SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-KSB

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

                  For the fiscal year ended: December 31, 2003

                              SEC File No. 0-32199


                           TUGBOAT INTERNATIONAL, 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 (losses) for the most recent fiscal year: ($6,697).

On February 16, 2004, the aggregate market value of the voting stock held by
non-affiliates of the Registrant was approximately $19,941,269, computed by
reference to the price at which the stock was sold on such date.

There were 13,600,000 shares of common stock $.0001 par value outstanding as of
December 31, 2003.

                      Documents incorporated by reference: None.

Transitional Small Business Format (check one): Yes [ ] No [X]
<PAGE>
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

TUGBOAT INTERNATIONAL, INC., is a Delaware corporation, incorporated on July 20,
1998 (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.
However, the Corporation's management does not intend to take any corporate
action to enact this resolution until such time as it has fulfilled its
obligations under the rules and regulations of the Securities and Exchange
Commission. Therefore, management sent a notice of the resolution to
shareholders. The Company believes this change in its name will better reflect
the nature of its business.

MERGER AND REORGANIZATION

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 ("MidNet"), from
the shareholders of MidNet, 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,

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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 three years, the founders of MidNet have developed a proprietary
system called "The Middle Network", which is designed to allow its potential
customers to communicate digitally in a secure, reliable and affordable
environment. The Middle Network provides a unique neutral data communications
environment among telecommunications infrastructure companies, such as AT&T,
Sprint and Verizon ("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 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.

The Middle Network is now ready for commercialization.

Tugboat intends to continue developing the business of MidNet.

                                    FEATURES

The features provided through utilization of The Middle Network include:

     *  high security
     *  privacy
     *  cost-effective operation
     *  neutrality
     *  high quality data service
     *  reliability

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                                    SERVICES

Our 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. The
Company intends to provide the means to move high-speed secured data, metered in
gigabyte units, for a broad mix of services within the Company's secure
environment, including:

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

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

     *  viruses
     *  worms
     *  hackers
     *  intermittent reliability
     *  unreliable bandwidth
     *  similar unpredictable features.

In addition, use of The Middle Network could eliminate the need for a company to
establish an expensive inter-office private network.

The Middle Network also avoids the problems created by the "regionality" aspects
of telecommunication companies. For example, in most cases, when the consumer
wants to utilize advanced communication services, such as conducting a
videoconference, there are numerous limitations and restrictions which arise
from the fact that the consumer's service provider has a limited area in which
it can provide services. Thus, the consumer is similarly limited in the area in
which he/she can conduct a high quality videoconference. The Middle Network
eliminates this "regionality" problem and related restrictions by creating and
operating a private network which has the ability to span or bridge all of the
networks of all of the communications companies worldwide. The Middle Network is
totally independent of and unencumbered by operational restrictions and is not
limited to any specific area of operation.

                                    INDUSTRY

The Company is in the general telecommunications industry. Currently, there are
many companies that provide digital communications services, data networking
services, and application services, but the Company is unaware of any company
that provides a service that currently competes with The Middle Network. The
Middle Network bridges existing competitive communications infrastructures
without providing any application services. Third party application service
providers (ASPs) are therefore able to deliver their services securely with
user-definable quality of service over The Middle Network to their customers who
may be connected to The Middle Network by competitive local exchange companies
(CLECs).

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                                   COMPETITORS

Many telecommunication companies provide virtual private network services.
However, the Company is currently unaware of any competitor providing a service
that competes directly with The Middle Network because all other companies
providing telecommunication services provide their own application services
along with their telecommunication services. In contrast, the Company's services
are complementary to Inter-Exchange Carriers (IXCs) and CLECs because they allow
third party ASPs to provide services through the Middle Network.

In addition to this, independent ASP's either have to deliver services over the
Internet or create their own private or semi-private networks in order to
realize the quality of service levels required to provide communication
services, such as videoconferencing.

                                    CUSTOMERS

The Company intends to provide The Middle Network to ASPs and end-user customers
who either receive services from ASPs or have created their own application
services or private networks.

                            REGULATORY CONSIDERATIONS

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

                               SALES AND MARKETING

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

                              INTELLECTUAL PROPERTY

MidNet has applied for a service mark for "The Middle Network" thorough the U.S.
Patent and Trademark Office.

                                    EMPLOYEES

As of February 2004, the Company had no employees. However, Mssrs. Fentiman,
Kunz and Aschwanden all receive compensation as paid consultants/independent
contractors to the Company

                                  RISK FACTORS

Our forward-looking statements are subject to a variety of factors that could
cause actual results to differ significantly from current beliefs and
expectations. In addition to the risk factors identified under the captions
below, the operation and results of our business are subject to risks and
uncertainties identified elsewhere in this annual report on Form 10-K as well as
the following general risks and uncertainties:

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     *    general economic conditions in the geographic areas that are being
          targeted for communications services;
     *    the ability to achieve and maintain market penetration and average per
          customer revenue levels sufficient to provide financial viability to
          our business; and
     *    fluctuations in the actual and forecast demand for national, regional
          or global telecommunications services.

                         RISKS RELATED TO OUR OPERATIONS

OUR RIGHTS TO THE USE OF TELECOMMUNICATIONS FACILITIES AND TELECOMMUNICATIONS
BANDWIDTH THAT MAKE UP OUR NETWORK MAY BE AFFECTED BY THE FINANCIAL HEALTH OF
OUR FACILITY AND BANDWIDTH PROVIDERS.

The majority of our planned network will be held by us through short-term and
long-term leases or irrevocable right of use agreements with various companies
that provide us access to telecommunications facilities and bandwidth owned by
them. A bankruptcy or financial collapse of one of these providers could result
in a loss of our rights under such leases and agreements with the provider,
which in turn could have a negative impact on the integrity of our network and
ultimately on our results of operations.

WE MAY NOT BE ABLE TO CONTINUE TO CONNECT OUR NETWORK TO INCUMBENT OR
COMPETITIVE LOCAL EXCHANGE CARRIERS' NETWORKS ON FAVORABLE TERMS.

We must be party to interconnection agreements with incumbent carriers and
certain independent carriers in order to connect our customers to The Middle
Network. If we are unable to renegotiate or maintain interconnection agreements
in all of our markets on favorable terms, it could adversely affect our ability
to provide services in the affected markets. Increases in costs associated with
telecommunications facilities and bandwidth could have a material adverse effect
on our margins for our products and services. We may not be able to renegotiate
or maintain access to bandwidth and telecommunications facility arrangements on
favorable terms, which would impair our growth and performance.

IT IS EXPENSIVE AND DIFFICULT TO SWITCH NEW CUSTOMERS TO OUR NETWORK, AND LACK
OF COOPERATION OF INCUMBENT OR COMPETITIVE LOCAL EXCHANGE CARRIERS CAN SLOW THE
NEW CUSTOMER CONNECTION PROCESS.

It is expensive and difficult for us to switch a new customer to our network
because:

     *    we may have to charge the potential customer certain one-time
          installation fees, and, although the fees are generally less than the
          cost to install a new customer, they may act as a deterrent to
          becoming our customer, and
     *    we require cooperation from carriers in instances where there is no
          direct connection between the customer and our network, which can
          complicate and add to the time that it takes to provision a new
          customer's service.

WE DEPEND ON OUR KEY PERSONNEL AND QUALIFIED TECHNICAL STAFF AND, IF WE LOSE
THEIR SERVICES, OUR ABILITY TO MANAGE THE DAY-TO-DAY ASPECTS OF OUR BUSINESS AND
COMPLEX NETWORK WILL BE WEAKENED. WE MAY NOT BE ABLE TO HIRE AND RETAIN
QUALIFIED PERSONNEL, WHICH COULD ADVERSELY AFFECT OUR OPERATING RESULTS.

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We are highly dependent on the services of our management and other key
personnel. The loss of the services of members of our senior executive
management team or other key personnel could cause us to make less successful
strategic decisions, which could hinder the introduction of new services or make
us less prepared for technological or marketing problems, which could reduce our
ability to serve our customers or lower the quality of our services. We believe
that a critical component for our success will be the attraction and retention
of qualified, professional technical and sales personnel. We may not be able to
attract, develop, motivate and retain experienced and innovative personnel. If
we fail to do so, there will be an adverse effect on our ability to generate
revenue and operate our business.

THE OPERATION, ADMINISTRATION, MAINTENANCE AND REPAIR OF OUR SYSTEMS ARE SUBJECT
TO RISKS THAT COULD LEAD TO DISRUPTIONS IN OUR SERVICES AND THE FAILURE OF OUR
SYSTEMS TO OPERATE AS INTENDED FOR THEIR FULL DESIGN LIFE.

