SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-KSB

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

    For the fiscal year ended: December 31, 2004

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

    For the transition period from ______ to ________

                              SEC File No. 0-32199

                                  MidNet, Inc.
                 (Name of Small Business Issuer in its Charter)

            DELAWARE                                     95-4735256
(State or other jurisdiction of             (I.R.S. Employer Identification No.)
incorporation or organization)

                      Suite 300, 1055 West Hastings Street
                          Vancouver, BC Canada V6E 2E9
               (Address of principal executive offices) (Zip Code)

                    Issuer's telephone number: (604) 609-6188

           Securities registered under Section 12(b) of the Act: None

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

                          Common Stock $.0001 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 Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]

Check if there is no disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]

State issuer's revenues for the most recent fiscal year: $2,897.

On December 31, 2004, the aggregate market value of the voting stock held by
non-affiliates of the Registrant was approximately $14,008,569, computed by
reference to the price at which the stock was sold on such date.

There were 15,684,335 shares of common stock at $.0001 par value outstanding as
of December 31, 2004.

Documents incorporated by reference: None.

Transitional Small Business Format (check one): Yes [ ] No [X]
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ITEM 1. DESCRIPTION OF BUSINESS

                           FORWARD LOOKING STATEMENTS

This annual report contains forward-looking statements by the registrant based
on its current expectations about its business and its industry. You can
identify these forward-looking statements when you see words such as "EXPECT",
"ANTICIPATE", "ESTIMATE" and other similar expressions. These forward-looking
statements involve risks and uncertainties and actual results could differ
materially from those anticipated in these forward-looking statements as a
result of such risk factors as discussed in Business Description, Risk Factors
and elsewhere in this Registration Statement. THE REGISTRANT undertakes no
obligation to publicly update any forward-looking statements for any reason,
even in the event new information becomes available or other events occur in the
future.

Unless otherwise indicated, all references to "DOLLARS", "$" or "US$" refer to
U.S. dollars and all references to "CDN$" refer to Canadian dollars.

                                   THE COMPANY

BACKGROUND

MidNet, Inc., is a Delaware corporation, incorporated on July 20, 1998, under
the name Tugboat International, Inc. (together with its subsidiary, Tugboat
Acquisition Corp., a Nevada corporation, referred to in this report as the
"Company" or "Corporation"). On February 4, 2004, the management of TUGBOAT
INTERNATIONAL, INC., solicited votes from selected shareholders of record
("Selected Shareholders"), to consider and act upon:

     1.   The Directors' proposal to amend the Corporation's Articles of
          Incorporation to change the Corporation's name from TUGBOAT
          INTERNATIONAL, INC., to MIDNET, INC.

These Selected Shareholders approved the above motion in a written resolution.

The Company believes this change in its name will better reflect the nature of
its business.

MERGER AND REORGANIZATION

MidNet has two wholly owned subsidiaries:

     *    MidNet USA, Inc., a Nevada corporation incorporated on January 16,
          2002 (MidNet USA, Inc. was formerly known as MidNet, Inc.; the company
          changed its name effective May 12, 2004 to avoid confusion with its
          parent company). This company conducts MidNet's operations in the
          United States; and

     *    MidNet Canada, Inc., a Canadian federal corporation incorporated on
          March 30, 2004 and acquired by MidNet in April 2004. This entity
          conducts MidNet's operations in Canada

Effective December 11, 2003, Tugboat International, Inc. ("Tugboat"), a Delaware
Corporation and MidNet, Inc. ("MidNetNV"), a Nevada corporation, completed an
agreement and plan of merger whereby Tugboat issued 7,505,935 shares of its
common stock and 300,000 shares of its preferred stock in exchange for all of

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the outstanding common stock of MidNetNV. Immediately prior to the agreement and
plan of merger, Tugboat had 5,544,000 shares of common stock issued and
outstanding. The acquisition was accounted for as a recapitalization of MidNetNV
because the shareholders of MidNetNV controlled Tugboat after the acquisition.
Therefore, MidNetNV was treated as the acquiring entity for accounting purposes
and Tugboat International, Inc. was the surviving entity for legal purposes.
Effective March 17, 2004, Tugboat changed its name to MidNet, Inc. and on May
12, 2004, MidNetNV changed its name to MidNet (USA), Inc. [from Notes to
Financials]

On December 11, 2003, registrant (MidNet, formerly Tugboat International, Inc.),
by and through its wholly-owned subsidiary, Tugboat Acquisition Corp., a Nevada
corporation ("TAC"), entered into a merger and reorganization agreement to
acquire 100% of the total issued and outstanding shares of MidNet, Inc., a
Nevada corporation ("MidNetNV"), from the shareholders of MidNetNV, in full and
sole consideration of 7,506,000 shares of the registrant's restricted Common
Stock, representing 58% of the total outstanding shares of Common Stock of
Tugboat, post-merger. The transaction did not involve the transfer of any funds.
The 7,506,000 shares were issued directly by Tugboat from its authorized but
unissued shares of Common Stock. The shareholders of MidNet now have direct
beneficial ownership and voting control of Tugboat.

In addition, the holders of 300,000 shares of Preferred Stock of MidNet
exchanged their shares for 300,000 shares of Tugboat Preferred Stock, $.0001 per
share par value. The 300,000 Tugboat Preferred Shares have the identical rights
and preferences as the 300,000 Preferred Shares issued by MidNet.

In addition, options, for members of the Advisory Board and two consultants of
MidNet, to acquire 1,260,000 restricted shares of MidNet, at an exercise price
of $.50 per share, were exchanged for options to acquire 1,260,000 restricted
shares of Tugboat, at an exercise price of $.50 per share, on the same terms and
conditions of the MidNet options.

There are no arrangements or understandings among members of the former and/or
the new control groups of the Company and/or their respective associates with
respect to the election of directors or other matters.

Concurrent with the merger, the following persons were appointed as Directors of
the Company: Ruedi Aschwanden, Tilo Kunz and Peter Fentiman. Karen A. Batcher
resigned as President, Secretary and Treasurer of Tugboat and the Board of
Directors appointed Peter Fentiman to serve as President. Mr. Aschwanden was
appointed to serve as interim Secretary and Treasurer.

There are no arrangements, known to the registrant, the operation of which may,
at a subsequent date, result in a change in control of registrant.

The shareholders of MidNet now have direct beneficial ownership and voting
control of Tugboat.

                                    BUSINESS

Over the past four years, the founders of MidNet developed the proprietary
configuration technology and software architecture called "The Middle
Network(SM)." The Middle Network(SM), is designed to allow its potential
customers to communicate digitally in a private, reliable and affordable
environment. The Middle Network(SM) provides a unique neutral data
communications environment among telecommunications infrastructure companies,
such as AT&T, Sprint and Verizon

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("Telco"), Application Service Providers such as Corio and BlueStar Solutions,
who are third-party entities that manage and distribute software-based services
and solutions to customers across a wide area network from a data center or
other information technology installations ("ASP") and the customers/consumers
of the Telcos and ASPs. This network is totally neutral and, by virtue of its
immense capacity, provides a complementary and effective digital alternative to
the unsecured congested Internet (fraught with viruses, worms and hackers),
land-based parcel couriers (such as FedEx and UPS) and expensive limited private
networks. MidNet anticipates users of The Middle Network(SM) will accept it as a
critical enhancement utility that will become an integral operational component
to the sustainability and future growth of the
users' businesses. We do not have any arrangements or understandings with any of
the companies named in this paragraph; they are merely provided for illustrative
purposes.

MidNet intends to generate revenue by charging fees to send and receive digital
data over The Middle Network(SM). Just as couriers and shipping companies use
trucks and other means of transportation to move packages and pay for such
services based on weight and distance, MidNet's customers will send and receive
digital packages over our private network at a cost based on number of gigabytes
sent and/or received.

When we refer to The Middle Network(SM) as neutral, we mean that it will be
independent and unrelated to any specific hardware, software, application
service providers and/or telecommunication service providers.

                PRINCIPAL PRODUCTS AND SERVICES AND THEIR MARKETS

MidNet does not offer any products and its principal service offered is its
proprietary digital network called The Middle Network(SM). The Middle
Network(SM) is intended to be a commercial alternative to the Internet.

MidNet's primary markets are expected to be Application Service Providers
("ASPs") serving the media and entertainment industry and their customers, both
current and future. Additionally, this market potentially includes companies
that have created their own application services or private networks. MidNet
will focus on those customers based in Canada and the United States in the key
media centers of Vancouver, Toronto, Montreal, Los Angeles, Chicago, and New
York.

                                    SERVICES

MidNet's purpose is to provide a reliable network-operating environment within a
secure private network and act as the middle layer between telecommunication
infrastructure companies, Application Service Providers and the end users.
MidNet intends to provide the means to move high-speed secured data, metered in
gigabyte units, for a broad mix of services within the MidNet's secure
environment, including:

     *    Digital media transfer
     *    Digital collaboration
     *    Security
     *    Videoconferencing
     *    E-commerce transaction fulfillment
     *    Unified messaging (including email)

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From an operational standpoint, The Middle Network(SM) allows a company to
communicate without the use of the Internet, thereby reducing the possibilities
of:

     *    viruses
     *    worms
     *    hackers
     *    intermittent reliability
     *    unreliable bandwidth

The Middle Network(SM) uses private circuits leased from telecommunication
companies, such as, for example AT&T, to establish its private digital network.
These private circuits, or networks, are controlled exclusively by MidNet. These
private circuits are called "The Middle Network(SM)". The only data transmitted
over these private circuits is controlled exclusively by MidNet. Customer access
to The Middle Network(SM) is allowed by providing each customer with an
electronic switch, provided to the customer by MidNet. The customer uses The
Middle Network(SM) through their individual access device to transmit data over
the network to other customers on the network. Thus if customer A wants to
transmit data to a third party through The Middle Network(SM), the third party
must also be a customer of The Middle Network(SM) and have their individual
access device provided by MidNet. MidNet electronically establishes closed
circuits between users, thus creating a private line of communication. Contrast
this to the Internet which effectively provides wide open access to everyone and
everyone is using the same bandwidth or circuit. It is relatively easy to
introduce a virus or worm into the Internet circuit because it is wide open and
unprotected and not a private channel. Since each transmission of data on The
Middle Network(SM) is on its own individual closed circuit between two users, a
worm or virus would be restricted to that connection and would not spread
throughout The Middle Network(SM).

The Middle Network(SM) is private because the Company leases private circuits.
And because The Middle Network(SM) is a closed, private network, traffic is
controlled and bandwidth is consistent and thus reliable. It is more advanced
than the Internet because it is private and controlled.

In addition, use of The Middle Network(SM) could eliminate the need for a
company to establish an expensive inter-office private network. The Middle
Network(SM) is intended to offer the same protected networking environment as an
inter-office private network, but without the associated costs and logistics of
operating a private network. Additionally, with a private network, companies may
be required to subscribe for bandwidth they may not actually utilize. On The
Middle Network(SM), users will only be charged for bandwidth actually used.

The Middle Network(SM) is comparable to an inter-office private network because
it uses private circuits like an inter-office network. As for cost and logistics
advantages, to establish an inter-office private network a company must research
what is available, solicit quotes, place orders for lines and equipment, buy and
install switches, often hire personnel to manage and operate the network, and
provide ongoing maintenance and support, 24 hours a day, seven days a week. To
further complicate this process, the company could find itself working with
multiple telecommunication providers. MidNet, on the other hand, assumes
responsibility for these functions and in return customers pay for the bandwidth
actually used.

The Middle Network(SM) also avoids the problems created by the geographic
boundaries or regional focus of telecommunication companies by connecting
otherwise disparate systems. Consider your local phone service. Your choice of

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local phone providers is limited to the companies in your area, and often times
you have only one telephone company to choose from (although your local cable
company may be able to provide telephone service). The same is true for other
telecommunication services. For example, a telecommunication company based in
the southeastern part of the United States is going to be limited in its ability
to provide telecommunication services to someone located in the northwest
because they do not have infrastructure in the northwest. The southeastern Telco
must work with their competitor in the northwest to deliver its services. The
Middle Network(SM) will not be subject to those geographic limitations. MidNet
will be able to connect the customer in the northwest to customers, vendors and
other offices located in the southeast. From the users' perspective, MidNet's
network will seamlessly span all telecommunications networks and services
because it is complementary to the telecommunication companies and not
competitive.

Additionally, the markets for data and Internet-related services are
characterized by rapidly changing technology, evolving industry standards,
changing customer needs, emerging competition and the frequent introduction of
new products and services. The future success of our proposed data services
business will depend, in part, on our ability to accomplish the following in a
timely and cost-effective manner:

     *    effectively use leading technologies and update or convert from
          existing technologies and equipment;
     *    continue to develop technical expertise;
     *    develop new services that meet changing customer needs; and
     *    influence and respond to emerging industry standards and other
          technological changes.

The pursuit of necessary technological advances may require substantial time and
expense. Moreover, in the course of business, MidNet must make choices regarding
technology based on its understanding of technological trends. If the technology
choices to be made prove to be incorrect, ineffective or unacceptably costly,
the ability to meet customers' demands for existing and future
telecommunications services could be impaired, which would adversely affect
MidNet's growth and operating results.

DISTRIBUTION

MidNet plans to distribute and deliver The Middle Network(SM) through:

     -    Private circuits leased from various telecommunication providers, such
          as AT&T, Verizon and Sprint; and
     -    Co-location facilities leased from various companies, like Level 3
          Communications.

The private circuits include circuits that connect customers to the co-location
facilities or aggregation points within a city, as well as long haul circuits
between cities.

Co-location facilities provide services and space within which MidNet installs
its equipment. MidNet will own or lease the equipment it installs in co-location
facilities.

NEW PRODUCTS OR SERVICES

MidNet currently has no new products. Its service, as announced to the public,
is a multi-company network called The Middle Network(SM).

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INDUSTRY

MidNet is in the general telecommunications industry. Currently, there are many
companies that provide digital communications services, data networking
services, and application services, but MidNet is unaware of any company that
provides a service that currently competes with The Middle Network(SM).

MidNet is creating a commercial alternative to the Internet and private data
networks. The Middle Network(SM) will represent a new way to send digital
information privately between geographic locations. The Middle Network(SM) is
also a digital alternative to parcel courier services such as UPS and Federal
Express, allowing the high-speed transfer of information (i.e., digital
packages) from location to location in a private and cost effective manner.

COMPETITIVE BUSINESS CONDITIONS

We believe conventional methods, such as digital communications services, data
networking services, and application services, will continue to be a prime
source of competition, along with many other Internet based services.

We believe that acceptance of our services will depend on the following factors,
among others:

     *    the growth of private networks as a medium for communication and
          commerce generally, and as a market for intellectual properties,
          financial products and services in particular;
     *    development of a neutral private network infrastructure to support new
          technologies and handle the demands placed upon electronic
          communications;
     *    government regulation of incumbent and competitive local exchange
          carriers;
     *    the ability to successfully and efficiently develop on-line services
          that are attractive to a sufficiently large number of consumers and
          businesses; and
     *    a change in the perception among many consumers, businesses and
          service providers that utilizing our on-line services is more
          dependable than obtaining competitive services through digital
          communications services, data networking services, and application
          services, the existing and more traditional methods.

