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

                                   FORM 10-KSB
                                   (Mark One)

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

                   For the fiscal year ended December 31, 2000

                                       OR

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

         For the transition period from January 1, 2001 to June 30, 2001

                         Commission File Number O-28690

                                SHOPNET.COM, INC.
                 (Name of Small Business Issuer in Its Charter)
<TABLE>
<CAPTION>

<S>                                                       <C>
             Delaware                                     13-3871821
---------------------------------------         -----------------------------------
(State or Other Jurisdiction of                 (I.R.S. Employer Identification No.)
Incorporation or Organization)
</TABLE>

            14 East 60th Street, Suite 402, New York, New York 10022
                    (Address of Principal Executive Offices)

                                 (212) 688-9223
                (Issuer's Telephone Number, Including Area Code)

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

       Title of Each Class and Name of Each Exchange on Which Registered
                                      NONE

                Securities registered pursuant to Section 12(g)
                              of the Exchange Act:
                         Common Stock, $.001 par value
                                (Title of Class)


         Check whether the Issuer (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes [X] No [ ]

         Check if no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is 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 Registrant's consolidated revenues for its six month transition
period ended June 30, 2001 were $4,728,948.

         The aggregate market value of the voting stock on October 10, 2001
(consisting of Common Stock, par value $0.001 per share) held by non-affiliates
was approximately $1,964,201 based upon the closing price for such Common Stock
on said date ($.42), as reported by a market maker. On such date, there were
7,472,224 of Registrant's Common Stock outstanding.


<PAGE>
                                     PART I

ITEM 1.  DESCRIPTION OF BUSINESS

     The statements  which are not historical facts contained in this Transition
Report are forward  looking  statements  that involve  risks and  uncertainties,
including,  but not  limited  to  instability  of  revenues,  future  losses and
unpredictable  operating  results.  The  Company's  actual  results  may  differ
materially from the results discussed in any forward looking  statement.  Unless
otherwise indicated,  all references to the number of our shares of common stock
give effect to the 1 for 3 reverse stock split effected in February  1998,  100%
Common Stock  dividend  effected in February  1999,  10% Common  Stock  dividend
effected in February  2000 and the 20% Common  Stock  dividend  effected in June
2000.

     In June 2001, the Company's  Board of Directors  voted to change the end of
the  Company's  fiscal  year  from  December  31 to June  30.  The  accompanying
consolidated  financial  statements  as of June 30, 2001  reflect the results of
operations for the six months ended June 30, 2001.

History

     ShopNet.com,  Inc. (the "Company" or "Shopnet") was formed in December 1995
in the State of Delaware,  as Hollywood  Productions,  Inc. ("HPI"). Its purpose
was to acquire screenplays and produce motion pictures.  The Company changed its
name from "Hollywood Productions, Inc." to "Shopnet.Com, Inc." in May 1999.

     In September 1996, the Company  acquired  Breaking Waves,  Inc.  ("Breaking
Waves"),  a New York corporation  which remains a wholly owned subsidiary of the
Company. This acquisition was contingent upon and was consummated simultaneously
with the  Company's  initial  public  offering  ("IPO") and marked the Company's
entrance  into  the  business  of  designing,  manufacturing,  and  distributing
(throughout  the United  States) young girls'  swimwear and  coordinating  beach
cover-ups and accessories.

     In May 1999, Shopnet incorporated a new subsidiary,  Hollywood Productions,
Inc. ("Hollywood"),  to which Shopnet assigned its motion picture business. As a
result, Shopnet is now a holding company,  owning 100% of Hollywood and Breaking
Waves.  Except  where  otherwise  indicated,  Shopnet and its  subsidiaries  are
collectively referred to herein as the "Company."


Motion Picture Business

General

     Since its inception in December  1995,  the Company has  co-produced  three
motion pictures:  "Dirty Laundry," "Machiavelli Rises" and "The Girl." Each such
film had limited  theatrical runs shortly after release.  The Company's  primary
focus  for  the  forseeable  future  will  be  to  work  directly,   or  through
distribution  arrangements  with third parties,  to establish  distribution  for
these  completed  films through public or cable  television - via  pay-per-view,
premium  and  standard  channels  - the  sale of  video  rights  and/or  foreign
distribution.  To a lesser extent,  the Company will continue to seek to acquire
screenplays   and  produce   motion   pictures,   either   directly  or  through
collaborative arrangements,  to be distributed primarily through public or cable
television and the sale of video rights.
<PAGE>
"Dirty Laundry"

     In March 1995, the Company  entered into a property  acquisition  agreement
(the  "Purchase  Agreement")  and a  co-production  agreement  (the  "Production
Agreement") with Rogue Features,  Inc.  ("Rogue"),  an unaffiliated  entity,  to
acquire the rights to and co-produce a motion picture of the screenplay entitled
"Dirty  Laundry."  In  addition,  the Company and Rogue  entered into a right of
first  refusal  agreement  with respect to the next two products of Rogue and/or
its principals.

     In  April  1996,  the  Company  formed  D.L.   Productions,   Inc.   ("D.L.
Productions"),  a New York corporation,  as a wholly owned  subsidiary,  for the
purpose of holding  title to and  producing the Dirty Laundry film and receiving
revenues from the  distribution  thereof.  The Purchase  Agreement  conveyed all
rights to the  screenplay and the film itself to the Company.  In return,  Rogue
directed "Dirty Laundry" and has the right to 25% of its profits as described in
the Production Agreement. Rogue also retained the right to produce a live comedy
or musical upon the earlier of five years after Dirty  Laundry's  release or the
Company's approval. In addition, Michael Normand, a principal of Rogue, retained
the right to adapt the screenplay of Dirty Laundry into a novel on the Company's
approval  of  the  compensation  it  is to  receive  therefrom.  The  Production
Agreement  provided for the  principals  of Rogue to direct and retain  creative
control of the production of the film while the Company retains final approval.

     In  November  1997,  with  production  of the movie  complete,  the Company
effected the dissolution of D.L. Productions. Its assets were transferred to the
Company, and the Company took over the marketing of Dirty Laundry.

     In June 1998, the Company  entered into an agreement with Artistic  License
Films,  Inc. ("ALF")  whereupon ALF agreed to use its best efforts to distribute
the film in at least three New York  theaters and two Los Angeles  theaters.  In
exchange for its efforts,  ALF received a $20,000 retainer fee which constitutes
an advance against ALF's distributor's fee of 25% of the gross receipts from the
theatrical distribution of the film

     The film was released to five New York and three Los Angeles  theaters.  It
had a limited run during the fall of 1998 and  received  marginal  reviews  (two
stars out of four). Currently, the Company is directly working to distribute the
film through various channels, including public or cable television, the sale of
video rights and foreign distribution.

     "Dirty  Laundry" is a romantic  comedy shot in the New York tri-state area.
It stars Jay Thomas as Joey (a dry cleaner going through a mid-life crisis), and
Tess Harper as Beth (a sex advice  columnist  for a woman's  magazine and Joey's
wife of 15 years).  Joey's dry  cleaning  business  is doing  poorly,  and he is
convinced that he is aging prematurely. Given their increasing lack of intimacy,
Beth encourages Joey to seek counseling,  which he does unbeknownst to Beth, who
has become  attracted  to her  chiropractor.  Throughout  the film, a variety of
bizarre  mishaps  occur which  result in the couple's  rekindling  of their lost
romance with a surprise ending.  Mr. Thomas has co-starred in the motion picture
"Mr.  Holland's  Opus"  and is known  for his  television  work in "Love & War,"
"Cheers," "Murphy Brown," and "Mork & Mindy," and, until recently,  was the host
of WTJM "Jammin" 105.1 FM, a New York radio station.  Ms. Harper earned a Golden
Globe  nomination for her performance in the film "Tender  Mercies" and an Oscar
nomination for her role in the film "Crimes of the Heart."
<PAGE>
"Machiavelli Rises"

     In April 1998,  the Company  entered into a  co-production  agreement  with
North Folk Films,  Inc.  ("North  Folk") for the  production  of a film entitled
"Machiavelli  Rises."  The  Company  and North Folk  formed a limited  liability
company,  Battle  Studies  Productions,  LLC  ("Battle  Studies"),  to  finance,
produce,  and distribute the film which commenced  production in April 1998. The
film was  completed  in  November  1998.  The film was  written,  directed,  and
co-produced by Efraim Horowitz and can be characterized as a contemporary  ghost
story about power,  greed,  love, and Leonardo Da Vinci's lost  notebook.  Total
production costs to date have aggregated  approximately  $433,000,  of which the
Company has funded approximately  $217,500.  In accordance with the terms of the
co-production  agreement,  the  proceeds  of the  film  will be  distributed  as
follows:  first,  both  parties  shall  be  entitled  to  recoup  their  initial
investment in the film, at 135% thereof; then, after repayment to the respective
parties of additional  costs incurred by same,  any remaining  proceeds shall be
distributed  50% to North  Folk and 50% to the  Company.  The film was  shown in
January 1999 in both New York and at the Brussels Film Festival.

     In  February  2000,  "Machiavelli  Rises"  was  one of  thirty-eight  films
showcased at the New York Independent  Film Festival  ("NYIFF") in New York City
where it was honored with the award for Best  Screenplay.  In  addition,  it was
chosen  (along  with only six other  films) for  presentment  at the Los Angeles
distribution of the NYIFF in April, 2000.

     In September 2000 and January 2001,  Battle  Studies  entered into two-year
agreements  with each of Raven  Pictures  International  and Koan,  Inc. for the
distribution   of  "Machiavelli   Rises"   internationally   and   domestically,
respectively.  See "Management's  Discussion and Analysis or Plan of Operation -
Investment in Joint  Ventures - Battle Studies  Productions,  LLC." To date, the
film has not generated any distribution revenues.

"The Girl"

     In July 1999,  the Company  entered into an agreement with ALF with respect
to the production of a film entitled "The Girl." Pursuant to such agreement, the
Company and ALF formed a limited liability company,  The Girl, LLC ("Girl LLC"),
to finance,  produce and  distribute  the film. As of June 30, 2001, the Company
invested $35,000 for a 22.533% interest in Girl LLC. "The Girl" was completed in
the spring of 2001,  has been exhibited at several film festivals and had a very
limited theatrical distribution in New York City. The Girl LLC is in the process
of attempting to secure video and foreign distribution arrangements.

     "The  Girl,"  which was filmed in Paris,  categorized  as a faux film noir,
chronicles a lesbian relationship.
<PAGE>
Production

     The Company  intends to continue to review  screenplays for acquisition and
co-production,  although to a lesser  extent.  Typically,  once a screenplay  is
acquired (i) a budget is prepared,  (ii)  revisions to the  screenplay are made,
(iii) the talent,  production  crews,  and all ancillary  items required for the
filming of the motion picture are hired and/or  otherwise  obtained,  and (iv) a
film  schedule is  established.  Once filming is  complete,  the film is edited,
sound and special effects are added, and a final print is produced.  The Company
then arranges  private  showings of the film and attempts to secure domestic and
foreign distributors.

     Production of a motion picture requires  approximately  five to eight weeks
of filming followed by approximately  fourteen weeks of editing and adding sound
and special effects. An additional twelve to sixteen weeks generally is required
in order to secure a  distributor  for the film.  If the  Company  cannot find a
distributor, it will attempt to distribute the film itself. Once this process is
complete,  the film will be ready for release to theaters or other  distribution
channels. See "--Distribution, Billing and Revenues."

Distribution, Billing and Revenues

     Generally,  distribution  of a film may be  undertaken  either  by a motion
picture studio,  an independent  distributor,  or through an agent.  The Company
expects  that  any  existing  films  or  future  films  it may  produce  will be
distributed  by an  independent  distributor  or itself  through an agent.  In a
distribution  arrangement,  the production company and the distributor determine
who will incur what  portion of the costs of  marketing a film,  at which time a
budget is prepared and the extent of the release of the film is determined.  The
release of films may be done in  platforming  stages.  A screening is then held,
and  critics are  invited to review the film.  If the film  receives a favorable
response from either the critics  and/or the audience,  the film's  distribution
will expand gradually into additional markets and theaters.

     The  Company  does not  expect  extensive  theatrical  distribution  of its
existing or future films. Rather,  after limited theatrical  distribution a film
may be  distributed  through  public  or cable  television  - via  pay-per-view,
premium,  and  standard  channels  -  and/or  through  the  sale  or  rental  of
videotapes.  The Company may enter into agreements  with different  distributors
for  different  markets  or sell all the  rights  to one  distributor.  Revenues
generated are distributed to all parties involved including the distributor, the
producers,  the owners, and the talent pursuant to extensive formulas previously
agreed upon.

     Distribution  rights to motion pictures are granted legal  protection under
the copyright laws of the United States and most foreign countries which provide
substantial  civil and  criminal  sanctions  for  unauthorized  duplication  and
exhibition of motion  pictures.  The Company plans to take all  appropriate  and
reasonable measures to secure,  protect,  and maintain or obtain agreements from
licensees to secure,  protect,  and maintain copyright protection for all of the
motion pictures it distributes under the laws of all applicable jurisdictions.

     The Company estimates that between 12 and 18 months will elapse between the
commencement  of expenditures by the Company in the acquisition of a screenplay,
the production of a motion picture, and its release. The Company does not expect
to receive revenues, if any, from the exploitation of a film until approximately
24 to 36 weeks after its release. Notwithstanding there can be no assurance that
any completed film will ever establish distribution at any level or generate any
revenues to the Company.  Billing in the industry  typically  occurs  quarterly:
theaters  pay  distributors  on a quarterly  basis,  and the Company is paid the
following quarter.  In the event a distributor  desires to distribute one of the
Company's  films,  however,  such  distributor  may  either (i) offer an initial
payment to the Company  against,  or in addition  to,  future  royalties or (ii)
purchase the film outright.
<PAGE>
Regulations

     The Code and Ratings  Administration  of the Motion Picture  Association of
America,   an  industry  trade   association,   assigns  ratings  for  age-group
suitability  for viewing of motion  pictures.  While the Company will follow the
practice of submitting most of its motion pictures for such ratings, the Company
may review this policy from time to time.

     United  States  television  stations  and  networks,  as  well  as  foreign
governments,  impose  regulations  on the content of motion  pictures  which may
restrict,  in whole or in part,  exhibition  on  television  or in a  particular
territory.  There can be no assurance  that current and future  restrictions  on
motion  pictures  released by the Company will not limit or affect the Company's
ability to exhibit such motion pictures.

Competition in the Film Industry

     The film industry is immense with many well  capitalized  industry  leaders
producing commercial films capable of wide theatrical distribution.  The Company
competes,  and will continue to compete, with these and other institutions which
produce,  distribute,  exploit and finance films, many of which have substantial
financial and human  resources  considerably  more extensive than the Company's.
These institutions include the major film studios - including Disney, Universal,
MGM, and Sony - as well as smaller independent film companies and television and
cable networks.  Industry members compete substantially for the hire or purchase
of a limited number of producers,  directors,  actors, and screenplays which are
able to attract major  distribution in all media and all markets  throughout the
world.

     The motion picture business is highly competitive and has an extremely high
profile in terms of name recognition,  with relatively insignificant barriers to
entry,  and  numerous  entities  compete  for  the  same  directors,  producers,
actors/actresses,  distributors,  theaters,  etc.  There is intense  competition
within  the film  industry  for  exhibition  times at  theaters,  as well as for
distribution in other media, and for the attention of the movie-going public and
other  viewing  audiences.  Competition  for  distribution  in other media is as
intense as the  competition for theatrical  distribution,  and not all films are
licensed in other media. Each year,  numerous  production  companies are formed,
and numerous  motion  pictures are produced,  all of which motion  pictures seek
full distribution and exploitation. Despite the increase in the number of films,
a small number of films,  those which receive  widespread  consumer  acceptance,
account for a large percentage of total box office receipts.
<PAGE>
Swimwear Business

General

     Breaking  Waves is a  designer,  manufacturer,  and  distributor  of girl's
swimwear which is sold  throughout  the United States.  In addition to swimwear,
Breaking Waves also  manufactures  beach cover-ups and accessories to coordinate
with  its  swimwear.  Swimwear  is made in  children's  sizes  from  2-16 and in
pre-teen sizes.

     Breaking  Waves  markets  swimwear  under  private  brand labels  including
"Breaking Waves," "All Waves," and "Making Waves." In July 2000,  Breaking Waves
added a new line of girls' swimwear which is sold under the label, "Coral Cove."
Breaking  Waves  also  licenses  rights to the name  "Daffy  Waterwear"  and the
"Gottex"  trademark in connection  with the  manufacture and sale of girls' swim
and related beach wear.


Products, Design, Supplies and Inventory

     Breaking Waves designs, manufactures, and sells both private label and name
brand girl's swimwear and  accessories.  It has an office in Homestead,  Florida
where its  designer  designs  all styles for its  swimwear  lines and  accessory
items.  Each  season,  roughly  20-25 prints and fabrics are  developed  for the
"Breaking  Waves"  line,  with  generally  between 10 to 20 prints  and  fabrics
developed  for each of its other lines.  For the six months ended June 30, 2001,
the "Coral Cove" line accounted for  approximately  one-third of Breaking Waves'
total sales volume,  with the other four lines  accounting  for, in equal parts,
the  remainder  of  Breaking  Waves'  volume  for  such  period.  Prior  to  the
introduction of the "Coral Cove" and "Gottex" lines, for the year ended December
31, 2000, the "All Waves" line accounted for approximately one-third of Breaking
Waves' total  volume,  with the  remaining  two lines  accounting  for, in equal
parts, the remainder of Breaking Waves' volume.

     In designing its children's swimwear,  Breaking Waves adapts certain of the
prints and styles it is provided by Beach  Patrol  Inc.,  the licensor of "Daffy
Waterwear" and Gottex Models Ltd. which  management  feels are  appropriate  for
children's   wear.  Of  each  fabric  or  print  chosen,   the  Company  usually
manufactures two swimsuits: a one-piece model and a two-piece model.


     Once Breaking  Waves has chosen the prints and colors it desires to use for
its  children's  swimwear,  it sends the  artwork for the fabric to its agent in
Korea  who  disseminates  them  to  one  or  more  clothing   manufacturers  for
prototyping   and  the  knitting  or  weaving  and  printing  of  fabrics.   The
manufacturer  returns the fabrics to Breaking  Waves,  and upon Breaking  Waves'
approval,  the fabrics are sent, with the desired design,  to any one or more of
several  Indonesian or Korean  companies where the fabric is cut and sewn into a
completed product.  Finished goods are shipped from the manufacturer to a public
warehouse in the City of  Industry,  California.  Breaking  Waves has found that
this process is the most  cost-effective  means of operating  its  business.  It
expects to continue its  operations in this manner in the future,  though it may
use other manufacturers and suppliers in different countries.
<PAGE>
     Breaking Waves' swimwear typically is produced in two blended fabrics:  one
is a blend of nylon  and  lycra  spandex,  and the  other is a blend of  cotton,
polyester,  and lycra  spandex.  Each  product line uses  different  designs and
emphasizes different fabric blends.

     For the six months ended June 30,  2001,  80% of Breaking  Waves'  finished
products  were  purchased  from an  Indonesian  manufacture,  with  the  balance
purchased  from a Korean  manufacturer.  For the year ended  December  31,  2000
Breaking  Waves'  finished   products  were  purchased  80%,  15%  and  5%  from
Indonesian, Samoan and Korean manufacturers,  respectively. Although the Company
believes  that the  fabrics  and  non-fabric  sub-materials  it uses are readily
available  and that there are  numerous  manufacturers  for such piece goods who
offer similar  terms and prices,  there can be no assurance  that  management is
correct  in such  belief.  The  unavailability  of  fabrics  or the  absence  of
clothiers,  or the availability of either at unreasonable  cost, could adversely
affect the operations of Breaking Waves and the Company.

     Since Breaking Waves purchases finished garments from overseas contractors,
it  does  not  buy or  maintain  an  inventory  of  sub-materials.  It  has  not
experienced difficulty in satisfying finished garment requirements and considers
its sources of supply  adequate.  Breaking  Waves'  inventory of garments varies
depending upon its backlog of purchase orders and its financial position.

Marketing and Sales

     The "Breaking  Waves," "Daffy  Waterwear,"  "Coral Cove" and "Gottex" lines
are distributed  and sold through better  department and specialty  stores.  The
"All Waves" label is sold to mass  merchants  and also as  promotional  goods in
department  stores.  Private label programs are supplied to several major chains
and department store groups.

     Breaking Waves sells its swimwear and accessory  items through its showroom
sales staff and through independent sales representatives. Over the past several
years,  certain  of its  customers  have  included  the  Dillard  and  Federated
department  store groups as well as Kids R Us,  Sears,  Wal-Mart,  T.J. Maxx and
Marshalls.  For the six  months  ended  June 30,  2001,  Breaking  Waves had two
customers representing in the aggregate,  37% of net sales, as compared to three
customers  representing in the aggregate,  46% of net sales,  for the year ended
December 31, 2000.

     Breaking Waves'  merchandise is shipped pursuant to purchase orders sent by
its  customers  and is sent f.o.b.  shipping  point  (freight on board)  meaning
Breaking Waves is neither  responsible for the goods during shipment nor for the
delivery charge.  Payment is due 30 days after shipment. No goods are shipped on
consignment;  therefore,  except for  non-conforming or damaged goods, all goods
shipped are considered sold.

     In addition to its  in-house  sales and showroom  personnel,  approximately
twenty  independent  sales  representatives  throughout  the United  States sell
Breaking  Waves  merchandise on a  non-exclusive  basis.  These  representatives
service  department  stores and  smaller  specialty  retailers.  In some  cases,
separate  independent  representatives  sell the "Daffy Waterwear" line. None of
these  representatives  is under  contract  with  Breaking  Waves;  nor does any
receive a salary.  Rather,  each is paid a commission  based upon his sales.  In
addition  to  showroom  sales and sales  representatives  calling on  customers,
Breaking  Waves  exhibits its  products at major trade shows.  End of season and
discontinued merchandise is sold to off-price stores.
<PAGE>
Suspended Internet Activities

     In March  1999,  Breaking  Waves  launched an online  wholesale  children's
swimwear  website  at   www.breakingwaves.com.   The  website  was  designed  to
complement the company's wholesale  distribution  efforts by providing retailers
instant access to more than 200 styles of Breaking Waves  swimwear.  The Company
has  determined,  however,  not to pursue this method of  distribution,  and its
website is now dormant.

Work in Progress

     Breaking Waves  manufactures its swimwear lines from June to December based
on its knowledge of the market and past sales.  Customer orders  generally start
arriving in June and July. Goods are reordered by customers on a continual basis
through the following June. The quantity of open purchase orders at any date may
be affected by, among other things, the timing and recording of orders. Breaking
Waves does not sell on  consignment  and accepts return of only such products as
are imperfect or shipped in error.

     The  major  design  work  takes  place  from  January  to  May.  Goods  are
manufactured,  printed,  and  sewn  overseas  from  June to  December.  Finished
garments are shipped  from the factory to a public  warehouse in Los Angeles for
shipments to  retailers.  The  majority of shipments to retailers  are made from
November to May, with January through March being the peak shipping time.

Trademarks

     Breaking Waves relies on common law and registered  trademarks for usage of
its private label swimwear lines under the names  "Breaking  Waves," "All Waves"
and "Coral Cove."  Breaking Waves has licensed  rights to the "Daffy  Waterwear"
and "Gottex" names for girls swim and beach wear. See  "Management's  Discussion
and Analysis or Plan of Operations of - License Agreements" for a description of
each of such license arrangements.

     There can be no  assurance  that such  trademarks  owned or licensed by the
Company adequately will be protected against  infringement.  In addition,  there
can be no assurance  that  Breaking  Waves will not be found to be infringing on
another company's trademark.  In the event Breaking Waves finds another party to
be infringing upon one of its trademarks,  if registered, or is found by another
company  to be  infringing  upon  such  company's  trademark,  there  can  be no
assurance that Breaking Waves will be successful in any resultant  litigation it
may ultimately become involved in.


Competition

     There is intense  competition in the swimwear  apparel  industry.  Breaking
Waves competes with many other manufacturers in these markets, many of which are
larger  and have  greater  resources  than it  does.  Major  competitors  in the
swimwear  industry  include "Ocean  Pacific,"  "Ralph  Lauren," and "Speedo." In
addition,  department stores and retailers have their own private label programs
which are the major competition in the mass merchant business.
<PAGE>
     Breaking   Waves'   business   is  highly   competitive   with   relatively
insignificant  barriers to entry and with numerous firms  competing for the same
customers.  Breaking Waves is in direct  competition with local,  regional,  and
national clothing  manufacturers,  many of which have greater resources and more
extensive  distribution  and marketing  capabilities  than it does. In addition,
many large  retailers have recently  commenced  sales of "store brand"  garments
which  compete  with those sold by  Breaking  Waves.  Management  believes  that
Breaking Waves' market share is not significant in its product lines.

