,753)

           Per share:

             As reported                     $     (0.28)   $     (0.79)

             Pro Forma                       $     (0.29)   $     (0.81)

         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                       1.36

                                      F-16
<PAGE>

                           Risk Free Interest Rate                     4%
                           Expected Holding Period                4 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, 2004 and 2003.

NOTE 12. SUPPLEMENTAL INFORMATION OF CASH FLOWS
         --------------------------------------

         Supplemental information of cash flows for the years ended May 31:


                                                         2004         2003
                                                      ----------   ----------
            Non-cash activities:
               Common stock issuances for:
                  Retirement of debt                  $  900,000   $   97,126
                  Dividends on preferred stock           396,987    1,111,606
               Debt issued in acquisition of assets
             of Greystone Plastics, Inc.               8,299,454         --
               Retirement of debt in exchange for
                 property and equipment                7,060,698         --
               Note receivable received on sale
             of equipment                                314,000         --

            Interest paid                                599,792      475,835

NOTE 13. OPERATING LEASES
         ----------------

         Rental expense on operating leases totaled $254,480 and $212,538 during
         2004 and 2003. Commitments for operating leases for the five years
         after May 31, 2004 are $788,640, $629,160, $576,000, $576,000, and
         $576,000 and $2,976,000 thereafter.

NOTE 14. ACQUISITION
         -----------

         Effective September 8, 2003, PalWeb acquired substantially all of the
         assets of Greystone Plastics, Inc., an Iowa corporation, through the
         purchase of such assets by a newly formed, wholly-owned subsidiary of
         PalWeb, Greystone Manufacturing, L.L.C., an Oklahoma limited liability
         company. The purchase price for the assets was $12,500,000, of which
         $4,200,546 was paid in cash and $8,299,454 was paid by issuing the
         following notes: a $5,000,000 note payable by Greystone Manufacturing,
         L.L.C. to Greystone Plastics, Inc. at 7.5%

                                      F-17
<PAGE>

         interest, due October 1, 2008; a $2,500,000 note payable by Greystone
         Manufacturing, L.L.C. to Greystone Plastics, Inc. at 7.5% interest, due
         October 1, 2018; and a $799,454 note payable by Greystone
         Manufacturing, L.L.C. to Bill Hamilton, one of the owners of Greystone
         Plastics, Inc, at 6% interest, due February, 2008. The cash payment was
         financed through the issuance of Series 2003 cumulative convertible
         preferred stock in the amount of $5,000,000 (see Note 9, "Stockholders'
         Equity"). The acquisition cost of $12,500,000 consisted of inventory of
         $499,870, building and equipment of $5,735,695, intangibles (patents)
         $100,000 and goodwill of $6,164,435.

NOTE 15. CONCENTRATIONS OF CREDIT RISK
         -----------------------------

         Financial instruments that potentially subject PalWeb to concentrations
         of credit risk consist principally of cash deposits in excess of
         federally insured limits. As of May 31, 2004, PalWeb's bank balances
         exceeded federally insured limits by $174,085.

NOTE 16. COMMITMENTS AND CONTINGENCIES
         -----------------------------

         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 Pritchard 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 manufacturing process and used to successfully
         obtain the UL listing. As of May 31, 2004, 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, a substantial amount of its revenue from a few
         large customers of which 2004 sales totaling $5,940,991 came from one
         customer. The 2003 sales included amounts of $301,000 and

                                       F-18
<PAGE>

         $271,227 from individual 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.



































                                      F-19