COMPETITORS

Many telecommunication companies provide virtual private network services. In
contrast to a true private network which has a dedicated private circuit, a
"virtual" private network actually uses shared networks or bandwidth combined
with a software configuration to make it appear private. Companies that provide
these services include, for example, AT&T, Verizon and Sprint. However, MidNet
is currently unaware of any competitor providing a service that competes
directly with The Middle Network(SM) because all other companies providing
telecommunication services provide their own proprietary application services
along with their telecommunication services. In contrast, MidNet's services are
complementary to Inter-Exchange Carriers (IXCs), such as AT&T and Sprint, as
well as Competitive Local Exchange Companies (CLECs), such as regional
telecommunication companies like Qwest and BellSouth because both the IXCs and
CLECs allow third party ASPs to provide services through the Middle Network(SM).
By complementary, we mean that MidNet will use and pay for telecommunication
services from IXCs and CLECs to host The Middle Network(SM).

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It is not anticipated that IXCs or CLECs would block MidNet from using their
services because MidNet is not competing with those companies. In fact, MidNet
is complementary to the IXCs and CLECs and represents a potential source of
revenue to them via the leasing of their circuits. In addition, although they
can compete using their own virtual private networks, MidNet, like all
consumers, is granted the right to acquire access under the Telecommunications
Act of 1996 and telecommunication companies can not prohibit such access.

Additional competition may come from independent application service providers,
or ASP's, such as Microsoft, Apple and Oracle. ASPs either have to deliver their
services over the Internet or create their own private or semi-private networks
to provide advanced telecommunication services, such as videoconferencing. The
Middle Network(SM) will make it possible for ASP's to provide their services
without the need to create their own networks.

OUR COMPETITIVE POSITION

The Internet is the only direct competition that MidNet is aware of, and the
Company differentiate itself by providing a private and reliable network that
has the ability to deliver advanced communication services, such as full screen,
full resolution videoconferencing, at prices that will compete with existing
long distance telephone calling. In addition, the Internet is not exclusive to
any one company. The Middle Network(SM) is private because it leases private
circuits. And because The Middle Network(SM) is a closed, private network,
traffic is controlled and bandwidth is consistent and thus reliable.
Additionally, this network will employ a mesh design (i.e., more than one path
available) and will have built-in redundancy.

Competition takes place on many levels, including pricing, convenience in
obtaining services, breadth of services offered and ease of use, among others.
MidNet's intent is to brand The Middle Network(SM) as one of the leading
specialty service providers for businesses that would normally use digital
communications services, data networking services and application services.

MidNet's objective is to provide a service that helps businesses cut through the
often perceived clutter, confusion and noise of the marketplace and help them
confidently and quickly find what MidNet believes is a new, viable and efficient
alternative to the traditional digital communications services, data networking
services, and application services.

We will attempt to brand MidNet as what we believe is a new, private, neutral
and cost-effective solution to communication services now provided by digital
communications services, data networking services and application services
providers. By attempting to provide specialized services for businesses, we will
seek to differentiate ourselves from other competing service providers. Our
services will allow our proposed customers to utilize a telecommunications
network that we call "neutral", because it will allow them a choice between our
network versus the traditional and costlier telecommunication service providers.
Our specialized service enables interaction between multiple companies in a
private network (i.e., a multi-company private network).

In attempting to brand and differentiate itself, MidNet has no assurance it will
be successful over its competitors, or that it will be successful in competing
in the marketplace with its proposed services.

MidNet expects that its operations will depend on a number of third parties over
which it will have limited control. Specifically, it intends to lease private
transmission lines and co-location spaces from unrelated third-party providers.

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In addition, MidNet does not plan to own an Internet gateway, but instead, will
rely on a third-party, independent and unrelated service providers to host its
website and provide gateway services to public networks. Hence, MidNet may
experience interruptions in its leased private transmission lines and
co-location spaces, as well as with its website connection and its
telecommunications access. This could result in loss of business and revenues.

It is anticipated that MidNet will use software that is dependent on an
operating system, database and server software developed and produced by and
licensed by independent third parties. The Company may discover errors and
defects in this third party software and rely on the third parties to correct
these errors and defects in a timely manner. Accordingly, continuous or
prolonged interruptions in its private transmission lines and co-location
spaces, as well as its website connection or in its telecommunications access or
services could have an adverse effect upon consumer perception of MidNet's
ability to provide private network services in a competent, timely and efficient
manner.

A significant barrier to entry in the area of electronic commerce and
communications is the secure transmission of confidential information over
public and private networks. MidNet relies on encryption and authentication
technology licensed from third parties to provide the security and
authentication necessary to effect secure transmission of confidential
information. There can be no assurance that advances in computer capabilities,
new discoveries in the field of cryptography or other events or developments
will not result in a compromise or breach of the algorithms used to protect
customer transaction data. If any compromise of MidNet's security were to occur,
potential users may lack confidence in the Company's ability to protect their
business communications and commerce information, such as credit card
information, billing address, etc. Furthermore, MidNet may be subject to damage
claims from users or others.

A party who is able to circumvent MidNet's security measures could
misappropriate the Company's proprietary information. MidNet may be required to
expend significant capital and other resources to protect against security
breaches or to alleviate problems caused by breaches. Concerns over the security
of Internet transactions and the privacy of users may also inhibit the growth of
private networks generally, and The Middle Network(SM) in particular, especially
as a means of conducting business and commercial transactions. To the extent
that future activities or those of third party contractors, whom MidNet may use,
involve the storage and transmission of proprietary information, such as
business information and data, and financial data, including credit card
numbers, security breaches could expose the Company to a risk of loss or
litigation. There can be no assurance that MidNet will be able to implement
security measures that will prevent security breaches.

MidNet cannot provide any assurances as to the actual useful life of any of the
technical systems used in The Middle Network(SM). A number of factors will
ultimately affect the useful life of each of its systems including, among
others, quality of construction, unexpected damage or deterioration and
technological or economic obsolescence.

Interruptions in service or performance problems, for whatever reason, could
undermine confidence in MidNet's services and cause the Company to lose
customers or make it more difficult to attract new ones. In addition, because
many of its services are critical to customers' businesses, a significant
interruption in service could result in lost profits or other loss to customers.
Although MidNet attempts to disclaim liability for these losses in its service

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agreements, a court might not enforce a limitation on liability, which could
expose the Company to financial loss. In addition, MidNet expects to provide
some of its customers with guaranteed service level commitments. If unable to
meet these guaranteed service level commitments for whatever reason, MidNet may
be obligated to provide its customers with credits, generally in the form of
free service for a short period of time, which could negatively affect operating
results.

Finally, many of MidNet's potential competitors have greater resources, greater
marketing presence and greater name recognition than MidNet.

SOURCES AND AVAILABILITY OF RAW MATERIALS

As of the date of this filing, MidNet has the necessary suppliers available to
execute its plan of operations.

CUSTOMERS

MidNet intends to provide The Middle Network(SM) to ASPs and end-user customers
who either receive services from ASPs or have created their own application
services or private networks. As of December 31, 2004 MidNet had six (6)
end-user premises connected to The Middle Network(SM).

REGULATORY CONSIDERATIONS

MidNet's multi-company private network, The Middle Network(SM) runs over
regulated CLECs and Inter-Exchange Carriers (IXCs). The Middle Network(SM)
provides a digital environment to enable ASPs that may or may not be regulated
in the future, depending on whether the FCC changes its current rulings under
which enhanced service providers, like MidNet, are exempt from federal and state
regulations governing common carriers.

The FCC has to date treated Internet service providers as enhanced service
providers. Enhanced service providers are currently exempt from federal and
state regulations governing common carriers, including the obligation to pay
access charges and contribute to the universal service funds. The FCC is
currently examining the status of Internet service providers and the services
they provide. If the FCC were to determine that Internet service providers, or
the services they provide, are subject to FCC regulation, including the payment
of access charges and contribution to the universal service funds, it could
affect MidNet by association and significantly increase our cost structure and
have a material adverse effect on our business.

Moreover, the interpretation of sales tax, libel and personal privacy laws
applied to electronic commerce is uncertain and unresolved. MidNet may be
required to qualify to do business as a foreign corporation in each state or
foreign country. Its failure to qualify as a foreign corporation in a
jurisdiction where it is required to do so could subject the Company to taxes
and penalties. Any existing or new legislation or regulation, including state
sales tax, or the application of laws or regulations from jurisdictions whose
laws do not currently apply to our business, could have a material adverse
effect on the business, results of operations and financial condition.

The regulatory requirements to which MidNet is subject could change in a manner
that significantly increases costs or otherwise adversely affects operations.
These include:

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     *    Planned interstate and international operations in the United States
          are governed by the Communications Act of 1934, as amended by the
          Telecommunications Act of 1996 ("Telecom Act"). There are several
          ongoing proceedings at the FCC and in the federal courts regarding the
          implementation of various aspects of the Telecom Act. The outcomes of
          these proceedings may affect the manner in which MidNet is permitted
          to provide its services in the United States and may have a material
          adverse effect on operations.

     *    The intrastate activities of local telephone service companies are
          regulated by the states in which they do business. A number of states
          in which MidNet expects to operate are conducting proceedings related
          to the provision of services in a competitive telecommunications
          environment. These proceedings may affect the manner in which the
          Company is permitted to provide its services in one or more states and
          may have a material adverse effect on operations.

     *    The laws of the countries in which MidNet operates or will operate
          govern operations outside the United States. The regulation of
          telecommunications networks and services outside the United States
          varies widely. In some countries, the range of services that MidNet is
          legally permitted to provide may be limited. In other countries,
          existing telecommunications legislation is in the process of
          development, is unclear or inconsistent, or is applied in an unequal
          or discriminatory fashion, or inadequate judicial, regulatory or other
          forums are available to address these inadequacies or disputes.
          MidNet's inability or failure to comply with the telecommunications
          laws and regulations of one or more of the countries in which it
          operates or will operate could result in the temporary or permanent
          suspension of operations in one or more countries. The Company may
          also be prohibited from entering certain countries at all or from
          providing all of its services in one or more countries. In addition,
          many of the countries in which MidNet will operate are conducting
          regulatory or other proceedings that will affect the implementation of
          their telecommunications legislation. MidNet cannot be certain of the
          outcome of these proceedings. These proceedings may affect the manner
          in which the Company will be permitted to provide its services in
          these countries and may have a material adverse effect on operations.

     *    In the ordinary course of constructing its networks and providing its
          services MidNet may be required to obtain and maintain a variety of
          telecommunications and other licenses and authorizations in the
          countries in which it plans to operate. MidNet may also have to comply
          with a variety of regulatory obligations. Its failure to obtain or
          maintain necessary licenses and authorizations or to comply with the
          obligations imposed upon license-holders, in one or more countries,
          may result in sanctions, including the revocation of authority to
          provide services in one or more countries.

SALES AND MARKETING

MidNet's management is currently directly involved in sales and marketing
activities. MidNet believes its management and advisors have the necessary
relationships and skills to meet its requirements for sales and marketing for
the foreseeable future.

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MidNet's marketing and sales strategy will include:

     *    Direct marketing to the major companies in the media and entertainment
          industry such as movie studios, production companies and supporting
          services (i.e., sound, editing, etc.) by utilizing MidNet's extensive
          industry contacts and relationships. This will involve contacting
          operational managers and decision makers (i.e., General Managers, V.P.
          Operations, Director of IT, etc.) of various companies that understand
          the merits of the network and how it will enable digitization of their
          workflows.

     *    Direct marketing to the ASPs, which will drive adoption of our network
          through the growth and expansion of their customer base. In this way,
          ASPs will act similar to a dealer or reseller of MidNet's services.

In addition, customers will promote growth of The Middle Network(SM) through
their customer and vendor relationships. For example, the network will enable
real-time collaboration (such as video conferencing). To participate, each party
must be on the network. MidNet anticipates that those companies that provide
products and services to MidNet's customers will be motivated to join the
network to secure, maintain and/or grow those business relationships.

INTELLECTUAL PROPERTY

MidNet's success is dependent upon its ability to protect its intellectual
property rights. MidNet relies principally on a combination of a service mark,
trade secrets, non-disclosure agreements and other contractual provisions to
establish and maintain its proprietary rights. MidNet has applied for a service
mark for "The Middle Network" thorough the U.S. Patent and Trademark Office.

The Middle Network(SM) will utilize a unique configuration based on software
developed by MidNet to configure private lines and establish transmission
sessions. In the future, MidNet plans to apply for defensive patents to protect
its configuration technology.

As part of its confidentiality and operating procedures, MidNet generally enters
into nondisclosure and confidentiality agreements with each of its key employees
and consultants and limits access to and distribution of its core technology,
documentation and other proprietary information.

Policing the unauthorized use of its intellectual property is difficult. MidNet
will use all viable and cost-permissive methods for defending and prosecuting
any suspected violators of its intellectual property.

RESEARCH AND DEVELOPMENT

The Middle Network(SM) topology resembles a "peer-to-peer" network, rather than
a "hub-and-spoke" model. Traffic routing and prioritization happens dynamically
at the access point in the customer premise, not in a centralized location.
Therefore, MidNet is not limited to a conventional, static network
configuration. MidNet's proprietary network design and configuration enables the
allocation of bandwidth "on-demand", as opposed to the static point-to-point
bandwidth typically offered by Telcos. As a result, MidNet can present itself as
a "dynamic private network". This innovative design provides powerful
characteristics, which simultaneously enhance flexibility, robustness and
security.

                                       11
<PAGE>
Although the network is based on standardized protocols, the network design and
configuration is proprietary and confidential. MidNet uses private lines and
runs Asynchronous Transfer Mode ("ATM") on top of them. MPLS or Multi-protocol
Label Switching is under consideration as an alternate protocol. Traffic on the
private lines is encrypted at the hardware port level using a stream cipher
algorithm. There are several additional layers of security.

MidNet is also building a network configuration tool using open source software,
including but not limited to Linux, FreeBSD, Apache, MySQL, Perl, PHP as well as
free and commercial application software to run in these environments, for
managing the network devices and automatic configuration of system parameters,
system firmware updates and system password changes. This tool offers tremendous
flexibility while lowering deployment costs, increasing network security and
reducing dependency on expert technicians for the deployment of network devices.

MidNet does not depend on any one equipment supplier. Consequently, there are no
primary equipment suppliers identified at this time. Price will be the primary
factor in selecting vendors.

Over the last four years approximately 5000 hours have been spent on research
and development, mostly on evaluating readily available hardware and software,
as well as on evaluating aspects relating to integration of these products.
MidNet's costs for research and development relate to equipment used in research
and development. Total equipment cost for the last two years is approximately
$100,000. Apart from personnel, MidNet did not incur any other costs for
research and development. None of the costs of research and development have
been borne directly by, or are expected to be borne by, our customers.

ENVIRONMENTAL LAW COMPLIANCE

To the extent which environmental compliance may be necessary, MidNet does not
anticipate any significant compliance expense.

EMPLOYEES

As of December 31, 2004, MidNet has 6 employees and 4 consultants/independent
contractors.

ITEM 2. DESCRIPTION OF PROPERTY.

MidNet leases 180 square feet of commercial space at Suite 300, 1055 West
Hastings Street, Vancouver, BC Canada V6E 2E9.

This facility houses a small satellite marketing and sales office. MidNet
renewed its lease on January 1, 2004, and the lease expired on December 31,
2004. The Company is in the process of renewing the lease at the current monthly
rental rate of Cdn$1,175.00 (approximately US$960).

MidNet believes that existing facilities are adequate for its needs through
the first quarter of 2005. Should the Company require additional space, MidNet
believes that such space can be secured on commercially reasonable terms and
without undue operational disruption.

ITEM 3. LEGAL PROCEEDINGS

MidNet is currently not a party to any legal proceedings.