Each of our systems is and will be subject to the risks inherent in large-scale,
complex telecommunications systems. The operation, administration, maintenance
and repair of our systems will require the coordination and integration of
sophisticated and highly specialized hardware and software technologies and
equipment located throughout the world. Our systems may not continue to function
as expected in a cost-effective manner. The failure of the hardware or software
to function as required could render The Middle Network unable to perform at
design specifications.

We cannot provide any assurances as to the actual useful life of any of the
technical systems used in The Middle Network. A number of factors will
ultimately affect the useful life of each of our systems, including, among other
things, 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 our services and cause us to lose customers or make it
more difficult to attract new ones. In addition, because many of our services
are critical to our customers' businesses, a significant interruption in service
could result in lost profits or other loss to customers. Although we attempt to
disclaim liability for these losses in our service agreements, a court might not
enforce a limitation on liability, which could expose us to financial loss. In
addition, we expect to provide some of our customers with guaranteed service
level commitments. If we are unable to meet these guaranteed service level
commitments for whatever reason, we may be obligated to provide our customers
with credits, generally in the form of free service for a short period of time,
which could negatively affect our operating results.

THE FAILURE OF OUR BUSINESS AND OPERATIONS SUPPORT SYSTEMS TO PERFORM AS WE
EXPECT COULD IMPAIR OUR ABILITY TO RETAIN CUSTOMERS AND OBTAIN NEW CUSTOMERS, OR
PROVISION THEIR SERVICES, OR RESULT IN INCREASED CAPITAL EXPENDITURES, WHICH
WOULD ADVERSELY AFFECT OUR REVENUES OR CAPITAL RESOURCES.

Our operations support systems are an important factor in our success. Critical
information systems used in daily operations will be used to perform sales and
order entry, provisioning, billing and accounts receivable functions, and cost
of service verification and payment functions. If any of these systems fail or
do not perform as expected, it would adversely affect our ability to process
orders and provision sales, and to bill for services efficiently and accurately,
all of which could cause us to suffer customer dissatisfaction, loss of
business, loss of revenue or the inability to add customers on a timely basis,
any of which would adversely affect our revenues. In addition, system failure or

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performance issues could have an adverse impact on our ability to effectively
audit and dispute invoicing and provisioning data provided by service providers
from whom we lease facilities. Furthermore, processing higher volumes of data or
additionally automating system features could result in system breakdowns and
delays and additional unanticipated expense to remedy the defect or to replace
the defective system with an alternative system.

INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS OF OTHERS COULD PREVENT US FROM
USING NECESSARY TECHNOLOGY.

While we do not believe that there exists any technology patented by others, or
other intellectual property owned by others, that is necessary for us to provide
our services and has not been licensed by us, there can be no assurances in this
regard. If there is intellectual property that is owned by others for we which
we have no license, we would have to negotiate such a license for the use of
that property. We may not be able to negotiate such a license at a price that is
acceptable. This could force us to cease offering products and services
incorporating such property, thereby adversely affecting operating results.

OUR COSTS MAY SIGNIFICANTLY INCREASE IF THE GNU GENERAL PUBLIC LICENSE AND
SIMILAR LICENSES ARE NOT ENFORCEABLE. The Linux operating system and many
software applications used in our business and operations support systems have
been developed and licensed under the GNU General Public License and similar
open source licenses. These licenses state that any program licensed under them
may be liberally copied, modified and distributed. The GNU General Public
license is a subject of litigation in the case of The SCO Group, Inc. v.
International Business Machines Corp., pending in the United States District
Court for the District of Utah. It is possible that a court would hold these
licenses to be unenforceable in that litigation or that someone could assert a
claim for proprietary rights in a program developed and distributed under them.
Any ruling by a court that these licenses are not enforceable, or that
Linux-based operating systems or any software made available under the GNU
General Public license, or significant portions of them, may not be liberally
copied, modified or distributed, could significantly increase our costs or
otherwise adversely affect our operations.

PHYSICAL SPACE LIMITATIONS IN OFFICE BUILDINGS AND LANDLORD DEMANDS FOR FEES OR
REVENUE SHARING COULD LIMIT OUR ABILITY TO CONNECT CUSTOMERS TO OUR NETWORKS AND
INCREASE OUR COSTS.

In some circumstances, connecting a customer who is a tenant in an office
building to our network may require the installation of in-building cabling
through the building's risers from the customer's office to our fiber in the
street or building equipment room, or our antenna on the roof. In some office
buildings, particularly the premier buildings in the largest markets, the risers
are already close to their maximum physical capacity due to the entry of
competitive carriers into the market. Direct connections may require us to
obtain access to rooftops from building owners. Moreover, the owners of these
buildings are increasingly requiring telecommunications service providers to pay
fees or otherwise share revenue as a condition of access to risers and rooftops.
We may be required to pay fees to access buildings, particularly for buildings
located in larger markets, which would reduce our operating margins.

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OUR INTERNATIONAL OPERATIONS MAY FACE POLITICAL, LEGAL AND OTHER RISKS FROM OUR
OPERATIONS IN FOREIGN JURISDICTIONS.

We expect to derive a substantial portion of our revenue from international
operations and expect to have substantial physical assets in several
jurisdictions along our routes, including countries in Latin America and Western
Europe. In addition, we lease capacity and obtain services from carriers in
those and other regions. As a result our business is subject to particular risks
from operating in these areas, including:

     *    uncertain and rapidly changing political and economic conditions,
          including the possibility of civil unrest, vandalism affecting cable
          assets, terrorism or armed conflict;
     *    unexpected changes in regulatory environments and trade barriers;
     *    exposure to different legal and regulatory standards; and
     *    difficulties in staffing and managing operations consistently through
          our several operating areas.

In addition, managing operations in multiple jurisdictions may place further
strain on our ability to manage growth.

MANY OF OUR CUSTOMERS DEAL PREDOMINANTLY IN FOREIGN CURRENCIES, SO WE MAY BE
EXPOSED TO EXCHANGE RATE RISKS AND OUR NET LOSS MAY SUFFER DUE TO CURRENCY
TRANSLATIONS.

Many of our current and prospective customers that derive their revenue in
currencies other than U.S. dollars will be invoiced by us in U.S. dollars. The
obligations of customers with substantial revenue in foreign currencies may be
subject to unpredictable and indeterminate increases in the event that such
currencies depreciate in value relative to the U.S. dollar. Furthermore, such
customers may become subject to exchange control regulations restricting the
conversion of their revenue currencies into U.S. dollars. In either event, the
affected customers may not be able to pay us in U.S. dollars. In addition, where
we invoice for our services in currencies other than U.S. dollars, our net
income or loss may suffer due to currency translations in the event that such
currencies depreciate relative to the U.S. dollar and we do not elect to enter
into currency hedging arrangements in respect of those payment obligations.
Declines in the value of foreign currencies relative to the U.S. dollar could
adversely affect our ability to market our services to customers whose revenues
are denominated in those currencies. On the other hand, significant increases in
the value of foreign currencies relative to the U.S. dollar could adversely
affect our ability to access telecommunications bandwidth and facilities at the
projected costs and therefore have a material adverse effect on our margins for
our products and services and/or ability to provide services to current and
prospective customers.

                  RISKS RELATED TO COMPETITION AND OUR INDUSTRY

THE PRICES FOR TELECOMMUNICATIONS SERVICES HAVE BEEN DECREASING, AND WE EXPECT
THAT SUCH DECREASES WILL CONTINUE OVER TIME.

We expect price decreases in our industry to continue as demand increases for
transmission capacity on existing and new networks. Accordingly, our historical
revenues will not be indicative of future revenues based on comparable traffic
volumes. If the prices for our services decrease for whatever reason and we are
unable to increase volumes through additional services or otherwise, our
operating results would be adversely affected.

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TECHNOLOGICAL ADVANCES AND REGULATORY CHANGES ARE ERODING TRADITIONAL BARRIERS
BETWEEN FORMERLY DISTINCT TELECOMMUNICATIONS MARKETS, WHICH COULD INCREASE
COMPETITION AND PUT DOWNWARD PRESSURE ON PRICES.

New technologies, such as voice-over-IP, and regulatory changes, particularly
those permitting incumbent local telephone companies to provide long distance
services, are blurring the distinctions between traditional and emerging
telecommunications markets. In addition, the increasing importance of data
services has focused the attention of most telecommunications companies on this
growing sector. As a result, a supplier to the Company is potentially a
competitor , which could impair our prospects, put downward pressure on prices
and adversely affect our operating results.