     Many of the national  clothing  manufacturers  have  extensive  advertising
campaigns which develop and reinforce brand  recognition.  In addition,  many of
such  manufacturers  have agreements with department  stores and national retail
clothing chains to jointly  advertise and market their products.  Since Breaking
Waves does limited  advertising  and  marketing  and has no  agreement  with any
department  store or national retail chain to advertise any of its products,  it
competes with companies that have brand names that are well known to the public.
All other factors being equal, it can be expected that a retail shopper will buy
a "brand name" garment before he buys an "unknown" brand, depending on price.

Seasonality

     Breaking Waves'  business is seasonal.  A large portion of its revenues and
profits are derived  between  November and March.  Each year from April  through
October, Breaking Waves designs and manufactures the following season's swimwear
lines.  There can be no assurance  that revenues  received from December to June
will support Breaking Waves' operations for the rest of the year.


Employees

     Mr. Harold  Rashbaum,  the Company's  Chairman of the Board,  President and
Chief Executive  Officer  oversees the Company's  consolidated  operations.  The
Company has one other  executive  officer,  a designer,  controller and 3 office
personnel  to oversee  Breaking  Wave's  operations  on a full-time  basis,  and
employs a Vice-President of Design,  Merchandising and Production on a part-time
basis.  Breaking  Waves  has  approximately  twenty  independent  sales  persons
representing  the Breaking  Wave's lines on a non-exclusive  basis.  Hollywood's
operations  are  governed  by  Mr.  Rashbaum.  Most  screenwriters,  performers,
directors,  and technical  personnel involved in the Company's films are members
of  guilds  or  unions  which  bargain   collectively   with   producers  on  an
industry-wide  basis  from  time to time.  Any  work  stoppages  or other  labor
difficulties  could delay the  production  of the films  resulting  in increased
production costs and delayed return of investments.


Business Risks

Film Production

     The likelihood of the success of any film and the Company's ability to stay
on budget  and on  schedule  for each film  must be  considered  in light of the
problems,   expenses,   difficulties,   complications,   and  delays  frequently
encountered  in  connection  with the  production  of a motion  picture.  Due to
unforeseen problems and delays including illness, weather, technical difficulty,
and human error,  by completion,  most films are  considerably  over budget.  In
addition,  the lack of experience of  management in this  industry,  the limited
operating history and capital of the Company, and the competitive environment in
which the Company  operates  may cause  increased  expenses  due to mistakes and
delays in the production of the films.
<PAGE>
     The success of a film in theatrical distribution,  television,  home video,
and  other   ancillary   markets  is  dependent   upon  public  taste  which  is
unpredictable  and  susceptible  to change.  The number and  popularity of other
films being distributed may also significantly  affect the theatrical success of
a film.  Accordingly,  it is  impossible  for anyone to predict  accurately  the
success of any film at the time it enters production. The production of a motion
picture  requires the  expenditure  of funds based  largely on a  pre-production
evaluation of the commercial potential of the proposed project.

Swimwear

     The apparel  industry is a cyclical  industry,  with consumer  purchases of
swimwear,   accessory  items,  and  related  goods  tending  to  decline  during
recessionary  periods when disposable  income is low.  Accordingly,  a prolonged
recession  would in all  likelihood  have an adverse effect on the operations of
Breaking  Waves and the Company.  Breaking Waves operates in only one segment of
the apparel industry,  specifically  swimwear, and is therefore dependent on the
demand for such goods.  Decreases in the demand for swimwear products would have
a material adverse effect on the Company's business as a whole.

     Breaking Waves believes that its success in the swimwear  industry  depends
in substantial part on its ability to anticipate, gauge, and respond to changing
consumer demands and fashion trends in a timely manner.  Breaking Waves attempts
to anticipate consumer preferences.  There can be no assurance, however, that it
will be successful in this regard, and if it misjudges the market for any of its
products,  it may be faced with unsold  finished goods,  inventory,  and work in
process,  which could have an adverse  effect on the  Company's  operations as a
whole.


ITEM 2.  DESCRIPTION OF PROPERTY

     The Company's  executive offices are located at 14 East 60th Street,  Suite
402, New York, New York 10022, (212) 688-9223,  comprising  approximately  1,800
square feet.  The Company leased its office space in November 1996 for a term of
five years,  at an approximate  base annual rental of $70,000.  Upon the lease's
expiration on November 30, 2001, the executive offices will relocate to Breaking
Waves' facilities described below.

     Breaking  Waves  maintains its  executive  offices and showroom at 112 West
34th  Street,  New York,  New York 10120.  Until  January  1998,  this space was
approximately  1,000 square feet and  comprised  only office  space.  In January
1998,  Breaking  Waves amended its lease and rented an  additional  1,000 square
feet.  The lease is for a term of seven years,  expiring  December  2004,  at an
annual rental of $71,600.  In July 2001,  Breaking Waves  terminated this lease,
effective  August 31,  2001. A new 6-year lease for an aggregate of 2,200 square
feet expiring September 30, 2007 was signed, which becomes effective on November
1,  2001,  or  such  later  date as the  landlord  of  such  premises  completes
construction.  Annual rent under the new lease is $84,915  through  December 31,
2004 and $95,760 for the remainder of the lease. Breaking Waves also maintains a
Florida office,  comprising  approximately 780 square feet, with annual payments
of approximately $11,000.
<PAGE>
ITEM 3.  LEGAL PROCEEDINGS

     On or about  June of 2000,  an action  was  brought  in the  Queens  County
Supreme  Court  against the Company and  several  others  claiming,  among other
things, that the Company allegedly breached a contract and engaged in fraudulent
statements  (including  supposedly  promising the plaintiff options and then not
allowing the plaintiff to exercise these options).  The plaintiff  seeks,  among
other things,  compensatory damages in the amount of $497,500,  punitive damages
in the amount of $995,000,  together with costs and attorney's fees. The Company
has responded to the complaint and denied the  allegations.  The Company intends
to contest this action  vigorously  and believes that such claims against it are
baseless and without merit.

     The  Company  is not a party to any other  material  litigation  and is not
aware of any threatened  litigation that would have a material adverse effect on
its business. Neither the Company's officers, directors,  affiliates, nor owners
of  record  or  beneficially  of more  than  five  percent  of any  class of the
Company's  Common  Stock is a party to any  material  proceeding  adverse to the
Company  or has a  material  interest  in any  such  proceeding  adverse  to the
Company.

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

     Not applicable.



<PAGE>
                                     PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS

Market Information

         The Company's Common Stock is quoted on the SmallCap Market of the
Nasdaq Stock Market and the Third Segment of the Frankfurt Stock Exchange. The
following table sets forth representative high and low sale prices as reported
by a market maker for the Company's Common Stock and Warrants, during the period
from January 1, 1999 through October 10, 2001. Sales prices reflect prices
between dealers and do not include resale mark-ups, mark-downs, or other fees or
commissions.
<TABLE>
<CAPTION>

                                                         Common Stock                         Warrants

Calendar Period                              Low               High              Low              High

1999(1)(2)
----

<S>                                            <C>              <C>               <C>              <C>
01/01/99 - 03/31/99                            .50              2.78              .03              .31
04/01/99 - 06/30/99                           1.06              3.09              .06              .41
07/01/99 -  09/30/99                          2.06              2.75              .13              .28
10/01/99 - 12/31/99                           2.06              3.44              .13              .31

2000(2)

01/01/00 - 03/31/00                           2.56              7.72              .13              .72
04/01/00 - 06/30/00                           2.44              5.13              .13              .47
07/01/00 - 09/30/00                           2.38              3.98              .25              .31
10/01/01 - 12/31/00                            .25              3.00              .16              .28

2001(2)

01/01/01 - 03/31/01                            .19               .89              .09              .22
04/01/01 - 06/30/01                           1.00              2.18              .14              .18
07/01/01 -10/10/01                             .42              1.56              .02              .15
</TABLE>

         As of October 10, 2001, there were 47 holders of record of the
Company's Common Stock, although the Company believes that there are
approximately 900 additional beneficial owners of shares of Common Stock held in
street name. As of October 10, 2001, the number of outstanding shares of the
Company's Common Stock was 7,472,224. (This number includes an aggregate of
2,420 shares of Common Stock being held by the Company on behalf of certain
shareholders pending their submission for exchange of stock certificates
outstanding on the date of the Company's one-for-three reverse stock split, as
adjusted for the reverse stock split and subsequent stock dividends.

     1  The  above  prices   reflect  the  price  for   post-split   shares  and
post-adjustment Warrants.

     2 The table reflects the price for post-dividend shares and post-adjustment
Warrants since February 5, 1999.
<PAGE>
         Initially, each Warrant issued in the IPO entitled the holders thereof
to purchase one share of the Company's Common Stock at an exercise price of
$6.50 per share, until September 9, 2001. On June 23, 1997, the Board of
Directors approved a reduction in the exercise price of the Warrants from $6.50
to $3.00. On February 5, 1998, the Company effected a one for three reverse
split of the Company's Common Stock. Accordingly, the Company adjusted the terms
of the Warrants to reflect the reverse split such that exercise of three
Warrants would entitle the holder to purchase one share of Common Stock at an
exercise price of $9.00. Giving effect to the February 1999 100% Common Stock
dividend, February 2000 10% Common Stock dividend and June 2000 20% Common Stock
dividend, the Warrants have been cumulatively adjusted such that the exercise of
each Warrant at an exercise price of $3.41 purchases .88 of a share of Common
Stock or, each Warrant, exercisable at an exercise price of $3.87 purchases 1
share of Common Stock.

         In August 2001, the Company extended the term of the Warrants for an 18
month period. The current expiration date of the Warrants is March 10, 2003.
There is no current Registration Statement on file with the Securities and
Exchange Commission ("SEC") covering the shares of Common Stock issuable upon
exercise of the Warrants. Accordingly, the Warrants cannot currently be
exercised. The Company plans to file a Registration Statement with the SEC in
the future.

         On April 15, 1998, the Company's Board of Directors authorized the
distribution of Distribution Warrants to all holders of shares of the Company's
Common Stock as of the May 8, 1998 Warrant Record Date. Pursuant to the
distribution, each share held on the Warrant Record Date shall generate the
issuance of one Distribution Warrant to purchase one share of Common Stock at an
exercise price of $4.00 per share. The Distribution Warrants, which are
exercisable for a period of three years commencing one year after issuance,
shall be issued and distributed once the Company has filed a registration
statement for same and same has been declared effective by the SEC. The Company
to date has not filed the registration statement.

Common Stock Dividends

20% Common Stock Dividend

         On May 8, 2000, the Company's Board of Directors authorized the
issuance of a 20% stock dividend to all holders of shares of the Company's
Common Stock, par value $0.001 per share (the "Common Stock") as of May 19, 2000
payable on June 19, 2000.

10% Common Stock Dividend

         On January 7, 2000, the Company's Board of Directors authorized the
issuance of a 10% stock dividend to all holders of Common Stock as of January
20, 1999, payable February 1, 2000.
<PAGE>
100% Common Stock Dividend

         On January 14, 1999, the Company's Board of Directors authorized the
issuance of a stock dividend to all holders of shares of the Company's Common
Stock as of January 29, 1999, payable on February 5, 1999.

         The Company has paid no cash dividends and has no present plan to pay
any cash dividends. Payment of future dividends will be determined from time to
time by its board of directors, based upon its future earnings, if any,
financial condition, capital requirements, and other factors. The Company is not
presently subject to any contractual or similar restriction on its present or
future ability to pay such dividends.

Recent Sales of Unregistered Securities

         In February 1998, in private transactions, the Company sold an
aggregate of 792,000 shares of Common Stock to three entities at a price of
$0.295 per share for an aggregate price of $195,000. These shares were purchased
by the following accredited investors: Full Moon Development, Inc., Volcano
Trading, Inc., and American Telecom Corp. See "Security Ownership of Certain
Beneficial Owners and Management." The private offering was conducted in
reliance upon Rule 506 of the General Rules and Regulations under the Act. The
proceeds from these sales were used by the Company for general working capital
and to fund the Company's interest in Battle Studies. No underwriter was used in
connection with this offering.

         In April 1998, in private transactions, the Company sold an aggregate
of 924,000 shares of Common Stock to three entities at a price of $0.73 per
share for an aggregate price of $560,000. These shares were purchased by the
following accredited investors: Amir Overseas Capital, Ltd., HDS Capital Corp.
(whose secretary is related to the Company's President), and Galit Capital, Ltd.
See "Security Ownership of Certain Beneficial Owners and Management." The
private offering was conducted in reliance upon Rule 506 of the General Rules
and Regulations under the Act. The proceeds from these sales were used by the
Company for general working capital and to fund the Company's interest in Battle
Studies. No underwriter was used in connection with this offering.

         In February 2000, in a private transaction, the Company sold 120,000
shares of Common Stock to Value Management & Research, AG for an aggregate price
of $300,000. The private offering was conducted in reliance upon Rule 506 of the
General Rules and Regulations under the Act. The proceeds from the sale were
used by the Company for general corporate purposes. No underwriter was used in
connection with this offering.


ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
        CAUTIONARY STATEMENTS ON FORWARD-LOOKING STATEMENTS

         Statements contained in this report which are not historical facts may
be considered forward looking information with respect to plans, projections, or
future performance of the Company as defined under the Private Securities
Litigation Reform Act of 1995. These forward-looking statements are subject to
risks and uncertainties which could cause actual results to differ materially
from those projected. The words "anticipate," "believe," "estimate," "expect,"
"objective," and "think" or similar expressions used herein are intended to
identify forward-looking statements. The forward-looking statements are based on
<PAGE>
the Company's current views and assumptions and involve risks and uncertainties
that include, among other things, the effects of the Company's business, actions
of competitors, changes in laws and regulations, including accounting standards,
employee relations, customer demand, prices of purchased raw material and parts,
domestic economic conditions, including housing starts and changes in consumer
disposable income, and foreign economic conditions, including currency rate
fluctuations. Some or all of the facts are beyond the Company's control.

General

         Shopnet was incorporated in the State of Delaware on December 1, 1995
as Hollywood Productions, Inc. On May 10, 1999, Shopnet filed an amendment to
its Articles of Incorporation effecting a change in its name to its current one.
On May 12, 1999, it incorporated a wholly-owned subsidiary, Hollywood to which
it assigned its motion picture business thereby rendering Shopnet a holding
company for Hollywood and another wholly-owned subsidiary, Breaking Waves.
Shopnet was formed initially for the purpose of acquiring screenplays and
producing motion pictures. In September 1996, in connection with the completion
of its IPO, it acquired all of the capital stock of Breaking Waves which
designs, manufactures, and distributes private and brand name label children's
swimwear. As of June 30, 2001, the Company changed its year end from December 31
to June 30.

         The consolidated financial statements at June 30, 2001 and 2000 and at
December 31, 2000 and 1999 include the accounts of Shopnet and its wholly owned
subsidiaries, Breaking Waves and Hollywood (collectively referred to as the
"Company") except where otherwise indicated after elimination of all significant
intercompany transactions and accounts.

         The following discussion and analysis should be read in conjunction
with the consolidated financial statements and related footnotes which provide
additional information concerning the Company's financial activities and
condition. Since Shopnet and its subsidiaries operate in different industries,
the discussion and analysis is presented by entity in order to be more
meaningful.

         Six months ended June 30, 2001 as compared to the six months ended June
30, 2000

Breaking Waves

         For the six months ended June 30, 2001 and 2000, Breaking Waves
generated net sales of $4,728,948 and $3,673,770, respectively, with related
cost of sales amounting to $3,303,919 and $2,491,788, respectively. The increase
in sales amounting to $1,055,178, or approximately 29%, from 2000 to 2001 was
primarily attributable to the new Gottex and Coral Cove lines. The gross profit
for the six months ended June 30, 2001 amounted to $1,425,029, or 30%, as
compared to the six months ended June 30, 2000 during which it amounted to
$1,181,982, or 32%. The decrease of 2% is due to higher production costs.
<PAGE>
         Selling, general, and administrative expenses during the six months
ended June 30, 2001 and 2000 amounted to $1,216,127 and $813,416, respectively.
The increase amounting to $402,711 or approximately 50%, is primarily
attributable to higher warehousing costs and royalty and consulting expense
related to the Gottex license agreement. As a percentage of sales, selling,
general and administrative expenses increased to 26% from 22% for the six months
ended June 30, 2001 and 2000, respectively.

         The major components of the Breaking Waves selling, general, and
administrative expenses are as follows for the six months ended June 30:
<TABLE>
<CAPTION>

                                                                        2001                 2000
                                                              ----------------       -------------------
<S>                                                            <C>              <C>

         Officers, office staff and
               designer salaries and related benefits          $       225,242  $           262,061
         Commission expense                                            149,992               64,484
         Warehousing costs                                             240,858              151,221
         Royalty fees                                                  176,610               99,113
         Rent expense                                                   44,200               40,909
         Factor commissions                                             55,166               39,994
         Miscellaneous general corporate
                overhead expenses                                      324,059              155,634
</TABLE>

         Interest expense in connection with its factoring agreement amounted to
$256,429 and $168,115, for the six months ended June 30, 2001 and 2000,
respectively. The increase is due to the increase in sales.

         In November 1998, Breaking Waves purchased 1,400,000 shares of Play Co.
Toys & Entertainment Corp. ("Play Co.") for a total of $504,000 comprised of
$300,000 in cash and by shipping $204,000 in merchandise. After the initial
purchase, Breaking Waves owned 25.4% of the outstanding common stock of Play Co.

         During the six months ended June 30, 2000, certain Play Co. preferred
shareholders converted their Series E Convertible Preferred Stock into Play
Co.'s common stock thereby diluting Breaking Waves' ownership interest in Play
Co. The percentage ownership of Breaking Waves' investment was diluted to
approximately 1.5% of June 30, 2001. Breaking Waves accounted for its investment
in Play Co. in accordance with the equity method of accounting to the point it
maintained at least a 20% ownership interest. Once its investment was below 20%,
Breaking Waves accounted for the investment in accordance with the cost method
of accounting which valued the investment at $- 0 - due to the prior equity
losses in Play Co.'s operations. In accordance with SFAS No. 115 "Accounting for
certain investments in debt and equity securities," since such securities are
classified as available for sale, the value of such investment was revalued and
recorded at the fair market value which was approximately $6,350 and $267,000 as
of June 30, 2001 and 2000, respectively. Accordingly, Breaking Waves recorded an
unrealized (loss) gain of ($101,600) and $266,700 for the six months ended June
30, 2001 and 2000, respectively, which has been recorded as a component of
comprehensive income (loss) in the statements of operations.
<PAGE>
         Breaking Waves generated net (loss) income of ($84,561) and $180,246
for the six months ended June 30, 2001 and 2000, respectively. The loss
generated during the six months ended June 30, 2001 is primarily attributable to
a lower gross profit percentage, higher interest expense and warehousing costs
and a new consulting agreement.

         Breaking Waves' comprehensive loss was $186,161 for the six months
ended June 30, 2001 versus comprehensive income of $446,946 for the six months
ended June 30, 2000.

Hollywood

         On May 12, 1999, Shopnet incorporated a wholly-owned subsidiary,
Hollywood, to which it assigned its film production business. All film related
operations prior to May 12, 1999 were conducted by Shopnet under its former
name.

         For the six months ended June 30, 2001 and 2000, Hollywood generated no
sales from its motion picture "Dirty Laundry". Although sales prior to and
including the six months ended June 30, 2001 were minimal, the Company expects
to effect increased sales during the fiscal year ending June 30, 2002 and
thereafter as a result of the implementation of a new marketing strategy which
among other things, emphasizes the development of new marketing and distribution
arrangements for "Dirty Laundry." There can be no assurance that the Company's
new marketing and distribution strategies will be successful in generating sales
from "Dirty Laundry." Upon a review of the net realizable value of the movie
costs, management has determined that a $145,272 and $100,000 write down was
necessary as of June 30, 2001 and 2000, respectively. Accordingly, Hollywood
generated a loss of $149,270 and $100,000 for the six months ended June 30, 2001
and 2000.

         Subsequent to "Dirty Laundry," Hollywood also has invested in other
movie ventures, some of which have generated revenue to date. See "Investment in
Joint Ventures."

Shopnet.com

         For the six months ended June 30, 2001 and 2000, Shopnet generated
minimal income comprised of interest from its money market and other ancillary
revenue from its corporate office.

         Shopnet's selling, general, and administrative expense amounted to
$283,581 and $283,244 for the six months ended June 30, 2001 and 2000,
respectively. This represents an increase of $337, or less than 1%.

         The major components of the Company's expenses are as follows for the
six months ended June 30:

<TABLE>
<CAPTION>
                                                                              2001           2000
                                                                       -----------    --------------------
<S>                                                                      <C>              <C>
         Salaries  (officer and office staff) and stock
              compensation and related benefits                          $        93,454  $        105,037
         Rent                                                                     39,286            38,171
         Legal and professional fees                                              54,529            40,964
         Consulting fees                                                          15,750            17,080
         Other general corporate and administrative expenses                      80,562            81,992
</TABLE>
<PAGE>
         Shopnet generated a net loss of $285,838 and $283,692 for the six
months ended June 30, 2001 and 2000, respectively. These net losses include on a
consolidated basis amortization of goodwill of $35,476 in each period.

         Year ended December 31, 2000 as compared to the year ended December 31,
1999

Breaking Waves

         For the years ended December 31, 2000 and 1999, Breaking Waves
generated net sales of $5,713,133 and $4,756,497, respectively, with related
cost of sales amounting to $3,764,258 and $3,214,704, respectively. The increase
in sales amounting to $956,636, or approximately 20%, from 1999 to 2000 was
primarily attributable to the introduction of the new Coral Cove product line.
The gross profit for the year ended December 31, 2000 amounted to $1,948,875, or
34%, as compared to the year ended December 31, 1999 during which it amounted to
$1,541,793, or 32%.

         Selling, general, and administrative expenses during the years ended
December 31, 2000 and 1999 amounted to $1,638,809 and $1,503,993, respectively.
The increase, amounting to $134,816 or approximately 9%, is primarily
attributable to factoring and warehousing costs. As a percentage of sales,
selling, general, and administrative expenses decreased to 29% from 32% for the
years ended December 31, 2000 and 1999.

         The major components of the Breaking Waves' selling, general, and
administrative expenses are as follows for the years ended December 31:
<TABLE>
<CAPTION>

                                                                        2000                 1999
                                                              ------------------   ------------------
<S>                                                           <C>                  <C>
         Officers, office staff and
               designer salaries and related benefits         $        535,137     $       499,642
         Commission expense                                             94,489             112,475
         Warehousing costs                                             228,934             178,479
         Royalty fees                                                  171,869             173,700
         Rent expense                                                   87,690              96,404
         Factor commissions                                             56,683              50,956
         Miscellaneous general corporate
                overhead expenses                                      464,007             392,337
</TABLE>

         Interest expense in connection with its factoring agreement amounted to
$305,309 and $228,772, for the years ended December 31, 2000 and 1999,
respectively. The increase is due to the increase in sales.

         In November 1998, Breaking Waves purchased 1,400,000 shares of Play Co.
Toys & Entertainment Corp. ("Play Co.") for a total of $504,000 comprised of
$300,000 in cash and by shipping $204,000 in merchandise. After the purchase,
Breaking Waves owned 25.4% of the outstanding common stock of Play Co.

         For the year ended December 31, 1999, Breaking Waves recognized
$994,305 of equity loss (non-cash loss) in Play Co. in connection with the
equity method of accounting.
<PAGE>
         During the year ended December 31, 2000, certain Play Co. preferred
shareholders converted their Series E Convertible Preferred Stock into Play Co's
common stock thereby diluting Breaking Waves ownership interest in Play Co. The
percentage ownership of Breaking Waves' investment was diluted to approximately
1.5% as of December 31, 2000. Breaking Waves accounted for its investment in
Play Co. in accordance with the equity method of accounting to the point it
maintained at least a 20% ownership interest. Once its investment was below 20%,
Breaking Waves accounted for the investment in accordance with the cost method
of accounting which valued the investment at $-0- due to the prior equity losses
in Play Co.'s operations. In accordance with SFAS No. 115 "Accounting for
certain investments in debt and equity securities," since such securities are
classified as available for sale, the value of such investment was revalued and
recorded at the fair market value which was approximately $108,000 as of
December 31, 2000. Accordingly, Breaking Waves recorded an unrealized gain of
approximately $108,000 for the year ended December 31, 2000, which has been
recorded as a component of comprehensive income (loss) in the statements of
operations.

         Breaking Waves generated a net income (loss) of $663 and ($1,025,449),
for the years ended December 31, 2000 and 1999, respectively. The net loss
generated for the year ended December 31, 1999 includes an equity loss (non -
cash loss) of $994,305 from Play Co.