                                       12
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

None.

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

MidNet's shares of Common Stock trade on the OTC Bulletin Board Market under the
trading symbol "MIDX." The high and low bid prices of
the Company's Common Stock for the period January-December 2004 on a quarterly
basis, as quoted from the OTC Bulletin Board, were:

         Quarter               High Bid Price         Low Bid Price
         -------               --------------         -------------
     1st Quarter 2004              $3.25                  $1.19
     2nd   Quarter 2004            $3.65                  $2.75
     3rd  Quarter 2004             $3.32                  $1.90
     4th  Quarter 2004             $3.35                  $1.51

These quotations reflect inter-dealer prices, without retail mark-up, mark-down
or commission, and may not represent actual transactions.

                    RECENT SALES OF UNREGISTERED SECURITIES.

The following sets forth certain information concerning the currently
outstanding securities of the Company which were sold or issued by the Company
during the last two years without the registration of the securities under the
Securities Act in reliance on exemptions from such registrations requirements.

On July 20, 1998, the Company issued 5,000,000 shares of common stock for
$1,000.00 cash. The stock was issued in reliance on an exemption from
registration for non public offerings contained in section 4 (2) of the
Securities Act of 1933, as amended.

Between February 11, 1999 through March 20, 1999, the Company sold 169,000
common shares to 45 persons at $0.10 per share for a total of $16,900. The
shares were sold in reliance on an exemption from registration contained in
Regulation D, Rule 504 of the Securities Act of 1933, as amended.

On November 15, 2000, the Company issued 250,000 shares of common stock for cash
valued at $0.0002 per share. The issuance was made in reliance upon Rule 506
under Regulation D, and/or under Section 4(2) of the Securities Act of 1933, as
amended, as a private transaction, not involving a public offering.

On May 14, 2001, the Company issued 62,500 shares of common stock for cash
valued at $0.10 per share to Icon Technologies, Inc (a private corporation not
known to have any affiliation with MidNet). The issuance was made in reliance of
Rule 506 under Regulation D and/or under Section 4(2) of the Securities Act of
1933, as amended, as a private transaction, not involving a public offering.

On May 18, 2001, the Company  issued  62,500  shares of common  stock for cash
valued at $0.10 per share to Checkers Investments Ltd. (a private corporation
not known to have any affiliation with MidNet). The issuance was made in
reliance of Rule 506 under Regulation D and/or under Section 4(2) of the
Securities Act of 1933, as amended, as a private transaction, not involving a
public offering.

                                       13
<PAGE>
On December 11, 2003 the stockholders approved the acquisition of MidNet, Inc. a
Nevada corporation for 7,505,935 shares of common stock and 300,000 shares of
preferred stock. Shares were issued as follows:

                                                      # Common      # Preferred
Name                 Position                          Shares          Shares
----                 --------                          ------          ------
Peter Fentiman       Director, President and          2,448,000       100,000
                     Chief Executive Officer
Tilo Kunz            Director, Chairman, Chief        2,448,000       100,000
                     Operating Officer
Ruedi Aschwanden     Director, Chief Technology       2,448,000       100,000
                     Officer
Various (12 individuals) MidNetNV shareholders          161,935             0
                                                      ---------       -------
Total                                                 7,505,935       300,000
                                                      =========       =======

The issuance was made in reliance of Rule 506 under Regulation D and/or under
Section 4(2) of the Securities Act of 1933, as amended, as a
private transaction, not involving a public offering. In addition, options for
the then four (4) members of the MidNetNV Advisory Board and two consultants to
MidNetNV (one of whom was a former officer of MidNetNV) to acquire 1,260,000
restricted shares of MidNetNV, at an exercise price of $.50 per share, were
exchanged for options to acquire 1,260,000 restricted shares of Tugboat, at an
exercise price of $.50 per share, on the same terms and conditions of the
MidNetNV options. The options are currently held by the same six (6) persons,
who are now the three (3) members of the Advisory Board, one former consultant
and former officer of MidNetNV, one current consultant, Mr. Staples and one of
the Company's officers, Mr. Locke. As of December 31, 2004, none of these
options to purchase 1,260,000 restricted shares have been exercised. All of
these parties are "accredited" investors.

On December 30, 2003, the Company issued 550,000 in common stock to an
individual (U.S. citizen) as full consideration for consulting services,
pursuant to a Form S-8, filed December 18, 2003. The services include computer
consulting services to develop and expand registrant's business operations and
provide general business consulting services to registrant. None of the services
relate to the offer or sale of securities in a capital raising transaction or
the direct or indirect promotion or maintenance of a market for the registrant's
securities.

In December, 2003, MidNet issued warrants to purchase up to 2,000,000 shares of
MidNet's restricted Common Stock, at an exercise price of $.75 per share. No
consideration was received for the issuance of the warrants because MidNet
wanted to establish a relationship with persons and entities which MidNet
believed could provide a source or sources of potential financing for MidNet in
the future. Accordingly, MidNet issued the subject warrants. The exercise price
of $0.75 per share was in excess of the market price of MidNet's shares at the
time the warrants were issued and was, in the opinion of MidNet, fair and
reasonable at the time. As of February 17, 2004, the holders of 1,342,450
warrants, consisting of 37 separate and unrelated holders, have exercised their
warrants to acquire 1,342,450 shares of MidNet's restricted Common Stock, at a
price of $.75 per share. 1,342,450 shares have been issued based upon this
exercise. MidNet received a total of US$1,006,837.50 from the exercise of those
warrants. None of the warrants were issued to or held by affiliates of the
registrant. None of the shares of Common Stock issued upon exercise of the
warrants were issued to, or are held by affiliates, either directly or

                                       14
<PAGE>
indirectly. As of December 19, 2004 all warrants to purchase the 2 million
shares have been exercised and the Company has received $1,500,000. These were
issued to "accredited" investors and were exempt under Rule 506.

The foregoing transactions are exempt from the registration provisions of the
Securities Act of 1933, as amended, by reason of exemptions from registration
afforded by Section 4 (2) thereof as constituting private transactions not
involving a public offering. The transfer thereof has been appropriately
restricted by MidNet. The offers and sales should not be integrated with the
public offering herein in reliance upon the safe harbor interpretation of Rule
152 under which it is the view of the Staff of the SEC that the filing of a
registration statement following an offering otherwise exempt under Section 4
(2) does not vitiate the exemption in that Section.

                           DESCRIPTION OF SECURITIES.

MidNet's Certificate of Incorporation authorizes a total share capital of
100,000,000 shares:

Preferred stock, $.0001 par value; 20,000,000 shares authorized; 300,000 shares
issued and outstanding as of December 31, 2004.

Common stock, $ 0.0001 par value; 80,000,000 shares authorized; 15,684,335
shares issued and outstanding as of December 31, 2004.

Each shareholder is entitled to one vote for each share of Common Stock owned of
record. The holders of shares of Common Stock do not possess cumulative voting
rights, which means that the holders of more than 50% of the outstanding shares
voting for the election of directors can elect all of the directors, and in such
event the holders of the remaining shares will be unable to elect any of the
Company's directors. Holders of outstanding shares of Common Stock are entitled
to receive dividends out of assets legally available at such times and in such
amounts as the Company's board of directors may determine. Upon liquidation,
dissolution, or winding up, the assets legally available for distribution to the
Company's shareholders will be distributed pro rata among the holders of the
shares outstanding at the time. Holders of the Company's shares of Common Stock
have no preemptive, conversion, or subscription rights, and are not subject to
redemption.

The rights and preferences of the Preferred Stock are as follows: Each share of
Preferred Stock entitles the holder to 100 votes on any issue that pertains to
mergers, hostile takeovers or a governmental nationalization attempt to take
control of the stock of the corporation, or any vote to amend the Articles of
Incorporation. Preferred Stock will be entitled to vote on and receive in
accordance with such vote, any forward or reverse split of the issued and
outstanding shares of Common Stock of the corporation. Preferred Stock will
receive dividends concurrent with and equivalent to any per share dividend paid
to the holders of Common Stock of the corporation. The preferred stock is not
convertible into common stock of MidNet.

The preferred stock will be entitled to preference over the common stock with
respect to the distribution of assets of MidNet in the event of its liquidation,
dissolution, or winding-up, whether voluntarily or involuntarily, or in the
event of any other distribution of assets of the corporation among its
stockholders for the purpose of winding-up its affairs. The authorized but
unissued shares of preferred stock may be divided into and issued in designated
series from time to time by one or more resolutions adopted by the Board of
Directors. The Board in its sole discretion shall have the power to determine

                                       15
<PAGE>
the relative powers, preferences, and rights of each series of preferred stock.
The issuance of preferred shares with such voting or conversion rights may have
the effect of delaying, deferring or preventing a change in control of MidNet.

There are no other provisions in its certificate of incorporation or its bylaws
that may result in the delaying, deferring or preventing of a change in control
of MidNet.

ITEM 6. MANAGEMENT DISCUSSION AND ANALYSIS AND PLAN OF OPERATIONS

The following discussion and analysis of MidNet's operations contains
forward-looking statements that involve risks and uncertainties, including those
referring to the period of time the Company's existing capital resources will
meet the Company's future capital needs, the Company's future operating results,
the market acceptance of the services of the Company, the Company's efforts to
establish itself as a market participant and the development of new services.
The Company's actual results could differ materially from those anticipated in
these forward-looking statements as a result of these and other factors. The
following should be read in conjunction with our audited Consolidated Financial
Statements included herein.

OVERVIEW

On December 12, 2003, Tugboat International Inc. (the "Company") entered into an
agreement to merge with MidNet Inc., a Nevada company ("MidNetNV") with a sales
and marketing office in Canada (the "Agreement"). Under the terms of the
Agreement, 100% of the issued and outstanding shares of stock of MidNetNV were
exchanged for shares of Tugboat International Inc., resulting in MidNetNV
becoming a wholly-owned subsidiary of Tugboat.

Pursuant to the Agreement, Tugboat had 13,049,935 shares of Common Stock issued
and outstanding, post-merger, of which MidNetNV shareholders own 7,505,935
shares. Existing shares in MidNetNV were exchanged for shares in the Company at
a ratio of 1:1.2240105. In addition, the three new Tugboat Directors, who were
the directors of MidNetNV, own 300,000 shares of Tugboat Preferred Stock; and
two consultants to the Company and four unrelated members of the Board of
Advisors of the Company own options to purchase 1,260,000 shares of the
Company's restricted Common Stock, at an exercise price of US$.50 per share.

The Company, on a consolidated basis, had nominal revenues in 2004 of $2,897.
These revenues were generated by MidNet Canada, Inc. The majority of $1,062,397
in operating expenses incurred by MidNet in 2004 related to salary, bandwidth
and co-location fees, administrative, accounting, legal and consulting fees.
Prior to this, expenses incurred by the Company were mainly administrative,
accounting, legal and consulting fees, which totaled $220,231 for the year ended
December 31, 2002; $78,798 for the period ended December 11, 2003; and $2,240
for the period December 12 to 31, 2003.

MidNet (formerly known as Tugboat) is a development stage company without
established operations or revenues. It is unable to satisfy cash requirements
without financial support or other funding. Management and certain investors
have made $1,632,300 of capital contributions to MidNet. The Company
anticipates, but has no assurance, that it will meet its cash requirements for
the foreseeable future from revenues from proposed operations, without raising
additional funds through the capital markets required to fulfill the goals of
its business plan.

                                       16
<PAGE>
PLAN OF OPERATIONS

MidNet's plan of operations over the next 12 months is to ramp up the marketing
and delivery of its network services to anticipated customers, consistent with
its business plan. MidNet is classified as a development stage company because
its principal activities involve seeking and developing business activities and
furthering operations. MidNet plans to generate revenue by charging customers to
send and receive data over The Middle Network(SM). This will include sending and
receiving "digital" packages (e.g., digital videos and movies), video
conferencing and customers using The Middle Network(SM) as their private company
network. Data is measured, and will be billed, in gigabytes. Pricing is designed
to be competitive with traditional shipping services (such as FedEx).

During MidNet's initial phase of operations the following key milestones were
realized:

Key Milestone                                  Beginning Date    Completion Date
-------------                                  --------------    ---------------
Acquired co-location facilities
for launch cities (Vancouver, Toronto,
Los Angeles, Houston, Calgary)                    May 2004        November 2004
Acquired private, inter city circuits
(Toronto-Vancouver-Los Angeles-Houston-
Denver-Calgary-Edmonton)                          June 2004       November 2004
Signed and connected first customer               June 2004       July 2004

Anticipated key milestones for the next phase of operations with related time
frames are as follows:

Key Milestone                                  Beginning Date    Completion Date
-------------                                  --------------    ---------------
Begin rollout of videophone network              March 2005         April 2005
Register first videophones with the network      April 2005         April 2005
Establish first LAN extensions                   April 2005         May 2005
Extend network support services                  April 2005         June 2005

Over the next twelve months MidNet anticipates spending the following amounts on
projected expenses deemed material (these figures are only an estimate; actual
costs will vary depending on the rate of growth in customers and vendor
pricing):

Bandwidth and co-location                         $1,000,000
Personnel costs                                   $  750,000
Sales and marketing                               $  500,000
Equipment purchased or leased                     $  750,000
                                                  ----------
Total                                             $3,000,000
                                                  ==========

Over the last two years, MidNet has spent approximately $300,000 relating to
research and development in the form of equipment (approximately, $100,000),
salaries ($120,000) and related expenses (approximately $80,000). We expect to
incur $240,000 in research and development costs over the next twelve months.

                                       17
<PAGE>
Over the next twelve months MidNet plans to lease or purchase various electronic
equipment required for rollout of the network. The projected cost of this
equipment is approximately $750,000. Equipment to be leased or purchased
includes: network switches, servers, computers and other technological devices.
The total to be expended on equipment over the next twelve months is only an
estimate and is subject to customer demand of The Middle Network(SM). If
customer demand is weak, equipment costs will likely be less; if customer demand
is strong, projected equipment costs could be higher.

MidNet does not expect to significantly increase the number of its employees
over the next twelve months but may increase its manpower via the addition of
contract specific consultants.

SHORT TERM GOAL

MidNet will focus its efforts on enabling the following types of application
services:

     *    Digital media transfer
     *    Digital collaboration
     *    Security
     *    Videoconferencing
     *    E-commerce transaction fulfillment
     *    Unified messaging (including email)

Our initial phase of operations included what we believe to constitute three key
media centers (Toronto, Vancouver and Los Angeles), and four key oil & gas
centers (Edmonton, Calgary, Denver and Houston). During this phase, MidNet
established connectivity between and within these cities by entering into
agreements with various telecommunication companies for local loops and
intercity private circuits (i.e., bandwidth). These cities were then connected
through co-location facilities which act as hubs for each metropolitan area
network. MidNet rents space in the co-location facilities and installed network
switches to facilitate connection to the leased circuits.

LONG TERM GOAL

MidNet's goal is to expand The Middle Network(SM) to further penetrate both
national and international markets, and secure additional business
opportunities.

Management is of the opinion that sufficient working capital may not be
available from internal operations during the next twelve months. Thus, the
Company may not be able to meet its obligations and commitments from revenues
alone.

MidNet is making its plans based on the assumption it will continue as a going
concern, but there is no assurance it will be able to do so.
Management is unsure whether proposed current operations will be able to provide
sufficient revenues to meet operating costs and expansion.