We face potential competition in each of our markets from the incumbent carrier
in that market and from recent market entrants, including long distance carriers
seeking to enter, reenter or expand entry into the local exchange marketplace
and incumbent carriers seeking to enter into the long distance market as they
are granted the regulatory authority to do so. This potential competition places
downward pressure on prices for data services, which can adversely affect our
operating results. In addition, we could face competition from other companies,
such as other competitive carriers, cable television companies, microwave
carriers, wireless telephone system operators and private networks built by
large end-users. If we are not able to compete effectively with these industry
participants, our operating results would be adversely affected.

MANY OF OUR POTENTIAL COMPETITORS HAVE SUPERIOR RESOURCES, WHICH COULD PLACE US
AT A COST AND PRICE DISADVANTAGE.

Many of our potential competitors may have significant competitive advantages,
including greater market presence, name recognition and financial, technological
and personnel resources, superior engineering and marketing capabilities, and
significantly larger installed customer bases. As a result, some of our
potential competitors can raise capital at a lower cost than we can, and they
may be able to adapt more swiftly to new or emerging technologies and changes in
customer requirements, take advantage of acquisition and other opportunities
more readily, and devote greater resources to the development, marketing and
sale of products and services than we can. Also, our potential competitors'
greater brand name recognition may require us to price our services at lower
levels in order to win business. Our potential competitors' financial advantages
may give them the ability to reduce their prices for an extended period of time
if they so choose.

OUR SELECTION OF TECHNOLOGY COULD PROVE TO BE INCORRECT, INEFFECTIVE OR
UNACCEPTABLY COSTLY, WHICH WOULD LIMIT OUR ABILITY TO COMPETE EFFECTIVELY.

The telecommunications industry is subject to rapid and significant changes in
technology. Most technologies and equipment that we use or will use, including
wireline and wireless transmission technologies, circuit and packet switching
technologies, multiplexing technologies, data transmission technologies,
including the Sonet, SDH, MPLS, DSL, ATM and IP technologies, and server and
storage technologies may become obsolete. If we do not replace or upgrade
technology and equipment that becomes obsolete, we will be unable to compete
effectively because we will not be able to meet the expectations of our
customers, which could cause our results to suffer.

The introduction of new technologies may reduce the cost of services similar to
those that we plan to provide. As a result, our most significant potential
competitors in the future may be new entrants to the telecommunications industry

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or existing providers that upgrade equipment with new technologies. These
providers may not be burdened by an installed base of outdated equipment and,
therefore, may be able to more quickly respond to customer demands.

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

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

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

CHANGES IN REGULATORY ENVIRONMENTS MAY REQUIRE US TO OBTAIN AND MAINTAIN A
NUMBER OF GOVERNMENTAL LICENSES AND PERMITS.

Our operations are currently not subject to regulation in the United States and
Canada. However, changing regulatory environments may require us to obtain and
maintain a number of governmental licenses and permits in the future. If we fail
to comply with those regulatory requirements or obtain and maintain those
licenses and permits, we may not be able to conduct our business. Moreover,
those regulatory requirements could change in a manner that significantly
increases our costs or otherwise adversely affects our operations.

     *    Our interstate and international operations in the United States are
          governed by the Communications Act of 1934, as amended by the 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 we are permitted to provide our services in the United States
          and may have a material adverse effect on our 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 we expect to operate are conducting proceedings related to
          the provision of services in a competitive telecommunications
          environment. These proceedings may affect the manner in which we are
          permitted to provide our services in one or more states and may have a
          material adverse effect on our operations.
     *    Our operations outside the United States are governed by the laws of
          the countries in which we operate. The regulation of
          telecommunications networks and services outside the United States
          varies widely. In some countries, the range of services that we are
          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

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          or discriminatory fashion, or inadequate judicial, regulatory or other
          fora are available to address these inadequacies or disputes. Our
          inability or failure to comply with the telecommunications laws and
          regulations of one or more of the countries in which we operate could
          result in the temporary or permanent suspension of operations in one
          or more countries. We also may be prohibited from entering certain
          countries at all or from providing all of our services in one or more
          countries. In addition, many of the countries in which we operate are
          conducting regulatory or other proceedings that will affect the
          implementation of their telecommunications legislation. We cannot be
          certain of the outcome of these proceedings. These proceedings may
          affect the manner in which we are permitted to provide our services in
          these countries and may have a material adverse effect on our
          operations.
     *    In the ordinary course of constructing our networks and providing our
          services we may be required to obtain and maintain a variety of
          telecommunications and other licenses and authorizations in the
          countries in which we operate. We also may have to comply with a
          variety of regulatory obligations. Our 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.
     *    The regulatory requirements to which we are subject could change in a
          manner that significantly increases our costs or otherwise adversely
          affects our operations.

ATTEMPTS TO LIMIT THE BASIC COMPETITIVE FRAMEWORK OF THE TELECOM ACT COULD
INTERFERE WITH THE SUCCESSFUL IMPLEMENTATION OF OUR BUSINESS PLAN.

Successful implementation of our business plan is predicated on the assumption
that the basic framework for competition in the local exchange services market
established by the Telecom Act will remain in place. We expect that there will
be attempts to modify, limit or eliminate this basic framework through a
combination of federal legislation, new rulemaking proceedings by the FCC and
challenges to existing and proposed regulations by the RBOCs. It is not possible
to predict the nature of any such action or its impact on our business and
operation, though the effect of certain changes could be material.

POTENTIAL REGULATION OF INTERNET SERVICE PROVIDERS COULD ADVERSELY AFFECT OUR
OPERATIONS.

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 the Company by association and significantly increase our cost structure
and have a material adverse effect on our business.

WE DEPEND ON THIRD PARTIES FOR MANY FUNCTIONS. IF THE SERVICES OF THOSE THIRD
PARTIES BECOME UNAVAILABLE TO US, WE MAY NOT BE ABLE TO CONDUCT OUR BUSINESS.

We depend and will continue to depend upon third parties to:

     *    construct and/or upgrade some of our systems and provide equipment and
          maintenance;
     *    provide access to a number of origination and termination points of
          our systems in various jurisdictions; and
     *    provide terrestrial and subsea capacity and services to our customers
          through contractual arrangements.

                                       11
<PAGE>
We cannot provide any assurances that third parties will perform their
contractual obligations or that they will not be subject to political or
economic events which may have a material adverse effect on their ability to
provide us with necessary services. If they fail to perform their obligations,
or if any of these relationships are terminated and we are unable to reach
suitable alternative arrangements on a timely basis, we may not be able to
conduct our business.

POWER OUTAGES AND ROLLING BLACKOUTS MAY ADVERSELY AFFECT OUR BUSINESS AND
OPERATIONS.

On August 14, 2003, eight states and southern Canada experienced a widespread
power outage after extreme energy fluctuations in the power grid. California
experienced rolling power outages and brownouts in the San Francisco Bay Area in
the year 2000 and in Los Angeles County in March and May of 2001 due to
shortages of energy supply in the affected areas. Although we make every
reasonable effort to protect The Middle Network from power outages, we have no
control over where, when and for how long such power outages may occur and
whether such outages exceed the capacity of our protection or the capacity of
telecommunications bandwidth and facilities providers that provide services to
us. Hence, power outages may impact The Middle Network and our business and
operations support systems in a manner that disrupts our operations and have a
material adverse effect on our business.

TERRORIST ATTACKS AND OTHER ACTS OF VIOLENCE OR WAR MAY ADVERSELY AFFECT THE
FINANCIAL MARKETS AND OUR BUSINESS AND OPERATIONS.

As a result of the September 11, 2001 terrorist attacks and subsequent events,
there has been considerable uncertainty in world financial markets. These events
and concerns about future terrorist attacks could lead to volatility or
illiquidity in world financial markets. They could cause consumer confidence and
spending to decrease or otherwise adversely affect the economy. These events
could adversely affect our business and our ability to obtain financing on
favorable terms.

Future terrorist attacks against the United States or other countries in which
we expect to operate are possible. Since telecommunications networks and
equipment may be considered critical infrastructure, it is possible that our
physical facilities or network control systems could be the target of such
attacks, or that such attacks could impact other telecommunications companies in
a manner that disrupts our operations. Any of these occurrences could materially
adversely affect our business.

OUR COMPANY HAS NO HISTORY OF EARNINGS AND UNCERTAIN FUTURE EARNINGS.