         Breaking Waves' comprehensive income was $108,613 for the year ended
December 31, 2000 versus a comprehensive (loss) of $1,025,449 for the year ended
December 31, 1999. The comparisons of the comprehensive net income (loss) for
the two years excluding the affect of the investment in Play Co. are $663 for
2000 and ($31,144) for 1999.

Hollywood

         On May 12, 1999, Shopnet incorporated a wholly-owned subsidiary,
Hollywood, to which it assigned its film production business. All film related
operations prior to May 12, 1999 were conducted by Shopnet under its former
name.

         For the years ended December 31, 2000 and 1999, Hollywood generated no
sales from its motion picture "Dirty Laundry". Although sales prior to, and
including, the year ended December 31, 1999 were minimal, the Company expects to
effect increased sales during 2001 and thereafter as a result of a new marketing
strategy which, among other things, emphasizes the development of new marketing
and distribution arrangements for "Dirty Laundry." There can be no assurance
that the Company's new marketing and distribution strategies will be successful
in generating sales from "Dirty Laundry." Upon a review of the net realizable
value of the movie costs, management determined that a $308,564 and $261,000
write down was necessary as of December 31, 2000 and 1999, respectively.
Accordingly, Hollywood generated a loss of $314,064 and $265,153 for the years
ended December 31, 2000 and 1999, respectively. Subsequent to "Dirty Laundry,"
Hollywood also has invested in other movie ventures, none of which have
generated revenue to date. See "Investment in Joint Ventures."
<PAGE>
Shopnet.com

         For the years ended December 31, 2000 and 1999, Shopnet generated
minimal income comprised of interest from its money market and other ancillary
revenue from its corporate office.

         Shopnet's selling, general, and administrative expense amounted to
$554,434 and $630,014 for the years ended December 31, 2000 and 1999,
respectively. This represents a decrease of $75,580, or approximately 12%.

         The major components of the Company's expenses are as follows for the
years ended December 31:
<TABLE>
<CAPTION>

                                                                                2000                 1999
                                                                         ---------------       -----------
<S>                                                                      <C>                 <C>
         Salaries  (officer and office staff) and stock
              compensation and related benefits                          $       192,135     $     231,631
         Rent                                                                     76,234            74,907
         Legal and professional fees                                              99,610            61,634
         Consulting fees                                                          27,080            45,824
         Other general corporate and administrative expenses                     159,375           204,018
</TABLE>

         Shopnet generated a net loss of $593,575 and $685,477 after an income
tax (benefit) expense of ($8,140) and $53,369 for the years ended December 31,
2000 and 1999, respectively. Those net losses include on a consolidated basis
amortization of goodwill of $70,952 in each year. The income tax expense in
1999 was primarily a result of an increase in the valuation allowance associated
with some of the Company's federal net operating losses. The Company has a
consolidated net operating loss carryforward of approximately $2,148,000 for
federal tax purposes which is expected to be utilized in the future as a result
of filing consolidated federal income taxes with its subsidiaries, Breaking
Waves and Hollywood.

Liquidity and Capital Resources

         At June 30, 2001, the Company's consolidated working capital amounted
to $159,203. The Company anticipates that its current available cash will be
sufficient for the next twelve months and does not anticipate any cash
shortfalls. Breaking Waves' ownership interest in Play Co. amounted to
approximately 1.5% as of June 30, 2001 as evidenced by the 1,270,000 shares of
common stock it currently owns. As of June 30, 2001, Breaking Waves' investment
in Play Co. decreased to $6,350 based on the fair market value of its common
stock holdings. On March 28, 2001, Play Co. and certain of its subsidiaries all
filed for protection under Title 11 of the United States Code with the United
States Bankruptcy Court for the Southern District of New York. In August 2001,
the case was converted to a Chapter 7 filing.

         The Company considers highly liquid investments with maturities of
three months or less at the time of purchase to be cash equivalents. Included in
cash are certificates of deposit of approximately $750,000. The Company
maintains cash deposits in accounts which are in excess of Federal Deposit
Insurance Corporation limits by approximately $665,000. The Company believes
that such risk is minimal. The Company maintains a letter of credit with a
financial institution as a condition of its factoring agreement. The financial
institution initially required the Company to maintain $1,150,000 as collateral
for the letter of credit. In September 2001, this was increased to 1,450,000. At
June 30, 2001, the $750,169 of the Company's certificates of deposit represented
a portion of the $1,150,000 required collateral. Subsequent to September 15,
2001, approximately $400,000 of the Company's certificates of deposit
represented a portion of the $1,450,000 required collateral.
<PAGE>
         In addition, during 1999, Breaking Waves was required to transfer a
$200,000 cash deposit to its factoring agent as additional collateral.
Accordingly, both cash amounts are designated as restricted.

         For the six months ended June 30, 2001 and 2000 and for the years ended
December 31, 2000 and 1999, the Company reported consolidated net income (loss)
of ($519,669),($203,446), ($906,976) and ($1,976,079) after an income tax
(benefit) provision of ($456), $10,970, ($6,004) and $12,273 and a comprehensive
net (loss) income of ($621,269), $63,254, ($799,026), and ($1,976,079),
respectively.

Investment in Joint Ventures

         Battle Studies Productions, LLC

         In April 1998, the Company entered into a co-production agreement with
North Fork for "Machiavelli Rises." The Company and North Fork formed Battle
Studies to finance, produce and distribute the film. Battle Studies will be
treated as a joint venture in order to co-produce motion pictures and to finance
the costs of production and distribution of such motion pictures. The joint
venture retains all rights to the motion pictures, the screenplays, and all
ancillary rights attached thereto. Total production costs to date have
aggregated approximately $425,000 of which the Company has funded approximately
$218,500. In accordance with the terms of the co-production agreement, the
proceeds of the film will be distributed as follows: first, both parties shall
be entitled to recoup their initial investment in the film, at 135% thereof;
then, after repayment to the respective parties of additional costs incurred by
same, any remaining proceeds shall be distributed 50% to North Folk and 50% to
the Company. The film was shown in January 1999 in both New York and at the
Brussels Film Festival.

         The Company accounts for the investment in Battle Studies on the equity
method. For the six months ended June 30, 2001 and 2000 and for the years ended
December 31, 2000 and 1999, the Company recorded $1,473, $-0-, $4,290 and $-0-,
respectively, equity losses for its proportionate share of Battle Studies. No
revenues have been derived from this film as of June 30, 2001 and December 31,
2000.

         On October 12, 2000, Battle Studies entered into a distribution
agreement with Raven Pictures International ("Raven Pictures") to distribute
Battle Studies' motion picture ("Machiavelli Rises") to foreign countries.
Battle Studies has granted rights under the agreement for the theatrical, video,
non-theatrical and television markets. The term of the agreement is for twenty -
four months for all portions of territory outside of the United States and
English speaking Canada. Battle Studies expects to realize 75% (which is net of
a 25% fee to Raven Pictures) of the expected estimated gross revenue derived
from foreign countries less $20,000 for marketing and advertising expenses.
<PAGE>
         On January 17, 2001, Battle Studies entered into a distribution
agreement with KOAN, to distribute and promote Battle Studies' motion picture
("Machiavelli Rises") in the United States and Canada. Battle Studies has
granted rights under the agreement for Free TV, pay TV, cable, satellite, video
and DVD markets. The terms of the agreement is for twenty - four months and it
will be automatically renewed unless KOAN receives a letter of cancellation at
least thirty days prior to the date of termination or if sales have not exceeded
$250,000 over the twenty - four month period. Battle Studies expects to realize
70% (which is net of a 30% fee to KOAN) of the expected estimated gross revenues
derived from the United States and Canada less $5,000 per year for promotional
costs.

         The Girl, LLC

         Pursuant to an agreement dated July 1, 1999 with ALF for the production
of a film entitled "The Girl," Hollywood invested through June 30, 2001 $35,000
for a 22.533% interest in a new entity, The Girl, LLC, a limited liability
company ("Girl LLC"). In return for its participation in Girl LLC, Hollywood
shall be entitled to receive a non-contested, non-dilutable 22.533% ownership
interest in Girl LLC, a recoupment of its investment on no less favorable terms
than any other investor and 22.533% of 100% of any contingent compensation which
shall be actually received by Girl LLC. Girl LLC retains all rights to the
motion pictures, the screenplays, and all ancillary rights attached thereto.
"The Girl" is completed and has been exhibited at several film festivals. Girl
LLC is in the process of attempting to secure video and foreign distribution
arrangements for the film.

         Hollywood accounts for the investment in Girl LLC under the equity
method. As of June 30, 2001, the Company has recorded its investment at $33,702.
This represents its initial investment of $35,000 less $1,298 of equity loss for
its proportionate share of Girl LLC.

Factoring Arrangements

         CIT Group

         On August 20, 1997, Breaking Waves entered into a factoring and
revolving inventory loan and security agreement (as amended December 9, 1998)
with CIT Group (formerly, Heller Financial, Inc. "CIT") to sell their interest
in all present and future receivables without recourse. Breaking Waves paid CIT
a factoring commission of .85% of the first $5,000,000 of receivables sold and
 .65% of receivables sold in excess of $5,000,000 for each year. Breaking Waves
took advances of up to 85% of the receivable, with interest at the rate of 1
3/4% over prime. In connection with the factoring agreement, the Company agreed
to maintain $1,150,000 of cash in a segregated account in order to collateralize
standby letters of credit. In addition, during 1999, the Company was required to
transfer an additional $200,000 of cash as collateral for the standby letter of
credit. Interest expense related to this agreement totaled $204,821 and $228,772
for the years ended December 31, 2000 and 1999, respectively. As of June 30,
2001 and December 31, 2000, the net due to Breaking Waves from CIT amounted to
$-0- and $312, respectively. On or about September 12, 2000 the agreement with
CIT was cancelled and a new factoring agreement was entered into with Century
Business Credit Corporation ("Century").
<PAGE>
         Century Business Credit Corporation

         On or about September 12, 2000, Breaking Waves entered into a factoring
and revolving inventory loan and security agreement with Century to sell their
interest in all present and future receivables without recourse. Breaking Waves
submits all sales offers to Century for credit approval prior to shipment, and
pays a factoring commission of .75% of receivables sold. Century retains from
the amount payable to Breaking Waves a reserve for possible obligations such as
customer disputes and possible credit losses on unapproved receivables. Breaking
Waves may take advances of up to 85% of the receivables, with interest at the
rate of 1 3/4% over prime. In connection with the factoring agreement, the
Company agreed to maintain $1,150,000 of cash in a segregated account in order
to collateralize standby letters of credit for Breaking Waves. Additionally,
Breaking Waves was required to pledge as additional collateral $200,000 of its
own cash and its investment in Play Co. which is represented by 1,270,000 shares
of Play Co.'s common stock. In September 2001, Century required the Company to
increase the amount of collateralized standby letters of credit by $300,000,
raising such amount to $1,450,000.

         To date, standby letters of credit in the aggregate amount of
$1,050,000 secured by assets of third parties have been provided to the Company.
This has enabled the Company to reduce the amount of cash in the segregated
account, enabling it to utilize such funds for operations. Such assets are
available to Breaking Waves for a ten year term, subject to earlier termination
in the event of default. Breaking Waves is obligated to make an annual payment
to each of the two entities which provided such assets, equal to an aggregate of
1-1/4% of net sales of Breaking Waves through June 30, 200l, and an aggregate of
1-3/4% of net sales of Breaking Waves for each year the letter of credit is
available thereafter, payable 45 days after the end of each fiscal quarter. On
the closing date, such entities received funds in the aggregate amount of
$36,750 reflecting advance payment of such amounts. See "Certain Relationships
and Related Transactions" for a more complete description of such transactions
and the Company's related financial obligations.

         In September 2001, the Company and Breaking Waves retained Arc
Financial Corp. ("ARC") , a British Virgin Islands company, for a ten year term
to provide financial consulting services. Pursuant to the terms of a consulting
agreement ("Arc Consulting Agreement"), ARC was retained to assist the company
in the acquisition of financing to acquire inventory and for other corporate
purposes ("Financing"), as well as consult with the Company with regard to its
ongoing operations, including systems to control expenses, methods to enhance
and promote sales of Breaking Waves' products and improving production. Pursuant
to the terms of the Arc Consulting Agreement, the Company and Breaking Waves
agreed to compensate Arc (i) an annual fee of $20,000 ("Base Fee") and (ii) a
percentage of annual net sales in the amount of 1-1/4% through June 30, 2001 and
1-3/4% of net sales for each year of the term thereafter ("ARC Percentage Fee"),
payable 45 days after the closing of each fiscal quarter. On the closing date of
the financing of the assets in the amount of $1,050,000, ARC received (i) a lump
sum payment of $209,000 reflecting full advance payment of the Base Fee and (ii)
$36,750 reflecting advance payment of the Arc Percentage Fee. The Company and
Breaking Waves are entitled to terminate the ARC Consulting Agreement any time
after September 30, 2006, in which event all prepaid fees are forfeited.

         Interest expense related to the factoring agreement totaled $256,429
and $100,488 for the six months ended June 30, 2001 and for the year ended
December 31, 2000, respectively. Century has a continuing interest in Breaking
Waves' inventory as collateral for the advances. As of June 30, 2001 and
December 31, 2000, the net advances to Breaking Waves from Century amounted to
$1,700,337 and $3,165,597.
<PAGE>
Capital Lease Obligations

         During 1998, the Company acquired computer equipment and proprietary
software for its subsidiary, Breaking Waves, pursuant to the following terms and
conditions:

         On August 13, 1998, the Company acquired various computer and related
components for $28,583 by entering into a capital lease obligation with interest
at approximately 9.2% per annum, requiring 48 monthly payments of principal and
interest of $762. The lease is secured by the related computer equipment.

         On September 13, 1998, the Company acquired proprietary software for
$32,923 by entering into a capital lease obligation with interest at
approximately 10.9% per annum, requiring 48 monthly payments of principal and
interest of $850. The lease is secured by the related software.


Lease Commitments

         The Company's executive offices are located at 14 East 60th Street,
Suite 402, New York, New York 10022, (212) 688-9223, compromising approximately
1,800 square feet. The Company leased its office space in November 1996 for a
term of five years, at an approximate base annual rental of $70,000. Upon the
lease's expiration on November 30, 2001, the executive offices will relocate to
Breaking Waves' facilities described below.

         Breaking Waves maintains its executive offices and showroom at 112 West
34th Street, New York, New York 10120. Until January 1998, this space was
approximately 1,000 square feet and compromised only office space. In January
1998, Breaking Waves amended its lease and rented an additional 1,000 square
feet. The lease is for a term of seven years, expiring December 2004, at an
annual rental of $71,600. In July 2001, Breaking Waves terminated this lease,
effective August 31, 2001. A new 6-year lease for an aggregate of 2,200 square
feet expiring September 30, 2007 was signed, which becomes effective on November
1, 2001, or such later date as the landlord of such premises completes
construction. Annual rent under the new lease is $84,915 through December 31,
2004 and $95,760 for the remainder of the lease. Breaking Waves also maintains a
Florida office, comprising approximately 780 square feet, with annual payments
of approximately $11,000.

License Agreements

         On October 16, 1995, Breaking Waves entered into a license agreement
with Beach Patrol, Inc. Pursuant to the licensing agreement, Breaking Waves was
given the right to use certain designs for its children's line under the "Daffy
Waterwear" label from January 1, 1996 to June 30, 1998. Thereafter, the
agreement provided for a three year extension, at the option of Breaking Waves,
through and until June 30, 2001. Breaking Waves has exercised this option,
thereby extending the agreement. The agreement calls for minimum annual
royalties of $75,000 to $200,000 over the life of the agreement with options
based on sales levels from $1,000,000 for the first year to $4,000,000 in the
sixth year. Breaking Waves has negotiated an additional two year extension
thereby extending the agreement through and until June 30, 2003, and it contains
a provision for an additional two year extension, at the option of Breaking
<PAGE>
Waves, through and until June 30, 2005. The new agreement signed February 28,
2001 and effective July 1, 2001 calls for minimum annual royalties of $50,000 to
$87,500 over the life of the extension with options based on sales levels from
$1,000,000 for the seventh year to $1,750,000 in the tenth year. Breaking Waves
recorded royalties and advertising under this agreement totaling $150,000,
$99,113, $163,009 and $162,501 during the six months ended June 30, 2001 and
2000 and during the years ended December 31, 2000 and 1999, respectively.

         On October 31, 1996, Breaking Waves entered into a license agreement
with North-South Books, Inc. for the exclusive use of certain artwork and text
in the making of swimsuits and accessories in the United States and Canada. The
agreement expired on March 1, 1999. Breaking Waves recorded royalties totaling
$784 under this agreement during the year ended December 31, 1999.

         On October 17, 1997, Breaking Waves entered into a license agreement
with Kawasaki Motors Corp., U.S.A. with an effective date of July 1, 1997 for
the exclusive use of certain trademarks in the making of swimwear in the United
States. The fee for the exclusive use of certain trademarks is five percent (5%)
of net sales. The agreement expired May 31, 1999 and was not renewed. Breaking
Waves recorded royalties under this agreement totaling $10,415 during the year
ended December 31, 1999.

         During June 2000, Breaking Waves entered into a license agreement with
an effective date of November 1, 2000 with Gottex Models Ltd., an Israeli
Corporation and Gottex Models (USA) Corp., a New York corporation for the use of
the trademark "Gottex" in the United States of America for children's swimwear.
The agreement calls for a royalty fee of 7% of net sales with guaranteed minimum
annual royalties of $70,000 to $140,000 over the life of the agreement, subject
to certain exceptions. The license agreement also requires the Company to expend
certain minimum amounts on advertising each year. The license agreement is for a
term of three years, subject to earlier termination in accordance with its
terms. Breaking Waves recorded royalties under this agreement totaling $26,610
and $8,859 for the six months ended June 30, 2001 and for the year ended
December 31, 2000, respectively.


ITEM 7. FINANCIAL STATEMENTS

     See attached Financial Statements.

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

     Not Applicable.



<PAGE>
PART III

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

Officers and Directors

         The following table sets forth the names, ages, and titles of all
directors and officers of the Company:
<TABLE>
<CAPTION>

         Name                               Age                  Position

<S>                                         <C>                  <C>
         Harold Rashbaum                    73                   President, CEO, and Director

         Jeanne Falletta                    43                   Secretary and Director

         Alain Le Guillou, M.D.             43                   Director

         James B. Frakes                    44                   Director

         Michael Friedland                  63                   Director

         Debra Riggs                        47                   Director

</TABLE>

         The Directors of the Company are elected annually by the stockholders,
and the Officers of the Company are appointed annually by the Board of
Directors. Vacancies on the Board of Directors may be filled by the remaining
Directors. Each current Director and Officer will hold office until the next
annual meeting of stockholders or until his successor is elected and qualified.
The outside Directors do not receive a Director's fee for their participation as
Directors. The outside Directors are Alain Le Guillou, M.D. (Until recently
Harold Rashbaum was the father-in-law of Alain Le Guillou, M.D.), James B.
Frakes and Debra Riggs. The Corporation does not have key man insurance on the
lives of any of its Officers or Directors.

         As permitted under the Delaware General Corporation Law, the Company's
Certificate of Incorporation eliminates the personal liability of the directors
to the Company or any of its shareholders for damages caused by breaches of said
directors' fiduciary duties. As a result of such provision, shareholders may be
unable to recover damages against directors for actions which constitute
negligence or gross negligence or are in violation of their fiduciary duties.
This provision in the Company's Certificate of Incorporation may reduce the
likelihood of derivative and other types of shareholder litigation against
directors.
<PAGE>
        Harold Rashbaum, age 73, has been the President, Chief Executive Officer
and a Director of the Company since January 1997.  Since  September 1996, he has
also been the President,  Secretary,  and sole Director of Breaking Waves,  Inc.
("Breaking Waves"), a New York company which is a wholly-owned subsidiary of the
Company.  From May 1996 to January 1997,  Mr.  Rashbaum  served as Secretary and
Treasurer  of the  Company.  Since  September  1996,  Mr.  Rashbaum has been the
Chairman of the Board of Directors of Play Co. Toys & Entertainment Corp. ("Play
Co."), a public entity whose Common Stock,  Series E Stock and Series E Warrants
are  quoted  on the  over-the-counter  market  on the OTC  Bulletin  Board.  Mr.
Rashbaum was a management consultant to Play Co. from July 1995 to September 10,
1996.  In May 1998,  he was  elected as a Director of Toys  International,  Inc.
("Toys"),  a majority-owned  subsidiary of Play Co. whose Common stock is traded
on the SMAX segment of the Frankfurt  Stock  Exchange.  On March 28, 2001,  Play
Co., Toys and Play Co. Toys Canyon  Country,  Inc. ("Play Co. Toys Canyon") each
filed for  protection  under Title 11 of the United  States Code with the United
States  Bankruptcy Court for the Southern  District of New York. In August 2001,
the case was converted to a Chapter 7 filing.  Since February 1996, Mr. Rashbaum
has also been the  President  and a Director  of H.B.R.  Consultant  Sales Corp.
("HBR"), of which his wife is the sole shareholder.

         Jeanne Falletta, age 43, was elected a director of the Company in May
2000 and has been its Secretary since February 2000. Since October 1997, Ms.
Falletta has been the controller of Breaking Waves where she has been employed
since February 1997, initially having been hired as a bookkeeper. From January
1996 to February 1997, Ms. Falletta consulted with various companies as a
freelance accountant.

         Alain Le Guillou, M.D., age 44, has been a Director and a consultant of
the Company since 1996. Since July 1995, Dr. Le Guillou has been a doctor of
pediatrics at Montefiore Medical Group.  Until recently,  Dr. Le Guillou was the
son-in-law of Harold Rashbaum.

         James Frakes, age 45, has been a Director of the Company since January
1998 and was appointed Chairman of the Company's Audit Committee in June 2000.
Since May 2001, Mr. Frakes has been Chief Financial Officer of NTN
Communications, Inc. a public company whose common stock trades on the American
Stock Exchange, Inc. From July 1997 to May 2001, Mr. Frakes served as Chief
Financial Officer and Secretary of Play Co. In August 1997, he was elected as a
Director of Play Co. In January 1998, Mr. Frakes was appointed Secretary and
Chief Financial Officer of Toys. He was elected as a Director of Toys in May
1998. On March 28, 2001, Play Co., Toys and Play Co. Toys Canyon each filed for
protection under Title 11 of the United States Code with the United States
Bankruptcy Court for the Southern District of New York. In August 2001, the case
was converted to a Chapter 7 filing. From June 1990 to March 1997, Mr. Frakes
was Chief Financial Officer of Urethane Technologies, Inc. ("UTI") and two of
its subsidiaries, Polymer Development Laboratories, Inc. ("PDL") and BMC
Acquisition, Inc. These were specialty chemical companies, which focused on the
polyurethane segment of the plastics industry. Mr. Frakes was also Vice
President and a Director of UTI during this period. In March 1997, three
unsecured creditors of PDL filed a petition for the involuntary bankruptcy of
PDL. From 1985 to 1990, Mr. Frakes was a manager for Berkeley International
Capital Corporation, an investment banking firm specializing in later stage
venture capital and leveraged buyout transactions.
<PAGE>
         Michael Friedland, age 63, has been a Director of the Company since May
2000. Mr. Friedland has been the Vice President of Design, Marketing and Sales
of Breaking Waves since its inception in 1991. Mr. Friedland has over 40 years
experience in the children's swimwear industry. Prior to joining Breaking Waves,
Mr. Friedland co-founded Making Waves, Inc., a manufacturer of children's
swimwear.

         Debra Riggs, age 46, has been a Director of the Company since June 2000
when she was also appointed to the Company's Audit Committee. In September 2001,
Ms. Riggs joined Premier Food Services Incorporated as a branch controller. Ms.
Riggs was the Controller of Play Co. since February, 1999 until September 2001.
On March 28, 2001, Play Co., Toys and Play Co. Toys Canyon each filed for
protection under Title 11 of the United States Code with the United States
Bankruptcy Court for the Southern District of New York. In August 2001, the case
was converted to a Chapter 7 filing. From June, 1998 through January, 1999, Ms.
Riggs was Controller of National Customer Engineering, a private company. Prior
to NCE, Ms. Riggs was Assistant Controller of Factory 2-U Inc., a public company
with over 200 retail stores in the business of selling discount clothing.

Compliance with Section 16(A) of the Exchange Act

         Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires the Company's officers, directors, and persons who beneficially own
more than ten percent of a registered class of the Company's equity securities
to file reports of securities ownership and changes in such ownership with the
SEC. Officers, directors, and greater than ten percent beneficial owners also
are required by rules promulgated by the Securities and Exchange Commission
("SEC") to furnish the Company with copies of all Section 16(a) forms they file.