MidNet intends to continue efforts to obtain market penetration and consumer
awareness of The Middle Network(SM), while focusing and building on its client
list of media-based customers and exploring other vertical markets. These
markets may include oil and gas, government, security, legal, health, financial,
engineering, and other industries that require the movement of large amounts of
data in a reliable, high speed and secure environment.

                                       18
<PAGE>
MidNet will require additional funds to further develop its marketing and
branding plans. Although it may need to raise additional funds for business
development, the Company has no assurance that it will be able to obtain such
financing. If adequate funds are not available, business development will be
adversely affected.

Future capital requirements will also depend on one or more of the following
factors:

     *    market acceptance of MidNet's proposed services;
     *    the extent and progress of research and development programs;
     *    competing technological and market developments; and
     *    the costs of commercializing proposed services.

There can be no assurance that funding will be available on favorable terms to
permit successful commercialization of the business plan or that MidNet will be
successful in its business operations.

In addition, MidNet has no credit facility or other committed sources of
capital. It may be unable to establish credit arrangements on satisfactory
terms, if at all. If capital resources are insufficient to meet futurecapital
requirements, MidNet may have to raise additional funds to continue operations.
There can be no assurance that the funds will be available on favorable terms,
if at all.

To the extent that additional capital is raised through the sale of equity
and/or convertible debt securities, the issuance of the securities will likely
result in substantial dilution to shareholders.

Until such time as the proposed business is sufficiently developed, MidNet does
not expect to have any significant revenues from operations. It anticipates
that, if its business plan becomes fully operational, it will generate
sufficient revenues to maintain operations. There is no assurance that MidNet
will be successful in selling telecommunications services metered in gigabyte
units or otherwise generating revenues. Therefore, if not successful in its
proposed business, the Company will be unable to achieve revenues under its
current business plan.

The Company's websites can be found at: www.midnetinc.com

SUBSEQUENT EVENTS

CHANGES IN MANAGEMENT

Effective March 14, 2005:

(a) Tilo Kunz resigned as Chairman and was replaced by Peter Fentiman, MidNet,
Inc.'s (the "registrant's") former President and Chief Executive Officer, and;

(b) Peter Fentiman resigned as President and Chief Executive Officer, and was
replaced by Tilo Kunz, MidNet, Inc.'s (the "registrant's") current Chief
Operations Officer, and;

(c) The position of Chief Operations Officer has been amalgamated with the
position of CEO, and;

                                       19
<PAGE>
(d) Kenneth M. Fasnacht resigned as Chief Financial Officer and was replaced in
the interim by Tom Locke, MidNet, Inc.'s (the "registrant's") current Executive
Vice-President of Strategic Planning, and;

(e) Mr. Fasnacht resigned as Secretary and Treasurer of MidNet, Inc. (the
"registrant") and was replaced by Tom Locke, MidNet, Inc.'s (the "registrant's")
current Executive Vice-President of Strategic Planning, and;

(f) Mr. Fasnacht has stated that he expects to remain with the Company during a
transitional period until at least March 31, 2005.

WORLD ACCESSIBILITY MARKETPLACE INC.

Effective March 3, 2005, MidNet entered into an agreement with World
Accessibility Marketplace Inc. ("World Accessibility") whereby MidNet will
provide hardware fingerprinting or registration services to World Accessibility.
The registration services will allow certain telecommunications devices marketed
by World Accessibility to operate over the registrant's digital communications
system known as The Middle Network. The agreement provides a flat rate fee of $4
(Canadian) for each device registered. Under the agreement, the registrant is
required to register a minimum of 300,000 devices during the calendar year 2005.

Mr. Tilo Kunz, Chairman and C.O.O. of MidNet, currently serves as the Chairman
of World Accessibility. Mr. Kunz serves in such capacity for World Accessibility
without any form or arrangement for compensation of any nature, presently or in
the future, and owns no form of equity in World Accessibility, either directly
or indirectly. However, Mr. Tilo Kunz's father, Eric Kunz, indirectly owns 50%
of the total outstanding equity in World Accessibility. Mr. Tilo Kunz devotes
nominal time to the business of World Accessibility.

THE LINEAR GROUP LLC

Effective February 24, 2005, MidNet entered into an agreement with Linear Group
LLC. The Linear Group will provide various investment banking services,
investors' communications, and public relation services with industry analysts,
existing shareholders, brokers, dealers and other professionals. The agreement
has a term of one year and may be canceled by either party for any reason during
the first ninety (90) days. Upon execution of the agreement, consideration paid
to Linear Group included $5,000 cash, 250,000 shares of the registrant's
restricted common stock and 400,000 stock options to acquire 400,000 shares of
the registrant's common stock. The stock options have a term of three years and
include certain registration rights. Half of the options are exercisable at
$2.00 per share and the other half are exercisable at $3.00 per share. In
addition, registrant will pay $5,000 cash per month and issue another 250,000
shares of the registrant's restricted common stock 90 days after execution of
the agreement.

LIGHTNING MEDIA

Effective February 8, 2005 MidNet entered into an agreement with Lightning
Media, a Los Angeles based company, to provide private digital network services
for the secure transport of media data over MidNet's digital communications
system known as The Middle Network. The agreement provides a minimum usage fee
of $1,000 per month and has a term of one year beginning March 9, 2005.

                                       20
<PAGE>
FLUCTUATIONS IN ANNUAL AND QUARTERLY RESULTS

MidNet's future annual and quarterly operating results, if any, may fluctuate
significantly as a result of numerous factors, including:

     1.   The amount and timing of expenditures required to build "The Middle
          Network(SM)";

     2.   The amount and timing of revenues based on the Company's ability to
          attract and secure new customers; and

     3.   The emergence of new services and technologies in the market in which
          MidNet plans to deliver services.

MidNet also faces foreign currency exchange risk if a majority of its revenue is
denominated in U.S. currency and a majority of its operating costs are incurred
in Canadian currency. Significant fluctuations in the foreign exchange rate
between U.S. and Canadian currency will result in fluctuations in MidNet's
annual and quarterly results.

IMPACT OF INFLATION

MidNet believes that inflation has not had a material effect on its past
business.

NEW ACCOUNTING PRONOUNCEMENTS

In November 2004, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 151, "Inventory Costs-- an amendment of ARB
No. 43, Chapter 4" (hereinafter "SFAS No. 151"). This statement amends the
guidance in ARB No. 43, Chapter 4, "Inventory Pricing," by clarifying that
abnormal amounts of idle facility expense, freight, handling costs, and wasted
material (spoilage) should be recognized as current-period charges and by
requiring the allocation of fixed production overheads to inventory based on the
normal capacity of the production facilities. This statement is effective for
inventory costs incurred during fiscal years beginning after June 15, 2005.
Management believes the adoption of this statement will have no material impact
on the Company's financial condition or results of operations.

In December 2004, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 152, "Accounting for Real Estate Time-Sharing
Transactions - an amendment of FASB Statements No. 66 and 67" (hereinafter "SFAS
No. 152"), which amends FASB Statement No. 66, "Accounting for Sales of Real
Estate," to reference the financial accounting and reporting guidance for real
estate time-sharing transactions that is provided in AICPA Statement of Position
04-2, "Accounting for Real Estate Time-Sharing Transactions" (hereinafter "SOP
04-2"). This statement also amends FASB Statement No. 67, "Accounting for Costs
and Initial Rental Operations of Real Estate Projects," to state that the
guidance for (a) incidental operations and (b) costs incurred to sell real
estate projects does not apply to real estate time-sharing transactions. The
accounting for those operations and costs is subject to the guidance in SOP
04-2. This statement is effective for financial statements for fiscal years
beginning after June 15, 2005. Management believes the adoption of this
statement will have no impact on the Company's financial condition or results of
operations.

                                       21
<PAGE>
In December 2004, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 153, "Exchanges of Nonmonetary Assets - an
Amendment of APB Opinion No. 29," (hereinafter "SFAS No. 153"). This statement
eliminates the exception to fair value for exchanges of similar productive
assets and replaces it with a general exception for exchange transactions that
do not have commercial substance, defined as transactions that are not expected
to result in significant changes in the cash flows of the reporting entity. This
statement is effective for financial statements for fiscal years beginning after
June 15, 2005. Management believes the adoption of this statement will have no
impact on the Company's financial condition or results of operations.

In December 2004, the Financial Accounting Standards Board issued a revision to
Statement of Financial Accounting Standards No. 123 (revised 2004), "Share-Based
Payments" (hereinafter "SFAS No. 123 (R)"). This statement replaces FASB
Statement No. 123, "Accounting for Stock-Based Compensation," and supersedes APB
Opinion No. 25, "Accounting for Stock Issued to Employees." SFAS No. 123 (R)
establishes standards for the accounting for share-based payment transactions in
which an entity exchanges its equity instruments for goods or services. It also
addresses transactions in which an entity incurs liabilities in exchange for
goods or services that are based on the fair value of the entity's equity
instruments or that may be settled by the issuance of those equity instruments.
This statement covers a wide range of share-based compensation arrangements
including share options, restricted share plans, performance-based award, share
appreciation rights and employee share purchase plans. SFAS No. 123 (R) requires
a public entity to measure the cost of employee services received in exchange
for an award of equity instruments based on the fair value of the award on the
grand date ( with limited exceptions). That cost will be recognized in the
entity's financial statements over the period during which the employee is
required to provide services in exchange for the award. The Company has adopted
SFAS No. 123 (R) after adopting SFAS No. 123 in prior years.

In May 2003, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity" (hereinafter
"SFAS No. 150"). SFAS No. 150 establishes standards for classifying and
measuring certain financial instruments with characteristics of both liabilities
and equity and requires that those instruments be classified as liabilities in
statements of financial position. Previously, many of those instruments were
classified as equity. SFAS No. 150 is effective for financial instruments
entered into or modified after May 31, 2003 and otherwise is effective at the
beginning of the first interim period beginning after June 15, 2003. The Company
has determined that there was no impact to its financial statements from the
adoption of this statement.

                                       22
<PAGE>
ITEM 7. FINANCIAL STATEMENTS


             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors
MidNet, Inc.
Vancouver, B.C.

We have audited the accompanying  consolidated  balance sheet of MidNet, Inc. (a
development  stage company and Delaware  corporation  formerly  known as Tugboat
International,  Inc.) as of December  31,  2004,  and the  related  consolidated
statements of operations and comprehensive loss,  stockholders'  equity and cash
flows for the year then ended. These financial statements are the responsibility
of the  Company's  management.  Our  responsibility  is to express an opinion on
these  financial  statements  based on our  audit.  The  consolidated  financial
statements  of  MidNet,  Inc.  as of  December  31,  2003 were  audited by other
auditors whose report dated January 28, 2004 and restated July 1, 2004 expressed
an unqualified opinion on those statements.

We conducted  our audit in accordance  with the standards of the Public  Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement.  An audit includes examining, on a
test basis,  evidence  supporting  the amounts and  disclosures in the financial
statements.  An audit also includes assessing the accounting principles used and
significant  estimates  made by  management,  as well as evaluating  the overall
financial  statement  presentation.   We  believe  that  our  audit  provides  a
reasonable basis for our opinion.

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects, the financial position of MidNet, Inc. as of December 31,
2004,  and the  results of its  operations  and its cash flows for the year then
ended in conformity with accounting  principles generally accepted in the United
States of America.

The  accompanying  financial  statements  have been  prepared  assuming that the
Company will  continue as a going  concern.  As discussed in Note 3, the Company
has sustained  substantial  operating  losses in recent years,  has limited cash
resources and negative working capital.  These factors raise  substantial  doubt
about the Company's ability to continue as a going concern.  Management's  plans
regarding  those matters also are described in Note 3. The financial  statements
do not  include  any  adjustments  that might  result  from the  outcome of this
uncertainty.


/s/ Williams & Webster, P.S.
------------------------------------
Williams & Webster, P.S.
Certified Public Accountants
Spokane, Washington

February 18, 2005

                                       23
<PAGE>
                                ARMANDO C. IBARRA
                           Certified Public Accountant
                           A Professional Corporation

Armando C. Ibarra, C.P.A.                   Members of the American Institute of
                                            Certified Public Accountants
Armando Ibarra, Jr., C.P.A., JD             Members of the California Society of
                                            Certified Public Accountants
                                            Registered with the Public Company
                                            Accounting Oversight Board


             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors of
MidNet, Inc.
(Formerly Tugboat International, Inc.)
(A Development Stage Company)

We have audited the  accompanying  consolidated  balance sheets of MidNet,  Inc.
(Formerly  Tugboat  International,  Inc.) as of December 31, 2003 (restated) and
2002 and the related statements of operations,  changes in stockholders'  equity
and cash flows for the years then ended and from the period of January  16, 2002
(inception)  to  December  31,  2003.   These   financial   statements  are  the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these financial statements based on our audit.

We conducted our audits in accordance  with the standards of the Public  Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement.  An audit includes examining, on a
test basis,  evidence  supporting  the amounts and  disclosures in the financial
statements.  An audit also includes assessing the accounting principles used and
significant  estimates  made by  management,  as well as evaluating  the overall
financial  statement  presentation.   We  believe  that  our  audit  provides  a
reasonable basis for our opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly,  in all  material  respects,  the  financial  position  of  MidNet  Inc.
(Formerly Tugboat International, Inc.) as of December 31, 2003 and 2002, and the
results  of their  operations  and their cash flows for the years then ended and
from the  period of  January  16,  2002  (inception)  to  December  31,  2003 in
conformity with U.S. generally accepted accounting principles.