To date, the Company has not engaged in any business or operations and has
generated little revenues. There is no assurance it will generate any revenues
from its proposed operations, or if it does, that such revenues, if any, will be
sufficient to sustain operations.

THE UNCERTAINTY OF ADDITIONAL CAPITAL PLACES US AT RISK FOR CONTINUED
OPERATIONS.

The Company cannot offer assurances that funds will be raised when it requires
them or that the Company will be able to raise funds on suitable terms. Failure
to obtain such financing when needed could delay or prevent the Company's

                                       12
<PAGE>
planned network roll-out, which could adversely affect the Company's business,
financial condition and results of operations. If additional capital is raised
through the sale of additional equity or convertible securities, dilution to the
Company's stockholders is likely to occur.

THE COMPANY'S CASH FLOW COULD BE LOWER THAN ANTICIPATED DUE TO SLOWER THAN
EXPECTED CUSTOMER ACCEPTANCE.

The Company has generated little cash flow and there is no assurance its
proposed services will be accepted by anticipated customers, or that any such
customers will accept the services at a time and in a manner that will produce
revenues for the Company as and when required for operations.

PROTECTION OF THE COMPANY'S INTELLECTUAL PROPERTY IS LIMITED.

The Company has only applied for protection of its name as a service mark. There
is no assurance a service mark will be granted or that the Company will be able
to successfully defend its service mark if contested or infringed upon.

THE COMPANY'S STOCK PRICE MAY BE VOLATILE.

In recent years and months, the U.S. stock market has experienced significant
price and volume fluctuations. These fluctuations, which are often unrelated to
the operating performances of specific companies, have had a substantial effect
on the market price of stocks, particularly stocks like the Company's. It is
also possible that the Company's operating results will not meet the
expectations of its public market analysts, which could have an adverse effect
on the trading price of its common shares. Accordingly, the market price for the
Company's Common Stock may fluctuate substantially.

THE COMPANY DOES NOT PLAN TO PAY DIVIDENDS.

The Company has not yet realized positive net income and has not, since
incorporation, paid dividends. the Company expects to use any earnings to fund
it's ongoing operations and to fund future network and market development.

MINIMAL TRADING HISTORY OF COMMON STOCK - POSSIBLE STOCK PRICE VOLATILITY.

The Company's Common Stock traded on the OTC Bulletin Board under the symbol
"TUGB". The stock has only been traded since October 2003.

The market price of the Company's Common Stock could fluctuate substantially due
to a variety of factors, including market perception of its ability to achieve
its planned growth, the trading volume in its Common Stock, changes in general
conditions in the economy, the financial markets or other developments affecting
the Company or its potential competitors. In addition, the stock market is
subject to extreme price and volume fluctuations. This volatility has had a
significant effect on the market prices of securities issued by many companies
for reasons unrelated to their operating performance.

PENNY STOCK REGULATIONS MAY LIMIT THE POTENTIAL PURCHASERS OF OUR STOCK IN THE
MARKET.

Broker-dealer practices in connection with transactions in "PENNY STOCKS" are
regulated by certain penny stock rules adopted by the Securities and Exchange
Commission (the "SEC" or the "COMMISSION"). Penny stocks generally are equity
securities with a price of less than $5.00 (other than securities registered on
certain national securities exchanges or quoted on NASDAQ provided that current
price and volume information with respect to transactions in such securities is
provided by the exchange or trading system).

                                       13
<PAGE>
The penny stock rules require a broker-dealer, prior to a transaction in a penny
stock not otherwise exempt from the rules, to deliver a standardized risk
disclosure document that provides information about penny stocks and the risks
in the penny stock market. The broker-dealer also must provide the customer with
current bid and offer quotations for the penny stock, the compensation of the
broker-dealer and its salesperson in connection with the transaction, and
monthly account statements showing the market value of each penny stock held in
the customer's account. In addition, the penny stock rules generally require
that prior to a transaction in a penny stock, the broker-dealer must make a
special written determination that the penny stock is a suitable investment for
the purchaser and receive the purchaser's written agreement to the transaction.
These disclosure requirements may have the effect of reducing the level of
trading activity in the secondary market for a stock that becomes subject to the
penny stock rules. the Company's securities are presently subject to the penny
stock rules, and, as a result, investors may find it more difficult to sell its
securities.

ITEM 2. DESCRIPTION OF PROPERTY.

The Company 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. The Company
renewed its lease on January 1, 2004, and the lease expires on December 31,
2004. The Company's monthly rent payment is Cdn$1,175.00 (approximately US$905).

The Company believes that existing facilities are adequate for its needs through
the middle of the year 2004. Should the Company require additional space at that
time, or prior thereto, the Company believes that such space can be secured on
commercially reasonable terms and without undue operational disruption.

ITEM 3. LEGAL PROCEEDINGS

The Company is currently not a party to any legal proceedings.

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

None.

ITEM 5. MARKET THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

The Company's shares of Common Stock trade on the OTC Bulletin Board Market
under the trading symbol "TUGB." The high and low bid prices of
the Company's Common Stock for the period October-December 2003 (the only
quarter in its last two fiscal years that it has been traded), as quoted from
the OTC Bulletin Board was:

         QUARTER               HIGH BID PRICE         LOW BID PRICE
         -------               --------------         -------------
     4th Quarter 2003              $1.30                  $0.35

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

                                       14
<PAGE>
                    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. To the extent U.S. securities laws were applicable
to the issuance, 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 the extent U.S. securities laws were applicable to
the issuance, 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 the extent U.S. securities laws were applicable to
the issuance, 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 December 11, 2003 the stockholders approved the acquisition of MidNet, Inc. a
Nevada  corporation  for 7,506,000  shares of common stock and 300,000 shares of
preferred stock. To the extent U.S. securities laws were applicable to the
issuance, 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 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, 2004. 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.

                                       15
<PAGE>
                           DESCRIPTION OF SECURITIES.

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

Preferred stock, $.001 par value; 20,000,000 shares authorized; 300,000 shares
issued and outstanding as of December 31, 2003.

Common stock, $ 0.0001 par value; 80,000,000 shares authorized; 13,600,000
shares issued and outstanding as of December 31, 2003.

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 ratably 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 the Company's shares
of Common Stock are not subject to redemption. All the Company's outstanding
shares of Common Stock are fully paid and non-assessable.

There are no restrictions in the Company's Certificate of Incorporation, as
amended to date or its current , which restrict or inhibit changes in the voting
control or ownership in the Company.

ITEM 6. MANAGEMENT DISCUSSION OF PLAN OF OPERATION.

The following Management's Discussion and Analysis of Plan of 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 ("MidNet") 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 MidNet were
exchanged for shares of Tugboat International Inc., resulting in MidNet becoming
a wholly-owned subsidiary of Tugboat.

Pursuant to the Agreement, Tugboat had 13,050,000 shares of Common Stock issued
and outstanding, post-merger, of which MidNet shareholders own 7,506,000 shares.
Existing shares in MidNet 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 MidNet, 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.

                                       16
<PAGE>
The Company, on a consolidated basis, had nominal revenues in 2003 of $21,328,
which were revenues from operations of MidNet, and the expenses incurred by the
Company to date are 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 $2,127 for the period December 12 to 31,
2003.

MidNet 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 $132,300 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.


MidNet is a networking company that proposes to aggregate bandwidth, and with
its proprietary configuration technology, intends to deliver to its clients a
secure, reliable and neutral dynamic private network that is cost effective.


MidNet developed The Middle Network to act as the `middle layer' between
telecommunication infrastructure companies and application service providers,
all to the benefit of end users.

The Company believes it has a strong technical foundation to develop its
proposed network. The technical background of its management and advisory team
span more than thirty years.

PLAN OF OPERATIONS

During the previous fiscal year, and prior to the merger with MidNet, Tugboat
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. The Company, under new management and direction, has a plan of
operation it intends to put into action as soon as sufficient funds have been
raised to commit to the delivery of network services to its anticipated
customers.

The Company's plan of operations over the next 12 months is to obtain funding to
implement its business plan. The Company is classified as a development stage
company because its principal activities involve seeking and developing business
activities.

SHORT TERM GOAL

The Company 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)

The initial network rollout is expected to include the seven key media centers
as set out in the business plan contained herein: Montreal, Toronto, Vancouver,
Los Angeles, Chicago, New York and London, England. Also, the Company will
continue to develop strategic relationships.

                                       17
<PAGE>
LONG TERM GOAL

Our goal is to expand The Middle Network 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.