         No person ("a Reporting Person") who during the six months ended June
30, 2001 was a director, officer, or beneficial owner of more than ten percent
of the Company's Common Stock which is the only class of equity securities of
the Company registered under ss.12 of the Securities Exchange Act of 1934, as
amended, failed to file on a timely basis reports required by ss.16 of the Act
except that, to the Company's knowledge, each of Mr. Michael Friedland and Ms.
Falletta and Riggs, all directors of the Company, filed their Forms 3 late in
March 2001. In addition, to the Company's knowledge, Mr. Rashbaum and Mr. Di
Milia (a former officer of the Company) did not file Forms 4 or Forms 5, and EVC
did not file a Form 5 for the year ended December 31, 1999. The foregoing is
based solely upon a review by the Company of (i) Forms 3 and 4 during the most
recent fiscal year as furnished to the Company under Rule 16a-3(e) under the
Act, (ii) Forms 5 and amendments thereto furnished to the Company with respect
to its most recent fiscal year, and (iii) any representation received by the
Company from any reporting person that no Form 5 is required, except as
described herein.
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION


Summary of Cash And Certain Other Compensation

         The following table provides certain information concerning all Plan
and Non-Plan (as defined in Item 402 (a)(ii) of Regulation S-B) compensation
awarded to, earned by, or paid to the named executive officer during the periods
ended December 31, 2000, 1999 and 1998 and the six month period ended June 30,
2001.
<TABLE>
<CAPTION>

                           SUMMARY COMPENSATION TABLE

                                          Annual Compensation                         Long-Term Compensation
                                                                           Awards                      Payouts
                                                         Other                       Securities
                                                         Annual       Restricted     Underlying                   All Other
                                                         Compen-      Stock          Options/        LTIP         Compen-
Name and Principal                 Salary      Bonus     sation       Award(s)       SARs            Payouts      sation
Position                  Year     ($)         ($)       ($)          ($)            (#)             ($)          ($)
<S>                       <C>      <C>         <C>       <C>          <C>            <C>             <C>          <C>
Harold Rashbaum
  President,  CEO,
  And Director            2000     160,000     --        --           --             --              --           --
                          1999     162,000     --        --           --             44,000(1)       --           --
                          1998     156,000     --        --           --             --              --           --
========================= ======== =========== ========= ============ ============== =============== ============ ============
</TABLE>

(1)  Represents an aggregate of 44,000 shares of Common Stock underlying options
     exercisable at $1.38 per share, granted in April 1999.
(2)  Mr. Rashbaum received $70,000 of salary during the six month period ended
     June 30, 2001.

Stock Options

         The following table contains information regarding options to purchase
Common Stock held at June 30, 2001 and December 31, 2000 by the Company's
executive officer named in the Executive Compensation Table above.

<TABLE>
<CAPTION>

===============================================================================================================================
                                   AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
                                              FISCAL YEAR END OPTION VALUES
--------------------------------------------------------- --------------------------------- -----------------------------------

                                                          Number of Securities Underlying   Value of Unexercised In-the-Money
                                                           Unexercised Options at Fiscal        Options at Fiscal Year End
                                                                      Year End
                             Shares
                           Acquired on      Value
           Name              Exercise      Realized       Exercisable     Unexercisable     Exercisable      Unexercisable
------------------------- --------------- --------------- ---------------- ---------------- ---------------- ------------------

<S>                            <C>              <C>         <C>                 <C>               <C>               <C>
     Harold Rashbaum           (1)              (1)         132,000(2)           --               (3)               --

========================= =============== =============== ================ ================ ================ ==================
</TABLE>
<PAGE>
     (1) No options  were  exercised in the six month period ended June 30, 2001
or the years ended December 31, 1999 or 2000.

     (2)  Represents  an aggregate of 88,000  shares of Common Stock  underlying
options granted in March 1997 under the Company's  Senior  Management  Incentive
Plan,  currently  exercisable  at $1.46 per share,  and an  aggregate  of 44,000
shares of Common  Stock  underlying  options  granted in April  1999,  currently
exercisable at $1.38 per share.

     (3) The options had no value at either June 30, 2001 or December  31, 2000,
since as of such dates the aggregate  exercise price of the options exceeded the
aggregate  market value of the  underlying  shares  (based on the closing  sales
prices of the Company's Common Stock.)

Employment and Consulting Agreements

ShopNet.com, Inc.

         Before he became an officer and director of the Company, Harold
Rashbaum provided consulting services to the Company through HBR, a company of
which he is an officer and director and of which his wife is the sole
shareholder. HBR entered into an oral consulting agreement with the Company
whereby it will receive 5% of the net profits received by the Company from the
distribution of "Dirty Laundry." To date, HBR has not received any fees as a
result of the distribution of "Dirty Laundry" not generating any net profits.
See "Certain Relationships and Related Transactions."

Breaking Waves, Inc.

         In November 1996, Breaking Waves entered into employment agreements
with each of Malcolm Becker and Michael Friedland; these agreements expired in
November 1999. The agreements initially provided that Messrs. Becker and
Friedland each would be compensated at a salary of $110,000 per annum during the
term of his agreement and that each would be issued restricted shares of Common
Stock, subject to a vesting schedule, annually during the term of his agreement.

         In November 1996, 3,667 shares of the Company's Common Stock were
issued to each of Messrs. Becker and Friedland, subject to the vesting schedule.
In November 1997, 15,888 shares of the Company's Common Stock were issued to
each of Messrs. Becker and Friedland, subject to the aforesaid vesting schedule.

         In January 1998, Mr. Friedland's employment agreement was amended to
provide for an increase in salary to $130,000 per annum, and Mr. Becker's
employment agreement was amended to reflect a reduction in the amount of time
Mr. Becker would be required to devote to the business of Breaking Waves, a
concomitant reduction in salary to $60,000 per annum, and a reduction in the
number of shares of Common Stock to be issued. In January 1999, Mr. Becker's
employment agreement was further amended to reflect an increase in the amount of
time Mr. Becker would be required to devote to the business of Breaking Waves
and a concomitant increase in salary to $70,000 per annum.

         In each of May and November 2000, pursuant to their respective
employment agreements, Messrs. Becker and Friedland received their final share
issuances. Mr. Becker received an aggregate of 91,289 shares of Common Stock,
45,644 in May 2000 and 45,645 in November 2000. Mr. Friedland received an
aggregate of 167,365 shares of Common Stock, 83,683 in May 2000 and 83,683 in
November 2000. Messrs. Becker and Friedland each granted an option to BBC
<PAGE>
Capital Corp. ("BBC"), of which Ilan Arbel is President, to purchase an
aggregate of 76,074 shares of common stock in the case of Mr. Becker and 139,471
shares in the case of Mr. Friedland, at an exercise price of $4.50 per share.
Such options expired to the extent of 1/2 of the underlying shares on May 27,
2001. The balance of the options scheduled to expire in November 2001 were
terminated by BBC in August 2001.

         Breaking Waves entered into a one-year consulting agreement in August
2000 with Larry Nash, Inc. ("Consultant") a New York corporation, whereby Mr.
Nash, the Consultant's sole stockholder provides sales and consulting services
in connection with Breaking Waves' Gottex line. Mr. Nash has provided similar
services for the past twelve years with another company for which he represented
the Gottex children's swimwear line. The agreement is automatically extended
from year to year thereafter unless cancelled by either party on thirty (30)
days' prior written notice. Pursuant to such agreement, the Consultant is
compensated a percentage of net sales (as such term is defined) on all orders
exclusively procured by him, ranging from 2.5 to 5%. He is entitled to
additional compensation ranging from 1.5% to 3% of net sales for the Coral Cove,
Gottex and Breaking Waves lines, generated by Company sales personnel he
introduces to the Company.

         See "Management's Discussion and Analysis or Plan of
Operations--Factoring Agreements-Century Business Credit Corporation" for a
description of the Arc Consulting Agreement.

Senior Management Incentive Plan

General

         In May 1996, the Board of Directors adopted the Senior Management
Incentive Plan (the "Management Plan") which was adopted by shareholder consent.
The Management Plan provides for the issuance of an aggregate of 750,000 shares
of Common Stock in connection with the issuance of stock options and other stock
purchase rights to executive officers, key employees, and consultants.

         The Management Plan was adopted to provide the Board of Directors with
sufficient flexibility regarding the forms of incentive compensation which the
Company will have at its disposal for rewarding executive officers, employees,
and consultants (of either the Company or a subsidiary of same) who render
significant services to the Company or its subsidiary with equity in the Company
through the grant of stock options and other rights. The Management Plan was
adopted to enable the Company to attract and retain qualified personnel without
unnecessarily depleting the Company's cash reserves (by offering those persons
who provide significant services a personal interest in the Company's growth and
success) and to augment the Company's existing compensation programs.

         The Management Plan is intended also to help the Company attract and
retain key executive management personnel whose performance is expected to have
a substantial impact on the Company's long-term profit and growth potential by
encouraging and assisting those persons to acquire equity in the Company. It is
contemplated that only persons who perform services of special importance to the
Company will be eligible to participate under the Management Plan. A total of
shares of Common Stock have been reserved for issuance under the Management
Plan. It is anticipated that awards made under the Management Plan will be
subject to three-year vesting periods, although the vesting periods are subject
to the discretion of the Administrator (as defined below).
<PAGE>
         The Management Plan is to be administered by the Board of Directors or
a committee of the Board if one is appointed for this purpose (the Board or such
committee, as the case may be, will be referred to in the following description
as the "Administrator"). Members of the Board of Directors who are eligible for
awards or have been granted awards may not vote on any matters affecting the
administration of the Management Plan or the grant of any award thereunder.
Subject to the specific provisions of the Management Plan, the Administrator
will have the discretion to determine the recipients of the awards, the nature
of the awards to be granted, the dates such awards will be granted, the terms
and conditions of awards, and the interpretation of the Management Plan, except
that any award granted to any employee of the Company who is also a director of
the Company will also be subject - in the event the Administrator of such plan
at the time such award is proposed to be granted does not satisfy the
requirements regarding the participation of "disinterested persons" set forth in
Rule 16b-3 ("Rule 16b-3") promulgated under the Securities Exchange Act of 1934,
as amended (the "Exchange Act") - to the approval of an auxiliary committee
consisting of not less than three individuals (all of whom qualify as
"disinterested persons" as defined under Rule 16b-3. In the event the Board of
Directors deems the formation of an auxiliary committee impractical, the Board
is authorized to approve any award under the Management Plan. As of the date
hereof, the Company has not yet determined who will serve on such auxiliary
committee, if one is required. The Management Plan generally provides that
unless the Administrator determines otherwise, each option or right granted
under the plan will become exercisable in full upon certain "change of control"
events as described therein.

         If any change is made in respect of the Common Stock subject to the
Management Plan or subject to any right or option granted under the Management
Plan (through merger, consolidation, reorganization, recapitalization, stock
dividend, or dividend in property other than cash, stock split, liquidating
dividend, combination of shares, exchange of shares, change in corporate
structure, or otherwise), the Administrator will make appropriate adjustments to
the Management Plan and the number of shares and price per share of Common Stock
subject to outstanding rights or options. Generally, the Management Plan may be
amended by action of the Board of Directors except that any amendment which
would change the class of securities subject to the plan, increase the total
number of shares subject to such plan, extend the duration of such plan,
materially increase the benefits accruing to participants under such plan, or
change the category of persons who can be eligible for awards under such plan
must be approved by the affirmative vote of the owners of a majority of the
Common Stock entitled to vote. The Management Plan permits awards to be made
thereunder until November 2004.

         Directors who are not otherwise employed by the Company will not be
eligible for participation in the Management Plan. The Management Plan provides
for four types of awards: stock options, incentive stock rights, stock
appreciation rights (including limited stock appreciation rights), and
restricted shares.

Incentive Stock Options ("ISOs" and "non-ISOs")

         The Management Plan may be either incentive stock options which qualify
as such under the Internal Revenue Code ("ISOs") or options which do not qualify
under the Internal Revenue Code as ISOs ("non-ISOs"). ISOs may be granted at an
option price of not less than 100% of the fair market value of the Common Stock
on the date of grant except that an ISO granted to any person who owns Common
Stock representing more than 10% of the total combined voting power of all
classes of Common Stock of the Company ("10% Shareholder") must be granted at an
<PAGE>
exercise price of at least 110% of the fair market value of the Common Stock on
the date of the grant. The exercise price of non-ISOs may not be less than 85%
of the fair market value of the Common Stock on the date of grant. The
Administrator will determine the exercise period of the options granted which
shall be no less than one year from the date of grant. Non-ISOs may be
exercisable for a period of up to 13 years from the date of grant. ISOs granted
to persons other than 10% Shareholders may be exercisable for a period of up to
10 years from the date of grant; ISOs granted to 10% Shareholders may be
exercisable for a period of up to five years from the date of grant. The
aggregate fair market value (determined at the time an ISO is granted) of shares
of Common Stock that are subject to ISOs held by a plan participant that may be
exercisable for the first time during each calendar year may not exceed
$100,000.

         Payment for shares of Common Stock purchased pursuant to exercise of
stock options may be remitted in cash or by certified check or at the discretion
of the Administrator (i) by promissory note, (ii) promissory note combined with
cash, (iii) by shares of Common Stock having a fair market value equal to the
total exercise price, or (iv) by a combination of items (i)-(iii) above. The
provision that permits the delivery of already owned shares of stock as payment
for the exercise of an option may permit "pyramiding." In general, pyramiding
enables a holder to use shares of Common Stock owned in order to pay for the
exercise of the stock option. This is done by transferring such shares to the
Company as payment of the exercise price for the shares purchased pursuant to
the exercise of the Option. The value of such shares shall be determined by the
market value of the shares at the time of transfer. Thereafter, the shares
received upon the exercise of the option could then be used to do the same.
Thereby, the holder may start with as little as one share of Common Stock and
use the shares of Common Stock acquired in successive, simultaneous exercises of
the option to exercise the entire option, regardless of the number of shares
covered thereby, with no additional cash or investment other than the original
share of Common Stock used to exercise the option.

         Upon termination of employment, an optionee will be entitled to
exercise the vested portion of an option for a period of up to three months
after the date of termination except that if the reason for termination was a
discharge for cause, the option shall expire immediately, and if the reason for
termination was death or permanent disability of the optionee, the vested
portion of the option shall remain exercisable for a period of 12 months
thereafter.

         In March 1997, the Company granted to Mr. Rashbaum an option to
purchase 88,000 shares of Common Stock at an exercise price of $1.46 per share,
pursuant to the Management Plan.

Incentive Stock Rights

         Incentive stock rights consist of incentive stock units each of which
is equivalent to one share of Common Stock and may be awarded in consideration
for services performed for the Company or any subsidiary. Each incentive stock
unit shall entitle the holder thereof to receive, without payment of cash or
property to the Company, one share of Common Stock in consideration for services
performed for the Company or any subsidiary by the employee, subject to the
lapse of the incentive periods, at which time the Company will issue one share
of Common Stock for each unit awarded upon the completion of each specified
period. If the employment with the Company of the holder of the incentive stock
units terminates prior to the end of the incentive period relating to the units
<PAGE>
awarded, the rights will thereupon be null and void, except that if termination
is caused by death or permanent disability, the holder or his heirs, as the case
may be, will be entitled to receive a pro rata portion of the shares represented
by the units, based upon that portion of the incentive period which has elapsed
prior to the death or disability.

Stock Appreciation Rights (SARs)

         SARs may be granted to recipients of stock options under the Management
Plan. In the discretion of the Board of Directors, SARs may be granted
simultaneously with, or subsequent to, the grant of a related stock option and
may be exercised to the extent that the related option is exercisable, except
that no general SAR (as hereinafter defined) may be exercised within a period of
six months of the date of grant of such SAR, and no SAR granted with respect to
an ISO may be exercised unless the fair market value of the Common Stock on the
date of exercise exceeds the exercise price of the ISO. An option holder may be
granted general SARs ("general SARs"), limited SARs ("limited SARs"), or both.
General SARs permit the holder thereof to receive - without payment of cash or
property to the Company - cash, shares of Common Stock, or a combination of both
in an amount determined by dividing (i) that portion, elected by the option
holder, of the total number of shares which the holder is eligible to purchase
multiplied by the amount, if any, by which the fair market value of a share of
Common Stock (on the exercise date) exceeds the option exercise price of the
related option by (ii) the fair market value of a share of Common Stock on the
exercise date. Limited SARs are similar to general SARs except that, unless the
Administrator determines otherwise, limited SARs may be exercised only during a
prescribed period following the occurrence of one or more of the following
"change of control" transactions: (i) the approval of the Board of Directors and
shareholders of the Company of a consolidation or merger in which the Company is
not the surviving corporation, the sale of all or substantially all of the
assets of the Company, or the liquidation or dissolution of the Company, (ii)
the commencement of a tender or exchange offer for the Company's Common Stock
(or securities convertible into Common Stock) without the prior consent of the
Board, (iii) the acquisition of beneficial ownership by any person or other
entity (other than the Company or any employee benefit plan sponsored by the
Company) of securities of the Company representing 25% or more of the voting
power of the Company's outstanding securities, or (iv) in the event, during any
period of two consecutive years or less, individuals who at the beginning of
such period constitute the entire Board cease to constitute a majority of the
Board, unless the election, or the nomination for election, of each new director
is approved by at least a majority of the directors then still in office.

         An SAR holder may exercise his SAR rights by giving written notice of
such exercise to the Company, which specifies the number of shares of Common
Stock involved. The exercise of any portion of either the related stock option
or the tandem SARs will cause a corresponding reduction in the number of shares
remaining subject to the option or the tandem SARs, thus maintaining a balance
between outstanding options and SARs. SARs have the same termination provisions
as the underlying stock options (as described above) in the event an SAR holder
ceases to be an employee of the Company.

Restricted Stock Purchase Agreements

         Restricted share agreements provide for the issuance of restricted
shares of Common Stock to eligible participants under the Management Plan. The
Board of Directors may determine the price to be paid by the participant for the
shares or that the shares may be issued for no monetary consideration. The
shares issued shall be subject to restrictions for a stated restricted period
during which the participant must remain in the Company's employ in order to
retain the shares. Payment may be made in cash, by promissory note, or via a
combination of both.
<PAGE>
         Restricted shares awarded under the Management Plan will be subject to
a period of time, designated by the Administrator as the "restricted period,"
during which the holder has limited rights with respect to such shares. The
Administrator may also impose other restrictions, terms, and conditions that
must be fulfilled before the restricted shares may vest. Upon the grant of
restricted shares, stock certificates registered in the name of the recipient
will be issued, and such shares will constitute issued and outstanding shares of
Common Stock for all corporate purposes. The holder will have the right to vote
the restricted shares and to receive all regular cash dividends (and such other
distributions as the Administrator may designate, other than distributions made
solely with respect to the restricted shares ("retained distributions"), if any,
which are paid or distributed on the restricted shares and, generally, to
exercise all other rights as a holder of Common Stock except that until the end
of the restricted period: (i) the holder will not be entitled to take possession
of the stock certificates representing the restricted shares or receive retained
distributions, and (ii) the holder will not be entitled to sell, transfer, or
otherwise dispose of the restricted shares. A breach of any restrictions, terms,
or conditions established by the Administrator with respect to any restricted
shares will cause a forfeiture of such restricted shares.

         Upon expiration of the applicable restricted period(s) and the
satisfaction of any other applicable conditions, the restricted shares and any
dividends or other distributions not distributed to the holder (the "retained
distributions") thereon will become vested. Any restricted shares and any
retained distributions thereon which do not so vest will be forfeited to the
Company. If prior to the expiration of the restricted period a holder's employ
is terminated without cause or because of a total disability (in each case as
defined in the Management Plan) or the holder dies, unless otherwise provided in
the restricted share agreement providing for the award of restricted shares, the
restricted period applicable to each award of restricted shares will thereupon
be deemed to have expired. Unless the Administrator determines otherwise, if a
holder's employment terminates prior to the expiration of the applicable
restricted period for any reason other than as set forth above, all restricted
shares and any retained distributions thereon will be forfeited. Upon forfeiture
of any restricted shares, the Company will repay to the holder thereof any
amount the holder originally paid for such shares.

         Acceleration of all awards under the Management Plan shall occur,
pursuant to the provisions of Section 13 the Management Plan, on the first day
following the occurrence of any of the following: (a) the approval by the
shareholders of the Company of an "Approved Transaction," (b) a "Control
Purchase," or (c) a "Board Change."

         An "Approved Transaction" is defined as (i) any consolidation or merger
of the Company in which the Company is not the continuing or surviving
corporation or pursuant to which shares of Common Stock would be converted into
cash, securities, or other property other than a merger of the Company in which
the holders of Common Stock immediately prior to the merger have the same
proportionate ownership of Common Stock of the surviving corporation immediately
after the merger, (ii) any sale, lease, exchange, or other transfer (in one
transaction or a series of related transactions) of all, or substantially all,
of the assets of the Company, or (iii) the adoption of any plan or proposal for
the liquidation or dissolution of the Company.
<PAGE>
         A "Control Purchase" is defined as circumstances in which any person
(as such term is defined in Sections 13(d)(3) and 14(d)(2) of the Exchange Act),
corporation, or other entity (other than the Company or any employee benefit
plan sponsored by the Company) (i) shall purchase any Common Stock of the
Company (or securities convertible into the Company's Common Stock) for cash,
securities, or any other consideration pursuant to a tender offer or exchange
offer, without the prior consent of the Board of Directors or (ii) shall become
the "beneficial owner" (as such term is defined in Rule 13d-3 under the Exchange
Act), directly or indirectly, of securities of the Company representing
twenty-five percent (25%) or more of the combined voting power of the then
outstanding securities of the Company ordinarily (and apart from rights accruing
under special circumstances) having the right to vote in the election of
directors (calculated as provided in paragraph (d) of such Rule 13d-3 in the
case of rights to acquire the Company's securities).

         A "Board Change" is defined as circumstances in which, during any
period of two consecutive years or less, individuals who at the beginning of
such period constitute the entire Board shall cease for any reason to constitute
a majority thereof unless the election, or the nomination for election by the
Company's shareholders, of each new director was approved by a vote of at least
a majority of the directors then still in office.

Non-Executive Director Stock Option Plan

         The Company terminated its Non-Executive Director Stock Option Plan on
December 31, 1998, in accordance with the terms thereof.



<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The following table sets forth information as of October 10, 2001 with
respect to the beneficial ownership of shares of Common Stock by (i) each person
known by the Company to be the owner of more than 5% of the outstanding shares
of Common Stock, (ii) each director or director nominee of the Company (iii)
each executive officer of the Company for whom information is given in the
Summary Compensation Table in this proxy statement and (iv) all officers and
directors as a group. Except to the extent indicated in the footnotes to the
following table or otherwise as specified in this Proxy Statement, each of the
individuals/entities listed below possesses sole voting power with respect to
the shares of Common Stock listed opposite his/its name.


                              [Table on next page]

<PAGE>
<TABLE>
<CAPTION>

            Name and Address                       Number of Shares            Percent of Common Stock Beneficially
        of Beneficial Owner (1)                 Beneficially Owned (1)                     Owned (1)(2)
        -----------------------                 ----------------------                     ------------

<S>                                                 <C>                                        <C>
European Ventures Corp.
P.O. Box 47 Road Town                               1,783,836(3)(7)                            23.9%
Tortola, BVI

Fiduciara Biaggini
Via Vanoni # 6                                       1,577,396(10)                              21%
Lugano, Switzerland
CH 6901

American Telecom Corp.
C/o MW Todtman McNamara Chamber
P.O. Box 47 Road Town                             594,000(4)(5)(6)(7)                          8.0%
Tortola, BVI

HDS Capital Corp.
C/o MW Todtman McNamara Chamber
P.O. Box 47 Road Town                                330,000(6)(7)                             4.4%
Tortola, BVI

Amir Capital Overseas Ltd.
P.O. Box 47 Road Town                                 303,600(8)                               4.1%
Tortola, BVI

Volcano Trading Inc.
C/o Valor Invest
Via Cantalone 16                                      250,800 (8)                              3.4%
6900 Lugano, Switzerland

Full Moon Development Corp.
C/o Valor Invest
Via Cantalone 16                                      277,200(8)                               3.7%
6900 Lugano, Switzerland

Galit Capital, Ltd.
Via Vanoni #6                                         290,400(8)                               3.9%
Lugano, Switzerland CH 6901

Harold Rashbaum                                       252,000(9)                               3.4%

Jeanne Falletta                                           --                                    --

Alain Le Guillou, M.D.                                    --                                    --

James Frakes                                              --                                    --

Michael Friedland                                       167,720                                2.3%

Debra Riggs                                               --                                    --

All Officers and Directors as a Group                 419,720(9)                               5.5%
(six persons)
</TABLE>
<PAGE>
* Less than 1% of the outstanding common stock.