/s/ Armando C. Ibarra, CPA-APC
------------------------------
Armando C. Ibarra, CPA-APC

January 28, 2004
July 1, 2004 (restated)
Chula Vista, California

                                       24
<PAGE>
MIDNET, INC.
(Formerly Tugboat International, Inc.)
(A Development Stage Company)
CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                  December 31,          December 31,
                                                                     2004                  2003
                                                                  -----------           -----------
<S>                                                               <C>                   <C>
ASSETS

CURRENT ASSETS
  Cash                                                            $   509,345           $    67,074
  Accounts receivable                                                   2,962                    --
  GST receivable                                                       18,864                    --
  Prepaid expenses                                                     37,819               220,500
                                                                  -----------           -----------
      Total Current Assets                                            568,990               287,574
                                                                  -----------           -----------

PROPERTY AND EQUIPMENT                                                 73,448                 6,066
                                                                  -----------           -----------
OTHER ASSETS
  Security deposits                                                    36,680                   758
                                                                  -----------           -----------
      Total Other Assets                                               36,680                   758
                                                                  -----------           -----------

      TOTAL ASSETS                                                $   679,118           $   294,398
                                                                  ===========           ===========

LIABILITIES & STOCKHOLDERS' EQUITY

CURRENT LIABILITIES
  Accounts payable                                                $    77,777           $     9,934
  Related party payable                                                 1,382                    --
  Consulting fees payable                                                  --               130,000
  Taxes payable                                                         5,596                   744
                                                                  -----------           -----------
      Total Current Liabilities                                        84,755               140,678
                                                                  -----------           -----------

COMMITMENTS AND CONTINGENCIES                                              --                    --
                                                                  -----------           -----------
STOCKHOLDERS' EQUITY
  Preferred stock, 20,000,000 shares authorized, $0.0001
   par value; 300,000 shares issued and outstanding                        30                    30
  Common stock, 80,000,000 shares authorized,
   $0.0001 par value; 15,684,335 and 13,732,935 shares
   issued and outstanding, respectively                                 1,568                 1,373
  Additional paid-in capital                                        1,939,997               432,532
  Subscriptions receivable                                                 --                  (300)
  Accumulated other comprehensive loss                                 (9,963)                   --
  Accumulated deficit during development stage                     (1,337,269)             (279,915)
                                                                  -----------           -----------
      Total Stockholders' Equity                                      594,363               153,720
                                                                  -----------           -----------

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                        $   679,118           $   294,398
                                                                  ===========           ===========
</TABLE>

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

                                       25
<PAGE>
MIDNET, INC.
(Formerly Tugboat International, Inc.)
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                                          Period from
                                                                                        January 16, 2002
                                                               Year Ended                 (Inception)
                                                              December 31,                     to
                                                    -------------------------------       December 31,
                                                        2004               2003               2004
                                                    ------------       ------------       ------------
<S>                                                 <C>                <C>                <C>
REVENUES
  Subscription fees                                 $      2,897       $         --       $      2,897
  Other                                                       --             21,328             21,328
                                                    ------------       ------------       ------------
      TOTAL REVENUE                                        2,897             21,328             24,225

EXPENSES
  Salaries expense                                       259,285                 --            259,285
  Bandwidth and co-location fees                         165,018                 --            165,018
  Office expense                                         112,022             13,883            163,067
  Depreciation                                            18,376              2,065             23,391
  Consulting services                                    386,359             59,570            617,013
  Professional fees                                       67,564              2,857             79,066
  Marketing expense                                       53,773                 --             53,773
                                                    ------------       ------------       ------------
      TOTAL OPERATING EXPENSES                         1,062,397             78,375          1,360,613
                                                    ------------       ------------       ------------
                                                                                          ------------
LOSS FROM OPERATIONS                                  (1,059,500)           (57,047)      $ (1,336,388)

OTHER INCOME (EXPENSE)
  Other income                                                --                 26                 26
  Foreign currency exchange loss                             (33)            (2,663)            (3,086)
  Interest income                                          2,179                 --              2,179
                                                    ------------       ------------       ------------
      TOTAL OTHER INCOME (EXPENSE)                         2,146             (2,637)              (881)
                                                    ------------       ------------       ------------

LOSS BEFORE TAXES                                     (1,057,354)           (59,684)        (1,337,269)

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

NET LOSS                                              (1,057,354)           (59,684)        (1,337,269)
                                                    ------------       ------------       ------------
OTHER COMPREHENSIVE LOSS
  Foreign currency translation loss                       (9,963)                --             (9,963)
                                                    ------------       ------------       ------------

COMPREHENSIVE NET INCOME LOSS                       $ (1,067,317)      $    (59,684)      $ (1,347,232)
                                                    ============       ============       ============
BASIC AND DILUTED NET LOSS PER COMMON SHARE         $      (0.07)      $      (0.01)
                                                    ============       ============
BASIC AND DILUTED WEIGHTED AVERAGE
 NUMBER OF COMMON STOCK SHARES OUTSTANDING            14,985,515          9,643,560
                                                    ============       ============
</TABLE>

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

                                       26
<PAGE>
MIDNET, INC.
(Formerly Tugboat International, Inc.)
(A Development Stage Company)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                      Preferred Stock               Common Stock             Additional
                                                     ------------------         ---------------------         Paid-in
                                                     Shares      Amount         Shares         Amount         Capital
                                                     ------      ------         ------         ------         -------
<S>                                                 <C>          <C>             <C>           <C>           <C>
Stock issued for cash on January 16, 2002
 at $0.0001 per share                                    --      $  --        7,344,000       $   734       $     5,266

Stock issued for cash at $1.00  per share                --         --          131,335            13           107,287

Stock subscription receivable                       300,000         30               --            --               270

Stock issued for consulting services at
 $1.00 per share                                         --         --           30,600             4            24,996

Net loss for the year ended December 31, 2002            --         --               --            --                --
                                                    -------      -----      -----------       -------       -----------

Balance, December 31, 2002                          300,000         30        7,505,935           751           137,819

Recapitalization of company via reverse                  --         --        5,544,000           554              (469)
 merger with Tugboat International, Inc.

Stock issued for cash at $0.75 per share                 --         --          133,000            13            99,737

Stock issued for consulting services at
 $0.36 per share                                         --         --          550,000            55           195,445

Net loss for the year ended December 31, 2003            --         --               --            --                --
                                                    -------      -----      -----------       -------       -----------

Balance, December 31, 2003                          300,000         30       13,732,935         1,373           432,532

Stock issued for consulting services at
 $1.00 per share                                         --         --          115,000            12           114,988

Warrants exercised for cash at $0.75 per share           --         --        1,867,000           186         1,400,063

Stock subscriptions paid                                 --         --               --            --                --

Stock repurchase                                         --         --          (30,600)           (3)          (24,997)

Warrants issued for services                             --         --               --            --            17,411

Foreign currency translation                             --         --               --            --                --

Net loss for the year ended December 31, 2004            --         --               --            --                --
                                                    -------      -----       ----------       -------       -----------

Balance, December 31, 2004                          300,000      $  30       15,684,335       $ 1,568       $ 1,939,997
                                                    =======      =====      ===========       =======       ===========

                                                                                     Accumulated
                                                                        Other       Deficit During       Total
                                                    Subscriptions    Comprehensive   Development      Stockholders'
                                                     Receivable         Loss            Stage        Equity (Deficit)
                                                     ----------         ----            -----        ----------------
Stock issued for cash on January 16, 2002
 at $0.0001 per share                                  $  --          $    --       $        --       $     6,000

Stock issued for cash at $1.00  per share                 --               --                --           107,300

Stock subscription receivable                           (300)              --                --                --

Stock issued for consulting services at
 $1.00 per share                                          --               --                --            25,000

Net loss for the year ended December 31, 2002             --               --          (220,231)         (220,231)
                                                       -----          -------       -----------       -----------

Balance, December 31, 2002                              (300)              --          (220,231)          (81,931)

Recapitalization of company via reverse                   --               --                --                85
 merger with Tugboat International, Inc.

Stock issued for cash at $0.75 per share                  --               --                --            99,750

Stock issued for consulting services at
 $0.36 per share                                          --               --                --           195,500

Net loss for the year ended December 31, 2003             --               --           (59,684)          (59,684)
                                                       -----          -------       -----------       -----------

Balance, December 31, 2003                              (300)              --          (279,915)          153,720

Stock issued for consulting services at
 $1.00 per share                                          --               --                --           115,000

Warrants exercised for cash at $0.75 per share            --               --                --         1,400,249

Stock subscriptions paid                                 300               --                --               300

Stock repurchase                                          --               --                --           (25,000)

Warrants issued for services                              --               --                --            17,411

Foreign currency translation                              --           (9,963)               --            (9,963)

Net loss for the year ended December 31, 2004             --               --        (1,057,354)       (1,057,354)
                                                       -----          -------       -----------       -----------

Balance, December 31, 2004                             $  --          $(9,963)      $(1,337,269)      $   594,363
                                                       =====          =======       ===========       ===========
</TABLE>

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

                                       27
<PAGE>
MIDNET, INC.
(Formerly Tugboat International, Inc.)
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                                                   Period from
                                                                                                 January 16,2002
                                                                        Year Ended                 (Inception)
                                                                       December 31,                    to
                                                             -------------------------------       December 31,
                                                                2004                2003              2004
                                                             -----------         -----------       -----------
<S>                                                          <C>                 <C>               <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net loss                                                   $(1,057,354)        $   (59,684)      $(1,337,269)
  Depreciation                                                    18,376               2,065            24,441
  Adjustments to reconcile net loss
   to net cash used by operating activities:
    Common stock issued for services                             115,000                  --           140,000
    Common stock issued for prepaid expenses                          --             195,500           195,500
    Common stock warrants issued for services                     17,411                  --            17,411
    (Increase) decrease in accounts receivable                    (2,962)                 --            (2,962)
    (Increase) decrease in prepaid expenses                      182,681            (219,766)          (37,819)
    (Increase) decrease in tax receivable                        (18,864)                 --           (18,864)
    (Increase) decrease in security deposits                     (35,922)               (758)          (36,680)
    Increase (decrease) in accounts payable                       67,843               5,290            77,777
    Increase (decrease) in related party payables                  1,383                  --             1,383
    Increase (decrease) in consulting fees payable              (130,000)             55,000                --
    Increase (decrease) in other payables                          5,900                 744             5,596
                                                             -----------         -----------       -----------
Net cash used in operating activities                           (836,508)            (21,609)         (971,487)
                                                             -----------         -----------       -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Acquisition of property and equipment                          (86,808)             (1,249)          (97,889)
                                                             -----------         -----------       -----------
Net cash used in investing activities                            (86,808)             (1,249)          (97,889)
                                                             -----------         -----------       -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Preferred stock issued for cash                                    300                  --               300
  Common stock issued for cash                                 1,400,250              99,750         1,613,299
  Cash issued for acquisition of subsidiary                           --                  85                85
  Treasury stock purchased for cash                              (25,000)                 --           (25,000)
  Payment on shareholder loan                                         --             (12,828)               --
                                                             -----------         -----------       -----------
Net cash provided in financing activities                      1,375,550              87,007         1,588,684
                                                             -----------         -----------       -----------

Net increase (decrease)  in cash                                 452,234              64,149           519,308

Foreign currency translation gain (loss)                          (9,963)                 --            (9,963)

CASH, BEGINNING OF PERIOD                                         67,074               2,925                --
                                                             -----------         -----------       -----------

CASH, END OF PERIOD                                          $   509,345         $    67,074       $   509,345
                                                             ===========         ===========       ===========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
  Interest paid                                              $        --         $        --       $        --
                                                             ===========         ===========       ===========
  Income tax paid                                            $        --         $        --       $        --
                                                             ===========         ===========       ===========
NON-CASH INVESTING AND FINANCING ACTIVITIES:
  Common stock issued for services                           $   115,000         $        --       $   140,000
  Common stock issued for acquisition of subsidiary          $        --         $        85       $        85
  Preferred stock issued for acquistion of subsidiary        $        --         $       300       $       300
  Common stock issued for prepaid expenses                   $        --         $   195,500       $   195,500
  Common stock warrants issued for services                  $    17,411         $        --       $    17,411
</TABLE>

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

                                       28
<PAGE>
MIDNET, INC.
(Formerly Tugboat International, Inc.)
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
--------------------------------------------------------------------------------

NOTE 1 - ORGANIZATION AND DESCRIPTION OF BUSINESS

MidNet, Inc. is a Delaware corporation originally incorporated on July 20, 1998,
under  the  name  Tugboat  International,  Inc.  MidNet  has  two  wholly  owned
subsidiaries:

     *    MidNet USA,  Inc., a Nevada  corporation  incorporated  on January 16,
          2002.  (MidNet  USA,  Inc.  was formerly  known as MidNet,  Inc.;  the
          Company  changed its name  effective  May 12, 2004 to avoid  confusion
          with its parent company). This company conducts MidNet's operations in
          the United States; and

     *    MidNet Canada,  Inc., a Canadian federal  corporation  incorporated on
          March 30,  2004 and  acquired  by MidNet in April  2004.  This  entity
          conducts MidNet's operations in Canada.

Effective December 11, 2003, Tugboat International, Inc. ("Tugboat"), a Delaware
Corporation and MidNet, Inc.  ("MidNetNV"),  a Nevada corporation,  completed an
agreement and plan of merger  whereby  Tugboat  issued  7,505,935  shares of its
common stock and 300,000  shares of its  preferred  stock in exchange for all of
the outstanding common stock of MidNetNV. Immediately prior to the agreement and
plan of  merger,  Tugboat  had  5,544,000  shares of  common  stock  issued  and
outstanding. The acquisition was accounted for as a recapitalization of MidNetNV
because the shareholders of MidNetNV  controlled  Tugboat after the acquisition.
Therefore,  MidNetNV was treated as the acquiring entity for accounting purposes
and Tugboat  International,  Inc. was the surviving  entity for legal  purposes.
Effective March 17, 2004,  Tugboat  changed its name to MidNet,  Inc. and on May
12, 2004, MidNetNV changed its name to MidNet (USA), Inc.

MidNet,  Inc. and  subsidiaries  (hereinafter  the  "Company" or "MidNet")  have
created "The Middle NetworkSM," a network-operating  environment deemed reliable
within a  protected  private  network,  which acts as the middle  layer  between
telecommunication  infrastructure companies (i.e., Telcos),  application service
providers ("ASPs"),  and the end users. The Middle NetworkSM is designed to be a
commercial   complement  to  the  Internet.   MidNet   enables  the   high-speed
transmission of secured data for a broad mix of services, including:

     *    Digital media transfer
     *    Digital collaboration
     *    Security
     *    Video conferencing
     *    E-commerce transaction fulfillment
     *    Unified managing (including email)

                                       29
<PAGE>
MIDNET, INC.
(Formerly Tugboat International, Inc.)
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
--------------------------------------------------------------------------------

Prior to the merger,  Midnet,  Inc.  (formerly  known as Tugboat  International,
Inc.)  had been in the  design  phase of a web  site  for the  buying,  selling,
trading and auctioning of collectible and valuable coins on the Internet with no
commercial success.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

This  summary of  significant  accounting  policies  is  presented  to assist in
understanding the financial  statements.  The financial statements and notes are
representations  of the Company's  management,  which is  responsible  for their
integrity  and  objectivity.  These  accounting  policies  conform to accounting
principles  generally  accepted  in the United  States of America  and have been
consistently applied in the preparation of the financial statements.

Accounting  Method - The Company's  financial  statements are prepared using the
accrual basis of accounting in accordance with accounting  principles  generally
accepted in the United States of America.

Accounts  Receivable - The Company carries its accounts  receivable at cost less
an allowance for doubtful  accounts.  On a periodic basis, the Company evaluates
its accounts  receivable  and  establishes  an allowance for doubtful  accounts,
based on a  history  of past  write-offs  and  collections  and  current  credit
conditions. The Company's policy is not to accrue interest on trade receivables.

Recent  Accounting  Pronouncements - In November 2004, the Financial  Accounting
Standards  Board issued  Statement of Financial  Accounting  Standards  No. 151,
"Inventory Costs-- an amendment of ARB No. 43, Chapter 4" (hereinafter "SFAS No.
151").  This statement  amends the guidance in ARB No. 43, Chapter 4, "Inventory
Pricing," by clarifying that abnormal amounts of idle facility expense, freight,
handling  costs,  and  wasted  material   (spoilage)  should  be  recognized  as
current-period  charges and by  requiring  the  allocation  of fixed  production
overheads  to  inventory   based  on  the  normal  capacity  of  the  production
facilities.  This  statement is effective for inventory  costs  incurred  during
fiscal years beginning after June 15, 2005.  Management believes the adoption of
this statement will have no material impact on the Company's financial condition
or results of operations.

In December 2004, the Financial  Accounting  Standards Board issued Statement of
Financial Accounting Standards No. 152, "Accounting for Real Estate Time-Sharing
Transactions - an amendment of FASB Statements No. 66 and 67" (hereinafter "SFAS
No. 152"),  which amends FASB  Statement No. 66,  "Accounting  for Sales of Real
Estate," to reference the financial  accounting and reporting  guidance for real
estate time-sharing transactions that is provided in AICPA Statement of Position
04-2, "Accounting for Real Estate Time-Sharing  Transactions"  (hereinafter "SOP

                                       30
<PAGE>
MIDNET, INC.
(Formerly Tugboat International, Inc.)
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
--------------------------------------------------------------------------------

04-2").  This statement also amends FASB Statement No. 67, "Accounting for Costs
and  Initial  Rental  Operations  of Real  Estate  Projects,"  to state that the
guidance  for (a)  incidental  operations  and (b) costs  incurred  to sell real
estate  projects does not apply to real estate  time-sharing  transactions.  The
accounting  for those  operations  and costs is subject to the  guidance  in SOP
04-2.  This  statement is effective  for financial  statements  for fiscal years
beginning  after  June  15,  2005.  Management  believes  the  adoption  of this
statement will have no impact on the Company's financial condition or results of
operations.