The Company is making its plans based on the assumption the Company will
continue as a going concern, but there is no assurance we will be able to do so.
Management is unsure whether proposed current operations, once commenced, 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, while focusing and building on its client list
of media-based customers and exploring other vertical markets. These markets
include 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.

The Company 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 the Company's proposed services;
     *    the extent and progress of research and development programs;
     *    competing technological and market developments; and
     *    the costs of commercializing our 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 we will be
successful in our business operations.

In addition, the Company 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 our future
capital requirements, the Company 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.

                                       18
<PAGE>
Until such time as the proposed business is sufficiently developed, the Company
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 the
Company will be successful in selling telecommunications services metered in
gigabyte units or otherwise generating revenues. The Company has no other
sources of revenue. Therefore, if not successful in its proposed business, the
Company will be unable to achieve revenues under our current business plan.

The Company does not anticipate significant research and development expenses
over the next twelve months. However, it does plan on making significant
equipment purchases and will probably increase the number of staff, consistent
with our business plan and financials.

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

SUBSEQUENT EVENTS

The Company will soon change its name from Tugboat International Inc., to
MidNet, Inc., which will also change its trading symbol.

FLUCTUATIONS IN ANNUAL AND QUARTERLY RESULTS

The Company'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 develop the
          Company's software and its licensing and strategic relationships to
          enhance sales and marketing;
     2.   changes in the growth rate of Internet usage and the interest of
          consumers in using the Internet ; and
     3.   the emergence of new services and technologies in the market in which
          the Company plans to deliver services.

The Company 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
the Company's annual and quarterly results.

IMPACT OF INFLATION

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

NEW ACCOUNTING PRONOUNCEMENTS

In June 2001 the Financial Accounting Standards Board (FASB) issued SFAS No.
141, "Business Combinations" which requires that the purchase method of
accounting be used for all business combinations initiated after June 30, 2001,
establishes specific criteria for the recognition of intangible assets
separately from goodwill, and requires that unallocated negative goodwill be
written off immediately as an extraordinary gain instead of being deferred and
amortized. The Company will account for business combinations in accordance with
the guidance in SFAS No. 141.

                                       19
<PAGE>
In June 2001 the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets". This statement establishes accounting and reporting standards for
goodwill and intangibles for years commencing after December 15, 2001. Whether
already acquired or subsequently acquired after the effective date, companies
are required to identify intangibles with finite lives and those with indefinite
lives. Those intangibles with finite lives are to be amortized over the
estimated useful lives of the assets while those with indefinite lives are not
to be amortized. Each intangible or goodwill asset should be analyzed at least
annually for impairment where the carrying value is in excess of the fair value
of the intangibles. The asset's carrying value is to be reduced by a charge to
income if the fair value is lower than the carrying value. The Company has
adopted SFAS No. 142 as of December 31, 2001. Management does not feel that the
standard will materially affect the Company.

In June 2001 the FASB issued SFAS No. 143 "Accounting for Asset Retirement
Obligations." SASF 143 requires that retirement obligations be recognized as
they occur and display as liabilities. This Statement applies to legal
obligations associated with the retirement of a tangible long-lived asset that
result from the acquisition, construction, or development and the normal
operation of a long-lived asset. Management does not feel that the standard will
materially affect the Company.

In August 2001 the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS No. 144 modifies the rules for accounting
for the impairment or disposal of long-lived assets. The new rules become
effective for fiscal years beginning after December 15, 2001, with earlier
application encouraged. Management does not feel that this standard will
materially affect the Company.

ITEM 7. FINANCIAL STATEMENTS

The consolidated financial statements and related financial information required
to be filed are attached hereto. Reference is made to page F-1 of this Annual
Report for an index to the consolidated financial statements.

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

None.

Registrant retained ARMANDO C. IBARRA, Certified Public Accountant as its
auditor at inception of the Company.

During the two previous fiscal years, the auditor expressed no adverse opinion,
nor was any audit qualified or modified. There were no disagreements of any kind
between TUGBOAT INTERNATIONAL, INC. and its auditor.

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.

                        DIRECTORS AND EXECUTIVE OFFICERS

     NAME             AGE                     POSITION
     ----             ---                     --------
Peter Fentiman        59     Director, President and Chief Executive Officer
Tilo Kunz             38     Director
Ruedi Aschwanden      46     Director, interim Secretary and Treasurer
Tom Locke             53     Executive Vice President of Strategic Planning

                                       20
<PAGE>
Peter Fentiman has been the Director, President, CFO and its Chief Executive
Officer of the Company since December 11, 2003. Mr. Fentiman has also served as
a Director, President and the Chief Executive Officer of the Company's
wholly-owned subsidiary, MidNet, Inc., since January 2002. Prior to joining the
MidNet, Mr. Fentiman was a Management Consultant since 1991. Mr. Fentiman
received a business diploma from the Eastern Ontario Institute of Technology, in
1964. Since January 1, 2004, Mr. Fentiman devotes approximately 90% of his time
to the business of the Company.

Tilo Kunz has been a member of the Company's Board of Directors since December
11, 2003. Mr. Kunz has also served as a Director of the Company's wholly owned
subsidiary, MidNet, Inc., since 2002. Prior to joining MidNet, Mr. Kunz was a
media-based communications consultant since 1995. Mr. Kunz received a business
diploma from the British Columbia Institute of Technology, in 1989. Since
January 1, 2004, Mr. Kunz devotes approximately 80% of his time to the business
of the Company.

Ruedi Aschwanden has been Director and interim Secretary and Treasurer of the
Company since December 11, 2003. Mr. Aschwanden has also served as a Director of
the Company's wholly owned subsidiary, MidNet, Inc., since January 2002. Prior
to joining MidNet, since 1998, Mr. Aschwanden was a business and technology
consultant for high-tech startups and technical service providers in the
entertainment industry. Mr. Aschwanden received a Masters degree in Business
Administration from the Simon Fraser University of Vancouver, BC, in 1996. Since
January 1, 2004, Mr. Aschwanden devotes approximately 90% of his time to the
business of the Company.

Tom Locke has been Executive Vice President of Strategic Planning of the Company
since December 11, 2003. Since January 2002, Mr. Locke also served in a similar
capacity for the Company's wholly-owned subsidiary, MidNet, Inc. Prior to
joining MidNet, since 1996, Mr. Locke was President of Hub Consulting Services,
and still serves in such capacity. Mr. Locke received an MBA degree from York
University in Toronto in 1977. Since January 1, 2004, Mr. Locke devotes
approximately 90% of his time to the business of the Company.

                   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

The following table shows, for the two-year period ended December 31, 2003, the
cash and other compensation paid to the Company's Chief Executive Officer. No
other executive officer had annual compensation in excess of $100,000 during
such period.

                           SUMMARY COMPENSATION TABLE

No compensation was paid by the Company during the prior two fiscal years.

                                       21
<PAGE>
                      OPTION/SAR GRANTS IN LAST FISCAL YEAR

On December 11, 2003, in connection with its merger with MidNet, the Company
granted its Advisory Board members and a consultant 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. The options for 700,000 of the shares expire in 2009
and the options for the remaining 560,000 shares expire in 2010.

                            COMPENSATION OF DIRECTORS

The directors of the Company are not compensated for their services although
such directors may from time to time be awarded options or other incentives
by the Company. 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, the Company assumed MidNet's written consultant contract
with Tom Locke, an officer of the Company. Mr. Locke receives a monthly salary
of US$5,000.00 for his services, which are focused primarily on positioning and
branding the Company's services. This contract 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, 2003, of our common
stock (a) by each person known by us to be the beneficial owner of more than 5%
of our outstanding common stock, and (b) by each of our directors, by all
executive officers and by our directors as a group. To the best of our
knowledge, all persons named have sole voting and investment power with respect
to the shares, except as otherwise noted.

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%

All Officers and Directors as a
 Group (Approx.) (3 Individuals)      Common       7,344,000       Direct 54%
                                      Preferred      300,000       Direct-100%

Mr. Locke, 2930 Yukon Street., Vancouver, B.C., Canada V5Y 3R3, has options to
purchase up to 500,000 shares of restricted Common Stock at an exercise price of
$.50 per share. These options expire in 2009.

                                       22
<PAGE>
(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 ("MidNet"), from
the shareholders of MidNet, 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 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 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, 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.

The shareholders of MidNet now have direct beneficial ownership and voting
control of 55% of the total issued and outstanding shares of the Company's
Common Stock.