(1)  Unless otherwise indicated, the address for each listed director or officer
     is c/o ShopNet.Com, Inc., 14 East 60th Street, New York, New York 10022. As
     used in this table, "beneficial ownership" means the sole or shared power
     to vote or direct the voting or to dispose or direct the disposition of any
     security. For the purposes of this table, a person is deemed to be the
     beneficial owner of securities that can be acquired within 60 days from
     February 1, 2001 through the exercise of any option or warrant. Shares of
     Common Stock subject to options or warrants that are currently exercisable
     or exercisable within 60 days are deemed outstanding for computing the
     ownership percentage of the person holding such options or warrants, but
     are not deemed outstanding for computing the ownership percentage of any
     other person. The amounts and percentages are based upon 7,472,224 shares
     of common stock outstanding as of October 10, 2001.
(2)  Does not give effect to the issuance of (i) 3,379,200 shares of Common
     Stock issuable upon exercise of the 3,840,000 outstanding Warrants (the
     exercise of each warrant at an exercise price of $3.41 purchases .88 of a
     share of Common Stock) or (ii) 128,333 shares of Common Stock reserved for
     issuance under the Company's Senior Management Incentive Plan.
(3)  Includes an  aggregate of 2,112  shares of common  stock  underlying  2,400
     warrants. Each warrant is exercisable at a purchase price of $3.41 for .88
     of a share of Common Stock. European Ventures Corp. ("EVC") is formed under
     the laws of the British Virgin Islands. Mr. Ilan Arbel, son-in-law of
     Harold Rashbaum, President, Chief Executive Officer and a director of the
     Company, was President of EVC until May 2001, when he resigned.
(4)  American  Telecom  Corp.  ("ATC")  is a  corporation  organized  under  the
     laws of the British Virgin Islands which is wholly-owned by Europe American
     Capital Foundation ("EACF"), a Liechtenstein Trust with an address at
     Pradafont Street #7, Vaduz Liechtenstein, c/o Dr. Wohlwerd. Mr. Arbel
     controlled EACF through October 2000 and has been President of ATC since
     July 2000. By virtue of his position with ATC, Mr. Arbel has voting and
     dispositive control over shares of the Company beneficially owned by ATC
     and therefore may be deemed to beneficially own such shares.(5) Includes
     330,000 shares owned by HDS Capital Corp. ("HDS"), a Company organized
     under the laws of the British Virgin Islands, which is wholly-owned by ATC.
(6)  Mr. Arbel is President of HDS and by virtue of such position and his
     control over ATC (see footnote (4) above), Mr. Arbel has voting and
     dispositive control over shares of the Company beneficially owned by HDS
     and therefore may be deemed to beneficially own such shares.
(7)  Shares of the Company beneficially owned by EVC, ATC and HDS are held of
     record in the name of "Fiduciara Biaggini, as trustee" ("Fiduciara
     Biaggini"), on behalf of such respective entities which have retained
     beneficial ownership of such shares. Fiduciara Biaggini is a fiduciary
     company with an address at via Vanoni #6, Lugano, Switzerland CH 6901.
(8)  Shares of the Company beneficially owned by each of Amir Capital Overseas
     Ltd. ("Amir"), Volcano Trading Inc. ("Volcano"), Full Moon Development
     Corp. ("Full Moon") and Galit Capital Ltd ("Galit"), all companies
     organized under the laws of the British Virgin Islands, are held of record
     in the name of "Fiduciara Biaggini, as trustee," on behalf of such
     respective entities. Fabio Rossi, a manager of Fiduciara Biaggini, is the
     President and sole director of each such entity. Accordingly, Mr. Rossi by
     virtue of such positions, may have voting and dispositive control over
     shares of the Company owned by each of Amir, Volcano, Full Moon and Galit
     and therefore may be deemed to be the beneficial owner of such shares,
     representing in the aggregate 15.1% of the Company's outstanding Common
     Stock.
<PAGE>
(9)  Includes an aggregate of 132,000 shares of Common Stock  underlying options
     granted to Mr. Rashbaum, the Chairman of the Board, President and Chief
     Executive Officer of the Company. See "Executive Compensation.
(10) Does not include shares of Common Stock identified in footnotes (7) or (8).

         By virtue of Mr. Arbel's voting and dispositive control of shares of
the Company owned by each of ATC and HDS (see footnotes 4, 5 and 6 above), Mr.
Ilan Arbel may be deemed to beneficially own 8% of the Company's outstanding
Common Stock.


ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         Breaking Waves' Loan and Security Agreement with Century Business
Credit Corporation ("Century") dated December 20, 2000 requires the provision of
one or more letters of credit in the aggregate amount of $1,150,000 to partially
secure the line of credit. Pursuant to the terms of a Reimbursement and
Compensation Agreement ("Reimbursement and Compensation Agreement"), a trust
("Trust"), the beneficiary of which is the granddaughter of Harold Rashbaum, the
Company's Chairman of the Board, President and Chief Executive Officer, and the
daughter of Mr. Arbel, a principal stockholder, provided the security underlying
a letter of credit in the amount of $250,000 issued by a bank to replace a
portion of a letter of credit previously provided by the Company. Breaking Waves
agreed to reimburse the Trust for any and all losses, fees, charges and expenses
to the Trust in the event the letter of credit is called by Century and the
issuing bank makes payment and then demands reimbursement from the Trust.
Breaking Waves' obligations are guaranteed by the Company in addition to being
secured by a first security interest in all of the assets of the Company and a
subordinate security interest in all of the assets of Breaking Waves. Breaking
Waves paid a fee of $42,500 to the Trust and reimbursed the Trust for all
related professional and other fees incurred by the Trust in connection with
such transaction.

         On May 3, 2001, the Company, Breaking Waves and the Trust entered into
a First Amendment to Reimbursement and Compensation Agreement ("Amendment")
pursuant to which the Trust increased the amount of security an additional
$150,000 for a total of $400,000, including the original $250,000. The Trust
conditioned the additional $150,000 of security upon the receipt of an
additional Guaranty from a party satisfactory to it. Gal Capital Corp. ("Gal")
provided a Guaranty agreeing to pay all obligations of Breaking Waves as
contained in the original Reimbursement and Compensation Agreement and all
related expenses in enforcing same. Gal received a fee of $42,500 for the
issuance of such guaranty. Mr. Arbel is President of Gal.

         In September, 2001, Century increased the required security in the form
of letters of credit from $1,150,000 to 1,450,000. The Company also sought to
raise additional funds to secure the letter of credit in order to have available
to it additional working capital.

         Pursuant to an Amended and Restated Reimbursement and Compensation
Agreement dated as of September 15, 2001, between the Trust and Breaking Waves,
which superceded the original Reimbursement and Compensation Agreement, the
Trust agreed to provide additional security to a bank in return for the issuance
<PAGE>
of a letter of credit from such bank to Century in the amount of $350,000 (in
addition to the original $400,000) to replace a portion of a letter of credit
previously provided by Shopnet in a similar amount. The Trust agreed to continue
such letter of credit for a period of ten years, absent any default. The terms
include the same reimbursement, guarantee and security provisions as in the
original Reimbursement and Compensation Agreement. As compensation, the Trust is
entitled to .83 percent of net sales of Breaking Waves through June 30, 2001,
and 1.16% of net sales of Breaking Waves for each year thereafter ("Trust L/C
Fees"). Such amounts are payable 45 days after the close of each fiscal quarter.
On the closing date, Breaking Waves paid $24,500 to the Trust as an advance of
future Trust L/C Fees and reimbursed the Trust for all related professional
fees.

         In addition, Breaking Waves entered into a Reimbursement Agreement
dated as of September 15, 2001 with Rivka and Yair Arbel ("RAYA") (Mr. Arbel's
brother and sister-in-law), pursuant to which RAYA agreed to provide security to
a bank in return for a letter of credit from such bank to Century in the amount
of $300,000 reflecting the increase of security required by Century. RAYA agreed
to continue such letter of credit for a period of ten years, absent any default.
The Reimbursement Agreement includes reimbursement provisions in favor of the
Trust in the event the letter of credit is called by Century and is paid by the
bank. All of Breaking Waves obligations are guaranteed by Shopnet and secured by
Shopnet's assets. As compensation, RAYA is entitled to a fee equal to .42
percent of net sales of Breaking Waves through June 30, 2001 and .58 percent of
net sales of Breaking Waves thereafter ("RAYA L/C Fees"). Such amounts are
payable forty-five days after the close of each fiscal quarter. On the closing
date, Breaking Waves paid $12,250 to RAYA as an advance of future RAYA L/C Fees
and reimbursed RAYA for all related professional fees.

         In August 2000, Breaking Waves received an $80,000 advance from Play
Co. against future orders of merchandise. No orders were received against this
advance and in December 2000 Breaking Waves repaid the full $80,000 to Play Co.

         In November 1999, Breaking Waves borrowed $400,000 from Play Co. with
such loan bearing interest at 9% per annum. Breaking Waves repaid $100,000 of
the loan in January 2000 and the balance in April 2000.

         In October 1999, the Company borrowed $50,000 from Play Co. and
Breaking Waves borrowed $200,000 from Play Co. The loans bore interest at 9% and
were repaid in March 2000.

         In February 1999, the Company loaned $100,000 to Play Co. with such
loan bearing interest at 9% per annum. In each of April and May 1999, the
Company loaned an additional $100,000 to Play Co. at an interest rate of 9% per
annum. All such loans have been repaid.

         In November 1998, pursuant to a sales agreement entered into between
Breaking Waves and Play Co., Breaking Waves purchased 1.4 million unregistered
shares of Play Co.'s common stock in a private transaction, which was
subsequently reduced to 1,270,000 shares. The shares purchased represented
approximately 25.4% of the outstanding common stock of Play Co. immediately
after the transaction. Such percentage has since been reduced to approximately
1.5% of Play Co.'s outstanding common stock. Pursuant to the agreement which
bore an initial term of one year and automatically extended for an additional
one year term since it was not terminated by either of the parties - Play Co.
<PAGE>
agreed to purchase (on a wholesale basis) a minimum of 250 pieces of merchandise
for each of its retail locations and to provide advertising promotional
materials and ads of the merchandise in all of its brochures, advertisements,
catalogs, and all other promotional materials, merchandising programs, and sales
promotion methods. Breaking Waves had previously sold a limited number of pieces
of its swimwear to Play Co. As consideration for the stock, Breaking Waves
remitted $504,000, which represented an approximate price of $0.36 per share:
$300,000 of the consideration was remitted in cash, and the remaining $204,000
was provided in the form of merchandise, primarily girls' swimsuits.

         In October 1996, pursuant to a promissory note, the Company loaned
Harold Rashbaum its President and Chief Executive Officer a total of $50,000
bearing interest at 6 1/2% payable over three years. As of June 30, 2001, the
unpaid portion, which is due on demand, amounted to $37,000, which has been
classified as current. In 1998, the Company's President was also advanced
additional funds totaling $3,000 which are non-interest bearing and due on
demand and are classified as current.

         Before he became an Officer and Director of the Company, Mr. Rashbaum
provided consulting services to the Company through HBR, a company of which he
is an officer and director and of which his wife is the sole shareholder. In
1996, HBR entered into an oral consulting agreement with the Company providing
for the payment to HBR of 5% of the net profits received by the Company from the
distribution of "Dirty Laundry." To date, HBR has not received any fees as a
result of the distribution of "Dirty Laundry" not generating any net profits.

         Alain Le Guillou, a director of the Company, has been a consultant to
the Company since 1996. Prior to July, 2001, he received $12,000 per annum for
such services which was subsequently reduced to $6,000 per annum. Until
recently, Dr. Le Guillou was the son-in-law of Harold Rashbaum.

         During the six months ended June 30, 2001 and years ended December 31,
2000 and 1999 the Company paid $24,000, $49,080 and $24,000 respectively, in
financial consulting fees to DRA Consulting, Inc., a company whose president is
the daughter of the Company's Chairman of the Board, President, Chief Executive
Officer.



<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>

(a)      The following financial statements of the Company are included as Part II, Item 8:

         <S>                                                                            <C>
         Index to Financial Statements                                                  F
         Independent Auditor's Report                                                   F-1
         Independent Accountants' Report                                                F-2
         Balance Sheets                                                                 F-3
         Statements of Operations                                                       F-4 to F-5
         Statement of Stockholders' Equity                                              F-6 to F-7
         Statements of Cash Flows                                                       F-8 to F-11
         Notes to Financial Statements                                                  F-12 to F-35
</TABLE>

(b)      On July 9, 2001, the Company filed a Form 8-K changing the Company's
         fiscal year-end to June 30.

(c)      The following  exhibits  which are  designated by an asterisk (*) are
         to be filed by amendment. Exhibits not so designated previously were
         filed with the Securities and Exchange Commission with either (i) the
         Registration Statement on Form SB-2, file no. 333-5098-NY, (ii) the
         Registration Statement on Form SB-2, file no. 333-5098-NY, Post-
         Effective Amendment No. 1, (iii) the Registration Statement on Form
         SB-2, file no. 333-5098-NY, Post-Effective Amendment No. 2, or (iv)
         such other documents as the Company has filed with the Securities and
         Exchange Commission. Pursuant to 17 C.F.R. 230.411, each exhibit filed
         by the Company is incorporated by reference herein.

<TABLE>
<CAPTION>
<S>                      <C>
3.1                      Certificate of Incorporation of the Company
3.2                      Amendment to Certificate of Incorporation of the Company, filed in June 7, 1996
3.4                      By-Laws of the Company
3.6                      Certificate of Incorporation of Breaking Waves, Inc.
3.7                      By-Laws of Breaking Waves, Inc.
3.8                      Certificate of Amendment to Certificate of Incorporation
4.1                      Specimen Common Stock Certificate
4.2                      Specimen Warrant Certificate
4.4                      Form of Warrant  Agreement  between the Company,  the  Underwriter  and  Continental  Stock
                         Transfer & Trust Company
4.5                      Form of Restricted Stock Agreement
10.2                     The Company's Senior Management Incentive Plan
10.4                     Consulting Agreement between Breaking Waves, Inc. and Dan Stone
10.5                     Lease for premises at 112 West 34th Street, New York, New York
10.6                     Lease for premises at 8410 N.W. 53rd Terrace, Miami, Florida
10.6(a)                  Amendment to lease at 8410 N.W. 53rd Terrace, Miami, Florida
10.7                     Stock Purchase  Agreement  between the Company,  European  Ventures Corp.,  Breaking Waves,
                         Inc., and the shareholders of Breaking Waves, Inc., dated May, 1996
10.9                     Property Acquisition  Agreement between the Company and Rogue Features,  Inc., dated March,
                         1996

<PAGE>
10.10                    Co-production  agreement  between the Company and Rogue Features,  Inc., dated March,  1996
                         and all amendments thereto
10.11                    Right of First Refusal Agreement with principals of Rogue Features, Inc.
10.13                    Shippers  Agency  Agreement   between   Hollywood   Productions,   Inc.,  and  Third  Party
                         Enterprises, Inc.
10.14                    License Agreement between Breaking Waves, Inc. and Beach Patrol, Inc.
10.16                    Employment  Agreement with Michael  Friedland  (incorporated  by reference to the indicated
                         exhibit in the Company's 10-KSB for the year ended December 31, 1996)
10.17                    Employment  Agreement  with Malcolm  Becker  (incorporated  by  reference to the  indicated
                         exhibit in the Company's 10-KSB for the year ended December 31, 1996)
10.18                    Termination of Employment Agreement with Robert Melillo
                         (incorporated by reference to the indicated exhibit in
                         the Company's 10-KSB for the year ended December 31,
                         1996)
10.19                    Trident  Releasing,  Inc.  License  Agreement  (incorporated  by reference to the indicated
                         exhibit in the Post-Effective Amendment No. 1)
10.20                    Cyclone  Option  Agreement  (incorporated  by  reference  to the  indicated  exhibit in the
                         Post-Effective Amendment No. 1)
10.21                    Cyclone  Co-Writer  Agreement  (incorporated  by reference to the indicated  exhibit in the
                         Post-Effective Amendment No.)
10.22                    Heller  Financial  Agreement  (incorporated  by reference to the  indicated  exhibit in the
                         Post-Effective Amendment No. 2)
10.23                    Non-Executive  Director Stock Option Plan  (incorporated  by reference to Appendix B in the
                         Proxy Statement for the Company's June 1997 Annual Meeting)
10.24                    Kawasaki Motors Corp.,  USA "Jet Ski" License  Agreement  (incorporated by reference to the
                         indicated exhibit in the Company's 10-KSB for the year ended December 31, 1997)
10.25                    Amendment to lease at 112 West 34th Street, New York,
                         New York (incorporated by reference to the indicated
                         exhibit in the Company's 10-KSB for the year ended
                         December 31, 1997)
10.26                    Form of Subscription  Agreement used in connection with the Company's February 1998 Private
                         Placement (incorporated by reference to the indicated
                         exhibit in the Company's 10-KSB for the year ended
                         December 31, 1997)
10.27                    Form of  Subscription  Agreement  used in  connection  with the  Company's May 1998 Private
                         Placement (incorporated by reference to the indicated
                         exhibit in the Company's 10-KSB for the year ended
                         December 31, 1998)
10.28                    Amendment  to  Employment   Agreement  with  Michael   Friedland   dated  January  1,  1998
                         (incorporated  by reference to the indicated  exhibit in the Company's  10-KSB for the year
                         ended December 31, 1998)
10.29                    Amendment to Employment  Agreement with Malcolm Becker dated January 1, 1998  (incorporated
                         by reference to the indicated  exhibit in the Company's  10-KSB for the year ended December
                         31, 1998)
10.30                    Second  Amendment  to  Employment  Agreement  with  Malcolm  Becker  dated  January 1, 1999
                         (incorporated  by reference to the indicated  exhibit in the Company's  10-KSB for the year
                         ended December 31, 1998)

<PAGE>
10.31                    Lease for premises at 14 East 60th Street,  Room 402, New York, New York  (incorporated  by
                         reference to the indicated  exhibit in the Company's  10-QSB for the quarter ended June 30,
                         1999)
10.32                    Option Agreement - Robb Peck McCooey Clearing
                         Corporation (incorporated by reference to the indicated
                         exhibit in the Company's 10-QSB for the quarter ended
                         September 30, 1999)
10.33                    License Agreement with Gottex Models Ltd, dated November 1, 2000
10.34                    Factoring Agreement with Century Business Credit Corp. dated September 12, 2000
10.35                    Supplement to factoring or Security  Agreement with Century  Business  Credit  Corporation,
                         dated August 14, 2000
10.36                    Corporate  Guaranty  unlimited  between Century  Business  Credit  Corporation and ShopNet,
                         dated August 14, 2000
10.37                    Trademark  Collateral  Security  Agreement between Century Business Credit  Corporation and
                         Breaking Waves, dated August 14, 2000.
10.38                    Consulting Agreement with Larry Nash, Inc., dated August 5, 2000
10.39*                   Lease  between 112 West 34th Street  Company,  as landlord,  and Breaking  Waves,  Inc., as
                         tenant, dated August 8, 2001.
16.1                     Letter from Scarano & Tomaro,  P.C.  regarding  dismissal of Scarano & Tomaro,  P.C. as the
                         Company's  auditors  (incorporated  by reference to the indicated  exhibit in the Company's
                         Form 8-K/A filed on November 24, 1998)
21.1                     Subsidiaries of the Registrant
</TABLE>
<PAGE>

                                   SIGNATURES

         Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this Report to be signed on its behalf by the
Undersigned hereunto duly authorized on the 12th day of October, 2001.


                                        ShopNet.Com, Inc.



                                By: /s/ Harold Rashbaum
                                       -----------------------------------------
                                        Harold Rashbaum
                                        Chairman of the Board, Chief Executive
                                        Officer and President


         Pursuant to the requirements of the Securities Act of 1933 as amended,
this Registration Statement has been signed below by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>


<S>                                         <C>                                    <C>
/s/ Harold Rashbaum                         Chairman of the Board,
    Harold Rashbaum                         Chief Executive Officer,               10/12/01
                                            President, and Director                Date

/s/ Jeanne Falleta                          Secretary and Director,                10/12/01
    Jeanne Falletta                                                                Date

/s/ Alain Le Guillou, MD                    Director                               10/15/01
    Alain Le Guillou, M.D.                                                         Date


/s/ James B. Frakes                         Director                               10/15/01
    James B. Frakes                                                                Date

/s/ Michael Friedland                       Director                               10/12/01
    Michael Friedland                                                              Date

/s/ Debra Riggs                             Director                               10/12/01
    Debra Riggs                                                                    Date
</TABLE>

<PAGE>
                       SHOPNET. COM, INC. AND SUBSIDIARIES

                        CONSOLIDATED FINANCIAL STATEMENTS

                 FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND 2000

                                       AND

                 FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999

<PAGE>
                       SHOPNET.COM, INC. AND SUBSIDIARIES
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>



                                                                                              Page
                                                                                             number
---------------------------------------------------------------------------------------------------------

<S>                                                                                              <C>
Independent auditors' report                                                                   F-1

Independent accountants' report                                                                F-2

Consolidated balance sheets at June 30, 2001 and December 31, 2000                             F-3

Consolidated statements of operations for the six months ended
  June 30, 2001 and June 30, 2000 (unaudited)                                                  F-4

Consolidated statements of operations for the years ended
  December 31, 2000 and 1999                                                                   F-5

Consolidated statement of stockholders' equity for the six months
  ended June 30, 2001 and for the years ended December 31, 2000 and 1999                    F-6 - F-7

Consolidated statements of cash flows for the six months ended
  June 30, 2001 and June 30, 2000 (unaudited)                                               F-8 - F-9

Consolidated statements of cash flows for the years ended
  December 31, 2001 and 1999                                                               F-10 - F-11

Notes to consolidated financial statements                                                 F-12 - F-35




</TABLE>
<PAGE>
                          INDEPENDENT AUDITORS' REPORT


     To the Board of Directors and Stockholders of
     Shopnet.com, Inc.

     We have audited the accompanying consolidated balance sheet of Shopnet.com,
     Inc. and subsidiaries (the "Company"), as of June 30, 2001 and December 31,
     2000, and the related consolidated statements of operations, stockholders'
     equity and cash flows for the six months ended June 30, 2001 and for the
     years ended December 31, 2000 and 1999. These consolidated financial
     statements are the responsibility of the Company's management. Our
     responsibility is to express an opinion on these consolidated financial
     statements based on our audits.

     We conducted our audits in accordance with auditing standards generally
     accepted in the United States of America. 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 consolidated
     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 the Company as of June 30, 2001 and December 31, 2000 and the
     consolidated results of its operations and cash flows for the six months
     ended June 30, 2001 and for the years ended December 31, 2000 and 1999 in
     conformity with accounting principles generally accepted in the United
     States of America.





     Massella, Tomaro & Co., LLP
     Jericho, New York
     July 31, 2001, except for Notes 14 and 16, as to which the date is
     September 15, 2001




<PAGE>
                         INDEPENDENT ACCOUNTANTS' REPORT


              To the Board of Directors and Stockholders of
              Shopnet.com, Inc.

              We have reviewed the accompanying consolidated statements of
              income and cash flows of Shopnet.com, Inc. and subsidiaries (the
              "Company"), for the six months ended June 30, 2000 in accordance
              with Statements on Standards for Accounting and Review Services
              issued by the American Institute of Certified Public Accountants.
              All information included in these consolidated financial
              statements is the representation of the management of the Company.

              A review consists principally of inquiries of Company personnel
              and analytical procedures applied to financial data. It is
              substantially less in scope than an audit in accordance with
              auditing standards generally accepted in the United States of
              America, the objective of which is the expression of an opinion
              regarding the consolidated financial statements taken as a whole.
              Accordingly, we do not express such an opinion.

              Based on our review, we are not aware of any material
              modifications that should be made to the accompanying consolidated
              financial statements in order for them to be in conformity with
              accounting principles generally accepted in the United States of
              America.