In December 2004, the Financial  Accounting  Standards Board issued Statement of
Financial  Accounting  Standards No. 153,  "Exchanges of Nonmonetary Assets - an
Amendment of APB Opinion No. 29,"  (hereinafter  "SFAS No. 153"). This statement
eliminates  the  exception  to fair value for  exchanges  of similar  productive
assets and replaces it with a general  exception for exchange  transactions that
do not have commercial substance,  defined as transactions that are not expected
to result in significant changes in the cash flows of the reporting entity. This
statement is effective for financial statements for fiscal years beginning after
June 15, 2005.  Management  believes the adoption of this statement will have no
impact on the Company's financial condition or results of operations.

In December 2004, the Financial  Accounting Standards Board issued a revision to
Statement of Financial Accounting Standards No. 123 (revised 2004), "Share-Based
Payments"  (hereinafter  "SFAS No.  123  (R)").  This  statement  replaces  FASB
Statement No. 123, "Accounting for Stock-Based Compensation," and supersedes APB
Opinion No. 25,  "Accounting  for Stock Issued to  Employees."  SFAS No. 123 (R)
establishes standards for the accounting for share-based payment transactions in
which an entity exchanges its equity instruments for goods or services.  It also
addresses  transactions  in which an entity incurs  liabilities  in exchange for
goods or  services  that are  based on the  fair  value of the  entity's  equity
instruments or that may be settled by the issuance of those equity  instruments.
This  statement  covers a wide range of  share-based  compensation  arrangements
including share options, restricted share plans,  performance-based award, share
appreciation rights and employee share purchase plans. SFAS No. 123 (R) requires
a public  entity to measure the cost of employee  services  received in exchange
for an award of equity  instruments  based on the fair value of the award on the
grand  date ( with  limited  exceptions).  That cost will be  recognized  in the
entity's  financial  statements  over the period  during  which the  employee is
required to provide  services in exchange for the award. The Company has adopted
SFAS No. 123 (R) after adopting SFAS No. 123 in prior years.

In May 2003,  the  Financial  Accounting  Standards  Board  issued  Statement of
Financial  Accounting  Standards  No. 150,  "Accounting  for  Certain  Financial
Instruments with  Characteristics  of Both Liabilities and Equity"  (hereinafter
"SFAS  No.  150").  SFAS No.  150  establishes  standards  for  classifying  and
measuring certain financial instruments with characteristics of both liabilities

                                       31
<PAGE>
MIDNET, INC.
(Formerly Tugboat International, Inc.)
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
--------------------------------------------------------------------------------

and equity and requires that those  instruments  be classified as liabilities in
statements of financial  position.  Previously,  many of those  instruments were
classified  as  equity.  SFAS No. 150 is  effective  for  financial  instruments
entered  into or modified  after May 31, 2003 and  otherwise is effective at the
beginning of the first interim period beginning after June 15, 2003. The Company
has  determined  that there was no impact to its financial  statements  from the
adoption of this statement.

ALLOWANCE FOR DOUBTFUL  ACCOUNTS - The Company estimates bad debts utilizing the
allowance method,  based upon past experience and current market conditions.  At
December  31,  2004,  the  allowance  for  doubtful  accounts  was zero,  as the
receivables are all recently acquired and are expected to be collectable.

CASH AND CASH  EQUIVALENTS - For purposes of the  statements of cash flows,  the
Company considers all highly liquid investments or short-term debt with original
maturities of three months or less to be cash equivalents.

COMPREHENSIVE  INCOME - Effective January 1, 1998, the Company adopted Statement
of Financial  Accounting  Standards No. 130,  "Reporting  Comprehensive  Income"
(hereinafter  "SFAS No.  130"),  which was  issued in June  1997.  SFAS No.  130
establishes rules for the reporting and display of comprehensive  income and its
components.  SFAS No. 130 requires  unrealized gains and losses on the Company's
foreign currency translation to be included in comprehensive income.

CONCENTRATION OF CREDIT RISK - The Company  maintains its cash in two commercial
accounts at major financial  institutions.  Although the financial  institutions
are considered creditworthy and have not experienced any losses on its deposits,
at December 31, 2004, the Company's total cash balances exceeded Federal Deposit
Insurance Corporation (FDIC) limits by $306,152.

DERIVATIVE  INSTRUMENTS  -  The  Financial  Accounting  Standards  Board  issued
Statement of  Financial  Accounting  Standards  No. 133  (hereinafter  "SFAS No.
133"),  "Accounting  for  Derivative  Instruments  and Hedging  Activities,"  as
amended by SFAS No. 137,  "Accounting  for  Derivative  Instruments  and Hedging
Activities-Deferral  of the Effective  Date of FASB No. 133",  and SFAS No. 138,
"Accounting for Certain Derivative  Instruments and Certain Hedging Activities,"
and SFAS No. 149,  "Amendment  of Statement 133 on  Derivative  Instruments  and
Hedging  Activities,"  the last of  which is  effective  June  30,  2003.  These
statements   establish  and  clarify  accounting  and  reporting  standards  for
derivative  instruments,  including certain derivative  instruments  embedded in
other  contracts,  and for  hedging  activities.  They  require  that an  entity
recognize all  derivatives  as either assets or liabilities in the balance sheet
and measure those instruments at fair value.

                                       32
<PAGE>
MIDNET, INC.
(Formerly Tugboat International, Inc.)
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
--------------------------------------------------------------------------------

If certain conditions are met, a derivative may be specifically  designated as a
hedge, the objective of which is to match the timing of gain or loss recognition
on the hedging  derivative  with the  recognition of (i) the changes in the fair
value of the hedged asset or liability that are  attributable to the hedged risk
or  (ii)  the  earnings  effect  of the  hedged  forecasted  transaction.  For a
derivative  not  designated  as a  hedging  instrument,  the  gain  or  loss  is
recognized in income in the period of change.

Historically,  the Company has not entered into  derivatives  contracts to hedge
existing risks or for speculative purposes.

At December 31, 2004 and 2003,  the Company had not engaged in any  transactions
that would be considered derivative instruments or hedging activities.

DEVELOPMENT  STAGE  COMPANY - The Company is a  development  stage  company that
presents  its  financial   statements  in  conformity  with  generally  accepted
accounting  principles that apply to established  operating companies.  As such,
the Company charges all  administrative  expenses to operations in the year they
occur.  The  Company  capitalizes  only  those  costs that it expects to recover
through  future  operations  and those costs are subject to a regular review for
possible impairment.

As a development stage company,  the Company  discloses the deficit  accumulated
during the  development  stage and the  cumulative  statements of operations and
cash flows from inception to December 31, 2004.

EARNINGS  PER SHARE - On January 16,  2002,  the Company  adopted  Statement  of
Financial Accounting Standard No. 128, which provides for calculation of "basic"
and "diluted"  earnings per share. Basic earnings per share includes no dilution
and is computed by dividing net income  available to common  shareholders by the
weighted average common shares outstanding for the period.  Diluted earnings per
share  reflect  the  potential  dilution of  securities  that could share in the
earnings of an entity  similar to fully  diluted  earnings  per share.  Although
there were common stock equivalents outstanding December 31, 2004 and 2003, they
were not included in the  calculation  of earnings per share  because they would
have been considered anti-dilutive.

ESTIMATES - The process of preparing  financial  statements in  conformity  with
accounting  principles  generally  accepted  in the  United  States  of  America
requires the use of estimates and assumptions regarding certain types of assets,
liabilities,   revenues,  and  expenses.  Such  estimates  primarily  relate  to
unsettled  transactions  and events as of the date of the financial  statements.
Accordingly, upon settlement, actual results may differ from estimated amounts.

                                       33
<PAGE>
MIDNET, INC.
(Formerly Tugboat International, Inc.)
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
--------------------------------------------------------------------------------

FAIR VALUE OF FINANCIAL  INSTRUMENTS - The Company's  financial  instruments  as
defined by Statement of Financial  Accounting  Standards  No. 107,  "Disclosures
about Fair Value of  Financial  Instruments,"  include  cash and  related  party
payables and loans payable.  All  instruments  are accounted for on a historical
cost basis,  which,  due to the short maturity of these  financial  instruments,
approximates fair value at December 31, 2004 and 2003.

FOREIGN  CURRENCY  TRANSLATION  GAINS/LOSSES  - The  functional  currency of the
Company's  foreign  subsidiary is the local currency in the country is which the
subsidiary is located.  Assets and liabilities denominated in foreign currencies
are  translated to United  States  dollars at the exchange rate in effect on the
balance sheet date. Revenues and expenses are translated at the average rates of
exchange  prevailing  during  the  year.  The net  gain or loss  resulting  from
translation is included in accumulated  other  comprehensive  income.  Gains and
losses  on  foreign  currency  transactions  are  included  in the  consolidated
statement of operations.  There were no significant foreign currency transaction
gains or losses in 2004 or 2003.

PRINCIPLES OF CONSOLIDATION - The consolidated  financial statements include the
accounts of the Company and its wholly owned subsidiaries,  after elimination of
the intercompany accounts and transactions. The wholly owned subsidiaries of the
Company are listed in Note 1.

PROPERTY AND EQUIPMENT - Property and equipment are stated at cost. Depreciation
of property and equipment is calculated using the straight-line  method over the
estimated  useful lives of the assets,  which range from three to ten years. See
Note 10.

PROVISION FOR TAXES - Income taxes are provided based upon the liability  method
of accounting pursuant to Statement of Financial  Accounting  Standards No. 109,
"Accounting for Income Taxes" (hereinafter "SFAS No. 109"). Under this approach,
deferred  income  taxes are recorded to reflect the tax  consequences  in future
years of differences  between the tax basis of assets and  liabilities and their
financial reporting amounts at each year-end.  A valuation allowance is recorded
against the  deferred tax asset if  management  does not believe the Company has
met the  "more  likely  than  not"  standard  imposed  by SFAS No.  109 to allow
recognition of such an asset.

RECLASSIFICATION  - Certain amounts from prior periods have been reclassified to
conform to the current period presentation.  This  reclassification has resulted
in no changes to the Company's accumulated deficit or net losses presented.

REVENUE - The Company  recognizes  revenue  from sales when there is  persuasive
evidence that an arrangement exists,  services have been rendered,  the seller's
price to the buyer is determinable, and collectibility is reasonably assured.

                                       34
<PAGE>
MIDNET, INC.
(Formerly Tugboat International, Inc.)
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
--------------------------------------------------------------------------------

The Company derives revenue by charging customers fees to transport digital data
over the Company's  private network.  Data will be measured in gigabytes and the
Company will recognize  revenue based on usage.  The amount charged per gigabyte
will vary depending on a number of factors including:

     *    the amount of data  transmitted  over the network  (high  volume users
          will generally pay less per gigabyte than low volume users);
     *    the  type of data  transmitted  (i.e..  video  or  data  files,  video
          conferencing, online collaboration, e-mail, etc.); and
     *    whether  transmission  is real-time or  instantaneous  (higher fee per
          gigabyte) or delayed (lower fee per gigabyte).

Revenue  recognized  during 2004 was based on a fixed monthly charge pursuant to
customer  agreements  entered  into  during  the  initial  or test  phase of the
Company's network.

Stock Options and Warrants - The Company's accounting for stock is in accordance
with  Financial  Accounting  Standards  Board  No.  123 (R) and EITF  96-18A  in
recording warrants and stock options. The Company uses fair value base method of
accounting  for employee  stock options or similar  instruments.  Under the fair
value based method, compensation cost is measured at the grant date based on the
value of the award and is recognized over the service  period,  which is usually
the vesting period.

Treasury  Stock - The Company  utilizes the cost method for  accounting  for its
treasury stock acquisitions and dispositions.

NOTE 3 - GOING CONCERN UNCERTAINTY

The  accompanying  financial  statements  have been  prepared on a going concern
basis,  which  contemplates  the  realization  of  assets  and  satisfaction  of
liabilities  in the normal  course of  business.  The Company  has only  nominal
revenues and incurred material recurring losses from operations. At December 31,
2004, the Company had an accumulated  deficit of $1,337,269.  For the year ended
December  31,  2004,  the  Company  sustained  a net loss of  $1,057,354.  These
factors, among others,  indicate that the Company may be unable to continue as a
going concern for a reasonable  period of time. The financial  statements do not
include any adjustments  relating to the  recoverability  and  classification of
recorded asset amounts or the amounts and classification of liabilities that may
be necessary  should the Company be unable to continue as a going  concern.  The
Company's  continuation  as a going  concern is  contingent  upon its ability to
obtain additional  financing,  and to generate revenue and cash flow to meet its
obligations on a timely basis.  Management plans to seek additional capital from
new equity  securities  offerings  that will  provide  funds  needed to increase

                                       35
<PAGE>
MIDNET, INC.
(Formerly Tugboat International, Inc.)
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
--------------------------------------------------------------------------------

liquidity,   fund  internal  growth  and  fully  implement  its  business  plan.
Management  anticipates  expenditures of approximately $3 million for operations
in 2005.  The Company's  management  is also putting  sales  strategies in place
which will, if successful,  mitigate these factors which raise substantial doubt
about the Company's ability to continue as a going concern.

NOTE 4 - STOCKHOLDERS' EQUITY

PREFERRED STOCK
The  Company is  authorized  to issue  20,000,000  shares of  $0.0001  par value
preferred  stock.  The  preferred  stock  has the  right  to  receive  dividends
equivalent  to any per share  dividend  paid to the  common  shares,  additional
voting rights that may be exercised  upon certain  conditions,  and the right to
participate in any  forward/reverse  stock splits of the issued and  outstanding
common stock of the Company.  As of December 31, 2004 and 2003,  the Company has
300,000 shares of preferred stock issued and outstanding.

COMMON STOCK
The Company is authorized to issue 80,000,000 shares of $0.0001 par value common
stock.  Each share of stock is entitled to one vote at the annual  shareholders'
meeting.

STOCK TRANSACTIONS
During the year ended December 31, 2004, the Company issued  1,867,000 shares of
common  stock upon  exercise  of warrants  for cash at $0.75 per share,  115,000
shares of common stock for consulting services at $1.00 per share. Additionally,
30,600  shares of common  stock were  repurchased  for $25,000 and  subsequently
cancelled.

During the year ended  December 31, 2003,  the Company  issued 133,000 shares of
common  stock upon  exercise of warrants for cash at $0.75 per share and 550,000
shares of common stock at $0.36 per share for prepaid consulting services.

During the year ended December 31, 2002, the Company issued  7,344,000 shares of
common  stock for cash  valued at $0.0001  per share,  131,335  shares of common
stock for cash valued at $1.00 per share,  and 30,600 shares of common stock for
consulting  services valued at $1.00 per share.  The Company also issued 300,000
shares of preferred  stock valued at $0.0001 per share for a stock  subscription
receivable.