Subsequent to December 31, 2003, certain holders of warrants to purchase up to
2,000,000 shares of the Company's restricted Common Stock exercised their
warrants to acquire 1,827,450 shares, at a price of $.75 per share. No shares
have yet been issued based upon this exercise. However, based upon the exercise
of the warrants, as of February 17, 2004, the Company has received a total of
US$1,021,762.68.

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, receive compensation of US$2,500.00 per
month. They receive no compensation for their respective services as officers
and directors, PER SE.

                                       23
<PAGE>
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     Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
       Section 302 of the Sarbanes-Oxley Act of 2002

32     Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
       Section 906 of the Sarbanes-Oxley Act of 2002

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

                                   SIGNATURES

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

Dated this 17th day of February, 2004


                                  By: /s/ Peter Fentiman
                                     ----------------------
                                     Peter Fentiman
                                     CEO

February 17, 2004

                                       24
<PAGE>
FINANCIAL STATEMENTS

                          TUGBOAT INTERNATIONAL, INC.,
                                 AND SUBSIDIARY
                              FINANCIAL STATEMENTS
                               FOR THE YEARS ENDED
                          DECEMBER 31, 2003, AND 2002,
                                      WITH
                                 AUDIT REPORT OF
                          CERTIFIED PUBLIC ACCOUNTANTS


                                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
                                Members of the Better Business Bureau since 1997

                          INDEPENDENT AUDITORS' REPORT

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

We  have  audited  the  accompanying  consolidated  balance  sheets  of  Tugboat
International,  Inc. as of December 31, 2003 and 2002 and the related statements
of operations, changes in stockholders' equity and cash flows for the years 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.

We conducted our audit in accordance with auditing standards  generally accepted
in the  United  States of  America.  Those  standards  require  that we plan and
perform the audit to obtain  reasonable  assurance  about  whether the 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  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 in  conformity  with
accounting principles generally accepted in the United States of America.

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

January 28, 2004
Chula Vista, California

                                      F-1
<PAGE>
                           TUGBOAT INTERNATIONAL, INC.
                          (A Development Stage Company)
                           Consolidated Balance Sheets
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                  Year Ended          Year Ended
                                                                  December 31,        December 31,
                                                                     2003                2002
                                                                   ---------           ---------
<S>                                                                <C>                 <C>
                                     ASSETS

Current Assets
  Cash                                                             $  67,074           $      59
                                                                   ---------           ---------
Total Current Assets                                                  67,074                  59

Net Property & Equipment                                               6,066                  --

Other Assets
  Organization costs                                                      --                 476
  Security deposits                                                      758                  --
  Prepaid expenses                                                    25,000                  --
                                                                   ---------           ---------
Total Other Assets                                                    25,758                 476
                                                                   ---------           ---------

      TOTAL ASSETS                                                 $  98,898           $     535
                                                                   =========           =========

                       LIABILITIES & STOCKHOLDERS' EQUITY

Current Liabilities
  Accounts payable                                                 $   9,934           $   2,485
  Consulting fees payables                                           130,000                  --
  Taxes payable                                                          744                  --
                                                                   ---------           ---------
Total Current Liabilities                                            140,678               2,485
                                                                   ---------           ---------

      TOTAL LIABILITIES                                              140,678               2,485

Stockholders' Equity
  Preferred stock, ($.001 par value, 20,000,000 shares
   authorized; 300,000 and -0- shares issued and
   outstanding, respectively.)                                           300                  --
  Common stock, ($.0001 par value, 80,000,000 shares
   authorized; 13,600,000 and 5,544,000 shares
   issued and outstanding, respectively.)                              1,359                 554
  Additional paid-in capital                                          91,708              29,896
  Stock warrants                                                      99,750                  --
  Stock subscriptions                                               (195,800)                 --
  Deficit accumulated during development stage                       (39,097)            (32,400)
                                                                   ---------           ---------
Total Stockholders' Equity                                           (41,780)             (1,950)
                                                                   ---------           ---------
      TOTAL LIABILITIES & STOCKHOLDERS' EQUITY                     $  98,898           $     535
                                                                   =========           =========
</TABLE>

               See Notes to the Consolidated Financial Statements

                                      F-2
<PAGE>
                           TUGBOAT INTERNATIONAL, INC.
                          (A Development Stage Company)
                      Consolidated Statements of Operations
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                               July 20, 1998
                                                                                 (inception)
                                           Year Ended         Year Ended           through
                                           December 31,       December 31,       December 31,
                                              2003               2002               2003
                                           -----------        -----------        -----------
<S>                                        <C>                <C>                <C>
Revenues
  Revenues                                 $        --        $        --        $        --
                                           -----------        -----------        -----------
Total Revenues                                      --                 --                 --

General & Administrative Expenses                6,723              3,893             39,823
                                           -----------        -----------        -----------
Total General & Administrative Expenses          6,723              3,893             39,823

Other Income & (Expenses)
  Other income                                      26                 --                726
                                           -----------        -----------        -----------
Total Other Income & (Expenses)                     26                 --                726
                                           -----------        -----------        -----------

Net Income (Loss)                          $    (6,697)       $    (3,893)       $   (39,097)
                                           ===========        ===========        ===========

Basic earnings (loss) per share            $     (0.00)       $     (0.00)
                                           ===========        ===========
Weighted average number of
 common shares outstanding                   5,978,866          5,544,000
                                           ===========        ===========

DILUTED EARNINGS (LOSS) PER SHARE          $     (0.00)       $        --
                                           ===========        ===========
WEIGHTED AVERAGE OF DILUTED
 COMMON SHARES OUTSTANDING                   6,049,140                 --
                                           ===========        ===========
</TABLE>
               See Notes to the Consolidated Financial Statements

                                      F-3
<PAGE>
                           TUGBOAT INTERNATIONAL, INC.
                          (A Development Stage Company)
            Consolidated Statement of Changes in Stockholders' Equity
            From July 20, 1998 (inception) through December 31, 2003
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                 Preferred                      Common
                                         Preferred       Stock          Common         Stock
                                           Stock         Amount         Stock          Amount
                                           -----         ------         -----          ------
<S>                                    <C>            <C>             <C>           <C>
Stock issued for cash on July 20,
1998 @ $0.0001 per share                $       --     $       --      5,000,000     $      500

Net income, July 20, 1998 (inception)
through December 31, 1998
                                        ----------     ----------     ----------     ----------
Balance, December 31, 1998                      --             --      5,000,000            500
                                        ==========     ==========     ==========     ==========
Stock issued for cash on March 20,
1999 @ $0.0001 per share                                                 169,000             17

Net loss, December 31, 1999
                                        ----------     ----------     ----------     ----------
Balance, December 31, 1999                      --             --      5,169,000            517
                                        ==========     ==========     ==========     ==========
Stock issued for cash on November 15,
2000 @ $0.0002 per share                                                 250,000             25

Net loss, December 31, 2000
                                        ----------     ----------     ----------     ----------
Balance, December 31, 2000                      --             --      5,419,000            542
                                        ==========     ==========     ==========     ==========
Stock subscription receivable

Stock issued for cash on May 14,
2001 @ $0.10 per share                                                    62,500              6

Stock issued for cash on May 18,
2001 @ $0.10 per share                                                    62,500              6

Net loss, December 31, 2001
                                        ----------     ----------     ----------     ----------
Balance, December 31, 2001                      --             --      5,544,000            554
                                        ==========     ==========     ==========     ==========
Net loss, December 31, 2002
                                        ----------     ----------     ----------     ----------
Balance, December 31, 2002                      --             --      5,544,000            554
                                        ==========     ==========     ==========     ==========
Capital Contribution

Recapitalization (note 1)                  300,000            300      7,506,000            750

Stock subscription issued for
consulting services                                                      550,000             55

Net loss, December 31, 2003
                                        ----------     ----------     ----------     ----------
Balance, December 31, 2003                 300,000     $      300     13,600,000     $    1,359
                                        ==========     ==========     ==========     ==========

                                                                          Deficit
                                                                        Accumulated
                                       Additional         Stock           During
                                        Paid-in        Subscription     Development
                                        Capital         Receivable         Stage          Total
                                        -------         ----------         -----          -----

Stock issued for cash on July 20,
1998 @ $0.0001 per share               $     500         $      --       $      --      $   1,000

Net income, July 20, 1998 (inception)
through December 31, 1998                                                       --             --
                                       ---------         ---------       ---------      ---------
Balance, December 31, 1998                   500                --              --          1,000
                                       =========         =========       =========      =========
Stock issued for cash on March 20,
1999 @ $0.0001 per share                  16,883                                           16,900