              Massella, Tomaro & Co., LLP
              Jericho, New York
              August 10, 2000










                                      F - 2
<PAGE>
                       SHOPNET.COM, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                       JUNE 30, 2001 AND DECEMBER 31, 2000
<TABLE>
<CAPTION>

                                     ASSETS
                                                                                       June 30, 2001               December 31, 2000
                                                                                 ----------------------------      -----------------
  Current assets:
<S>                                                                                          <C>                       <C>
    Cash                                                                                     $ 24,703                  $   107,734
    Cash - restricted                                                                         969,582                    1,114,572
    Accounts receivable, net                                                                   77,706                       47,966
    Other receivables                                                                          62,734                       27,922
    Inventory                                                                                 796,538                    3,464,229
    Prepaid expenses                                                                           70,762                      107,632
    Advances to officer                                                                        40,000                       40,000
                                                                                ---------------------        ---------------------
         Total current assets                                                               2,042,025                    4,910,055
                                                                                ---------------------        ---------------------

Furniture, computer equipment, and leasehold improvements, net                                 72,137                       61,708
Film production and distribution costs, net                                                 1,204,728                    1,350,000
Costs in excess of net assets of business acquired                                            727,261                      762,737
Investments in movie ventures                                                                 246,439                      248,210
Deferred tax asset - non-current                                                              202,500                      202,500
Other assets                                                                                   20,635                       20,635
Marketable securities - affiliate                                                               6,350                      107,950
                                                                                ---------------------        ---------------------
         Total assets                                                           $           4,522,075        $           7,663,795
                                                                                =====================        =====================

                      LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
    Due to factor                                                               $           1,700,337        $           3,165,909
    Accounts payable                                                                          138,218                    1,095,490
    Accrued expenses                                                                           21,965                       99,843
         Capital lease obligations                                                             17,953                       17,074
    Other taxes payable                                                                           743                       11,051
    Deferred tax liability                                                                      3,606                        4,704
                                                                                ---------------------        ---------------------
         Total current liabilities                                                          1,882,822                    4,394,071
                                                                                ---------------------        ---------------------

Capital lease obligations, net of current portion                                               3,758                       12,960
                                                                                ---------------------        ---------------------

         Total liabilities                                                                  1,886,580                    4,407,031
                                                                                ---------------------        ---------------------

Commitments and contingencies (Note 12)                                                             -                            -
                                                                                ---------------------        ---------------------

Stockholders' equity:
    Common stock - $.001 par value, 20,000,000 shares authorized,
          7,472,244 shares issued, outstanding and subscribed                                   7,472                        7,472
    Additional paid-in capital                                                              6,638,852                    6,638,852
    Accumulated deficit                                                                     (4,017,179)
         (3,497,510)
    Accumulated other comprehensive income                                                      6,350                      107,950
                                                                                    -----------------            -----------------
         Total stockholders' equity                                                         2,635,495                    3,256,764
                                                                                    -----------------            -----------------

Total liabilities and stockholders' equity                                          $       4,522,075            $       7,663,795
                                                                                    =================            =================
</TABLE>

           See accompanying notes to consolidated financial statements

                                      F - 3
<PAGE>
                       SHOPNET.COM, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                 FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND 2000
<TABLE>
<CAPTION>


                                                                                                                         2000
                                                                                               2001                 (unaudited)
                                                                                       -------------------    --------------------

<S>                                                                                    <C>                    <C>
Net sales                                                                              $         4,728,948    $          3,673,770

Cost of sales                                                                                    3,303,919               2,491,788
                                                                                       -------------------    --------------------

Gross profit                                                                                     1,425,029               1,181,982
                                                                                       -------------------    --------------------

Expenses:
    Selling, general, and administrative expenses                                                1,500,707               1,096,660
    Amortization of costs in excess of net assets of business
      acquired                                                                                      35,476                  35,476
                                                                                       -------------------    --------------------

Total expenses                                                                                   1,536,183               1,132,136
                                                                                       -------------------    --------------------

(Loss) income before other income (expense)
 and provision for income taxes                                                                   (111,154)                 49,846
                                                                                       --------------------   --------------------

Other income (expense):
    Equity in earnings (loss) of affiliate                                                          (2,771)                      -
    Write down of film costs                                                                      (145,272)               (100,000)
    Rental and other income                                                                         14,400                  11,100
Interest and finance expense                                                                      (300,273)               (189,327)
Interest income                                                                                     24,945                  35,905
                                                                                       -------------------    --------------------

         Total other income (expense)                                                             (408,971)               (242,322)
                                                                                       --------------------   ---------------------

Loss before (benefit of) provision for
 income taxes                                                                                     (520,125)               (192,476)
(Benefit of) provision for income taxes                                                               (456)                 10,970
                                                                                       --------------------   --------------------

Net loss                                                                                          (519,669)               (203,446)

Other items of comprehensive (loss) income                                                        (101,600)                266,700
                                                                                       --------------------   --------------------

Comprehensive net (loss) income                                                        $          (621,269)   $             63,254
                                                                                       --------------------   --------------------

Basic and diluted loss per share:                                                      $              (.07)   $              (.03)
                                                                                       ====================   ====================

Weighted average number of
     common shares outstanding - basic and diluted                                               7,472,244               6,717,491
                                                                                       ===================    ====================

</TABLE>
           See accompanying notes to consolidated financial statements

                                      F - 4

<PAGE>
                       SHOPNET.COM, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                 FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
<TABLE>
<CAPTION>


                                                                                               2000                    1999
                                                                                       -------------------    --------------------

<S>                                                                                    <C>                    <C>
Net sales                                                                              $         5,713,133    $          4,756,497

Cost of sales                                                                                    3,764,258               3,214,704
                                                                                       -------------------    --------------------

Gross profit                                                                                     1,948,875               1,541,793
                                                                                       -------------------    --------------------

Expenses:
    Selling, general, and administrative expenses                                                2,208,724               2,137,895
    Amortization of costs in excess of net assets of business
         acquired                                                                                   70,952                  70,952
                                                                                       -------------------    --------------------

Total expenses                                                                                   2,279,676               2,208,847
                                                                                       -------------------    --------------------

Loss before other income (expense)
 and provision for income taxes                                                                   (330,801)               (667,054)
                                                                                       --------------------   ---------------------

Other income (expense):
    Equity in earnings (loss) of affiliate                                                          (4,290)               (994,305)
    Write down of film costs                                                                      (308,564)               (261,153)
    Gain on sale of equity investment in affiliate                                                       -                 130,093
    Rental and other income                                                                         22,271                  15,549
Interest and finance expense                                                                      (371,752)               (243,148)
Interest income                                                                                     80,156                  56,212
                                                                                       -------------------    --------------------

         Total other income (expense)                                                             (582,179)             (1,296,752)
                                                                                       --------------------   ---------------------

Loss before (benefit of) provision for
 income taxes                                                                                     (912,980)             (1,963,806)
(Benefit of) provision for income taxes                                                             (6,004)                 12,273
                                                                                       --------------------   --------------------

Net loss                                                                                          (906,976)             (1,976,079)

Other items of comprehensive income                                                                107,950                       -
                                                                                       -------------------    --------------------

Comprehensive net loss                                                                 $          (799,026)   $         (1,976,079)
                                                                                       --------------------   ---------------------

Basic and diluted loss per share:                                                      $              (.13)   $               (.33)
                                                                                       ====================   =====================

Weighted average number of
    common shares outstanding                                                                    7,021,917               5,983,188
                                                                                       ===================    ====================
</TABLE>

           See accompanying notes to consolidated financial statements

                                      F - 5
<PAGE>
<TABLE>
<CAPTION>
                       SHOPNET.COM, INC. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
 FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999



                                                                                             Accumulated
                                                                 Additional                     Other         Total
                                           Common Stock            Paid-in     Accumulated  Comprehensive  Stockholders'
                                       Shares         Amount       Capital       Deficit       Income        Equity

<S>                  <C> <C>         <C>         <C>           <C>            <C>            <C>           <C>
Balances at December 31, 1998 ..     2,686,944   $     2,687   $ 6,310,103    $  (614,455)   $      --     $ 5,698,335

Issuance of common stock in
  connection with January 1999
  stock dividend ...............     2,686,944         2,687        (2,687)          --             --            --

Stock issued for compensation in
  accordance with employment
  agreements ...................       215,732           216        38,420           --             --          38,636

Net loss for the year ended
  December 31, 1999 ............          --            --            --       (1,976,079)          --      (1,976,079)
                                   -----------   -----------   -----------     -----------   -----------    -----------
Balances at December 31, 1999 ..     5,589,620         5,590     6,345,836     (2,590,534)          --       3,760,892

Issuance of common stock in
  connection with January 2000
  stock dividend ...............       537,389           537          (537)          --             --            --

Sale of common stock in February
   2000, net of costs ..........       100,000           100       294,798           --             --         294,898

Issuance of common stock in
  connection with May 2000
  stock dividend ...............     1,245,235         1,245        (1,245)          --             --            --
Unrealized gain on mark to
    market securities ..........          --            --            --             --          107,950       107,950

Net loss for the year ended
  December 31, 2000 ............          --            --            --         (906,976)          --        (906,976)
                                   -----------   -----------   -----------     -----------   -----------    -----------
Balances at December 31, 2000 ..     7,472,244         7,472     6,638,852     (3,497,510)       107,950     3,256,764
  (carried forward)
</TABLE>

           See accompanying notes to consolidated financial statements
                                      F - 6
<PAGE>
<TABLE>
<CAPTION>
                       SHOPNET.COM, INC. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
 FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999

                                                                                               Accumulated
                                                                  Additional                     Other          Total
                                            Common Stock           Paid-in     Accumulated    Comprehensive   Stockholders'
                                        Shares        Amount       Capital       Deficit         Income         Equity
<S>                                   <C>               <C>       <C>          <C>               <C>          <C>
Balances at December 31, 2000
  (From previous page) ..........     7,472,244         7,472     6,638,852    (3,497,510)       107,950      3,256,764

Unrealized loss on securities ...          --            --            --            --         (101,600)      (101,600)

Net loss for the six months ended
  June 30, 2001 .................          --            --            --        (519,669)          --         (519,669)
                                    -----------   -----------   -----------   -----------    -----------    -----------

Balances at June 30, 2001 .......     7,472,244   $     7,472   $ 6,638,852   $(4,017,179)   $     6,350    $ 2,635,495
                                    ===========   ===========   ===========   ===========    ===========    ===========

</TABLE>

           See accompanying notes to consolidated financial statements

                                      F - 7
<PAGE>
                       SHOPNET.COM, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                 FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND 2000
<TABLE>
<CAPTION>

                                                                                                                       2000
                                                                                                 2001               (unaudited)
                                                                                  -------------------         ----------------------
Cash flows from operating activities:
<S>                                                                               <C>                         <C>
   Net loss                                                                       $          (519,669)        $           (203,446)
   Adjustments to reconcile net loss to net
    cash (used for) provided by operating activities:
       Equity in earnings (loss) of affiliate                                                   2,771                            -
       Amortization and depreciation                                                           49,473                       57,352
       Deferred income tax (benefit) expense                                                   (1,098)                           -
       Write down of film costs                                                               145,272                      100,000
   Decrease (increase) in:
           Accounts receivable                                                                (29,740)                      18,948
Other receivables                                                                             (34,812)                           -
       Inventory                                                                            2,667,691                    2,294,207
       Prepaid expenses                                                                        36,870                       (7,366)
       Other assets                                                                                 -                           54
   Increase (decrease) in:
       Due to factor                                                                       (1,465,572)                    (738,332)
       Accounts payable                                                                      (957,272)                    (223,274)
       Accrued expenses                                                                       (77,878)                    (869,616)
       Other taxes payable                                                                    (10,308)                           -
                                                                                  --------------------        ---------------------

Net cash (used for) provided by operating activities                                         (194,272)                     428,527
                                                                                  --------------------        ---------------------

Cash flows from investing activities:
   Acquisition of furniture, computer equipment, and
     leasehold improvements                                                                   (24,426)                     (13,197)
Loan repayments to affiliate                                                                        -                     (650,000)
    Investment in movie ventures                                                               (1,000)                           -
                                                                                  --------------------        ---------------------

Net cash used in investing activities                                                         (25,426)                    (663,197)
                                                                                  --------------------        ---------------------

Cash flows from financing activities:
   Proceeds from sale of common stock                                                               -                      294,898
   Proceeds from line of credit                                                                     -                      225,000
   Repayments of line of credit                                                                     -                      (11,106)
   Principal payments on capital lease obligations                                             (8,323)                      (7,529)
                                                                                  --------------------        ---------------------

Net cash (used in) provided by financing activities                                            (8,323)                     501,263
                                                                                  --------------------        ---------------------

Net (decrease) increase in cash                                                              (228,021)                     266,593

Cash, beginning of period                                                                   1,222,306                    1,376,239
                                                                                  --------------------        ---------------------

Cash, end of period                                                               $           994,285         $          1,642,832
                                                                                  ====================        =====================
</TABLE>

           See accompanying notes to consolidated financial statements

                                      F - 8
<PAGE>
                       SHOPNET.COM, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                 FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND 2000
<TABLE>
<CAPTION>


                                                                                                               2000
                                                                                        2001                (unaudited)
                                                                                  -----------------      ------------------

Supplemental disclosure of non-cash flow information:
    Cash paid during the year for:
<S>                                                                               <C>                    <C>
         Interest                                                                 $         300,273      $          184,965
                                                                                  =================      ==================
         Income taxes                                                             $               -      $                -
                                                                                  =================      ==================




</TABLE>

           See accompanying notes to consolidated financial statements

                                      F - 9
<PAGE>
                       SHOPNET.COM, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                 FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
<TABLE>
<CAPTION>

                                                                                                 2000                  1999
                                                                                  -------------------         ----------------------
Cash flows from operating activities:
<S>                                                                               <C>                         <C>
   Net loss                                                                       $          (906,976)        $         (1,976,079)
   Adjustments to reconcile net loss to net
    cash provided by (used for) operating activities:
       Equity in earnings (loss) of affiliate                                                   4,290                      994,305
       Amortization and depreciation                                                          117,328                      114,974
       Deferred income tax (benefit) expense                                                  (10,336)                      (8,961)
       Write down of film costs                                                               308,564                      261,153
       Stock issued for services rendered                                                           -                       38,636
   Decrease (increase) in:
           Accounts receivable                                                                (16,862)                      22,124
       Other receivables                                                                      (27,922)                           -
       Inventory                                                                             (602,176)                    (199,050)
       Prepaid expenses                                                                       (36,973)                     (17,991)
       Film production and distribution costs                                                       -                      (18,495)
   Increase (decrease) in:
       Due to factor                                                                        1,389,635                     (287,280)
       Accounts payable                                                                       (33,340)                     209,516
       Accrued expenses                                                                        40,598                      368,153
       Other taxes payable                                                                     11,051                            -
                                                                                  -------------------         --------------------

Net cash provided by (used for) operating activities                                          236,881                     (498,995)
                                                                                  -------------------         --------------------

Cash flows from investing activities:
   Proceeds from sale of equity investment in affiliate                                             -                      130,093

   Acquisition of furniture, computer equipment, and
     leasehold improvements                                                                   (15,267)                      (7,964)
   Acquisition costs                                                                                -                      (17,035)
   Investment in movie ventures                                                                (5,000)                     (47,500)
                                                                                  -------------------         --------------------

Net cash (used for) provided by investing activities                                          (20,267)                      57,594
                                                                                  -------------------         --------------------

Cash flows from financing activities:
   Proceeds from sale of common stock                                                         294,898                            -
   Proceeds from line of credit                                                               250,000                            -
   Repayments of line of credit                                                              (250,000)                           -
   Advances from related parties                                                                    -                      650,000
   Repayments to related parties                                                             (650,000)                    (130,000)
   Principal payments on capital lease obligations                                            (15,445)                     (11,886)
                                                                                  -------------------         --------------------

Net cash (used for) provided by financing activities                                         (370,547)                     508,114
                                                                                  -------------------         --------------------

Net (decrease) increase in cash                                                              (153,933)                      66,713

Cash, beginning of period                                                                   1,376,239                    1,309,526
                                                                                  -------------------         --------------------

Cash, end of period                                                               $         1,222,306         $          1,376,239
                                                                                  ===================         ====================
</TABLE>


           See accompanying notes to consolidated financial statements

                                      F -10
<PAGE>
                       SHOPNET.COM, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                 FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
<TABLE>
<CAPTION>




                                                                                       2000                     1999


Supplemental disclosure of non-cash flow information:
    Cash paid during the year for:
<S>                                                                               <C>                    <C>
         Interest                                                                 $         379,802      $          235,098
                                                                                  =================      ==================
          Income taxes                                                            $               -      $                -
                                                                                  =================      ==================

In connection with the issuance of compensation,
          215,732 shares of common stock were issued                              $               -      $           38,636
                                                                                  =================      ==================
</TABLE>












           See accompanying notes to consolidated financial statements

                                      F -11

<PAGE>
                       SHOPNET.COM, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND 2000
               AND FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999



NOTE 1       -    ORGANIZATION

                  Shopnet.com, Inc. ("Shopnet") was incorporated in the State of
                  Delaware on December 1, 1995 under the name of Hollywood
                  Productions, Inc. It was formed for the purpose of acquiring
                  screenplays and producing motion pictures. On May 10, 1999, it
                  filed an amendment to its Articles of Incorporation to change
                  its name to Shopnet.com, Inc. On May 12, 1999, Shopnet
                  incorporated a new wholly owned subsidiary, Hollywood
                  Productions, Inc. ("Hollywood"), to which the Company assigned
                  all of its film rights. Accordingly, Shopnet is considered a
                  holding company. During September 1996, simultaneously with
                  the completion of its Initial Public Offering ("IPO"), Shopnet
                  acquired all of the capital stock of Breaking Waves, Inc.
                  ("Breaking Waves"). Breaking Waves designs, manufactures, and
                  distributes private and brand name labels of children's
                  swimwear nationally. As of June 30, 2001, Shopnet and all of
                  its subsidiaries changed their financial year end from
                  December 31 to June 30.

NOTE 2 -        SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

         a)     Principles of consolidation

                The accompanying consolidated financial statements include the
                accounts of Shopnet and its wholly owned subsidiaries, Breaking
                Waves and Hollywood (the "Company"), after elimination of all
                significant intercompany transactions and accounts. Affiliated
                companies which are 20 to 50 percent owned are accounted for
                under the equity method.

         b)      Cash and cash equivalents

                The Company considers highly liquid investments with maturities
                of three months or less at the time of purchase to be cash and
                cash equivalents. Included in these amounts are certificates of
                deposit of approximately $750,000. The Company maintains
                balances in accounts which are in excess of Federal Deposit
                Insurance Corporation limits by approximately $665,000. The
                Company believes that such risk is minimal based on the
                reputation of the financial institution. At June 30, 2001 the
                Company has classified $969,582 as restricted cash which is
                comprised of approximately $750,200 on deposit with a bank and
                $219,400 with its factor as collateral pursuant to its factoring
                agreement.

         c)      Accounts receivables

                The Company utilizes the allowance method for recognizing the
                collectibility of its accounts receivables. The allowance method
                recognizes bad debt expense based on a review of the individual
                accounts outstanding based on the surrounding facts. As of June
                30, 2001 and December 31, 2000, no allowance was deemed
                necessary by management.





                                     F - 12
<PAGE>
                       SHOPNET.COM, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND 2000
               AND FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999



NOTE 2 -SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)

        d)      Marketable securities

                All the Company's marketable securities are classified as
                available for sale and recorded at current market value. Net
                unrealized gains and losses on marketable securities available
                for sale are credited or charged to other comprehensive income.
                Marketable securities were classified as non-current as a result
                of being pledged pursuant to the factoring agreements.

         e)     Inventory

                Inventory consists of finished goods and is valued at the lower
                of cost (using the first-in, first-out method) or market. All
                inventory is pledged as collateral for factored receivables
                pursuant to a factoring agreement with a financial institution.

         f)     Furniture, computer equipment, and leasehold improvements

                Furniture, computer equipment, and leasehold improvements are
                recorded at cost less accumulated depreciation and amortization
                which is provided on the straight line basis over the estimated
                useful lives of the assets which range between five and seven
                years. Expenditures for maintenance and repairs are expensed as
                incurred.

         g)     Film production and distribution costs

                The Company follows industry standards in capitalizing film
                production and distribution costs. Film production and
                distribution costs include all costs associated with the
                writing, producing, and distribution of the film. Film costs
                include the costs of production, prints, pre-release, and other
                advertising expected to benefit future periods. These costs, as
                well as participation and talent residuals, are charged against
                earnings on an individual film basis in the ratio that the
                current year's gross film revenues bear to management's estimate
                of total remaining ultimate gross film revenues from all
                sources.

                Film costs are stated at the lower of cost or estimated net
                realizable value on an individual film basis. Revenue and cost
                forecasts are continually reviewed by management and revised
                when warranted by changing conditions. Estimates of total gross
                revenues can change significantly due to the level of market
                acceptance of film products. Accordingly, revenue estimates are
                reviewed periodically and amortization is adjusted. Such
                adjustments could have a material effect on the results of
                operations in future periods. When estimates of total revenue
                and costs indicate that a feature film will result in an
                ultimate loss, additional amortization is recognized to the
                extent required to produce a zero gross margin over the
                remaining life of the film.



                                     F - 13

<PAGE>
                       SHOPNET.COM, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND 2000
               AND FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999



NOTE 2 -        SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)

        g)      Film production and distribution costs (cont'd)

                For the six months ended June 30, 2001 and 2000 and for the
                years ended December 31, 2000 and 1999, the Company has written
                down film production and distribution costs by $145,272,
                $100,000, $308,564 and $261,153, respectively, in order to
                reduce the balance to its estimated net realizable value.

        h)      Intangible assets

                At each balance sheet date, the Company evaluates the period of
                amortization of intangible assets. The factors used in
                evaluating the period of amortization include: (i) current
                operating results, (ii) projected future operating results, and
                (iii) other material factors that affect the continuity of the
                business.

         i)     Equity method of accounting

                Investments in significantly (20 to 50 percent) owned affiliates
                are accounted for by the equity method of accounting, whereby
                the investment is carried at cost of acquisition, plus the
                Company's equity percentage in undistributed earnings or losses
                since acquisition. Reserves are provided where management
                determines that the investment or equity in earnings is not
                realizable.

           j)     Income taxes

                The Company accounts for income taxes in accordance with the
                "liability method" of accounting for income taxes. Accordingly,
                deferred tax assets and liabilities are determined based on the
                difference between the financial statement and tax bases of
                assets and liabilities, using enacted tax rates in effect for
                the year in which the differences are expected to reverse.
                Current income taxes are based on the respective periods'
                taxable income for federal, state and city income tax reporting
                purposes.

       k)       Revenue and cost recognition

                The terms of Breaking Waves' sales are FOB shipping point
                thereby revenue is recognized upon shipment from the warehouse.
                Sales returns are recorded upon acceptance of the goods by the
                warehouse. Duty costs, which are a component of cost of sales,
                are recorded upon the clearance of such goods through customs.








                                     F - 14
<PAGE>
                       SHOPNET.COM, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND 2000
               AND FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999



NOTE 2 -        SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)

          k)    Revenue and cost recognition (cont'd)

                Revenues from the theatrical distribution of motion pictures are
                recognized when motion pictures are exhibited. Revenues from
                video sales are recognized, together with related costs, on the
                date that video units are made widely available for sale by
                retailers. Revenues from the licensing of feature films,
                together with related costs, are recorded when the material is
                available for telecasting by the licensee and when certain other
                conditions are met. Film production and distribution costs are
                stated at the lower of unamortized cost or estimated net
                realizable value. In accordance with Financial Accounting
                Standards Board's Statement of Financial Accounting Standards
                ("SFAS") No. 53, "Financial Reporting by Producers and
                Distributors of Motion Pictures Films," the individual film
                forecast method is used to amortize film costs.

         l)     Earnings per share

                Earnings per common share is computed pursuant to SFAS No. 128
                "Earnings Per Share." Basic earnings per share is computed as
                net income (loss) available to common shareholders divided by
                the weighted average number of common shares outstanding for the
                period. Diluted earnings per share reflects the potential
                dilution that could occur from common shares issuable through
                stock options, warrants and convertible preferred stock.

         m)     Use of estimates

                In preparing financial statements in conformity with accounting
                principles generally accepted in the United States of America,
                management is required to make estimates and assumptions which
                affect the reported amounts of assets and liabilities and the
                disclosure of contingent assets and liabilities at the date of
                the financial statements and revenues and expenses during the
                reporting period. The most significant estimate with regard to
                these financial statements is the estimate of projected income
                of motion pictures which is the basis used in amortizing film
                production and distribution costs. Actual results could differ
                from those estimates.

          n)    Fair value disclosure at June 30, 2001 and December 31, 2000

                The carrying value of cash, accounts receivable, inventory,
                marketable securities, accounts payable, accrued expenses, and
                capital lease obligations are a reasonable estimate of their
                fair value.

          o)    Reclassifications

                Certain prior period accounts have been reclassified to conform
                to the current year presentation.



                                     F - 15
<PAGE>
                       SHOPNET.COM, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND 2000
               AND FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999



NOTE 2 -          SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)

         p)     Costs in excess of net assets of business acquired

                Costs in excess of net assets of business acquired in connection
                with the acquisition of Breaking Waves are being amortized on a
                straight line basis over the estimated useful life of the
                related assets acquired for a period of fifteen years.

         q)     Accounting for stock-based compensation

                The Company elected to continue to measure compensation cost
                using Accounting Principles Board Opinion ("APB") No.
                25,"Accounting for Stock Issued to Employees," as is permitted
                by SFAS No. 123, "Accounting for Stock-Based Compensation."
                Accordingly, no compensation cost has been recognized for the
                options issued under the Incentive Plan as the exercise price
                and market value at the date of grant were the same.