NOTE 5 - MERGER AND REORGANIZATION

On December 11, 2003, Tugboat International,  Inc. and MidNet, Inc. completed an
agreement  and  plan  of  merger  whereby  Tugboat  International,  Inc.  issued
7,505,935  shares of its common stock and 300,000 shares of its preferred  stock
in exchange for all of the  outstanding  common and  preferred  stock of MidNet,

                                       36
<PAGE>
MIDNET, INC.
(Formerly Tugboat International, Inc.)
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
--------------------------------------------------------------------------------

Inc. The acquisition  was accounted for as a  recapitalization  of MidNet,  Inc.
because the shareholders of MidNet, Inc. controlled Tugboat International,  Inc.
after the acquisition. Net assets consisted of $85 cash.

NOTE 6 - COMMITMENTS AND CONTINGENCIES

As of December 31, 2004,  the Company has  executed  agreements  with a regional
telecommunications  vendor to provide private circuits. The agreements establish
connectivity  between  various  cities in North  America and local loops between
customer premises and co-location facilities. The Company has paid deposits with
the vendor of $32,730 as of December 31, 2004.  The  contracts  require  monthly
payments of approximately $33,395.  Annual payments for the years ended December
31, 2005, 2006 and 2007 are approximately $400,740 per year.

As of December 31, 2004, the Company has executed various  agreements with local
vendors  to  provide  co-location  services.  Co-location  facilities  represent
network transition or aggregation points in cities and metropolitan areas. These
facilities  provide  Telco  grade  services  and spaces for either a single rack
cabinet  within which the Company  installs its  equipment or rooms within which
the Company installs multiple rack cabinets.  The Company has paid deposits with
these vendors of $3,950 as of December 31, 2004. The contracts  require  monthly
payments of  approximately  $18,145.  Remaining  payments on the  contracts  are
approximately $173,440 for the year ended December 31, 2005.

During the year ended  December  31, 2004,  the Company  entered into a one-year
rental agreement for office space in Vancouver, B.C. The Company paid a security
deposit of $1,456 and  approximately  $16,355 in rent expense for twelve months.
The  Company is in the  process of  reviewing  this  agreement  for 2005 with no
significant changes being anticipated.

NOTE 7 - PROVISION FOR TAXES

At  December  31,  2004 and  2003,  the  Company  had a net  deferred  tax asset
calculated  at an expected  rate of 34% of  approximately  $455,000 and $95,000,
respectively,  principally  arising from net operating  loss  carryforwards  for
income tax purposes.  As management of the Company  cannot  determine that it is
more  likely  than not that the  Company  will  realize  the  benefit of the net
deferred tax asset,  a valuation  allowance  equal to the net deferred tax asset
has been  recorded at December  31, 2004 and 2003.  The change in the  allowance
account  from  December  31, 2004 to December  31,  2003 was  $360,000  which is
attributed to operating expenses.

                                       37
<PAGE>
MIDNET, INC.
(Formerly Tugboat International, Inc.)
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
--------------------------------------------------------------------------------

The  significant  components  of the deferred tax asset at December 31, 2004 and
2003 were as follows:

                                                December 31,        December 31,
                                                   2004                2003
                                                -----------         -----------

     Net operating loss carryforwards           $ 1,337,300         $   280,000
                                                ===========         ===========

     Deferred tax asset                         $   455,000         $    95,000
                                                ===========         ===========
     Deferred tax asset valuation allowance     $  (455,000)        $   (95,000)
                                                ===========         ===========

At December 31, 2004 and 2003, the Company has net operating loss  carryforwards
of approximately $1,337,300 and $280,000, respectively, which will expire in the
years 2021 through 2024.

The above estimates are based upon  management's  decisions  concerning  certain
elections  which could  change the  relationship  between net income and taxable
income.

The Tax Reform Act of 1986  substantially  changed the rules relative to the use
of net operating losses and general  business credit  carryforwards in the event
of an "ownership  change" of a  corporation.  The Company has issued  additional
shares of common stock,  which may have resulted in  restrictions  on the future
use of net operating  losses and tax credit  carryforwards  generated  before an
ownership change. The effect of such change has not been determined.

NOTE 8 - RELATED PARTY TRANSACTIONS

The Company has a related  party trade  payable for advances  from  shareholders
totaling  $1,382  as  of  December  31,  2004.  These  advances  are  unsecured,
non-interest  bearing and are payable  upon demand.  Subsequent  to December 31,
2004, the entire amount was repaid.

During the year ended  December 31,  2004,  the Company paid $15,972 for prepaid
software  subscriptions to a related company, whose chairman is also chairman of
MidNet.

                                       38
<PAGE>
MIDNET, INC.
(Formerly Tugboat International, Inc.)
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
--------------------------------------------------------------------------------

NOTE 9 - PREPAID EXPENSES

Prepaid expenses consist of the following:

                                                         December 31,
                                                  -------------------------
                                                    2004             2003
                                                  --------         --------
     Prepaid legal & accounting fees              $ 12,935         $ 25,000
     Prepaid consulting services                        --          195,500
     Prepaid subscriptions                          15,972               --
     Other prepaid expenses                          8,912               --
                                                  --------         --------
     Total                                        $ 37,819         $220,500
                                                  ========         ========

NOTE 10 - PROPERTY AND EQUIPMENT

Property and equipment, net consists of the following:

                                                         December 31,
                                                  -------------------------
                                                    2004             2003
                                                  --------         --------
     Computer Equipment                           $ 87,604         $ 11,081
     Leasehold improvements                         10,285               --
                                                  --------         --------
     Total                                          97,889           11,081
     Accumulated depreciation                      (24,441)          (5,015)
                                                  --------         --------
     Net Property & Equipment                     $ 73,448         $  6,066
                                                  ========         ========

NOTE 11 - STOCK OPTIONS AND WARRANTS

The Company's  accounting is in accordance with Financial  Accounting  Standards
Board No. 123 and EITF  96-18A in  recording  warrants  and stock  options.  The
Company uses fair value base method of accounting  for employee stock options or
similar  instruments.  Under the fair value based method,  compensation  cost is
measured  at the grant  date  based on the value of the award and is  recognized
over the service period,  which is usually the vesting period.  The Company does
not have a stock option plan approved by its shareholders.

                                       39
<PAGE>
MIDNET, INC.
(Formerly Tugboat International, Inc.)
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
--------------------------------------------------------------------------------

As of  December  31,  2004,  the  Company  has  granted  various  directors  and
non-directors options to purchase shares as follows:

                                                                Weighted Average
                                                      Shares     Exercise Price
                                                      ------     --------------
Outstanding at January 1, 2003                         700,000     $   0.50
Granted                                                560,000         0.50
Exercised or expired                                        --        --
                                                    ----------     --------
Outstanding and exercisable at December 31,2003      1,260,000     $   0.50
                                                    ----------     --------
Granted                                                     --        --

Exercised or expired                                        --        --
                                                    ----------     --------
Outstanding and exercisable at December 31, 2004     1,260,000     $   0.50
                                                    ==========     ========

Weighted average fair value of options granted
during the period ended December 31, 2004                          $     --
                                                                   ========

As of December 31, 2004,  the  Company's  options had the  following  expiration
dates:

                                                 Exercise
                                                  Prices
Date of Grant            Options Granted       (#)($/share)      Expiration Date
-------------            ---------------       ------------      ---------------
3/4/2002                    500,000               0.50              3/04/2009
6/15/2002                   200,000               0.50              6/15/2009
2/12/2003                   560,000               0.50              2/12/2010
                          ---------
Total Options Granted     1,260,000
                          =========

During the year ended  December 31,  2004,  the Company  issued  warrants in two
separate  issuances  of 10,000  each  (20,000 in total) to purchase up to 20,000
shares of the Company's  restricted common stock with an exercise price of $2.45
per  share  for  10,000 of the  warrants  and $2.52 per share for the  remaining
10,000  warrants.  The  warrants  have a two-year  term and expire in 2006.  The
warrants were issued to a third party in exchange for services rendered.

The fair value of each warrant  granted is estimated on the grant date using the
Black-Scholes Option Price Calculation.  The following  assumptions were made in
estimating fair value: risk-free interest rate is 2.5%, volatility is 61.5%, and
expected life is 2 years.

                                       40
<PAGE>
MIDNET, INC.
(Formerly Tugboat International, Inc.)
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
--------------------------------------------------------------------------------

During the year ended December 31, 2003, the Company issued warrants to purchase
up to 2,000,000 shares of the Company's  restricted common stock, at an exercise
price of $0.75 per share. As of December 31, 2004, all of the warrants have been
exercised resulting in net proceeds to the Company of $1,500,000.

NOTE 12 - SUBSEQUENT EVENTS

WORLD ACCESSIBILITY MARKETPLACE INC.
Effective March 3, 2005, MidNet entered into an agreement with a related entity,
World  Accessibility  Marketplace Inc. ("World  Accessibility"),  whereby MidNet
will  provide  hardware   fingerprinting  or  registration   services  to  World
Accessibility.  The registration services will allow certain  telecommunications
devices  marketed  by World  Accessibility  to  operate  over  MidNet's  digital
communications system known as The Middle Network. The agreement provides a flat
rate fee of $4  (Canadian)  for each  device  registered.  Under the  agreement,
MidNet is required to register a minimum of 300,000  devices during the calendar
year 2005.

Mr. Tilo Kunz,  chairman of MidNet,  currently  serves as the  chairman of World
Accessibility.  Mr. Kunz's father  indirectly owns 50% of the total  outstanding
equity in World Accessibility.  Mr. Kunz devotes nominal time to the business of
World Accessibility.

THE LINEAR GROUP LLC
Effective  February 24, 2005,  MidNet  entered into an agreement with The Linear
Group LLC (hereinafter "Linear"). Linear will provide various investment banking
services, investors' communications, and public relations services with industry
analysts, existing shareholders,  brokers, dealers and other professionals.  The
agreement  has a term of one year and may be  canceled  by either  party for any
reason  during  the  first  ninety  days.   Upon  execution  of  the  agreement,
consideration  paid to Linear  included  $5,000 in cash,  250,000  shares of the
Company's  common stock and 400,000 stock options to acquire  400,000  shares of
common stock.  The stock options have a term of three years and include  certain
registration  rights. Half of the options are exercisable at $2.00 per share and
the other half are exercisable at $3.00 per share.  In addition,  the Company is
obligated  under the  agreement  to pay Linear  $5,000  cash per month and issue
another 250,000 shares of common stock 90 days after execution of the agreement.

LIGHTNING MEDIA
Effective  February 8, 2005,  MidNet  entered into an agreement  with  Lightning
Media, a Los Angeles based company,  to provide private digital network services
for the secure  transport  of media data over  MidNet's  digital  communications
system known as The Middle Network.  The agreement  provides a minimum usage fee
of $1,000 per month and has a term of one year beginning March 9, 2005.

                                       41
<PAGE>
ITEM 8.  CHANGES  IN  AND  DISAGREEMENTS  WITH  ACCOUNTANTS  ON  ACCOUNTING  AND
         FINANCIAL DISCLOSURE.

Yes.

On July 22, 2004, Registrant retained Williams & Webster, P.S., Certified Public
Accountant as its auditor for the year ending December 31, 2004.

During the two previous fiscal years, the auditor, ARMANDO C. IBARRA, Certified
Public Accountant, expressed no adverse opinion, nor was any audit qualified or
modified. There were no disagreements of any kind between MidNet, Inc. (formerly
TUGBOAT INTERNATIONAL, INC.) and its auditor.

ITEM 8A. CONTROLS AND PROCEDURES

We maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed by us in reports that we file or submit
under the Securities Exchange Act, is recorded, processed, summarized and
reported within the time periods specified in the SEC's rules and forms and that
such information is accumulated and communicated to our management, including
our Chief Executive Officer and Chief Financial Officer, as appropriate, to
allow timely decisions regarding required disclosures. In designing and
evaluating the disclosure controls and procedures, management recognizes that
any controls and procedures, no matter how well designed and operated, can
provide only reasonable assurance of achieving the desired control objectives,
and management necessarily is required to apply its judgment in evaluating the
cost-benefit relationship of possible controls and procedures. As of the end of
the period covered by this report, and under the supervision and with the
participation of our management, including our Chief Executive Officer and Chief
Financial Officer, we evaluated the effectiveness of the design and operation of
these disclosure controls and procedures. Based on this evaluation and subject
to the foregoing, our Chief Executive Officer and Chief Financial Officer
concluded that our disclosure controls and procedures were effective in reaching
a reasonable level of assurance of achieving management's desired controls and
procedures objectives.

There have been no changes in our internal controls over financial reporting
that occurred during our most recent fiscal quarter that have materially
affected, or are reasonably likely to affect, our internal control over
financial reporting.

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS

Although the Company's Bylaws provide for a Board of Directors consisting of not
less than two nor more than five directors, and the number is determined by a
properly approved resolution of the Board. The Board currently consists of three
(3) directors.

(a) DIRECTORS AND EXECUTIVE OFFICERS AS OF DECEMBER 31, 2004

        Name             Age                     Position
        ----             ---                     --------
   Peter Fentiman        60     Director, President and Chief Executive Officer
   Tilo Kunz             38     Director
   Ruedi Aschwanden      47     Director
   Ken Fasnacht          45     Chief Financial Officer, Secretary and Treasurer
   Tom Locke             54     Executive Vice President of Strategic Planning

                                       42
<PAGE>
Peter Fentiman has been the Director, President, and Chief Executive Officer of
MidNet since December 11, 2003. Mr. Fentiman has also served as a Director,
President and the Chief Executive Officer of MidNet's wholly-owned subsidiary,
MidNet, Inc., the Nevada corporation ("MidNetNV")since January 2002. Prior to
joining MidNetNV, Mr. Fentiman was a Management Consultant since 1991. In his
role as Management Consultant, Mr. Fentiman has performed a variety of
consulting functions including, analyzing business opportunities for mergers and
acquisitions, business plan development, financing models, corporate relations,
collateral material development for clients that included Triton Global Business
Services Ltd.; Penn Capital Canada Ltd.; Meridian Co Ltd.; Sintec Corp.; and
Biscay Management. Mr. Fentiman received a business diploma from the Eastern
Ontario Institute of Technology, in 1964.

Tilo Kunz has been the Director, Chairman and Chief Operating Officer of MidNet
since December 11, 2003. Mr. Kunz has also served as a Director, Chairman and
Chief Operating Officer of MidNet's wholly owned subsidiary, MidNetNV, since
January 2002. Prior to joining MidNetNV, Mr. Kunz was a media-based
communications consultant since 1995. As a media consultant, Mr. Kunz's
responsibilities and experience included business development, customer support
operations, network development and market promotion strategies for various
companies such as Tech-Catalyst Ventures, Inc., World Accessibility Marketplace
Inc., International Image Services, Cinax Designs Inc., and Rainmaker Digital
Pictures. Mr. Kunz received a business diploma from the British Columbia
Institute of Technology, in 1989.

Ruedi Aschwanden has been a Director, Chief Technology Officer of MidNet since
December 11, 2003. Mr. Aschwanden has also served as a Director and Chief
Technology Officer of MidNet's wholly owned subsidiary, MidNetNV, since January
2002. Prior to joining MidNetNV, since 1998, Mr. Aschwanden was a business and
technology consultant for high-tech startups and technical service providers in
the entertainment industry. Mr. Aschwanden's consulting engagements included:
Project Officer (Telecoms) for HSBC Canada, where he was involved in designing
the telecommunications infrastructure for head offices, branch offices and data
centers; working as a Systems Programmer on mainframe computers for Union Bank
of Switzerland (UBS) in Zurich, where he designed and implemented a
telecommunications performance measurement and load test system. As an
Electronics Engineer, he created various analog and digital devices and
microprocessor controlled control systems for the audio recording and video post
production industry, as well as a test program for the alarm system in two
nuclear power plants. Mr. Aschwanden also served as a technical consultant to
Tech-Catalyst Ventures. Mr. Aschwanden received a Masters degree in Business
Administration from the Simon Fraser University of Vancouver, BC, in 1996.