Net loss, December 31, 1999                                                 (2,633)        (2,633)
                                       ---------         ---------       ---------      ---------
Balance, December 31, 1999                17,383                --          (2,633)        15,267
                                       =========         =========       =========      =========
Stock issued for cash on November 15,
2000 @ $0.0002 per share                      25               (50)                            --

Net loss, December 31, 2000                                                (11,208)       (11,208)
                                       ---------         ---------       ---------      ---------
Balance, December 31, 2000                17,408               (50)        (13,841)         4,059
                                       =========         =========       =========      =========
Stock subscription receivable                                   50                             50

Stock issued for cash on May 14,
2001 @ $0.10 per share                     6,244                                            6,250

Stock issued for cash on May 18,
2001 @ $0.10 per share                     6,244                                            6,250

Net loss, December 31, 2001                                                (14,666)       (14,666)
                                       ---------         ---------       ---------      ---------
Balance, December 31, 2001                29,896                --         (28,507)         1,943
                                       =========         =========       =========      =========
Net loss, December 31, 2002                                                 (3,893)        (3,893)
                                       ---------         ---------       ---------      ---------
Balance, December 31, 2002                29,896                --         (32,400)        (1,950)
                                       =========         =========       =========      =========
Capital Contribution                       6,520                                            6,520

Recapitalization (note 1)               (140,153)             (300)                      (139,403)

Stock subscription issued for
consulting services                      195,445          (195,500)                            --

Net loss, December 31, 2003                                                 (6,697)        (6,697)
                                       ---------         ---------       ---------      ---------
Balance, December 31, 2003             $  91,708         $(195,800)      $ (39,097)     $(141,530)
                                       =========         =========       =========      =========
</TABLE>
               See Notes to the Consolidated Financial Statements

                                      F-4
<PAGE>
                           TUGBOAT INTERNATIONAL, INC.
                          (A Development Stage Company)
                      Consolidated Statements of Cash Flows
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                                          July 20, 1998
                                                                                           (inception)
                                                          Year Ended       Year Ended        through
                                                          December 31,     December 31,    December 31,
                                                             2003             2002            2003
                                                          -----------      -----------     -----------
<S>                                                       <C>              <C>             <C>
CASH FLOWS FROM OPERATING ACTIVITIES
  Net income (loss)                                       $    (6,697)     $    (3,893)    $   (39,097)
  Depreciation                                                  5,015
  (Increase) decrease in organization costs                       476               --              --
  (Increase) decrease in security deposits                       (758)              --            (758)
  (Increase) decrease in prepaid expenses                     (25,000)              --         (25,000)
  Increase (decrease) in consulting fees payables             130,000               --         130,000
  Increase (decrease) in taxes payables                           744               --             744
  Increase (decrease) in accounts payable                       7,449            2,485           9,934
  Common stock issued for services                            195,500                0         195,500
                                                          -----------      -----------     -----------
     Net cash provided by (used in) operating
      activities                                              301,714           (1,408)        276,338

CASH FLOWS FROM INVESTING ACTIVITIES
  Acquisition of property & equipment                          (6,066)              --         (11,081)
                                                          -----------      -----------     -----------
     Net cash provided by (used in) investing
      activities                                               (6,066)              --         (11,081)

CASH FLOWS FROM FINANCING ACTIVITIES
  Issuance of preferred stock                                     300               --             300
  Issuance of common stock                                        750               --           1,304
  Additional paid in capital                                 (133,633)              --        (103,737)
  Stock warrants                                               99,750               --          99,750
  Subscription receivable                                    (195,800)              --        (195,800)
                                                          -----------      -----------     -----------
     Net cash provided by (used in) financing
      activities                                             (228,633)              --        (198,183)
                                                          -----------      -----------     -----------

Net increase (decrease) in cash                                67,015           (1,408)         67,074

Cash at beginning of year                                          59            1,467              --
                                                          -----------      -----------     -----------

Cash at end of year                                       $    67,074      $        59     $    67,074
                                                          ===========      ===========     ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
  Interest paid                                           $        --      $        --     $        --
                                                          ===========      ===========     ===========
  Income taxes paid                                       $        --      $        --     $        --
                                                          ===========      ===========     ===========
SUPPLEMENTAL SCHEDULE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:
  Common stock issued for acquisition of subsidiary       $ 7,506,000      $        --     $ 7,506,000
                                                          ===========      ===========     ===========
  Preferred stock issued for acquisition of subsidiary    $   300,000      $        --     $   300,000
                                                          ===========      ===========     ===========
Stock issued for services                                 $   195,000      $        --     $   195,000
                                                          ===========      ===========     ===========
</TABLE>
               See Notes to the Consolidated Financial Statements

                                      F-5
<PAGE>
                           TUGBOAT INTERNATIONAL, INC.
                          (A Development Stage Company)
                 Notes to the Consolidated Financial Statements
                             As of December 31, 2003


NOTE 1. ORGANIZATION AND DESCRIPTION OF BUSINESS

Tugboat  International,  Inc was  incorporated in the State of Delaware,  United
States of America on July 20, 1998, under the Delaware Revised Statutes, Chapter
78,  Private  Companies.  On  December  11,  2003  the  Company  entered  into a
recapitalization with MidNet Inc. (a Nevada Corporation).

On December 11, 2003 Tugboat  International,  Inc. and MidNet, Inc. completed an
Agreement and Plan of Merger  whereby  Tugboat  International  issued  7,506,000
shares of its common  stock and 300,000 of its  preferred  stock in exchange for
all of the outstanding  common stock of MidNet,  Inc.  Immediately  prior to the
Agreement and Plan of Merger, Tugboat  International,  Inc. had 5,544,000 shares
of common stock issued and  outstanding.  The acquisition was accounted for as a
recapitalization  of MidNet,  Inc.  because  the  shareholders  of MidNet,  Inc.
controlled Tugboat International, Inc. after the acquisition. Therefore, Midnet,
Inc. was treated as the  acquiring  entity for  accounting  purposes and Tugboat
International, Inc. was the surviving entity for legal purposes.

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

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

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

A. BASIS OF ACCOUNTING

The Company's  financial  statements  are prepared  using the accrual  method of
accounting. The Company has elected a December 31, year end.

                                      F-6
<PAGE>
                           TUGBOAT INTERNATIONAL, INC.
                          (A Development Stage Company)
                 Notes to the Consolidated Financial Statements
                             As of December 31, 2003


NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

B. BASIC EARNINGS PER SHARE

In February  1997,  the FASB issued SFAS No. 128,  "Earnings  Per Share",  which
specifies the computation, presentation and disclosure requirements for earnings
(loss) per share for entities  with  publicly  held common  stock.  SFAS No. 128
supersedes the provisions of APB No. 15, and requires the  presentation of basic
earnings (loss) per share and diluted earnings (loss) per share. The Company has
adopted the provisions of SFAS No. 128 effective July 20, 1998 (inception).

Basic net loss per share  amounts is computed  by  dividing  the net loss by the
weighted average number of common shares outstanding. Diluted earnings per share
are the same as basic  earnings  per share due to the lack of dilutive  items in
the Company.

C. CASH EQUIVALENTS

The Company considers all highly liquid  investments  purchased with an original
maturity of three months or less to be cash equivalents.

D. CONSOLIDATION

The accompanying  financial  statements  include the accounts of the Company and
its subsidiaries.  Significant  intercompany accounts and transactions have been
eliminated in consolidation.

E. INCOME TAXES

Income taxes are provided in accordance  with Statement of Financial  Accounting
Standards No. 109 (SFAS 109),  Accounting for Income Taxes. A deferred tax asset
or liability is recorded for all temporary differences between financial and tax
reporting and net operating loss  carryforwards.  Deferred tax expense (benefit)
results  from  the net  change  during  the  year of  deferred  tax  assets  and
liabilities.

Deferred tax assets are reduced by a valuation allowance when, in the opinion of
management,  it is more likely than not that some portion of all of the deferred
tax assets will be realized.  Deferred tax assets and  liabilities  are adjusted
for the effects of changes in tax laws and rates on the date of enactment.

                                      F-7
<PAGE>
                           TUGBOAT INTERNATIONAL, INC.
                          (A Development Stage Company)
                 Notes to the Consolidated Financial Statements
                             As of December 31, 2003


NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

F. USE OF ESTIMATES

Preparation  of financial  statements  in  conformity  with  generally  accepted
accounting  principles  requires  management to make estimates and  assumptions.
These estimates or assumptions affect reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the financial
statements  and  reported  amounts of expenses  and gains  during the  reporting
periods. Actual results could differ from estimates.