                For companies that choose to continue applying APB No. 25, SFAS
                No. 123 requires certain pro forma disclosures as if the fair
                value method had been utilized. Had compensation cost for the
                Company's stock-based compensation plan been determined based on
                the fair value at the grant dates for awards under the plan
                consistent with the method of SFAS No. 123, the Company's net
                income (loss) and earnings per share would have been reduced to
                the pro forma amounts indicated below utilizing the Black-Sholes
                option pricing model:
<TABLE>
<CAPTION>
                                                                   June 30,
                                                                                 2000                           December 31,
                                                        2001                 (unaudited)         2000               1999
                Net income (loss)-
<S>                                              <C>                     <C>                 <C>              <C>
                      as reported                $        (519,669)      $        (203,446)  $     (906,976)  $ (1,976,079)
                                                 =================       ==================  ===============  =============
                                      pro forma  $        (519,669)      $        (203,446)  $     (906,976)  $ (1,988,329)
                                                 ==================      ==================  ===============  =============


                Basic and Diluted EPS -
                           as reported           $            (.07)      $            (.03)  $         (.13)  $       (.33)
                                                 ==================      ==================  ===============  =============
                           pro forma              $           (.07)      $            (.03)  $         (.13)  $       (.33)
                                                 ==================      ==================  ===============  =============
</TABLE>




                                     F - 16
<PAGE>
                       SHOPNET.COM, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND 2000
               AND FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999



NOTE 2 -        SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)


          q)    Accounting for stock-based compensation (cont'd)

                The fair market value of each option grant is estimated at the
                date of grant using the Black-Scholes option pricing model with
                the following weighted-average assumptions:
<TABLE>
<CAPTION>

<S>                                                                             <C>
                                    Dividend yield                              0.00%
                                    Expected volatility                         30%
                                    Risk-free interest rate                     6%
                                    Expected life                               1-5 years
</TABLE>

           r)   Effect of new accounting standards

                The Company does not believe that any recently issued accounting
                standards, not yet adopted by the Company, will have a material
                impact on its financial position and results of operations when
                adopted.

NOTE 3 -        FURNITURE, COMPUTER EQUIPMENT & LEASEHOLD IMPROVEMENTS

                Furniture, computer equipment, and leasehold improvements
                are as follows:
<TABLE>
<CAPTION>

                                                                                June 30, 2001            December 31, 2000
<S>                                                                       <C>                           <C>
                           Furniture & fixtures                           $              38,727         $             38,727
                           Computer equipment and software                              104,070                       79,645
                           Leasehold improvements                                        13,415                       13,415
                                                                          ---------------------         ----------------------
                                                                                        156,212                      131,787
                           Less: accumulated depreciation
                                    and amortization                                     84,075                       70,079
                                                                          ---------------------         ----------------------
                                                                          $              72,137         $             61,708
                                                                          =====================         ======================
</TABLE>

                Computer equipment and software amounting to $61,506 is pledged
                in connection with capital lease obligations.

                Depreciation and amortization expense for the six months ended
                June 30, 2001 and 2000 and for the years ended December 31, 2000
                and 1999 amounted to $13,997, $21,876, $21,376 and $19,023,
                respectively.






                                     F - 17
<PAGE>
                       SHOPNET.COM, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND 2000
               AND FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999



NOTE 4    -     ACQUISITION OF BREAKING WAVES, INC.

                Pursuant to a stock purchase agreement dated May 31, 1996 (the
                "Agreement"), on September 24, 1996, the Company issued 110,000
                shares of common stock in exchange for all of the issued and
                outstanding capital stock of Breaking Waves. The transaction was
                accounted for using the purchase method of accounting. As a
                result of the transaction, excess of cost over net assets
                acquired totaling $1,064,283 was recorded and is being amortized
                over the useful lives of the related assets which is fifteen
                years. Amortization expense totaled $35,476 for each of the six
                months ended June 30, 2001 and 2000 and $70,952 for each of the
                years ended December 31, 2000 and 1999, respectively.

NOTE 5    -  INVESTMENTS IN MOVIE VENTURES

           a)   Battle Studies

                Pursuant to a co-production agreement dated April 17, 1998 with
                North Folk Films, Inc., the Company invested through June 30,
                2001 and December 31, 2000 $217,500 for a 50% interest in a new
                entity, Battle Studies Productions, LLC ("Battle Studies") a
                limited liability company. Battle Studies will be treated as a
                joint venture in order to co-produce motion pictures and to
                finance the costs of production and distribution of such motion
                pictures. The joint venture retains all rights to the motion
                pictures, the screenplays, and all ancillary rights attached
                thereto.

                The Company accounts for the investment in Battle Studies under
                the equity method. For the six months ended June 30, 2001 and
                2000 and for the years ended December 31, 2000 and 1999, the
                Company recorded $1,473, $-0-, $4,290 and $-0-, respectively,
                equity losses for its proportionate share of Battle Studies. No
                revenues have been derived from this film as of June 30, 2001
                and December 31, 2000.

                On October 12, 2000, Battle Studies entered into a distribution
                agreement with Raven Pictures International ("Raven Pictures")
                to distribute Battle Studies motion picture ("Machiavelli
                Rises") to foreign countries. Battle Studies has granted rights
                under the agreement for the theatrical, video, non-theatrical
                and television markets. The term of the agreement is for
                twenty-four months for all portions of territory outside of the
                United States and English speaking Canada. Battle Studies
                expects to realize 75% (which is net of a 25% fee to Raven
                Pictures) of the expected estimated gross revenues derived from
                foreign countries less $20,000 for marketing and advertising
                expenses.

                On January 17, 2001, Battle Studies entered into a distribution
                agreement with KOAN, Inc. ("KOAN") to distribute and promote
                Battle Studies' motion pictures ("Machiavelli Rises") in the
                United States and Canada. Battle Studies has granted rights
                under the agreement for free TV, pay TV, cable, satellite, video
                and DVD markets. The terms of the agreement is for twenty-four
                months and it will be automatically renewed unless KOAN receives
                a letter of cancellation at least thirty days prior to the date
                of termination or if sales have not exceeded $250,000 over the
                twenty - four month period. Battle Studies expects to realize
                70% (which is net of a 30% fee to KOAN) of the expected
                estimated gross revenues derived from the United States and
                Canada less $5,000 per year for promotional costs.


                                     F - 18
<PAGE>
                       SHOPNET.COM, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND 2000
               AND FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999



NOTE 5    -  INVESTMENTS IN MOVIE VENTURES (cont'd)

           b)   The Girl

                Pursuant to an agreement dated July 1, 1999 with Artistic
                License Films Inc., Hollywood invested through June 30, 2001 and
                December 31, 2000 $35,000 for a 22.533% interest in a new
                entity, The Girl, LLC a limited liability company ("The Girl").
                In return for its participation in The Girl, Hollywood is
                entitled to receive a non-contested, non-dilutable 22.533%
                ownership interest in The Girl, a recoupment of its investment
                on no less favorable terms than any other investor and 22.533%
                of 100% of any contingent compensation which shall be actually
                received by The Girl. The Girl retains all rights to the motion
                pictures, the screenplays and all ancillary rights attached
                thereto.

                Hollywood accounts for the investment in The Girl under the
                equity method. During the six months ended June 30, 2001, The
                Girl began to generate revenues resulting in a net equity loss
                to the Company of $1,298, resulting in an investment balance of
                $33,702 as of June 30, 2001.

NOTE 6    -     MARKETABLE SECURITIES - AFFILIATE

                On November 24, 1998, pursuant to a sales agreement entered into
                during September 1998 by and between Breaking Waves and Play Co.
                Toys & Entertainment Corp. ("Play Co," a toy retailer and a
                publicly traded company whose Chairman of the Board is also the
                President of Shopnet and the Company), Breaking Waves purchased
                1,400,000 unregistered shares of Play Co.'s common stock for a
                total of $504,000 comprised of $300,000 in cash and by shipping
                $204,000 of merchandise to Play Co. After the purchase, Breaking
                Waves owned 25.4% of the outstanding common stock of Play Co.

                Breaking Waves accounted for its investment under the equity
                method. For the year ended December 31, 1999 Breaking Waves
                recorded $994,305 of equity loss for its proportionate share of
                Play Co's loss for that year.

                As of December 31, 1999, the Company's investment in Play Co.
                was reduced to $-0- since its share of Play Co.'s losses
                exceeded its cost basis. In addition, as of December 31, 1999,
                as a result of Play Co.'s issuance of additional common stock
                and the Company's sale of 130,000 shares of Play Co.'s common
                stock, the Company's percentage ownership was reduced to 22.88%.








                                     F - 19
<PAGE>
                       SHOPNET.COM, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND 2000
               AND FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999



NOTE 6    -     MARKETABLE SECURITIES - AFFILIATE (cont'd)

                During the year ended December 31, 2000, Play Co. converted a
                portion of its series E preferred stock into common stock,
                thereby reducing Breaking Waves' ownership percentage to
                approximately 1.5%. Accordingly, upon this event the accounting
                method for the investment in Play Co. was changed to the
                requirements of SFAS No. 115 "Accounting for Certain Investments
                in Debt and Equity Securities." Under SFAS 115, the securities
                are considered available for sale and therefore the carrying
                value is based on the fair market value of the securities at
                June 30, 2001 and December 31, 2000 which amounted to $6,350 and
                $107,950, respectively. The change in unrealized gain or loss
                has been recorded as a component of comprehensive income. The
                Company has pledged such shares as collateral for a standby
                letter of credit in connection with Breaking Waves entering into
                a new factoring agreement with Century Business Credit
                Corporation ("Century") and are therefore considered non-current
                (See Note 8 (b)).

                On March 28, 2001, Play Co. filed for protection under Title
                Eleven of the United States Code with the United State
                Bankruptcy Court for the Southern District of New York. The
                filing was converted into a Title Seven filing on August 28,
                2001. The Company is in the process of developing a plan for the
                orderly liquidation of the Company's operations through
                discussions with representatives of its secured lender, other
                creditors, landlords and others under the supervision of the
                Bankruptcy Court.

NOTE 7  -      ACCRUED EXPENSES

<TABLE>
<CAPTION>
                Accrued expenses consist of the following:
                                                                           June 30, 2001                       December 31, 2000
                                                                       -----------------------            -----------------------


<S>                                                                    <C>                                <C>
                               Commissions                             $                   -              $              33,610
                               Professional fees                                      18,827                             17,500
                               Other corporate overhead                                3,138                             48,733
                                                                       ---------------------              ---------------------
                                                                       $              21,965              $              99,843
                                                                       =====================              =====================
</TABLE>

NOTE  8 -     DUE TO FACTOR

         a)      CIT Group

                On August 20, 1997, Breaking Waves entered into a factoring and
                revolving inventory loan and security agreement (as amended
                December 9, 1998) with CIT Group (formerly, Heller Financial,
                Inc. "CIT") to sell their interest in all present and future
                receivables without recourse. Breaking Waves paid CIT a
                factoring commission of .85% of the first $5,000,000 of
                receivables sold and .65% of receivables sold in excess of
                $5,000,000 for each year.






                                     F - 20
<PAGE>
                       SHOPNET.COM, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND 2000
               AND FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999



NOTE  8 -     DUE TO FACTOR (cont'd)

           a)    CIT Group (cont'd)

                Breaking Waves took advances of up to 85% of the receivable,
                with interest at the rate of 1 3/4% over prime. In connection
                with the factoring agreement, the Company agreed to maintain
                $1,150,000 of cash in a segregated account in order to
                collateralize standby letters of credit. In addition, during the
                year ended December 31, 1999, Breaking Waves was required to
                transfer an additional $200,000 of cash as collateral for the
                standby letter of credit.

                On or about September 12, 2000 the agreement with CIT was
                cancelled and a new factoring agreement was entered into as
                discussed below. As of June 30, 2001 and December 31, 2000, a
                balance of $-0- and $312 was due CIT, respectively. Interest
                expense related to this agreement totaled $204,821 and $228,772
                for the years ended December 31, 2000 and 1999.

         b)     Century Business Credit Corporation

                On or about September 12, 2000, Breaking Waves entered into a
                factoring and revolving inventory loan and security agreement
                with Century to sell their interest in all present and future
                receivables without recourse. Breaking Waves submits all sales
                offers to Century for credit approval prior to shipment, and
                pays a factoring commission of .75% of receivables sold. Century
                retains from the amount payable to Breaking Waves a reserve for
                possible obligations such as customer disputes and possible
                credit losses on unapproved receivables. Breaking Waves may take
                advances of up to 85% of the receivables, with interest at the
                rate of 1 3/4% over prime.

                In connection with the factoring agreement, the Company agreed
                to continue maintaining $1,150,000 of cash in a segregated
                account in order to collateralize standby letters of credit for
                Breaking Waves. Additionally, Breaking Waves was required to
                pledge as additional collateral $200,000 of its own cash and its
                investment in Play Co., which is represented by 1,270,000 shares
                of Play Co's common stock.

                Pursuant to the terms of a Reimbursement and Compensation
                Agreement (the "Agreement"), a trust ("Trust"), the beneficiary
                of which is a relative of the Company's President and Chief
                Executive Officer ("CEO") and a relative of a principal
                stockholder, pledged assets as collateral for securing a
                $250,000 letter of credit to replace a portion of the collateral
                previously pledged by the Company. Accordingly, on December 20,
                2000 the original agreement with the factor was amended to allow
                such replacement of collateral. Breaking Waves' Loan and
                Security Agreement with Century dated December 20, 2000 requires
                the provision of one or more letters of credit in the aggregate
                amount of $1,150,000 to partially secure the line of credit. See
                Note 16.






                                     F - 21
<PAGE>
                       SHOPNET.COM, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND 2000
               AND FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999



NOTE  8 -     DUE TO FACTOR (cont'd)

         b)     Century Business Credit Corporation (cont'd)

                Breaking Waves agreed to reimburse the Trust for any and all
                losses, fees, charges and expenses to the Trust in the event the
                letter of credit is called by Century and/or the issuing bank
                demands reimbursement from the Trust. Breaking Waves'
                obligations are guaranteed by the Company in addition to being
                secured by a first security interest in all of the assets of the
                Company and a subordinate security interest in all of the assets
                of Breaking Waves. On December 20, 2000, Breaking Waves paid a
                fee of $42,500 to the Trust and reimbursed the Trust for all
                related professional and other fees incurred by the Trust in
                connection with such transaction.

                On May 3, 2001, the Agreement was amended so that the letter of
                credit secured by the Trust was increased to $400,000. As a
                condition of the amendment, the Company entered into a guarantee
                agreement with Gal Capital Corp, whose President is a relative
                of the Company's President and CEO and a principal stockholder
                of the Company to act as guarantor of the obligation to the
                Trust up to $400,000 in exchange for a fee of $42,500 which the
                Company paid on May 3, 2001. The amended letter of credit
                expired on September 1, 2001 and was subsequently amended. See
                Note 16.

                Interest expense related to the factor agreement totaled
                $256,429 for the six months ended June 30, 2001 and $100,488 for
                the year ended December 31, 2000. Century has a secured interest
                in Breaking Waves' inventory as collateral for the advances. As
                of June 30, 2001 and December 31, 2000 the net advances to
                Breaking Waves from Century amounted to $1,700,337 and
                $3,165,597, respectively.

NOTE 9 -        LINE OF CREDIT

                On March 30, 2000, the Company entered into a revolving line of
                credit agreement with a bank. Total available credit under the
                line of credit is $250,000. Total outstanding balance was
                payable in monthly installments including 9% interest. As a
                condition of the line of credit, the Company was required to
                deposit $250,000 in a certificate of deposit as collateral with
                the bank. The line of credit was repaid in full and closed as of
                July 12, 2000.

NOTE 10 -       CAPITAL LEASE OBLIGATIONS

                During the year ended December 31, 1998, the Company acquired
                computer equipment and proprietary software for its subsidiary,
                Breaking Waves, pursuant to the following terms and conditions:

                 i) The Company acquired various computer and related components
                   for $28,583 by entering into a capital lease obligation with
                   interest at approximately 9.2% per annum, requiring 48
                   monthly payments of principal and interest of $762. The lease
                   is secured by the related computer equipment.



                                     F - 22
<PAGE>
                       SHOPNET.COM, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND 2000
               AND FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999



NOTE 10 -       CAPITAL LEASE OBLIGATIONS (cont'd)

                 ii) The Company acquired proprietary software for $32,923 by
                    entering into a capital lease obligation with interest at
                    approximately 10.9% per annum, requiring 48 monthly payments
                    of principal and interest of $850. The lease is secured by
                    the related software.

                At June 30, 2001, the aggregate future minimum lease payments
                due pursuant to the above capital lease obligations are as
                follows:
<TABLE>
<CAPTION>
                                                                                           Year ended
                                                                                               June 30:
                                                                                        ------------------

                                            <S>                                         <C>
                                            2002                                        $           19,344
                                            2003                                                     9,672
                                                                                        ------------------
                                     Total minimal lease payments                                   29,016
                                                                                        ------------------

                                        Less: Amounting representing interest                        7,305
                                                                                        ------------------

                          Present value of net minimum
                                          lease payments                                $           21,711
                                                                                        ==================
</TABLE>

                At June 30, 2001 and December 31, 2000 equipment and software
                under capital leases is carried at a book value of $24,606 and
                $30,750, respectively.

NOTE 11 -       (BENEFIT OF) PROVISION FOR INCOME TAXES

                (Benefit of) provision for income taxes is comprised of the
                following:
<TABLE>
<CAPTION>

                                                              June 30,
                                                                      (unaudited)                    December 31,
                                                     2001               2000                  2000                    1999
                  Current:
<S>                                             <C>                <C>                   <C>                  <C>
                         Federal                $            -     $            -        $            -       $              -
                         State and local                   642             10,970                 4,332                 21,234
                                                --------------     --------------        --------------       ----------------
                                                           642             10,970                 4,332                 21,234
                                                --------------     --------------        --------------       ----------------

                  Deferred:
                        Federal                              -                  -                (6,150)                     -
                          State and local               (1,098)                 -                (4,186)                (8,961)
                                                ---------------    --------------        ---------------      -----------------
                                                        (1,098)                 -               (10,336)                (8,961)
                                                ---------------    --------------        ---------------      -----------------

                  Total (benefit of) provision
                    for income taxes            $         (456)    $       10,970        $       (6,004)      $         12,273
                                                ===============    ==============        ===============      ================
</TABLE>

                                     F - 23
<PAGE>

                       SHOPNET.COM, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND 2000
               AND FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999



NOTE 11 -         (BENEFIT OF) PROVISION FOR INCOME TAXES (cont'd)

                  A reconciliation of the provision for income taxes on income
                  per the federal statutory rate to the reported income tax
                  expense is as follows:
<TABLE>
<CAPTION>
                                                                                 June 30,
                                                                                        (unaudited)     December 31,
                                                                        2001              2000             2000             1999
                                                                  ---------------     -----------    --------------- -------------
                  Federal statutory rate applied to
<S>                                                               <C>                <C>             <C>                <C>
                    pretax loss                                   $            -     $          -    $            -     $       -
                  State and local income taxes, net of
                    federal income tax benefit, applied
                    to pretax loss                                             -                -                 -             -
                  Permanent differences                                        -                -                 -             -
                  Increase in valuation allowance                              -                -           865,023        34,298
                  Current provision for state and local taxes                642           10,970             4,332        21,234
                  (Increase) in deferred tax assets                            -                -              -                -
                  Increase (decrease) in deferred tax liability           (1,098)               -          (875,359)      (43,259)
                                                                  ---------------     -----------    --------------- -------------

                    Total provision (benefit) for income taxes    $         (456)    $     10,970    $       (6,004)    $  12,273
                                                                  ===============    ============    =============== =============
</TABLE>


                  Income taxes are provided for the tax effects of transactions
                  reported in the financial statements and consist of taxes
                  currently due plus deferred taxes related to difference
                  between the financial statement and income tax bases of assets
                  and liabilities for financial statements and income tax
                  reporting purposes. Deferred tax assets and liabilities
                  represent the future tax return consequences of these
                  temporary differences, which will either be taxable or
                  deductible in the year when the assets or liabilities are
                  recovered or settled. Accordingly, measurement of the deferred
                  tax assets and liabilities attributable to the book-tax basis
                  differential are computed at a rate of 34% federal and 11%
                  state and local pursuant to SFAS No. 109.

                  The tax effect of significant items comprising the Company's
                  net non-current deferred tax assets and liability are as
                  follows:
<TABLE>
<CAPTION>

                                                                            June 30, 2001           December 31, 2000
                                                                       -------------------          -----------------

<S>                                                                     <C>                         <C>
                    Net operating loss carryforwards                    $        1,167,919          $           966,552
                    Inventory capitalization                                       166,995                        7,530
                    Write down of film costs                                       392,380                      256,373
                    Valuation allowance                                         (1,524,794)                  (1,027,955)
                                                                     ---------------------      -----------------------
                    Deferred non-current tax asset                                 202,500                      202,500
                                                                     ---------------------       ----------------------

                    Equity earnings of affiliate                                     2,858                       12,430
                    Depreciable assets                                                 748                       (7,726)
                                                                     ---------------------       ----------------------
                    Deferred non-current tax liability                               3,606                        4,704
                                                                     ---------------------       ----------------------

                    Net non-current deferred tax asset               $             198,894       $              197,796
                                                                     =====================       ======================
</TABLE>

                                     F - 24
<PAGE>

                       SHOPNET.COM, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND 2000
               AND FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999



NOTE 11 -         (BENEFIT OF) PROVISION FOR INCOME TAXES (cont'd)

                  Shopnet and its subsidiaries have a tax year end of December
                  31 and file a consolidated tax return for federal tax
                  purposes. For state and local purposes, Shopnet and its
                  subsidiaries file separate tax returns. As such, each entity
                  computes its state and local tax based on it own taxable
                  income or loss.

                  At June 30, 2001 and December 31, 2000, the Company had a net
                  operating loss carryforward (NOL) of approximately $2,072,000
                  for federal tax purposes and $2,172,000 for state tax
                  purposes, all of which expire between 2010 and 2020.
                  Management believes it is more likely than not that the
                  results of future operations will generate sufficient taxable
                  income to realize the deferred tax assets.

NOTE 12 -       COMMITMENTS AND CONTINGENCIES

          a)      Lease commitments

                  Shopnet and Breaking Waves have entered into lease agreements
                  for their administrative offices. Shopnet leases its
                  administrative office pursuant to a 5-year lease expiring
                  November 30, 2001 at annual rent amounting to approximately
                  $70,000, before annual escalations. Breaking Waves leased its
                  administrative offices pursuant to a lease requiring annual
                  payments of $71,600 expiring December 2004. Lastly, Breaking
                  Waves terminated its lease effective November 30, 2001. A new
                  6 year lease expiring September 30, 2007 was signed in July
                  2001 and is effective beginning December 1, 2001. Annual rent
                  under the new lease is $84,915 through December 31, 2004 and
                  $95,760 for the remainder of the lease. Lastly, Breaking Waves
                  leases an offsite office for one of its designers on a
                  month-to-month basis with annual payments approximating
                  $11,000.

                  The Company and Breaking Waves' approximate future minimum
                  rentals under non-cancelable operating leases in effect on
                  June 30, 2001 (including Breaking Waves' new lease) are as
                  follows:
<TABLE>
<CAPTION>

<S>                          <C>                                                    <C>
                             2002                                                   $       111,861
                             2003                                                            84,915
                             2004                                                            84,915
                             2005                                                            90,338
                             2006                                                            95,760
                             Thereafter                                                     119,700
                                                                                    ---------------
                                                                                    $       587,489
                                                                                    ===============
</TABLE>


                Rent expense for the six months ended June 30, 2001 and 2000 and
                for the years ended December 31, 2000 and 1999 amounted to
                approximately $83,500, $79,500, $163,900 and $172,700,
                respectively.