Messrs. Kunz and Aschwanden both served as officers and directors for Konnect
Corp., a private Delaware corporation, was a 50/50 joint venture formed in June
2000 between Condor Capital, Inc., a publicly traded Nevada corporation, and
Tech-Catalyst Ventures, Inc., a private British Columbia corporation.
Messrs. Kunz and Aschwanden provided consulting services to Tech-Catalyst.
Neither of them were shareholders, directors or officers of Tech-Catalyst.
Konnect Corp. was formed to develop and implement a real-time, interactive
digital data network. Pursuant to the joint venture, Condor Capital was to
provide all financing necessary for the venture and Tech-Catalyst was to provide
the technical expertise to develop and implement the proposed network. Condor
Capital failed to provide the financing necessary for the venture, and as a
result the joint venture project was abandoned by the parties. Konnect Corp.
never conducted any operations nor developed any technologies. Subsequent to the
dissolution and abandonment of the project by the parties in early 2001, and

                                       43
<PAGE>
subsequent to their resignation of their Officer and Director positions in April
2001 and February 2001, Messrs. Kunz and Aschwanden engaged in their respective
independent third-party consulting activities. Messrs Kunz and Aschwanden's
consulting activities for Tech-Catalyst ended with their respective resignations
from Konnect Corp. In January 2002, Messrs. Kunz and Aschwanden, together with
Mr. Fentiman formed MidNet, Inc., a Nevada corporation, and commenced
development of the business now call The Middle Network((SM)).

Ken Fasnacht has been the Chief Financial Officer of the Company since May 2004.
Mr. Fasnacht is a certified public accountant with more than 20 years of
finance, accounting and tax experience in private and public companies. After
graduating from the University of Houston with a BBA in Accounting, he joined
KPMG Peat Marwick's Houston office where he specialized in corporate and
international tax. Subsequent assignments with KPMG included a posting to the
London, England office and then later Atlanta, Georgia where he assisted in
developing the firm's international practice in the southeast.

Mr. Fasnacht moved to the media and entertainment industry joining Turner
Broadcasting System in Atlanta and then started a consulting practice serving
companies such as The Weather Channel and Hallmark Entertainment. Recent
experience includes the position of CFO for a high technology start-up company
that developed a web-based point-of-sale system for the hospitality industry and
Director of Finance for a casino, managing and overseeing the turnaround of the
company's finance and accounting functions. Mr. Fasnacht resigned his position
as CFO with MidNet effective March 14, 2005 and has been replaced on an interim
basis by Tom Locke, Executive Vice President of Strategic Planning.

Tom Locke has been Executive Vice President of Strategic Planning of MidNet
since December 11, 2003. Since January 2002, Mr. Locke also served in a similar
capacity for MidNet's wholly-owned subsidiary, MidNetNV. Prior to joining
MidNetNV, since 1996, Mr. Locke was President of Hub Consulting Services, and
still serves in such capacity. Hub Consulting Services was founded in 1996 and
is a wholly-owned subsidiary of Sportraits International Galleries Inc. The
company is focused on business development, strategic planning and management
design within the entertainment and communications industries. Tom Locke is the
President of Hub Consulting Services and sole shareholder of Sportraits
International Galleries Inc. Mr. Locke received an MBA degree from York
University in Toronto in 1977.

(b) Significant Employees.

None

(c) Family Relationships.

There are no family relationships among our officers, directors, or persons
nominated for such positions.

(d) Legal Proceedings.

No officer, director, or persons nominated for these positions, and no promoter
or significant employee of our corporation has been involved in legal
proceedings that would be material to an evaluation of our management.

(e) Board Committees

Our board of directors has not established an Audit Committee or a Human
Resources and Compensation Committee. There is currently no plan to establish
such committees.

                                       44
<PAGE>
Board of Directors and Officers

All directors hold office for one (1) year and until the next annual meeting of
shareholders and the election and qualification of their successors. Officers
are elected annually by the Board of Directors and serve at the discretion of
the Board.

                   INDEMNIFICATION OF DIRECTORS AND OFFICERS.

Section 145 of the General Corporation Law of the State of Delaware provides
that a Delaware corporation has the power, under specified circumstances, to
indemnify its directors, officers, staff, and agents, against expenses incurred
in any action, suit, or proceeding. There are no specific provisions in either
the articles or the bylaws.

ITEM 10. EXECUTIVE COMPENSATION

No executive officer had annual compensation in excess of $100,000 during the
two year period ending December 31, 2004.

                           SUMMARY COMPENSATION TABLE

MidNet paid $60,000 in salary to Mr. Peter Fentiman, Chief Executive Officer,
during the year ended December 31, 2004. No compensation was paid by MidNet to
the Chief Executive Officer during the prior two fiscal years.

                      OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
                                                        % of Total      Exercise
                                          Options        Options         Prices      Expiration
     Name/Position (a)                  Granted(#)(b)    Granted       ($/share)        Date
     -----------------                  -------------    -------       ---------        ----
<S>                                       <C>             <C>             <C>         <C>
Tom Locke, Exec. V.P.
Strategic Planning                        500,000         39.7%           0.50        3/04/2009

Robert Mackay, former officer             200,000         15.9%           0.50        6/15/2009

Curtis Staples, Exec. V.P. Business
Development, former Advisory Board
member                                    250,000         19.8%           0.50        2/12/2010

Dr. Panos Nasiopoulos, Advisory
Board                                     210,000         16.6%           0.50        2/12/2010

Jack Leigh, Advisory Board                 50,000          4.0%           0.50        2/12/2010

Roger Jones, Advisory Board                50,000          4.0%           0.50        2/12/2010

All Optionees                           1,260,000          100%           0.50        (c)
</TABLE>

----------
(a)  We did not grant any stock options to our Chief Executive Officer or other
     most highly compensated executive officers during the last two fiscal years
     ended December 31, 2003 and December 31, 2004.
(b)  On December 11, 2003, in connection with its merger with MidNetNV, the
     Company granted (a) its Advisory Board members (b) a former officer of
     MidNetNV and (c) a consultant to the Company, options to purchase a total
     of 1,260,000 shares of the Company's restricted Common Stock, at an
     exercise price of $.50 per share. These options were exchanged for the
     outstanding MidNetNV options that were previously issued to these
     individuals.
(c)  No other options were granted for the fiscal year ended December 31, 2004.
     See expiration date above for each individual.

                                       45
<PAGE>
We consider the terms of the foregoing option transactions to be fair and
reasonable to both us and respective parties involved. All option grants,
including exercise prices, were the result of arms-length negotiations between
the parties.

Although the Board of Directors approved the creation of a stock option plan, no
plan was actually prepared or implemented. Nevertheless, although a stock option
plan was not in existence, the Board of Directors issued stock options to the
individuals named in the above table to acquire 1,260,000 shares of the
Company's restricted common stock.

OPTION EXERCISES.

None of the option holders have exercised options to purchase shares of common
stock as of March 15, 2005.

                            COMPENSATION OF DIRECTORS

The directors of MidNet are not compensated for their services although such
directors may from time to time be awarded options or other incentives by
MidNet. However, directors will be reimbursed for their out-of-pocket expenses
incurred in connection with their attendance at Board meetings.

                            CONTRACTUAL ARRANGEMENTS

On December 11, 2003, MidNet assumed MidNetNV's written consultant contract
with Tom Locke, an officer of MidNet. Mr. Locke receives a monthly salary
of US$5,000.00 for his services, which are focused primarily on positioning and
branding MidNet's services. This contract, which was updated as of January 1,
2005, may be terminated at any time upon 30 days' notice by either party. This
contract is being paid on a month-to-month basis.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following tables set forth the ownership, as of December 31, 2004, of
MidNet's common stock (a) by each person known by the Company to be the
beneficial owner of more than 5% of the outstanding common stock, and (b) by
each of the directors, by all executive officers and by the directors as a
group. To the best of the Company's knowledge, all persons named have sole
voting and investment power with respect to the shares, except as otherwise
noted.

(a) Security Ownership of Certain Beneficial Owners

None.

                                       46
<PAGE>
(b) Security Ownership of Officers and Directors.

Title
 of                   Current                        No. of        Nature of
Class             Name & Address                     Shares        Ownership
-----             --------------                     ------        ---------
Common            Peter Fentiman                   2,448,000       Direct-18%
                  306 3680 Banff Court
                  North Vancouver, B.C.
                  Canada V7H 2Y7
Preferred                                            100,000       Direct-33.3%

Common            Tilo Kunz                        2,448,000       Direct-18%
                  5182 Redonda Drive
                  North Vancouver, B.C.
                  Canada V7R 3K3
Preferred                                            100,000       Direct-33.3%

Common            Ruedi Aschwanden                 2,448,000       Direct-18%
                  261 E. 11th Street
                  North Vancouver, B.C.
                  Canada V7L 2G8
Preferred                                            100,000       Direct-33.3%

Common            Tom Locke (1)                      500,000       Direct-3.5%
                  2930 Yukon Street.
                  Vancouver, B.C.
                  Canada V5Y 3R3

All Officers and Directors as a
 Group (Approx.) (4 Individuals)      Common       7,844,000       Direct 57%
                                      Preferred      300,000       Direct-100%

----------
(1)  Mr. Locke, Executive Vice President of MidNet, 2930 Yukon Street.,
     Vancouver, B.C., Canada V5Y 3R3, beneficial ownership includes 100,000
     shares included in this registration statement and options to purchase up
     to 500,000 shares of restricted Common Stock at an exercise price of $.50
     per share. These options expire in April 2009 and are included in this
     table since they are exercisable within 60 days.

(c) Changes in Control.

There are currently no arrangements which would result in a change in control of
the Company.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

On December 11, 2003, registrant ("Tugboat"), by and through its wholly-owned
subsidiary, Tugboat Acquisition Corp., a Nevada corporation ("TAC"), entered
into a merger and reorganization agreement to acquire 100% of the total issued
and outstanding shares of MidNet, Inc., a Nevada corporation ("MidNetNV"), from
the shareholders of MidNetNV, in full and sole consideration of 7,505,935 shares
of the registrant's restricted Common Stock, representing 58% of the total
outstanding shares of Common Stock of Tugboat, post-merger. The transaction did
not involve the transfer of any funds. The 7,505,935 shares were issued directly

                                       47
<PAGE>
by Tugboat from its authorized but unissued shares of Common Stock. The
shareholders of MidNetNV now have direct beneficial ownership and voting control
of Tugboat.

In addition, the holders of 300,000 shares of Preferred Stock of MidNet
exchanged their shares for 300,000 shares of Tugboat Preferred Stock, $.0001 per
share par value. The 300,000 Tugboat Preferred Shares have the identical rights
and preferences as the 300,000 Preferred Shares issued by MidNet. In addition,
options for members of the Advisory Board and a consultant of MidNet to acquire
1,260,000 restricted shares of MidNet, at an exercise price of $.50 per share,
were exchanged for options to acquire 1,260,000 restricted shares of Tugboat, at
an exercise price of $.50 per share, on the same terms and conditions of the
MidNet options.

There are no arrangements or understandings among members of the former and/or
the new control groups of MidNet and/or their respective associates with respect
to the election of directors or other matters.

Concurrent with the merger, the following persons were appointed as Directors of
MidNet: Ruedi Aschwanden, Tilo Kunz and Peter Fentiman. Karen A. Batcher
resigned as President, Secretary and Treasurer of Tugboat and the Board of
Directors appointed Peter Fentiman to serve as President, CEO and CFO. Mr.
Aschwanden was appointed to serve as interim Secretary and Treasurer.

There are no arrangements, known to the registrant, the operation of which may,
at a subsequent date, result in a change in control of registrant. As of the
merger, four (4) of the management personnel (Messrs. Fentiman, Kunz, Aschwanden
and Locke) had direct beneficial ownership and voting control of 57% of the
total issued and outstanding shares of MidNet's Common Stock.

Subsequent to December 31, 2003 certain holders of warrants have purchased
2,000,000 shares of MidNet's restricted common stock by exercising their
warrants at a price of $.75 per share. Based upon this exercising of warrants
the Company received a total of $1,500,000. None of the warrants were held by
affiliates of the registrant. Under the terms of the Warrant Agreement, MidNet
has, at its sole expense, registered the shares acquired by exercise of the
Warrants.

Based on the independent contractor agreements they have with the Company,
commencing February 1, 2004, Mssrs. Fentiman, Kunz and Aschwanden, who are
officers and directors of the Company, received compensation of $2,500.00 per
month. They receive no compensation for their respective services as officers
and directors, per se. Effective March 1, 2004, Mssrs. Fentiman, Kunz and
Aschwanden became employees of the company and now receive an annual
compensation of approximately $60,000 per annum.

                                       48
<PAGE>
The following individuals are, or were, considered promoters of the Company:

<TABLE>
<CAPTION>
                                                                                               Consideration received
Name                 Position                         Consideration Received (a)                  by Company (b)
----                 --------                         --------------------------                  --------------
<S>                  <C>                        <C>                                              <C>
Peter Fentiman       Director, President        2,448,000 shares of common stock and 100,000     Cash and services
                     and Chief Executive        shares of preferred stock were issued in
                     Officer                    exchange for cash consideration

Tilo Kunz            Director, Chairman,        2,448,000 shares of common stock and 100,000     Cash and services
                     Chief Operating Officer    shares of preferred stock were issued in
                                                exchange for cash consideration

Ruedi Aschwanden     Director, Chief            2,448,000 shares of common stock and 100,000     Cash and services
                     Technology Officer         shares of preferred stock were issued in
                                                exchange for cash consideration

Christos Papadimas   Previous Director,         5,000,000 shares of common stock were issued     Cash and services in the
                     President & Secretary      in exchange for cash consideration               organization of the Company
                                                                                                 at inception
</TABLE>

----------
(a)  The named individuals did not receive any other money, property, contracts,
     options or other rights as consideration for their position as a promoter.
(b)  The Company did not receive any other assets, services or other
     consideration.

ITEM 13. INDEX TO EXHIBITS

The following exhibits are filed pursuant to Rule 601 of Regulation S-B.

Exhibit
Number                            Description
------                            -----------
3.1    Certificate of Incorporation of the Company filed on January 2, 2001.*
3.2    Bylaws of the Company filed on January 2, 2001.*
31.1   Certification of Principal Executive Officer Pursuant to Section 302 of
       the Sarbanes-Oxley Act of 2002
31.2   Certification Principal Financial Officer Pursuant to Section 302 of the
       Sarbanes-Oxley Act of 2002
32.1   Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
       Section 906 of the Sarbanes-Oxley Act of 2002
32.2   Certification Pursuant to 18 U.S.C. Section 906, as Adopted Pursuant to
       Section 302 of the Sarbanes-Oxley Act of 2002

----------
*    Previously filed and incorporated by reference to the registrant's
     Form-10SB12G, filed January 2, 2001.

                                       49
<PAGE>
                                   SIGNATURES

Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.

Dated this 31st day of March, 2005


                           By: /s/ Tom Locke
                              --------------------------------------
                              Tom Locke
                              Chief Financial Officer, and Treasurer
                              (Principal financial and chief accounting officer)


                                       50