G. RELATED PARTY TRANSACTIONS

Related parties include directors and officers the shares. The company discloses
all  transactions,  other than those in the ordinary  course of  business,  with
these related parties.

H. PROPERTY & EQUIPMENT

Property  and  equipment  are  recorded at cost.  Minor  additions  renewals are
expensed in the year incurred.  Major additions and renewals are capitalized and
depreciated over their estimated useful lives.  Depreciation and amortization is
calculated using  straight-line and accelerated  methods for income tax purposes
(five years for vehicles and equipment, and seven years for office furniture).

I. DEVELOPMENT STAGE ENTERPRISE

The company is a  development  stage  enterprise  that  presents  its  financial
statements in conformity with the generally accepted accounting  principles that
apply to the established operating enterprises. 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 enterprise, the company discloses the deficit accumulated
during the  development  stage and the  cumulative  statements of operations and
cash flows from inception to December 31, 2003.

                                      F-8
<PAGE>
                           TUGBOAT INTERNATIONAL, INC.
                          (A Development Stage Company)
                 Notes to the Consolidated Financial Statements
                             As of December 31, 2003


NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

J. FOREIGN CURRENCY

All  financial  information  is  expressed in US dollars.  Financial  assets and
liabilities denominated in a currency other than US dollars are translated using
the period end exchange rates.  Revenues and expenses  denominated in other than
US dollars  are  translated  using the  average  exchange  rates for the period.
Currency  gains or losses are treated as a current  period  transaction  and are
reported on the operating statement.

NOTE 3.  CONSULTING FEES PAYABLE

The company  entered into an agreement with two consultants on April 1, 2002 and
June 1, 2002  respectively,  in which the consultants agree to provide strategic
planning and  financial  services to the  company,  for a fee of $5,000 each per
month.  During  the year the  company  accrued  $55,000 in  consulting  fees and
terminated the consulting agreement for financial services.  Cash payment of the
fees shall  commence  once the company is  successful  in raising  funds and the
financing is in place. The consultant,  at his option, will have the opportunity
to take  shares  at a value  of  $1.00  US per  share  in  lieu  of  cash,  or a
combination of cash and shares.

NOTE 4. GOING CONCERN

The  Company's  financial  statements  are  prepared  using  generally  accepted
accounting  principles  applicable to a going concern,  which  contemplates  the
realization  of assets and  liquidation  of  liabilities in the normal course of
business.  However,  the  Company  has no  current  source of  revenue.  Without
realization  of  additional  capital,  it would be  unlikely  for the Company to
continue as a going concern.  It is management's plan to seek additional capital
through sale of its securities through private placements.

NOTE 5. RELATED PARTY TRANSACTION

The Company  neither owns nor leases any real or personal  property.  A director
provides  office  services  without  charge.  Such costs are  immaterial  to the
financial  statements  and  accordingly,  have not been reflected  therein.  The
officers and directors of the Company are involved in other business  activities
and may, in the future, become involved in other business  opportunities as they
become  available,  such  persons may face a conflict in  selecting  between the
Company and their other  business  interests.  The Company has not  formulated a
policy for the resolution of such conflicts.

                                      F-9
<PAGE>
                           TUGBOAT INTERNATIONAL, INC.
                          (A Development Stage Company)
                 Notes to the Consolidated Financial Statements
                             As of December 31, 2003


NOTE 6. PROPERTY & EQUIPMENT

A summary of property and equipment,  and the related depreciation expense is as
follows:

                                                                    2003
                                                                  --------
     Property & Equipment
     Office Equipment                                             $ 11,081
                                                                  --------
     Total Office Equipment                                         11,081
     Accumulated depreciation                                       (5,015)
                                                                  --------
     Net Property & Equipment                                     $  6,066
                                                                  ========

NOTE 7. INCOME TAXES

a.   The Company is in the development  stage and has not yet earned any revenue
     or  income.  No  provision  for  additional  income tax  recovery  has been
     recorded by the company due to its losses indicating that, more likely than
     not, none of the deferred income tax assets will be realized.

b.   Due to the  company  not  having  earned any  revenue or income,  it has an
     effective tax rate of zero percent.

c.   Losses available for deduction against future taxable income is as follows:

                                                            Loss Expiration Date
                                                            --------------------
     1998 Net Operating Income             $      0                  --
     1999 Net Operating Loss                 (2,633)                2019
     2000 Net Operating Loss                (11,208)                2020
     2001 Net Operating Loss                (14,666)                2021
     2002 Net Operating Loss                 (3,893)                2022
     2003 Net Operating Loss                 (6,697)                2023
                                           --------
     Net Operating Loss                    $(39,097)
                                           ========

                                      F-10
<PAGE>
                           TUGBOAT INTERNATIONAL, INC.
                          (A Development Stage Company)
                 Notes to the Consolidated Financial Statements
                             As of December 31, 2003


NOTE 7. INCOME TAXES (CONTINUED)

d.
                                                         As of December 31, 2003
                                                         -----------------------
     Deferred tax assets:
     Net operating tax carryforwards                             $ 5,865
     Other                                                             0
                                                                 -------
     Gross deferred tax assets                                     5,865
     Valuation allowance                                          (5,865)
                                                                 -------

     Net deferred tax assets                                     $     0
                                                                 =======

Realization of deferred tax assets is dependent upon  sufficient  future taxable
income during the period that deductible temporary differences and carryforwards
are expected to be available to reduce  taxable  income.  As the  achievement of
required  future taxable income is uncertain,  the Company  recorded a valuation
allowance.

NOTE 8. STOCK TRANSACTIONS

For  transactions  with other than  employee's  stock issuance are in accordance
with paragraph 8 of SFAS 123, where  issuance's  shall be accounted for based on
the fair value of the consideration received. Transactions with employee's stock
issuance are in accordance with paragraphs (16-44) of SFAS 123, where issuance's
shall be accounted for based on the fair value of the consideration  received or
the fair value of the equity  instruments  issued,  whichever  is more  reliable
measurable.

On July 20, 1998, the Company issued  5,000,000  shares of common stock for cash
valued at $0.0001 per share.

On March 20, 1999,  the Company  issued  169,000 shares of common stock for cash
valued at $0.0001 per share.

On November 15, 2000, the Company issued 250,000 shares of common stock for cash
valued at $0.0002 per share.

On May 14,  2001,  the Company  issued  62,500  shares of common  stock for cash
valued at $0.10 per share.

On May 18,  2001,  the Company  issued  62,500  shares of common  stock for cash
valued at $0.10 per share.

                                      F-11
<PAGE>
                           TUGBOAT INTERNATIONAL, INC.
                          (A Development Stage Company)
                 Notes to the Consolidated Financial Statements
                             As of December 31, 2003


NOTE 8. STOCK TRANSACTIONS (CONTINUED)

On December 11, 2003 the stockholders approved the acquisition of MidNet, Inc. a
Nevada  corporation  for 7,506,000  shares of common stock and 300,000 shares of
preferred stock.

On December  30, 2003,  the Company  issued a stock  subscription  of 550,000 in
common stock a stock for consulting services.

NOTE 9.  STOCKHOLDERS' EQUITY

The  stockholders'  equity section of the Company contains the following classes
of capital stock as of December 31, 2003.

Preferred  stock,  $ 0.001 see above note on discrepancy  par value;  20,000,000
shares authorized;  300,000 and -0- shares issued and outstanding as of 2003 and
2002, respectively.

Common stock, $ 0.0?01 par value;  80,000,000 shares authorized;  13,600,000 and
5,544,000 shares issued and outstanding as of 2003 and 2002, respectively.

NOTE 10. ISSUANCE OF SHARES FOR SERVICES

In  accordance  with SFAS 8 the valuation of shares for services is based on the
fair market value of services  received or rendered,  whichever is more reliably
measurable.

A total of 550,000  shares of common stock were issued for  consulting  services
for the year ended December 31, 2003.

NOTE 11. ISSUANCE OF SHARES FOR SERVICES - STOCK OPTIONS

The company  has a  nonqualified  stock  option  plan,  which  provides  for the
granting of options to key employees,  consultants,  non-employees and directors
of the  Company.  The  valuations  of shares for  services are based on the fair
market  value of  services.  The  Company  has  elected to account for the stock
option plan in accordance with paragraph 30 of SFAS 123 were the compensation to
employees  should be recognized over the period(s) in which the related employee
services are  rendered.  In  accordance  with  paragraph 19 of SFAS 123 the fair
value of a stock option granted is estimated using an option-pricing model.

                                      F-12