                                     F - 25
<PAGE>
                       SHOPNET.COM, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND 2000
               AND FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999



NOTE 12 -         COMMITMENTS AND CONTINGENCIES (cont'd)

           b)     Significant vendors and customers

                  Breaking Waves purchases 100% of its inventory from two
                  vendors, one in Indonesia and the other from Samoa. Breaking
                  Waves believes other sources and vendors are available and
                  that it is not dependent exclusively on these vendors. For the
                  six months ended June 30, 2001 and 2000 and for the years
                  ended December 31, 2000 and 1999, Breaking Waves had two, two,
                  three and four customers, respectively, which comprised 37%,
                  54%, 46% and 52%, of net sales, respectively.

            c)    Seasonality

                  Breaking Waves' business is considered seasonal with a large
                  portion of its revenues and profits being derived between
                  November and March. Each year from April through October,
                  Breaking Waves engages in the process of designing and
                  manufacturing the following season's swimwear lines, during
                  which time it incurs the majority of its production costs with
                  limited revenues.

           d)     License agreements

                         i) On October 16, 1995,  Breaking  Waves entered into a
                    license agreement with Beach Patrol,  Inc. ("Beach") for the
                    exclusive use of certain  trademarks  in the United  States.
                    The  agreement  covered a term from  January 1, 1996 to June
                    30, 1998 and contained a provision  for an additional  three
                    year extension, at the option of Breaking Waves, through and
                    until  June 30,  2001.  Breaking  Waves has  exercised  this
                    option, thereby extending the agreement. The agreement calls
                    for minimum annual royalties of $75,000 to $200,000 over the
                    life of the  agreement  with  options  based on sales levels
                    from  $1,000,000  for the first  year to  $4,000,000  in the
                    sixth year.  Breaking Waves has negotiated an additional two
                    year extension  thereby  extending the agreement through and
                    until June 30,  2003,  and it  contains a  provision  for an
                    additional  two year  extension,  at the option of  Breaking
                    Waves,  through and until June 30, 2005.  The new  agreement
                    signed  February 28, 2001 and  effective  July 1, 2001 calls
                    for minimum annual  royalties of $50,000 to $87,500 over the
                    life of the  extension  with  options  based on sales levels
                    from  $1,000,000  for the seventh year to  $1,750,000 in the
                    tenth year.  Breaking  Waves recorded  royalties  under this
                    agreement totaling $150,000,  $99,113, $163,009 and $162,501
                    during  the six  months  ended  June  30,  2001 and 2000 and
                    during  the  years  ended   December   31,  2000  and  1999,
                    respectively.

                         ii) On October 31, 1996,  Breaking Waves entered into a
                    license  agreement with North-South  Books, Inc. ("N-S") for
                    the exclusive use of certain art work and text in the making
                    of  swimsuits  and  accessories  in the  United  States  and
                    Canada.  The  agreement  expired on March 1, 1999.  Breaking
                    Waves  recorded  $-0-  and  $784  of  royalties  under  this
                    agreement during the years ended December 31, 2000 and 1999,
                    respectively.



                                     F - 26
<PAGE>
                       SHOPNET.COM, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND 2000
               AND FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999



NOTE 12 -         COMMITMENTS AND CONTINGENCIES (cont'd)

         d)       License agreements (cont'd)

                         iii) On October 17, 1997, Breaking Waves entered into a
                    license agreement with Kawasaki Motors Corp., U.S.A. ("KMC")
                    with an effective date of July 1, 1997 for the exclusive use
                    of  certain  trademarks  in the  making of  swimwear  in the
                    United  States.  The fee for the  exclusive  use of  certain
                    trademarks is five percent (5%) of net sales.  The agreement
                    expired on May 31, 1999 and was not renewed.  Breaking Waves
                    recorded  royalties  under this agreement  totaling $-0- and
                    $10,415  during the years ended  December 31, 2000 and 1999,
                    respectively.

                         iv) During June 2000,  Breaking  Waves  entered  into a
                    license agreement with an effective date of November 1, 2000
                    with Gottex Models Ltd., an Israeli  corporation  and Gottex
                    Models (USA) Corp.,  a New York  corporation  for the use of
                    the  trademark  "Gottex" in the United States of America for
                    children's  swimwear.  The agreement calls for a royalty fee
                    of 7% of net sales with guaranteed  minimum annual royalties
                    of  $70,000  to  $140,000  over the  life of the  agreement.
                    Breaking  Waves  recorded   royalties  under  the  agreement
                    totaling  $26,610  and $8,859 for the six months  ended June
                    30,  2001  and  for  the  year  ended   December  31,  2000,
                    respectively.

         e)     Co-production and property purchase agreements

                Pursuant to co-production and property purchase agreements dated
                March 15, 1996, as amended, the Company acquired the rights to
                co-produce a motion picture and to finance the costs of
                production and distribution of such motion picture with the
                co-producer agreeing to finance $100,000 of the costs of
                production. The Company retains all rights to the motion
                picture, the screenplay, and all ancillary rights attached
                thereto. The motion picture was completed during the latter part
                of 1996 and, accordingly, the Company commenced the marketing
                and distribution process.

                As of June 30, 2001 and December 31, 2000, the Company invested
                $1,971,956 for the co-production and distribution of such motion
                picture whereas the co-producers have invested $100,000. For the
                six months ended June 30, 2001 and 2000 and for the years ended
                December 31, 2000 and 1999, the Company derived no revenues from
                the motion picture and amortized no film costs.

                For the six months ended June 30, 2001 and 2000 and for the year
                ended December 31, 2000 and 1999, the Company has written down
                its film production and distribution costs by $145,272,
                $100,000, $308,564 and $261,153, respectively, in order to
                reduce the asset to its estimated net realizable value.







                                     F - 27
<PAGE>
                       SHOPNET.COM, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND 2000
               AND FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999



NOTE 12 -         COMMITMENTS AND CONTINGENCIES (cont'd)

         f)       Employment agreements

                  On November 27, 1996, Breaking Waves entered into two
                  employment agreements (as amended) with two key employees.
                  Such employees are responsible for the designing, marketing
                  and sales of Breaking Waves. The employment agreements are for
                  a term of three years with annual salaries of $110,000 each
                  for 1997 and $60,000 and $130,000 for 1998 (as amended),
                  respectively.

                  One of the employment agreements was further amended effective
                  January 1, 1999 with an annual salary increase from $60,000 to
                  $70,000. In connection with the decrease in salary from
                  originally $110,000 per year to $70,000 per year for one of
                  the key employees, the Company reduced the value of shares to
                  be issued to $13,636 for 1998. As of June 30, 2001, the
                  employees are still employed and all prior arrangements are in
                  effect.

                  Effective July 2001, Breaking Waves and the employees agreed
                  to decrease the annual salaries from $130,000 to $105,000 and
                  $70,000 to $50,000, respectively.

        g)        Litigation

                  On or about June 2000, an action was brought in the Queens
                  County Supreme Court against the Company and several others
                  claiming, among other things, that the Company allegedly
                  breached a contract and engaged in fraudulent statements
                  (including supposedly promising the plaintiff options and then
                  disallowing the exercise of these options). The plaintiff
                  seeks, among other things, compensatory damages in the amount
                  of $497,500 and punitive damages in the amount of $995,000,
                  together with costs and attorney's fees. The Company has
                  responded to the complaint and denied the allegations. The
                  Company intends to contest the action vigorously and believes
                  that such claims against it are baseless and without merit.

NOTE 13     -     STOCKHOLDERS' EQUITY

           a)   Stock Dividends

                         i) On January 14,  1999,  the  Company  declared a 100%
                    stock dividend to all  shareholders  of record as of January
                    29, 1999 amounting to a total of 2,686,944  shares of common
                    stock. The stock dividend was issued on February 5, 1999. In
                    order for shareholders to receive their stock dividend, they
                    must exchange the old shares for the new shares.

                         As a result of such stock dividend,  the Company issued
                    2,686,027  shares of its common  stock.  An  additional  917
                    shares are entitled to the  dividend,  and such shares shall
                    be  issued to the  holders  upon the  redemption  of the old
                    shares. After the effect of stock dividends these shares are
                    2,420 at June 30, 2001 and December 31, 2000.


                                     F - 28
<PAGE>
                       SHOPNET.COM, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND 2000
               AND FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999



NOTE 13     -   STOCKHOLDERS' EQUITY (cont'd)

         a)     Stock Dividends (cont'd)

                         ii) On  January  7, 2000,  the  Company  declared a 10%
                    stock dividend to all  shareholders  of record as of January
                    20, 2000 amounting to 537,389  shares of common stock.  Such
                    stock dividend was issued on February 1, 2000.

                         iii) On May 8, 2000,  the Company  declared a 20% stock
                    dividend  to all  shareholders  of record as of May 19, 2000
                    amounting to 1,245,235  shares of common  stock.  Such stock
                    dividend was distributed on June 19, 2000.

         b)     Sale of common stock

                On February 1, 2000, the Company sold 100,000 shares of common
                stock for $300,000 (before certain transaction costs) pursuant
                to a private transaction with an unrelated party. Giving effect
                to the May 2000 20% stock dividend the related shares are
                120,000.

         c)     1996 Senior Management Incentive Plan

                The shareholders approved the 1996 Senior Management Incentive
                Plan ("Incentive Plan") in May 1996. Officers, key employees and
                non-employees, who in the judgment of the Company render
                significant service to the Company, are eligible to participate.

                The Incentive Plan provides for the award of a broad variety of
                stock-based compensation alternatives such as non-qualified
                stock options, incentive stock options, restricted stock,
                performance awards and stock appreciation rights. The Incentive
                Plan provided 750,000 shares of common stock to be offered from
                either authorized and unissued shares or issued shares, which
                have been reacquired by the Company.

                On March 14, 1997, the Company granted 132,000 options to
                purchase shares of common stock pursuant to the Company's
                Incentive Plan consisting of 88,000 options to the Company's
                President and 44,000 options to another officer. The exercise
                price of each option was fixed at $1.46 (as revised) per share
                and the options expire March 2002. The terms of the options
                state that in the event of termination of optionee's employment
                the vested portion of the options shall remain exercisable for
                six months after termination, at which time the options expire.

                The officer granted the 44,000 options has resigned as an
                officer of the Company and is currently performing consulting
                services for the Company. Based on the terms of the option
                agreement his options should have terminated. The Company has
                agreed to extend the expiration date of such options to December
                2001.


                                     F - 29
<PAGE>
                       SHOPNET.COM, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND 2000
               AND FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999



NOTE 13     -   STOCKHOLDERS' EQUITY (cont'd)

           c)   1996 Senior Management Incentive Plan

                During April 1999, the Company granted its President 44,000
                stock options. The exercise price of each option is a $1.38 per
                share and the options expire April 16, 2004.

                A summary of the status of the Company's stock options
                outstanding as of December 31, 2000 and changes during the six
                months ended June 30, 2001 and during the years ended December
                31, 2000 and 1999 are as follows:

<TABLE>
<CAPTION>
                                    Number of                Exercise
                                    Options                   Price
                                  ----------               ----------
<S>                     <C> <C>    <C>                           <C>
Outstanding at December 31, 1998   132,000                       1.46
   Granted .....................    44,000                       1.38
   Exercised ...................      --                         --
   Cancelled ...................      --                         --
                                  ----------               ----------
Outstanding at December 31, 1999   176,000                 1.46 - 1.38
   Granted .....................      --                         --
   Exercised ...................      --                         --
   Cancelled ...................      --                         --
                                  ----------               ----------
Outstanding at December 31, 2000   176,000                $1.46 - 1.38
   Granted .....................      --                         --
   Exercised ...................      --                         --
   Cancelled ...................      --                         --
                                  ----------               ----------
Outstanding at June 30, 2001 ...   176,000                $1.46- 1.38
                                  ===========              ==========
</TABLE>

         d)     Warrants

                         i) Initially, each Warrant issued in the initial public
                    offering of September 24, 1996 entitled the holders  thereof
                    to purchase  one share of the  Company's  common stock at an
                    exercise price of $6.50 per share,  until September 9, 2001.
                    On August 31,  2001,  the Company  extended  the term of its
                    warrants by eighteen months, the Warrants will now expire on
                    March 10,  2003.  On June 23,  1997,  the Board of Directors
                    approved a reduction in the  exercise  price of the Warrants
                    from  $6.50 to $3.00.  On  February  5,  1998,  the  Company
                    effected  a one for  three  reverse  split of the  Company's
                    common stock. Accordingly, the Company adjusted the terms of
                    the Warrants to reflect the reverse split such that exercise
                    of three  Warrants  would entitle the holder to purchase one
                    share of common stock at an exercise price of $9.00.  Giving
                    effect to the  January  1999  100%  common  stock  dividend,
                    January  2000 10%  common  stock  dividend  and May 2000 20%
                    common stock  dividend the warrants  have been  cumulatively
                    adjusted  such  that  the  exercise  of each  Warrant  at an
                    exercise  price of $3.41  purchases .88 of a share of common
                    stock.



                                     F - 30
<PAGE>
                       SHOPNET.COM, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND 2000
               AND FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999



NOTE 13     -   STOCKHOLDERS' EQUITY (cont'd)

         d)     Warrants (cont'd)

                         ii) On April 15, 1998, the Company's Board of Directors
                    authorized  the  distribution  of warrants to all holders of
                    shares  of the  Company's  common  stock as of May 8,  1998.
                    Pursuant to the  distribution,  each  shareholder  of record
                    received  one warrant to purchase  one share of common stock
                    at an exercise price of $4.00 per share. The warrants, which
                    are exercisable for a period of three years,  commencing one
                    year after issuance,  shall be issued and  distributed  once
                    the Company has filed a registration  statement for same and
                    same has  been  declared  effective  by the  Securities  and
                    Exchange  Commission.  The Company to date has not filed the
                    registration statement.

         e)     Grant of Stock Options

                In connection with a consulting and option agreement entered on
                September 1, 1999, the Company granted 400,000 options to
                purchase shares of the Company as follows; 100,000 shares at an
                exercise price of $2.50 per share, 100,000 shares at an exercise
                of $3.00 per share, 100,000 shares at an exercise price of $3.50
                per share and 100,000 shares at an exercise price of $4.00 per
                share. No consulting expenses were recorded in connection with
                such options based on the underlying value of the stock on the
                grant date. As of September 2000, the options expired and no
                options were ever exercised.

NOTE 14 -    RELATED PARTIES TRANSACTIONS

           a)   During November 1998, the Company agreed to issue 215,732 shares
                of common stock in the amount equal to the fair market value of
                $38,636, to two key employees of Breaking Waves in connection
                with their employment agreements. The shares vested in November
                1999 and the Company recorded compensation expense amounting to
                $38,636 during the year ended December 31, 1999. The employees
                agreed to postpone the issuance of such shares of common stock
                as follows fifty percent of the shares in May 2000 and fifty
                percent of the shares in November 2000.

          b)    For the six months ended June 30, 2001 and 2000 and for the
                years ended December 31, 2000 and 1999, financial consulting
                fees were paid to a corporation and an individual who are
                related to the Company's President and CEO amounting to $24,000,
                $29,000, $51,080 and $36,000, respectively.

          c)    During October 1996, pursuant to two promissory notes,
                the Company loaned two of its officers a total
                of $87,000 bearing interest at six and one-half percent (6 1/2%)
                payable over three years. As of June 30, 2001 and December 31,
                2000, one Promissory note remains amounting to $37,000 and has
                been classified as current. As of June 30, 2001 and December 31,
                2000, the Company's President and CEO was also advanced
                additional funds totaling $3,000 which are non-interest bearing
                and due on demand and are classified as current.



                                     F - 31
<PAGE>
                       SHOPNET.COM, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND 2000
               AND FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999



NOTE 14 -    RELATED PARTIES TRANSACTIONS (cont'd)

          d)    During  October 1999,  Play Co.  loaned funds to Breaking  Waves
                in return for an  unsecured  promissory  note in the amount of
                $200,000.  Such note was due and was repaid in full on March 29,
                2000 plus interest at 9% per annum.

          e)    On November 29, 1999, Play Co. loaned additional funds to
                Breaking Waves in return for an unsecured promissory note in the
                amount of $400,000. Such note is due in two installments. The
                first installment of $100,000 was due and repaid January 30,
                2000 and the second installment of $300,000 was due and repaid
                April 30, 2000. Interest accrued at 9% per annum.

          f)    During  October  1999,  Play Co.  loaned  funds to the Shopnet
                in return for an  unsecured promissory  note in the amount of
                $50,000.  Such note is due in full and was repaid on March
                29, 2000 plus interest at 9% per annum.

          g)    On December 20, 2000, the Company entered into the Agreement
                with the Trust, the beneficiary of which is a relative of the
                Company's President and CEO and a relative of a principal
                stockholder. The Trust pledged assets as collateral for securing
                a $250,000 letter of credit to replace a portion of the
                collateral previously pledged by the Company in connection with
                its factoring agreement with Century. The Company paid $42,500
                to the Trust in connection with the Agreement.

                On May 3, 2001, the Agreement was amended so that the letter of
                credit secured by the Trust was increased to $400,000. As a
                condition of the amendment, the Company entered into a guarantee
                agreement with Gal Capital Corp, whose President is a relative
                of the Company's President and CEO and a principal stockholder
                of the Company to act as guarantor of the obligation to the
                Trust up to $400,000 in exchange for a fee of $42,500 which the
                Company paid on May 3, 2001. The amended letter of credit
                expired on September 1, 2001.

                On September 15, 2001, the Agreement was further amended so that
                the letter of credit secured by the Trust was increased to
                $750,000. The amended letter of credit expires on September 1,
                2001 but can be extended year to year at the Company's option
                for a period of ten years.

                On September 15, 2001, the Company entered into a new
                Reimbursement Agreement with relatives of a principal
                stockholder who is related to the President and CEO of the
                Company ("RAYA") who pledged assets as collateral for securing a
                $300,000 letter of credit as additional collateral in connection
                with Breaking Waves' factoring agreement with Century. Absent
                any default, the letter of credit will remain in effect for ten
                years.

                In exchange for the above letters of credit, the Trust and RAYA
                will proportionately, based on the total outstanding letters of
                credit, receive a fee of one and one quarter percent (1-1/4%) of
                net sales of Breaking Waves through June 30, 2002 and thereafter
                one and three quarters percent (1-3/4%) of net sales through
                September 30, 2011. Upon the signing of the Agreement, the Trust
                and RAYA received advance payments to be applied towards future
                fees of $24,500 and $12,250, respectively. All future payments
                are payable forty five days after the close of each fiscal
                quarter. See Note 16.

                                     F - 32
<PAGE>
                       SHOPNET.COM, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND 2000
               AND FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999



NOTE 15      -    INDUSTRY SEGMENTS

               The  Company's  operations  have  been  classified  into two
               segments: swimwear sales and film productions.  Information about
               the two segments is as follows:
<TABLE>
<CAPTION>

                                                                              Six months ended June 30,

                                                                 2001                                2000
                                                    -------------------------------  -----------------------------
                                                         Segment       Consolidated       Segment     Consolidated
                Sales:
<S>                                                 <C>               <C>            <C>            <C>
                    Swimwear sales                  $   4,728,948                    $   3,673,770
                    Film production                             -                                -
                                                    -------------                    -------------
                Total sales                                           $   4,728,948                 $    3,673,770
                                                                      =============                 ==============

                Operating income (loss):
                    Swimwear sales                                    $     208,902                 $      368,566
                    Film production                                        (145,272)                      (100,000)
                                                                      --------------                ---------------
                   Total   operating income                                  63,630                        268,566

                Corporate:
                    General and administrative
                     expense                                               (284,580)                      (283,244)
                    (Loss) equity in earnings of affiliate                   (2,771)                             -
                    Amortization expense                                    (35,476)                       (35,476)
                    Interest income                                          24,945                         35,905
                    Interest and finance expense                           (300,273)                      (189,327)
                    Other                                                    14,400                         11,100
                                                                      -------------               ----------------
                Loss from operations before (benefit)
                  provision for income tax                                 (520,125)                      (192,476)

                (Benefit) provision for income tax                             (456)                         10,970
                                                                      -------------               ----------------

                Net (loss) income                                     $    (519,669)             $        (203,446)
                                                                      ==============             ==================

                Identifiable assets:
                    Swimwear sales                                    $   1,313,223                 $    1,207,122
                    Film productions                                      1,451,167                      1,806,064
                    Corporate                                             1,757,685                      2,497,729
                                                                      -------------               ----------------

                Total assets                                          $   4,522,075              $       5,510,915
                                                                      =============              =================

</TABLE>

                                     F - 33
<PAGE>
                       SHOPNET.COM, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND 2000
               AND FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999



NOTE 15      -    INDUSTRY SEGMENTS (cont'd)
<TABLE>
<CAPTION>

                                                                     Years ended December 31,

                                                                 2000                         1999
                                                    -------------------------------  -----------------------------
                                                         Segment       Consolidated       Segment     Consolidated
                Sales:
<S>                                                 <C>               <C>            <C>            <C>
                    Swimwear sales                  $   5,713,133                    $   4,756,497
                    Film production                             -                                -
                                                    -------------                    -------------
                Total sales                                           $   5,713,133                 $    4,756,497
                                                                      =============                 ==============

                Operating income (loss):
                    Swimwear sales                                    $     310,068                 $       37,800
                    Film production                                        (314,135)                      (268,880)
                                                                      --------------                ---------------
                   Total   operating income                                  (4,067)                      (231,080)

                Corporate:
                    General and administrative
                     expense                                               (564,346)                      (626,175)
                    (Loss) equity in earnings of affiliate                   (4,290)                      (994,305)
                    Gain on sale of equity investment                             -                        130,093
                   Amortization expense                                     (70,952)                       (70,952)
                    Interest income                                          80,156                         56,212
                    Interest and finance expense                           (371,752)                      (243,148)
                    Other                                                    22,271                         15,549
                                                                      -------------               ----------------
                Loss from operations before (benefit)
                  provision for income tax                                 (912,980)                    (1,963,806)

                (Benefit) provision for income tax                           (6,004)                       12,273
                                                                      -------------               ----------------

                Net (loss) income                                     $    (906,976)             $      (1,976,079)
                                                                      ==============             ==================

                Identifiable assets:
                    Swimwear sales                                    $   4,072,174                 $    3,219,328
                    Film productions                                      1,598,210                      1,906,064
                    Corporate                                             1,993,411                      2,302,228
                                                                      -------------               ----------------

                  Total assets                                        $   7,663,795              $       7,427,620
                                                                      =============              =================
</TABLE>


Operating profit is total revenue less cost of sales and operating expenses and
excludes general corporate expenses, interest expense and income taxes.
Identifiable assets are those used by each segment of the Company's operations.
Corporate assets are primarily cash and investments.

                                     F - 34
<PAGE>
                       SHOPNET.COM, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND 2000
               AND FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999



NOTE 16      -    SUBSEQUENT EVENT

                  On September 15, 2001, Century required the Company to
                  increase the amount of collateralized standby letters of
                  credit by $300,000 raising such amount to $1,450,000.

                  On  September  15,  2001,   the  Amended  and  Restated
                  Reimbursement  and Compensation  Agreement (See Note 8b) was
                  further  amended so that the letter of credit secured by the
                  Trust was  increased  to  $750,000.  The  amended  letter of
                  credit expires on September 1, 2002 but can be extended year
                  to year at the  Company's  option for a period of ten years.
                  Breaking Waves agreed to reimburse the Trust for any and all
                  losses, fees, charges and expenses to the Trust in the event
                  the letter of credit is called by Century and/or the issuing
                  bank demands  reimbursement from the Trust.  Breaking Waves'
                  obligations  are  guaranteed  by the  Company in addition to
                  being  secured by a first  security  interest  in all of the
                  assets of the Company and a subordinate security interest in
                  all of the assets of Breaking Waves.

                  On September 15, 2001, the Company entered into a new
                  Reimbursement Agreement with relatives of a principal
                  stockholder who is related to the President and CEO of the
                  Company ("RAYA") who pledged assets as collateral for securing
                  a $300,000 letter of credit as additional collateral to secure
                  Breaking Waves' Loan and Security Agreement with Century.
                  Absent any default, the letter of credit will remain in effect
                  for ten years. The agreement is guaranteed by Shopnet under a
                  separate Security Agreement dated September 15, 2001.

                  In exchange for the letters of credit, the Trust and RAYA will
                  proportionately, based on the total outstanding letters of
                  credit, receive a fee of one and one quarter percent (1-1/4%)
                  of net sales of Breaking Waves through June 30, 2002 and
                  thereafter one and three quarters percent (1-3/4%) of net
                  sales through September 30, 2011. Upon the signing of the
                  Agreement, the Trust and RAYA received advance payments to be
                  applied towards future fees of $24,500 and $12,250,
                  respectively. All future payments are payable forty five days
                  after the close of each fiscal quarter.

                  In exchange for facilitating the financing arrangements for
                  both the Amended and Restated Reimbursement and Compensation
                  Agreement and the Reimbursement Agreement dated September 15,
                  2001, Arc Financial Corp. ("Arc") received a consulting fee of
                  i)$209,500 on September 15, 2001 ($20,000 per year for ten
                  years payable in advance plus costs) and ii) one and one
                  quarter percent (1-1/4%) of net sales of Breaking Waves
                  through June 30, 2002 and one and three quarters (1-3/4%)
                  percent of net sales through September 30, 2011. On September
                  15, 2001, Arc received advance payments to be applied towards
                  future fees of $36,750. All payments are payable forty five
                  days after the close of each fiscal quarter. The agreement
                  with Arc expires September 30, 2011.








                                     F - 35